CHIRON CORP, 10-Q, 1998-08-10

CHIRON CORP
10-Q, 1998-08-10
PHARMACEUTICAL PREPARATIONS

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<PAGE>

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED JUNE 28, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

Commission File Number: 0-12798

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

DELAWARE 94-2754624
- -------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4560 HORTON STREET, EMERYVILLE, CALIFORNIA 94608
--------------------------------------------------
(Address of principal executive offices) (Zip code)

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

NOT APPLICABLE
----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----

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

TITLE OF CLASS OUTSTANDING AT JULY 31, 1998

Common Stock, $0.01 par value 177,808,473

<PAGE>

CHIRON CORPORATION
TABLE OF CONTENTS

PAGE NO.
--------

PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997. . . . . . . . . . . . .3

Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 1998 and 1997. . . .4

Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 1998 and 1997. .5

Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1998 and 1997. . . . . . . . .6

Notes to Condensed Consolidated Financial Statements . . . .7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . .16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .27

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . .27

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . .28

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . .29

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

</TABLE>

2
<PAGE>

ITEM 1. FINANCIAL STATEMENTS.
CHIRON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>

JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 158,120 $ 98,483
Short-term investments in marketable debt securities 99,211 84,588
----------- ------------
Total cash and short-term investments 257,331 183,071
Accounts receivable 328,132 344,044
Inventories 170,231 165,652
Assets held for sale (Note 4) 29,854 -
Other current assets 62,879 77,285
----------- ------------
Total current assets 848,427 770,052
Noncurrent investments in marketable debt securities 155,648 75,401
Property, plant, equipment and leasehold improvements, at cost:
Land and buildings 187,451 218,509
Laboratory, production and office equipment 406,491 422,278
Leasehold improvements 108,342 123,379
Construction in progress 63,080 67,355
----------- ------------
765,364 831,521
Less accumulated depreciation and amortization (283,432) (277,623)
----------- ------------
Net property, plant, equipment and leasehold improvements 481,932 553,898
Purchased technology, net 30,351 45,903
Other intangible assets, net 163,753 79,955
Investments in equity securities and affiliated companies 47,786 176,851
Other assets 74,943 66,418
----------- ------------
$ 1,802,840 $ 1,768,478
----------- ------------
----------- ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,864 $ 79,339
Accrued compensation and related expenses 52,937 59,405
Short-term borrowings 17,529 154,700
Current portion of unearned revenue 25,896 13,361
Taxes payable 53,547 37,191
Other current liabilities 137,315 127,190
----------- ------------
Total current liabilities 378,088 471,186
Long-term debt 402,312 397,217
Other noncurrent liabilities 33,050 26,130
----------- ------------
Total liabilities 813,450 894,533
----------- ------------
Commitments and contingencies
Stockholders' equity:
Common stock 1,775 1,757
Additional paid-in capital 1,894,807 1,853,591
Accumulated deficit (882,118) (961,986)
Accumulated other comprehensive loss (25,074) (18,808)
Notes receivable from stock sales - (609)
----------- ------------
Total stockholders' equity 989,390 873,945
----------- ------------
$ 1,802,840 $ 1,768,478
----------- ------------
----------- ------------
</TABLE>

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.

3
<PAGE>

CHIRON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net $ 237,570 $ 203,645 $ 442,042 $ 404,436
Equity in earnings of unconsolidated joint businesses 17,364 28,772 30,238 53,986
Collaborative agreement revenues 24,458 29,128 48,864 55,976
Other revenues 26,140 19,493 53,293 46,585
---------- ---------- ---------- ----------
Total revenues 305,532 281,038 574,437 560,983
---------- ---------- ---------- ----------

Expenses:
Cost of sales 102,437 81,281 191,418 166,052
Research and development 93,530 94,259 184,376 182,220
Selling, general and administrative 87,827 78,822 161,505 154,871
Write-off of purchased in-process technologies 1,645 - 1,645 -
Restructuring and reorganization charges (Note 3) (1,852) - 22,346 -
Other operating expenses 3,224 1,251 3,856 2,367
---------- ---------- ---------- ----------
Total expenses 286,811 255,613 565,146 505,510
---------- ---------- ---------- ----------

Income from operations 18,721 25,425 9,291 55,473

Gain on sale of assets (Note 5) 6,241 - 6,241 -
Interest expense (6,301) (7,773) (13,347) (16,278)
Other income, net 8,534 3,437 16,969 5,207
---------- ---------- ---------- ----------

Income from continuing operations
before income taxes 27,195 21,089 19,154 44,402

Provision for income taxes 1,808 6,276 4,618 13,214
---------- ---------- ---------- ----------

Income from continuing operations 25,387 14,813 14,536 31,188
---------- ---------- ---------- ----------

Discontinued operations (Note 2):
Income (loss) from discontinued operations - 929 - (110)
Gain on disposal of discontinued operations - - 65,332 -
---------- ---------- ---------- ----------

Net income $ 25,387 $ 15,742 $ 79,868 $ 31,078
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

Basic earnings per share:
Income from continuing operations $ 0.14 $ 0.09 $ 0.08 $ 0.18
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income $ 0.14 $ 0.09 $ 0.45 $ 0.18
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

Diluted earnings per share:
Income from continuing operations $ 0.14 $ 0.08 $ 0.08 $ 0.18
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income $ 0.14 $ 0.09 $ 0.44 $ 0.18
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.

4
<PAGE>

CHIRON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)

THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 25,387 $ 15,742 $ 79,868 $ 31,078
---------- ---------- ---------- ---------

Other comprehensive income (loss):

Foreign currency translation adjustment:
Change in foreign currency translation
adjustment during the period 1,430 446 (983) (11,524)
Plus: reclassification adjustment for loss
included in discontinued operations - - 2,087 -
---------- ---------- ---------- ---------
Net foreign currency translation adjustment 1,430 446 1,104 (11,524)
---------- ---------- ---------- ---------

Unrealized loss from investments:
Unrealized holding losses arising during
the period (10,244) (11,438) (4,935) (5,450)
Less: reclassification adjustment for net
gains included in net income (635) - (2,435) -
---------- ---------- ---------- ---------
Net unrealized loss from investments (10,879) (11,438) (7,370) (5,450)
---------- ---------- ---------- ---------

Other comprehensive loss (9,449) (10,992) (6,266) (16,974)
---------- ---------- ---------- ---------

Comprehensive income $ 15,938 $ 4,750 $ 73,602 $ 14,104
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.

5
<PAGE>

CHIRON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>

SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
1998 1997
---------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 46,698 $ 61,387
---------- ----------
Cash flows from investing activities:
Purchases of investments in marketable debt securities (222,316) (27,911)
Proceeds from sale and maturity of investments in marketable debt securities 127,620 39,760
Capital expenditures (35,548) (36,383)
Proceeds from disposal of discontinued operations 298,939 -
Proceeds from sale of assets 18,482 -
Business acquired, net of cash acquired (54,770) -
Other, net (7,084) (7,976)
---------- ----------
Net cash provided by (used in) investing activities 125,323 (32,510)
---------- ----------

Cash flows from financing activities:
Proceeds from issuance of short-term debt - 16,014
Repayment of short-term debt (137,025) -
Repayment of notes payable and capital leases (1,319) (30,818)
Proceeds from issuance of common stock 25,960 29,740
---------- ----------
Net cash (used in) provided by financing activities (112,384) 14,936
---------- ----------

Net increase in cash and cash equivalents 59,637 43,813
Cash and cash equivalents at beginning of the period 98,483 68,114
---------- ----------
Cash and cash equivalents at end of the period $ 158,120 $ 111,927
---------- ----------
---------- ----------
</TABLE>

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.

6
<PAGE>

CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The information at June 30, 1998, and for the three and six months ended
June 30, 1998 and 1997, is unaudited, but includes all normal recurring
adjustments which the management of Chiron Corporation (the "Company" or
"Chiron") believes to be necessary for fair presentation of the periods
presented. In addition, in the second quarter of 1998, a $6.0 million reduction
in cost of sales was recognized due to a change in estimated property tax
accruals created in prior periods; a $3.6 million reduction in restructuring and
reorganization charges was recognized due to a revised estimate of property and
other tax-related accruals recorded in 1995 in connection with the idling of the
Puerto Rico facility (see Note 3); and a $3.6 million reduction in selling,
general and administrative expenses was recognized due to changes in estimated
accruals created in prior periods. In the second quarter of 1997, a $6.6
million reduction in cost of sales was recognized due to a revised estimate of
royalties to be paid on sales of certain diagnostic products; a $4.7 million
reduction in selling, general and administrative expenses was recognized due to
changes in estimated accruals created in prior periods; and $0.9 million of
other revenues was recognized as a result of a reduction in estimated royalty
reserves created in the first quarter of 1997.

The condensed consolidated balance sheet amounts at December 31, 1997 have
been derived from audited financial statements. Interim results are not
necessarily indicative of results for a full year. This information should be
read in conjunction with Chiron's audited consolidated financial statements for
the year ended December 28, 1997, which are included in the Annual Report on
Form 10-K filed by the Company with the Securities and Exchange Commission.

In the first quarter of 1998, Chiron completed the sale of its ophthalmic
business unit, Chiron Vision Corporation ("Chiron Vision"), to Bausch & Lomb
Incorporated (see Note 2). The accompanying Condensed Consolidated Statements
of Operations for all periods presented reflect the after-tax results of Chiron
Vision, and the gain on disposal thereof, as discontinued operations.

In the second quarter of 1998, Chiron acquired Hoechst AG's 51 percent
interest in Chiron Behring GmbH & Co KG ("Chiron Behring") in an acquisition
accounted for under the purchase method of accounting (see Note 6). Beginning
March 31, 1998, the financial position and results of operations of Chiron
Behring are consolidated with those of the Company.

FISCAL YEAR

The fiscal year of the Company is a 52 or 53-week year ending on the Sunday
nearest the last day in December of each year. As a result, the second quarters
of 1998 and 1997 represent the thirteen-week periods ended June 28, 1998 and
June 29, 1997, respectively. For presentation purposes, dates used in the
condensed consolidated financial statements and notes refer to the fiscal month
end.

7
<PAGE>

CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES

Pharmaceutical inventories are stated at the lower of cost or market using
the average cost method or, in the case of certain vaccine products, using the
last-in, first-out ("LIFO") method. Diagnostic, ophthalmic (see Note 2), and
certain other vaccine products are valued at cost, using the first-in, first-out
("FIFO") method which is less than market value. Inventories consist of the
following:

JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods $ 61,513 $ 82,896
Work in process 73,870 47,417
Raw materials 34,848 35,339
--------- ----------
$ 170,231 $165,652
--------- ----------
--------- ----------
</TABLE>

INCOME TAXES

The 1998 estimated annual tax provision is expected to be 25 percent of
pretax income from continuing operations, excluding restructuring and
reorganization charges, a financial reporting gain on sale of assets (see Note
5), and $6.0 million of financial reporting income recognized in the second
quarter of 1998 due to a change in estimated property tax accruals. The
provision may be affected in future periods by changes in management's estimates
with respect to the Company's deferred tax assets and other items affecting the
overall tax rate. Restructuring and reorganization charges recorded during the
six months ended June 30, 1998 are expected to create a current additional
income tax benefit of approximately $1.2 million in 1998. The Company does not
anticipate an income tax benefit from these charges for the three months ended
June 30, 1998. The $1.2 million benefit is lower than the estimated annual tax
rate applied to the restructuring and reorganization charges in the first half
of 1998 due to the timing of the deduction of a certain portion of the charges
for income tax purposes, and because a substantial portion of the charge offsets
income of certain subsidiaries which, without regard to such charges, is already
taxed at a low effective rate due to the use of certain net operating loss
carryforwards. The sale of the Company's Puerto Rico facility, for which a
financial reporting gain on sale of assets was recorded during the three and six
months ended June 30, 1998, resulted in a tax deductible loss for which a
current additional income tax benefit of approximately $1.5 million was
recognized. These income tax benefits offset income tax expense attributable to
pretax income from continuing operations and, accordingly, reduce the effective
rate of tax on continuing operations. Financial reporting income of $6.0
million was recognized during the three and six months ended June 30, 1998 from
a change in estimated property tax accruals; such accruals were not tax
deductible and, accordingly, the change of estimate resulted in no income tax
provision. As they more likely than not will be realized, net deferred tax
assets of $2.5 million and $3.5 million and corresponding credits to deferred
tax expense, were recognized during the three and six months ended June 30,
1998, respectively, for U.S. federal and state tax purposes. The recognition of
such net deferred tax assets is based on management's estimates of future
taxable income in the United States and for certain foreign jurisdictions in
which the Company's operations have historically been profitable. Such
estimates are subject to change based on future events and, accordingly, the
amount of deferred tax assets recognized may increase or decrease from period to
period.

Income tax expense for the three and six months ended June 30, 1997 was
based on an estimated annual effective tax rate on pretax income from continuing
operations of approximately 30 percent. The actual 1997 annual effective tax
rate of 24 percent, exclusive of the impact of an impairment loss in the third
quarter, reflects a change in estimate during the second half of 1997 of the mix
of foreign versus domestic profits, benefits of certain tax credits and loss
carryforwards, and anticipated foreign sales corporation benefits.

8
<PAGE>

CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PER SHARE DATA

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" ("SFAS 128"), basic earnings per share data is based
on the weighted-average number of common shares outstanding during the period.
Diluted earnings per share data is based on the weighted-average number of
common and dilutive potential common shares outstanding. Dilutive potential
common shares result from (i) the assumed exercise of outstanding stock options,
warrants and equivalents thereof that have a dilutive effect when applying the
treasury stock method; and (ii) performance units to the extent that dilutive
shares are assumed to be issuable if the contingency and reporting periods ended
on the same date. All prior-period per share data has been restated to conform
with the provisions of SFAS 128 subsequent to its adoption by the Company in the
fourth quarter of 1997.

Income from continuing operations as reported and available to common
stockholders was $25.4 million and $14.5 million for the three and six months
ended June 30, 1998, respectively, and $14.8 million and $31.2 million for the
three and six months ended June 30, 1997, respectively. A reconciliation of the
denominators of Chiron's earnings per common share computations is as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted-average common shares outstanding 177,308 172,996 176,725 172,270
Effect of dilutive securities:
Options and equivalents 2,585 3,771 2,703 4,149
Warrants 187 188 188 192
Performance units - 56 - 36
------------ ------------ ------------ ------------
Weighted-average common shares outstanding
plus assumed conversions 180,080 177,011 179,616 176,647
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

A total of 12,026,000 shares of common stock issuable upon conversion of
the Company's convertible subordinated debentures, having a weighted-average
conversion price of $29.43 per share, has been excluded from the computations of
diluted earnings per common share for all periods presented since its inclusion
would be antidilutive.

For the three and six months ended June 30, 1998, options to purchase
13,500,000 and 13,456,000 shares, respectively, of common stock were outstanding
on a weighted-average basis but were excluded from the computation of diluted
earnings per common share because the options' exercise prices were greater than
the respective average market price of the underlying stock of $19.07 in the
second quarter of 1998 and $19.06 in the first half of 1998. An insignificant
number of performance units contingently payable in shares of common stock was
also excluded from the computation of diluted earnings per common share based on
the performance goals which were then unmet at June 30, 1998.

For the three and six months ended June 30, 1997, options to purchase
11,435,000 and 11,129,000 shares, respectively, of common stock were outstanding
on a weighted-average basis but were excluded from the computation of diluted
earnings per common share because the options' exercise prices were greater than
the average market price of the underlying stock of $19.10 in the second quarter
of 1997 and $19.27 in the first half of 1997. An insignificant number of
performance units contingently payable in shares of common stock was also
excluded from the computation of diluted earnings per common share based on the
performance goals which were then unmet at June 30, 1997.

9
<PAGE>

CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

COMPREHENSIVE INCOME

In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which establishes standards for reporting
and display of comprehensive income and its components. In accordance with SFAS
130, the Company has displayed the components of "Other comprehensive loss" and
"Comprehensive income," net of their related tax effects, in the accompanying
Condensed Consolidated Statements of Comprehensive Income. The net foreign
currency translation adjustment and components thereof have no tax effect as the
Company makes no provision for U.S. income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations. All prior-period data has been reclassified to conform with the
provisions of SFAS 130.

SEGMENT INFORMATION

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which is effective for fiscal years beginning after December 15, 1997.
SFAS 131 establishes standards for reporting financial and descriptive
information about an enterprise's operating segments in its annual financial
statements and selected segment information in interim financial reports.
Although SFAS 131 need not be applied to interim financial statements in the
initial year of application, comparative information for interim periods of
fiscal 1998 will be reported in the Company's interim financial statements in
fiscal 1999. Further, all comparative information for prior periods will be
restated to conform with the provisions of SFAS 131. Application of the
disclosure requirements of SFAS 131 will have no impact on the Company's
consolidated financial position, results of operations or earnings per share
data as currently reported.

NEW ACCOUNTING STANDARD

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is effective for all quarters of fiscal years beginning after June 15,
1999. SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In accordance with SFAS 133, an entity
is required to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The Company has not determined the
timing or method of adoption and is currently evaluating the effect that
implementation of SFAS 133 will have on its results of operations and financial
position.

NOTE 2--DISCONTINUED OPERATIONS

On December 29, 1997, Chiron completed the sale of all of the outstanding
capital stock of Chiron Vision, a wholly owned subsidiary, to Bausch & Lomb
Incorporated ("B&L") for approximately $300.0 million in cash, subject to
certain post-closing adjustments. The sale was completed under the terms of a
Stock Purchase Agreement (the "Agreement"), dated as of October 21, 1997,
between Chiron and B&L. In accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," Chiron Vision is reported as a discontinued
operation for all periods presented in the accompanying Condensed Consolidated
Statements of Operations. Chiron Vision's cash and cash equivalents totaling
$2.7 million, certain Chiron Vision real estate assets (the "real estate
assets") with a carrying value of $25.1 million and Chiron Vision's future
noncancelable operating lease costs totaling $1.1 million were retained by the
Company upon completion of

10
<PAGE>

CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 2--DISCONTINUED OPERATIONS (CONTINUED)

the sale. Additionally, the Company agreed to provide customary indemnities
under the terms of the Agreement.

For a period of three years following the completion of the sale, Chiron
Vision has the right to use the currently occupied portion of the real estate
assets on a rent-free basis. The real estate assets are recorded in the
accompanying Condensed Consolidated Balance Sheet at June 30, 1998 as a
component of "Assets held for sale" (see Note 4). In the first quarter of 1998,
the Company recorded a $13.6 million adjustment to record the real estate assets
at their estimated fair value, determined on the basis of independent
appraisals, less cost to sell. This adjustment was recorded as a reduction to
the "Gain on disposal of discontinued operations" in the accompanying Condensed
Consolidated Statement of Operations for the six months ended June 30, 1998.

The accompanying Condensed Consolidated Balance Sheets include the net
assets of discontinued operations, including the real estate assets, as follows:

JUNE 30, DECEMBER 31,
1998 1997
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable, net $ - $ 48,073
Inventories - 37,944
Assets held for sale 11,500 -
Property, plant, equipment and leasehold improvements, net - 47,634
Purchased technology, net - 25,068
Other intangible assets, net - 41,567
Accounts payable and other current liabilities - (38,343)
Other assets and liabilities, net - 5,025
----------- ----------
$ 11,500 $ 166,968
----------- ----------
----------- ----------

</TABLE>

Chiron Vision recognized total revenues of $52.7 million and $103.1 million
for the three and six months ended June 30, 1997, respectively. "Income (loss)
from discontinued operations" in the accompanying Condensed Consolidated
Statement of Operations for both the three and six months ended June 30, 1997 is
reported net of a provision for income taxes of $0.8 million. "Gain on disposal
of discontinued operations" in the accompanying Condensed Consolidated Statement
of Operations for the six months ended June 30, 1998 is reported net of a
provision for income taxes of $31.2 million.

For the three months ended June 30, 1998, basic and diluted earnings per
common share from discontinued operations was $0.00. For the three months ended
June 30, 1997, basic and diluted earnings per common share from discontinued
operations were $0.00 and $0.01, respectively. For the six months ended
June 30, 1998, basic and diluted earnings per common share from discontinued
operations were $0.37 and $0.36, respectively. For the six months ended
June 30, 1997, basic and diluted loss per common share from discontinued
operations was ($0.00).

NOTE 3--RESTRUCTURING AND REORGANIZATION CHARGES

In the first half of 1998, Chiron recognized net restructuring and
reorganization charges of $22.3 million, which include a second-quarter net
benefit of $1.9 million and a first-quarter charge of $24.2 million. The net
restructuring and reorganization benefit in the second quarter of 1998 consists
of a $3.6 million benefit due to a revised estimate of property and other
tax-related accruals recorded in 1995 in connection with the idling of the
Puerto Rico facility, and charges of $1.7 million consisting primarily of
facility and employee termination costs. At June 30, 1998, the liability
associated with second-quarter restructuring and reorganization charges was $0.4
million.

11
<PAGE>

CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 3--RESTRUCTURING AND REORGANIZATION CHARGES (CONTINUED)

Of the $24.2 million restructuring and reorganization charge in the first
quarter of 1998, $21.0 million was due to termination and other employee-related
costs in connection with the planned elimination of 403 positions in sales,
marketing and other administration, manufacturing, and research and development
functions. The elimination of these positions is due primarily to the Company's
ongoing rationalization of business operations, particularly within its
diagnostics business, the consolidation of blood gas instrument manufacturing
and the closure of the Company's St. Louis manufacturing facility. In
connection with the plan of termination, 283 employees were terminated during
the first half of 1998 and benefits of $6.2 million were paid and charged
against the accrual. The remaining $3.2 million of first-quarter restructuring
and reorganization charges resulted primarily from facility-related costs. Of
this amount, approximately $1.3 million was charged against the liability during
the first half of 1998. At June 30, 1998, the liability associated with
first-quarter restructuring and reorganization charges was $16.7 million. This
liability is expected to be substantially settled through the first quarter of
1999.

The Company anticipates that it will incur future restructuring and
reorganization expenses in the second half of 1998 as it continues to create a
simpler, more efficient cost structure for the organization.

NOTE 4--ASSETS HELD FOR SALE

Assets held for sale at June 30, 1998 consist of the Company's St. Louis
facility and the real estate assets from discontinued operations, described in
Note 2. In March 1998, the Company committed to plans to sell its manufacturing
facility in St. Louis, Missouri and its related machinery and equipment assets.
These plans were made in response to Chiron's ongoing analysis of manufacturing
capacity relative to its projected needs. The carrying amount of the St. Louis
facility and related machinery and equipment assets (collectively, the "St.
Louis facility") was $18.3 million at June 30, 1998. Operating expenses of the
St. Louis facility of $0.9 million and $3.1 million for the three and six months
ended June 30, 1998, respectively, and $3.3 million and $6.6 million for the
three and six months ended June 30, 1997, respectively, are included in "Income
from operations" in the accompanying Condensed Consolidated Statements of
Operations. The Company is currently in negotiations for sale of the St. Louis
facility in the third quarter of 1998.

NOTE 5--GAIN ON SALE OF ASSETS

In March 1998, the Company committed to plans to sell its idle
pharmaceutical fill and finishing facility in Puerto Rico and related machinery
and equipment assets (collectively, the "Puerto Rico facility") in response to
Chiron's ongoing analysis of manufacturing capacity relative to its projected
needs. The resulting adjustment in the first quarter of 1998 to record the
assets held for sale at the lower of their aggregate carrying amount or
estimated fair value, determined on the basis of independent appraisals, less
cost to sell, was insignificant. The Company sold the Puerto Rico facility in
June 1998 to IPR Pharmaceuticals, Inc. for $18.5 million in cash. The sale of
the Puerto Rico facility resulted in a net gain of $6.2 million, which is
reflected as "Gain on sale of assets" in the accompanying Condensed Consolidated
Statements of Operations for the three and six months ended June 30, 1998. At
the time of sale, the carrying amount of the Puerto Rico facility was $11.1
million. Operating expenses of the Puerto Rico facility for the second quarter
and first half of 1998, through the date of disposal, were $0.6 million and $2.1
million, respectively. For the second quarter and first half of 1997, these
expenses were $2.1 million and $4.2 million, respectively. These operating
expenses are included in the Company's "Income from operations" in the
accompanying Condensed Consolidated Statements of Operations for all periods
presented.

NOTE 6--AGREEMENT WITH HOECHST AG

Effective July 1, 1996, Chiron purchased a 49 percent interest in the human
vaccine business of Behringwerke AG, which subsequently merged into its parent
company, Hoechst AG. During the period of mutual ownership and through the
first quarter of 1998, Chiron and Hoechst AG operated the vaccine business as a
joint venture. Chiron accounted for its interest under the equity method and
recognized $2.4 million for the three months ended March

12
<PAGE>

CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 6--AGREEMENT WITH HOECHST AG (CONTINUED)

31, 1998, and $6.2 million and $6.3 million for the three and six months ended
June 30, 1997, respectively, as components of "Equity in earnings of
unconsolidated joint businesses" in the accompanying Condensed Consolidated
Statements of Operations.

Summarized statement of operations information for Chiron Behring during
the period of mutual ownership and through the first quarter of 1998, which
excludes Chiron's amortization of intangible assets recorded in the July 1996
acquisition, is as follows:

Three Months Three Months Six Months
Ended Ended Ended
March 31, June 30, June 30,
1998 1997 1997
------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales $ 36,356 $ 41,913 $ 84,038
Gross profit $ 21,075 $ 26,778 $ 54,389
Income from continuing operations before
extraordinary items and cumulative effect
of a change in accounting principle $ 6,213 $ 9,326 $ 19,177
Net income $ 6,213 $ 9,326 $ 19,177
</TABLE>

Prior to December 1997, Chiron's share of the joint venture's results were
reported on a one-month lag. As a result, Chiron's equity in earnings of Chiron
Behring for the second quarter and first half of 1997 was calculated based, in
part, on the joint venture's net income for the three and six months ended May
31, 1997 of $13.6 million and $14.2 million, respectively, rather than the net
income of $9.3 million and $19.2 million for the three and six months ended
June 30, 1997, respectively, reflected above.

On March 31, 1998, Chiron acquired Hoechst AG's 51 percent interest in
Chiron Behring. The acquisition was accounted for under the purchase method
of accounting. The purchase price of approximately $113.1 million was
allocated to the acquired assets and liabilities assumed based upon their
estimated fair value on the acquisition date. In connection with the
acquisition, liabilities were assumed as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired $ 264,041
Carrying value of original investment in Chiron Behring (117,157)
Cash paid (111,889)
Acquisition costs (1,180)
------------
Liabilities assumed $ 33,815
------------
------------
</TABLE>

Chiron recognized as an expense the amount of the purchase price allocated
to purchased in-process technologies, resulting in a charge against earnings of
approximately $1.6 million in the second quarter of 1998. Other purchased
intangible assets of approximately $135.0 million, including goodwill,
trademarks, patents and customer list, are being amortized over their
estimated useful lives of 4 to 18 years on a straight-line basis. The results
of operations of Chiron Behring are included in Chiron's consolidated
operating results beginning in the second quarter of 1998.

The following unaudited pro forma information presents the results of
continuing operations of Chiron and Chiron Behring for the three months ended
June 30, 1997 and the six months ended June 30, 1998 and 1997, with pro forma
adjustments as if Chiron's acquisition of the remaining 51 percent interest in
Chiron Behring had been consummated as of January 1, 1997. Given the Company's
acquisition of the remaining 51 percent interest in, and consolidation of,
Chiron Behring effective March 31, 1998, pro forma information for the three
months ended June 30, 1998 is not applicable. The pro forma information does not
purport to be indicative of what would have occurred had the acquisition been
made as of those dates or of results which may occur in the future. In
addition, the pro forma information for the three months ended June 30, 1997 and
the six months ended June 30, 1998 and 1997, does not include the write-off of
purchased in-process technologies of $1.6 million (the "non-recurring charge")
related to the acquisition of the remaining 51 percent interest in Chiron
Behring, which is reflected in the Company's results as reported for the three
months ended June 30, 1998.

13
<PAGE>

CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 6--AGREEMENT WITH HOECHST AG (CONTINUED)

The unaudited pro forma information is as follows:

<TABLE>
<CAPTION>
Three Months Six Months Six Months
Ended Ended Ended
June 30, June 30, June 30,
1997 1998 1997
------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total revenues $ 316,813 $ 608,398 $ 638,770
Income from continuing operations
before the non-recurring charge $ 25,616 $ 16,881 $ 48,175
Pro forma income per share from continuing
operations before the non-recurring charge:
Basic $ 0.15 $ 0.10 $ 0.28
Diluted $ 0.14 $ 0.09 $ 0.27
</TABLE>

As discussed in Note 1, the fiscal year of the Company is a 52 or 53-week
year ending on the Sunday nearest the last day in December of each year. Chiron
Behring, however, is accounted for on a calendar year basis, which may not
coincide with the Company's quarter-end and year-end periods.

NOTE 7--CONTINGENCIES

The Company is party to various claims, investigations and legal
proceedings arising out of the normal course of its business. These claims,
investigations and legal proceedings relate to intellectual property rights,
contractual rights and obligations, employment matters, shareholder derivative
claims, claims of product liability, and other issues. While there can be no
assurance that an adverse determination of any 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 these matters will
have a material adverse effect upon the Company's consolidated financial
position and annual results of operations and cash flows.

NOTE 8--SUBSEQUENT EVENTS

AGREEMENT WITH GEN-PROBE, INC. ("GEN-PROBE")

In the third quarter of 1998, Chiron and Gen-Probe, a wholly owned
subsidiary of Chugai Pharmaceutical Co., Ltd., signed an agreement to form a
strategic alliance to develop, manufacture and market nucleic acid probe
assay systems for blood screening and certain areas of diagnostics. Under
the terms of the agreement, Chiron will market and sell products that utilize
the Company's intellectual property relating to hepatitis C (HCV) and human
immunodeficiency virus (HIV) and Gen-Probe's patented transcription-mediated
amplification (TMA), target capture, hybridization protection assay (HPA) and
dual kinetic assay (DKA) technologies. In exchange for the rights to
Gen-Probe's technology, Chiron paid $10.0 million upon signing the agreement,
which will be recorded as a component of "Other intangible assets, net" in
the Company's consolidated balance sheet at September 30, 1998. This asset
will be utilized across a broad base of technology within the Company's blood
screening and nucleic acid diagnostic businesses. In addition, Chiron is
obligated to pay an additional $15.0 million 30 days after Gen-Probe's
submission of an investigational new drug application to the Food and Drug
Administration ("FDA") and another $10.0 million upon Gen-Probe's receipt of
marketing approval from the FDA. The agreement also provides certain
provisions for additional cost sharing and royalties upon the
commercialization of specified products.

14
<PAGE>

CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 8--SUBSEQUENT EVENTS (CONTINUED)

AGREEMENT WITH INTERNATIONAL BUSINESS MACHINES CORPORATION ("IBM")

Effective July 1, 1998, Chiron and IBM executed a ten-year information
technology services agreement. Under this agreement, IBM will provide Chiron
with a full range of information services, including designing and deploying a
company-wide distributed network system, establishing a comprehensive help-desk
operation, and developing a standardized desk-top platform using IBM
workstations. Chiron may terminate this agreement beginning July 1, 1999, with
no less than 180 days prior notice to IBM, subject to certain termination
charges. Through July 1, 1999, Chiron's payments to IBM will total $19.3
million. If Chiron does not terminate this agreement prior to expiration,
payments to IBM will approximate $138.8 million in aggregate. Payments to IBM
are subject to adjustment depending upon the levels of services and
infrastructure equipment provided by IBM.

PURCHASE OF MANUFACTURING AND ADMINISTRATIVE FACILITIES

On July 16, 1998, the Company completed the purchase of manufacturing and
administrative facilities in Siena, Italy, which were previously under lease.
The net purchase price of 35.3 billion Italian lira (approximately $20.2
million), will be recorded as a component of "Land and buildings" in the
Company's consolidated balance sheet at September 30, 1998.

LICENSE ISSUANCE FEE REVENUES

In July 1998, the Company entered into a non-exclusive license agreement
with respect to certain of its technologies. Under this agreement, Chiron
expects to recognize one-time non-refundable license issuance fee revenues of
$24.0 million in the third quarter of 1998.

15
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

CHIRON CORPORATION

OVERVIEW

THE DISCUSSION BELOW CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES RELATING TO THE FUTURE FINANCIAL PERFORMANCE OF CHIRON
CORPORATION (THE "COMPANY" OR "CHIRON"), AND ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY. IN EVALUATING SUCH STATEMENTS, STOCKHOLDERS AND INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED UNDER THE CAPTION "FACTORS
THAT MAY AFFECT FUTURE OPERATING RESULTS" WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCES OF
UNANTICIPATED EVENTS.

THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH PART I, ITEM 1,
"FINANCIAL STATEMENTS," OF THIS QUARTERLY REPORT ON FORM 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 THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 28, 1997.

Chiron develops, manufactures and markets human healthcare products for the
prevention, diagnosis and treatment of disease utilizing innovations in biology
and chemistry. Chiron participates in three human healthcare markets: (i)
diagnostics, including blood screening tests, automated immunodiagnostic
systems, critical blood analyte systems and nucleic acid probe tests; (ii) adult
and pediatric vaccines; and (iii) therapeutics, with an emphasis on oncology,
serious infectious diseases and critical care diseases. Chiron also develops or
acquires new technologies, employing these technologies to discover new products
for the Company or for its partners. On December 29, 1997, Chiron completed the
sale of its ophthalmic business unit, Chiron Vision Corporation ("Chiron
Vision"), to Bausch & Lomb Incorporated ("B&L"). The Company's condensed
consolidated statements of operations reflect the after-tax results of Chiron
Vision, and the gain on disposal thereof, as discontinued operations for all
periods presented. In addition, Chiron is currently examining various strategic
transactions, including a possible joint venture arrangement, involving
significant portions of its diagnostics business.

RESULTS OF OPERATIONS

REVENUES

The Company's revenues are derived from a variety of sources, including
product sales, joint business arrangements, collaborative agreements and product
royalty agreements. Product sales, Chiron's largest revenue category, consists
of the following product lines:

THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
--------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Diagnostic products $146,607 $154,929 $286,309 $303,951
Vaccine products 43,973 17,191 58,441 35,710
Therapeutic products 46,990 31,525 97,292 64,775
-------- -------- -------- --------
$237,570 $203,645 $442,042 $404,436
-------- -------- -------- --------
-------- -------- -------- --------

</TABLE>

Sales of the Company's diagnostic products are moderately seasonal, with
lower sales in the first and third quarters and higher sales in the second and
fourth quarters of the year. Sales of certain of the Company's vaccine
products, particularly flu vaccine, also are seasonal, with higher sales in the
fourth quarter of the year. As a result, Chiron's results in any one quarter
are not necessarily indicative of results to be expected for a full year.

16
<PAGE>

The Company markets most of its commercial products internationally. As a
result, product revenues in almost all product lines are affected by fluctuating
foreign currency exchange rates. Foreign product sales in the second quarter of
1998 and 1997 were approximately $146.6 million and $114.6 million,
respectively. For the first half of 1998 and 1997, foreign product sales were
$253.7 million and $228.1 million, respectively. The overall increase in foreign
product sales between periods was primarily due to Chiron's acquisition of the
remaining 51 percent interest in, and consolidation of, Chiron Behring GmbH & Co
KG ("Chiron Behring"), effective March 31, 1998. See additional discussion under
AGREEMENT WITH HOECHST AG herein. Changing currency exchange rates have had, and
will continue to have, an impact on Chiron's results. For the second quarter
and first half of 1998, product sales would have been higher by $6.8 million and
$15.2 million, respectively, had currency exchange rates in 1998 remained
constant with those in 1997. In addition, Chiron's product sales in the
Asia/Pacific area, consisting largely of diagnostic products, are subject to
fluctuation due to the economic crises that are occurring throughout that
region. There can be no assurances that these economies will recover in the
near term or that the Asian financial crisis will not have a material adverse
impact on the Company's results of operations in future periods. The Company's
non-product revenues, discussed below, are largely denominated in U.S. dollars
but are affected by the Company's joint partners' and collaborators' non-U.S.
operations.

DIAGNOSTIC PRODUCTS Diagnostic product sales include sales and sales-type
leases of immunodiagnostic testing systems (ACS:180-Registered Trademark- and
ACS:Centaur-TM- automated chemiluminescence systems), reagents and supplies for
these systems and revenues from instruments, reagents and supplies under related
operating leases; sales of critical care systems, clinical chemistry products
and manual immunodiagnostic systems; sales of branched DNA ("bDNA") probe
systems and kits for human immunodeficiency virus ("HIV"), hepatitis C virus
("HCV") and hepatitis B virus ("HBV"), which are available in the U.S. for
research use only; and sales of blood screening antigens and kits. Sales of
diagnostic products decreased by $8.3 million and $17.6 million in the second
quarter and first half of 1998, respectively, as compared with the same periods
in 1997, primarily due to the December 1997 sale and closure of the worldwide
Quality Controls business and electrophoresis business, respectively, which
contributed an aggregate of $6.4 million and $12.8 million to diagnostic product
sales in the second quarter and first half of 1997, respectively. In addition,
had exchange rates in the second quarter and first half of 1998 remained
constant with those in the same periods of 1997, particularly in Japan, Germany,
Australia, France and Korea, diagnostic product sales in the second quarter and
first half of 1998 would have been higher by $5.9 million and $12.6 million,
respectively. Diagnostic product sales in the second quarter and first half of
1998, as compared with the corresponding periods in 1997, reflect increased
sales of ACS:180-Registered Trademark- immunodiagnostic products, despite
competitive pricing pressure on certain assays, and increased sales of critical
blood gas instruments. The increase in sales of ACS:180-Registered Trademark-
immunodiagnostic products reflects increased sales volume of reagents resulting
from the compounding effect of increased ACS:180-Registered Trademark- system
placements as compared with the prior year. The increase in sales of critical
blood gas instruments reflects strong domestic sales as well as a shift in the
mix of sales from operating leases to capital sales.

VACCINE PRODUCTS Vaccine product sales consist principally of sales by
Chiron Behring and by Chiron's Italian subsidiary of pediatric and flu vaccines
in Germany, Italy and certain international markets. Vaccine product sales in
the second quarter and first half of 1998 increased by $26.8 million and $22.7
million, respectively, as compared with the corresponding periods in 1997, due
to Chiron's acquisition of the remaining 51 percent interest in, and
consolidation of, Chiron Behring effective March 31, 1998. Decreased sales of
the Company's oral polio vaccine in the second quarter and first half of 1998 as
compared with the same periods of the prior year were largely offset by
increased vaccine sales of haemophilus influenzae type B (HIB) and adult
influenza vaccines. The supply constraints related to the Company's oral polio
vaccine experienced in 1997 and through much of the second quarter of 1998 have
been resolved, and sales in the third and fourth quarter of 1998 are expected to
increase over their current level.

THERAPEUTIC PRODUCTS Sales of Proleukin-Registered Trademark-
(aldesleukin, interleukin-2) increased $7.7 million and $10.7 million in the
second quarter and first half of 1998, respectively, as compared with the
corresponding periods in 1997, due to (i) a domestic sales price increase in
January 1998, and (ii) volume increases attributable to continued growth in
existing indications and the expanded use of Proleukin-Registered Trademark-
for the new indication of metastatic melanoma. Also contributing to the
overall increase in Proleukin-Registered Trademark- sales was an increase in
vials sold in European markets. On an annual basis, Proleukin-Registered
Trademark- revenues in 1998 are not expected to increase at the current rate.

Under the terms of a development and supply agreement with Schering AG,
Germany ("Schering AG"), and its U.S. affiliate, Berlex Laboratories, Inc.
("Berlex"), Chiron manufactures Betaseron-Registered Trademark- (interferon
beta-1b) for Berlex and Schering AG. Under the terms of the agreement, Chiron
earns an initial partial payment for Betaseron-Registered Trademark- upon
shipment

17
<PAGE>

to Berlex and Schering AG and a subsequent secondary payment for
Betaseron-Registered Trademark- upon net sales of the product to patients.
Beginning July 1997, the terms of payment changed, with a larger portion due
when sales are realized rather than at the time of initial shipment. The
increase in Betaseron-Registered Trademark- product sales in the second quarter
and first half of 1998 of $2.8 million and $3.2 million, respectively, reflects
the change in payment terms described above and an increase in vials sold to
Berlex and Schering AG. Secondary revenues earned by Chiron represent only part
of the total revenues derived from Betaseron-Registered Trademark- sales by
Berlex and Schering AG. The timing of future shipments to Berlex and the
related revenue may vary based upon the inventory management practices of
Berlex. A contractual decrease in the total payments received by Chiron for the
manufacture of Betaseron-Registered Trademark- will occur in October 1998. This
contractual decrease is not anticipated to impact Betaseron-Registered
Trademark- product sales until December 1998 when the secondary revenues are
recognized.

Revenues derived from platelet-derived growth factor ("PDGF"), which were
first recognized in the third quarter of 1997, contributed $4.6 million and
$17.9 million to Chiron's net product sales in the second quarter and first half
of 1998, respectively. PDGF is the active ingredient in Johnson & Johnson's
Regranex-Registered Trademark- (becaplermin) Gel (recombinant human
platelet-derived growth factor -rhPDGF-BB), a treatment for diabetic foot
ulcers. Of the total PDGF revenues recognized during the first half of 1998,
$8.0 million resulted from a contractual price adjustment to Chiron's 1997
sales, which was recognized during the first quarter of 1998, and approximately
$9.9 million was attributable to 1998 shipments. Revenues from sales of PDGF
are expected to fluctuate significantly in future periods subject to the
inventory management practices of Ortho-McNeil Pharmaceutical, Inc., a Johnson &
Johnson ("J&J") company, and to the development of the market for
Regranex-Registered Trademark-.

DIAGNOSTIC JOINT BUSINESS Equity in earnings of unconsolidated joint
businesses consists substantially of Chiron's one-half interest in the pretax
operating earnings of its joint blood screening business with Ortho Diagnostic
Systems, Inc. ("Ortho"), a J&J company. The joint business sells a full line of
tests required to screen blood for hepatitis viruses and retroviruses, and
provides supplemental tests and microplate-based instrument systems to automate
test performance and data collection. The joint business also holds the
immunodiagnostic rights to Chiron's hepatitis and retrovirus technology and
receives royalties from several companies, including Abbott Laboratories,
Pasteur Sanofi Diagnostics and Genelabs Diagnostic, Inc., for their sales of
certain tests. Chiron and Ortho separately are developing new immunodiagnostic
instrument systems expected to contain broad menus of immunodiagnostic tests to
serve their respective clinical diagnostic businesses. Chiron must obtain
Ortho's agreement in order that hepatitis and retrovirus tests may be developed
and marketed for use on Chiron Diagnostics' new systems. There can be no
assurance that Chiron can obtain such agreement on acceptable terms or at all.
Refer to Part II, Item 1, "Legal Proceedings--Ortho Diagnostic Systems, Inc." in
this Quarterly Report on Form 10-Q and Part I, Item 3, "Legal Proceedings--Ortho
Diagnostic Systems, Inc." of Chiron's Annual Report on Form 10-K for the fiscal
year ended December 28, 1997.

In the second quarter and first half of 1998, Chiron's share of the pretax
operating earnings of the joint business decreased by $5.2 million and $18.8
million, respectively, as compared with the same periods in the prior year.
These earnings are recorded by Chiron on a one-month lag based upon estimates
supplied by Ortho, which are subject to a final adjustment 90 days after the end
of each calendar year (the "final annual accounting"). In the second quarter of
1998, the decrease in joint business revenues as compared with the second
quarter of 1997 resulted from decreased foreign profits of the joint business,
including the adverse impact of changes in foreign currency exchange rates
between years, and joint business asset write-offs related to the implementation
of certain processes to comply with stricter Food and Drug Administration
("FDA") guidelines mandated throughout the industry. With respect to the first
half of 1998, the final annual accounting for 1997 resulted in a $4.1 million
charge as compared with $0.8 million of income in 1997. In addition, certain
other items recorded by Chiron in the first quarter of 1998 related to (i)
foreign profits of the joint business, (ii) certain one-time contract
termination fees, and (iii) joint business asset write-offs, contributed $6.9
million to the decrease in joint business revenues in the first half of 1998 as
compared with the first half of 1997.

AGREEMENT WITH HOECHST AG From the date of acquisition and through the
first quarter of 1998, equity in earnings of unconsolidated joint businesses
included Chiron's 49 percent share of the after-tax operating results of
Chiron Behring, which was acquired in July 1996. Chiron's share of earnings
of the joint venture, including amortization of intangibles, was $2.4 million
in the first quarter of 1998 and $6.2 million and $6.3 million in the second
quarter and first half of 1997, respectively. Refer to Note 6 of NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

In the second quarter of 1998, Chiron acquired Hoechst AG's 51 percent
interest in Chiron Behring. The acquisition was accounted for under the
purchase method of accounting. The purchase price of approximately $113.1
million, which included approximately $1.8 million of acquisition costs, was
allocated to the acquired assets and liabilities assumed based upon their
estimated fair value on the acquisition date. Chiron recognized as an expense
the amount of the purchase price allocated to purchased in-process
technologies, resulting in a charge against earnings of approximately $1.6
million in the second quarter of 1998. Other purchased intangible assets of
approximately $135.0 million, including goodwill, trademarks, patents and
customer list, are being amortized over their estimated useful lives of 4 to
18 years on a straight-line basis. The results of operations of Chiron
Behring are included in Chiron's consolidated operating results beginning in
the second quarter of 1998.

18
<PAGE>

COLLABORATIVE AGREEMENT REVENUES Collaborative agreement revenues consist
of fees received for research services as they are performed, proceeds from
sales of product rights, proceeds from sales of biological materials to research
partners for preclinical and clinical testing, and fees received upon attainment
of benchmarks specified in the related research agreements. Collaborative
agreement revenues for the second quarter and first half of 1998 decreased $4.7
million and $7.1 million, respectively, as compared with the same periods of
1997, due largely to decreased revenues recognized under collaborative
agreements with Green Cross of Japan for HIV gene therapy research and clinical
development, and with Janssen Pharmaceutica, N.V. for the development and use
of combinatorial libraries. In view of these decreases, management does not
expect future collaborative agreement revenues to be at levels commensurate
with that in 1997, unless new collaborative arrangements are made.

Collaborative agreement revenues also include research and development
funding from Novartis AG ("Novartis"). Under a December 1995 limited liability
company agreement, as amended, Novartis agreed to provide $250.0 million (which
may be increased to $300.0 million subject to certain conditions) through 1999
in support of research and development at Chiron, subject to certain aggregate
annual funding limitations. In connection with this funding arrangement, Chiron
recognized collaborative agreement revenues of $15.6 million and $18.0 million
for the second quarters of 1998 and 1997, respectively. For the first half of
1998 and 1997, Chiron recognized $31.6 million and $33.8 million, respectively.
Chiron anticipates receiving substantial additional funding from Novartis in
future periods under this funding arrangement. Under the December 1995 limited
liability company agreement, as amended, Novartis' funding obligation will not
exceed $62.3 million in 1998 and $50.3 million (plus any unused portion of the
funding limit for 1998) in 1999.

OTHER REVENUES Other revenues consist principally of product royalties,
including royalty revenues resulting from Schering AG's European sales of
Betaferon-Registered Trademark-, revenues generated from promotion and
co-promotion of Novartis' product Aredia-Registered Trademark- (pamidronate
disodium for injection), and, beginning in the second quarter of 1998,
royalty revenues and sales fees generated by Chiron Behring. Other revenues
recognized by Chiron in the second quarters of 1998 and 1997 were $26.1
million and $19.5 million, respectively. For the first half of 1998 and
1997, Chiron recognized $53.3 million and $46.6 million, respectively. The
overall increase in other revenues in the second quarter of 1998 as compared
with the corresponding period in 1997 is largely due to $9.3 million of other
revenues generated by Chiron Behring, consisting primarily of royalties and
sales fees from HBV vaccines. In addition, royalty revenues resulting from
Schering AG's European sales of Betaferon-Registered Trademark- increased by
$1.1 million in the second quarter of 1998 as compared with the same period
in 1997. Partially offsetting the increase in other revenues in the second
quarter of 1998 as compared with the second quarter of 1997 were decreased
revenues related to Aredia-Registered Trademark- (see discussion below) and
the sale of certain oncology-related marketing rights for $2.0 million in the
second quarter of 1997. The overall increase in other revenues in the first
half of 1998 as compared with the first half of 1997 is primarily due to
royalties and sales fees related to HBV vaccines generated by Chiron Behring,
an increase of $3.2 million in royalty revenues resulting from Schering AG's
European sales of Betaferon-Registered Trademark- and a one-time $5.0 million
license fee received from Pharmacia & Upjohn Company (see discussion below).
Partially offsetting the increase in the first half of 1998 as compared with
the corresponding period of 1997 were decreased revenues from
Aredia-Registered Trademark- (see discussion below) and an aggregate decrease
of $3.1 million from royalties on sales by Merck & Co., Inc. of HBV vaccines
and by Novo Nordisk of insulin and glucagon. A significant contractual
decrease in royalties related to insulin will occur in January 1999.

A November 1996 agreement with Novartis, executed primarily in connection
with a consent and agreement that resolved the Federal Trade Commission's review
of the Ciba-Geigy Ltd. and Sandoz Ltd. merger that created Novartis, provided
that Chiron, through a co-promotion arrangement with Novartis, would promote
Aredia-Registered Trademark- for two

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years after a six-month transitional period beginning April 1997. In
December 1997, the co-promotion arrangement with Novartis was modified such
that Chiron would no longer promote Aredia-Registered Trademark- after April
3, 1998. In the second quarter and first half of 1998, Chiron recognized $0.6
million and $9.8 million, respectively, of other revenues related to
Aredia-Registered Trademark-co-promotion services as compared with $6.6
million in both the second quarter and the first half of 1997. Prior to
April 1997, Chiron recognized other revenues from sales fees earned under an
agreement with Novartis which provided Chiron with sole promotional rights in
the U.S. to Aredia-Registered Trademark-. Under this exclusive agreement
which expired in March 1997, Chiron recognized Aredia-Registered Trademark-
sales fees of $12.5 million in the first quarter of 1997.

In January 1998, Chiron recognized $5.0 million of other revenues from a
one-time license fee under an exclusive collaboration with Pharmacia & Upjohn
Company to research, develop, manufacture and commercialize therapeutic and
prophylactic products for the treatment of HCV in humans. Subject to certain
limitations and cancellation clauses, Chiron and Pharmacia & Upjohn will share
equally in the funding of research activities performed under the collaboration
agreement. The term of the collaboration is three years, subject to extension
by mutual consent.

COSTS AND EXPENSES

GROSS PROFIT Gross profit as a percentage of net product sales for the
quarters ended June 30, 1998 and 1997 was 57 percent and 60 percent,
respectively. For the first six months of 1998 and 1997, gross profit as a
percentage of net product sales was 57 percent and 59 percent, respectively. In
the second quarter of 1998, a $6.0 million reduction in cost of sales was
recognized due to a change in estimated property tax accruals created in prior
periods. In the second quarter of 1997, a $6.6 million reduction in cost of
sales was recognized within Chiron Diagnostics due to a revised estimate of
royalties to be paid on sales of certain products. Gross profit margin
excluding these items would have been 54 percent and 57 percent for the quarters
ended June 30, 1998 and 1997, respectively, and 55 percent and 57 percent for
the first six months of 1998 and 1997, respectively.

The overall decrease in gross profit margin in the second quarter of
1998 as compared with the corresponding period in 1997 primarily resulted
from high fixed manufacturing costs related to the launch of the
ACS:Centaur-TM-, a more powerful immunodiagnostic system designed to markedly
increase laboratory productivity, and an unfavorable mix of vaccine product
sales which, beginning with the consolidation of Chiron Behring in the second
quarter of 1998, includes a significant portion of in-licensed products with
lower gross margins. The overall decrease in gross profit margin in the
second quarter of 1998 as compared with the second quarter of 1997 was
partially offset by improvements in gross profit margins on domestic sales of
Proleukin-Registered Trademark- due to a January 1998 price increase; sales of
PDGF in the second quarter of 1998; and the impact of an adverse sales mix of
diagnostic products in international markets in the second quarter of 1997.

In addition to the factors affecting gross profit margin in the second
quarters of 1998 and 1997 discussed above, the overall decline in gross profit
margin in the first half of 1998 as compared with the same period in 1997 is due
to certain nucleic acid diagnostic ("NAD") inventory adjustments and lower
average selling prices of NAD products, particularly in international markets,
in the first quarter of 1998. This decrease in gross profit margin was
partially offset by improvements in gross profit margin resulting from the
impact of charges recorded in the first quarter of 1997 related to vaccine
inventory reserves and temporarily idled manufacturing facilities in Italy.
Gross profit margin percentages may fluctuate significantly in future periods as
the Company's product mix continues to evolve.

RESEARCH AND DEVELOPMENT Chiron recognized research and development
expenses of $93.5 million and $94.3 million in the second quarters of 1998
and 1997, respectively. For the first half of 1998 and 1997, Chiron
recognized research and development expenses of $184.4 million and $182.2
million, respectively. Generally, the Company's research and development
expenses fluctuate from period to period depending upon the extent of
clinical trial-related activities, including the manufacturing of clinical
material; the number of products under development and their progress; and
the acquisition of companies and new technology and licensing rights. In the
second quarter and first half of 1998, research and development expenses
remained fairly constant despite the consolidation of Chiron Behring in the
second quarter of 1998, which increased research and development expenses by
$4.3 million. Decreases in research and development spending in the second
quarter and first half of 1998 were primarily related to
Myotrophin-Registered Trademark- (mecasermin) Injection, and research and
development costs related to PDGF, HBV vaccine and NAD products.
Myotrophin-Registered Trademark- Injection is being

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developed by the Company in collaboration with Cephalon, Inc. ("Cephalon") as
a treatment for amyotrophic lateral sclerosis ("ALS" or Lou Gehrig's
disease). On May 8, 1997, an FDA advisory committee found that there was not
sufficient evidence of efficacy in the use of Myotrophin-Registered
Trademark- Injection for the treatment of ALS to warrant FDA approval. In
November 1997, Chiron and Cephalon withdrew and resubmitted their application
to the FDA; this was done at the request of the FDA to allow more time for
review of the new drug application. In May 1998, the FDA issued a letter
stating that Myotrophin-Registered Trademark- is "potentially approvable,"
subject to the submission of additional information demonstrating that
Myotrophin-Registered Trademark- is effective in the treatment of ALS. There
can be no assurance as to whether this information will satisfy the FDA with
respect to Myotrophin-Registered Trademark-. Although Chiron and Cephalon are
continuing their discussions with the FDA and intend to provide this
information, the Company is unable to predict when resolution of this issue
will occur. In the second quarter and first half of 1998, the Company
incurred additional research expenses related to certain vaccine research,
biologics research and cancer targets and mechanisms research. In addition,
in connection with a May 1997 agreement with Hyseq, Inc. to collaborate in
the identification of genetic targets for the development of pharmaceutical
treatments for cancer, Chiron is obligated to fund allowable research costs,
in amounts not less than $8.5 million in the first year and $5.5 million in
each of the second and third years of the collaboration term, incurred by
Hyseq in performing research requested by the Company.

OTHER OPERATING EXPENSES Selling, general and administrative ("SG&A")
expenses as a percentage of net product sales in the second quarters of 1998
and 1997 were 37 percent and 39 percent, respectively. For the first six
months of 1998 and 1997, SG&A expenses as a percentage of net product sales
were 37 percent and 38 percent, respectively. In the second quarters of 1998
and 1997, Chiron recognized $3.6 million and $4.7 million, respectively, as
reductions in SG&A expenses due to changes in estimated accruals created in
prior periods. Selling and marketing expenses continued to represent the
largest portion of total SG&A expenses, as Chiron devoted significant
resources to support sales volumes in its existing product lines as well as
new products. The overall increase in SG&A expenses in the second quarter
and first half of 1998 as compared with the corresponding periods in 1997 was
due primarily to the consolidation of Chiron Behring in the second quarter of
1998, which contributed $13.4 million to SG&A expenses. In addition, SG&A
expenses in the second quarter and first half of 1997 included an aggregate
of $2.0 million and $4.2 million, respectively, of operating expenses
incurred by Chiron Diagnostics' Quality Controls and electrophoresis
businesses, which were sold and closed, respectively, in the fourth quarter
of 1997.

Of the $24.2 million restructuring and reorganization charge in the first
quarter of 1998, $21.0 million was due to termination and other employee-related
costs in connection with the planned elimination of 403 positions in sales,
marketing and other administration, manufacturing, and research and development
functions. The elimination of these positions is due primarily to the Company's
ongoing rationalization of business operations, particularly within its
diagnostics business, the consolidation of blood gas instrument manufacturing
and the closure of the Company's St. Louis manufacturing facility. In connection
with the plan of termination, 283 employees were terminated during the first
half of 1998 and benefits of $6.2 million were paid and charged against the
accrual. The remaining $3.2 million of first-quarter restructuring and
reorganization charges resulted primarily from facility-related costs. Of this
amount, approximately $1.3 million was charged against the liability during the
first half of 1998. At June 30, 1998, the liability associated with
first-quarter restructuring and reorganization charges was $16.7 million. This
liability is expected to be substantially settled through the first quarter of
1999. The first-quarter restructuring plans are expected to result in reduced
cost of sales, and SG&A and research and development expenses in future
periods.

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NON-OPERATING INCOME AND EXPENSE

In June 1998, Chiron completed the sale of its fill and finishing facility
in Puerto Rico to IPR Pharmaceuticals, Inc. which resulted in a gain on sale of
assets of $6.2 million. Interest expense in the second quarter and first half
of 1998 decreased $1.5 million and $2.9 million, respectively, from the
corresponding periods of 1997. These decreases were due primarily to the January
1998 repayment of $100.0 million of borrowings outstanding under the Company's
U.S. credit facilities utilizing a portion of the proceeds received from the
sale of Chiron Vision. Other income, net, consists primarily of investment
income on the Company's cash and investment balances and other non-operating
gains and losses. Interest income in the second quarter and first half of 1998
increased by $3.9 million and $8.5 million, respectively, as compared with the
same periods in 1997, due primarily to increased average cash and investment
balances attributable to net cash proceeds received from the sale of Chiron
Vision. In addition, during the second quarter and first half of 1998, Chiron
recognized gains of $0.9 million and $4.5 million, respectively, attributable to
the sale of certain equity securities. In the first quarter of 1998, the
Company recognized a loss of $3.0 million attributable to the
other-than-temporary impairment of certain equity securities. In the second
quarter and first half of 1997, no gains or losses were recognized related to
equity securities.

NEW ACCOUNTING STANDARD

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be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement,
and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The Company has
not determined the timing or method of adoption and is currently evaluating the
effect that implementation of SFAS 133 will have on its results of operations
and financial position.

LIQUIDITY AND CAPITAL RESOURCES

Chiron's capital requirements have been generally funded from operations,
cash and investments on hand, debt borrowings and sales of equity. In addition
to these sources of capital, future capital requirements may be financed through
a combination of research and development funding provided by Novartis, possible
off-balance-sheet financing and cash provided by operations. Chiron's cash and
investments in marketable debt securities, which totaled $413.0 million at June
30, 1998, are invested in a diversified portfolio of investment grade financial
instruments, including money market instruments, corporate notes and bonds,
government or government agency securities, and other debt securities. By
policy, the amount of credit exposure to any one institution is limited. These
investments are generally not collateralized and primarily mature within three
years. Investments with maturities in excess of one year are presented on the
balance sheet as noncurrent investments.

SOURCES AND USES OF CASH Chiron had cash and cash equivalents of $158.1
million and $111.9 million at June 30, 1998 and 1997, respectively. Cash
provided by operating activities was $46.7 million in the first half of 1998
as compared with $61.4 million in the first half of 1997. Primary sources of
the decrease in cash from operating activities were the income from
continuing operations of $14.5 million in the first half of 1998 (as compared
with $31.2 million in the first half of 1997), and an increase in accounts
receivable in the first half of 1998 as compared with a decrease in the first
half of 1997, excluding the decrease in accounts receivable from the sale of
Chiron Vision.

Cash provided by (used in) investing activities was $125.3 million in the
first half of 1998 as compared with ($32.5) million in the first half of 1997.
In the first half of 1998, the primary sources of cash from investing activities
were proceeds of $298.9 million from the sale of Chiron Vision, $127.6 million
from the sale and maturity of investments in marketable debt securities and
$18.5 million from the sale of the Puerto Rico facility. These sources of cash
in the first half of 1998 were partially offset by the purchase of $222.3
million of investments in marketable debt securities, $54.8 million (net of cash
acquired) for the purchase of Chiron Behring and acquisitions of property and
equipment totaling $35.5 million. In the first half of 1997, the primary source
of cash from investing activities was $39.8 million of proceeds from the sale
and maturity of investments in marketable debt securities. This source of cash
in the first half of 1997 was offset by acquisitions of property and equipment
totaling $36.4 million and the purchase of $27.9 million of investments in
marketable debt securities.

Cash (used in) provided by financing activities was ($112.4) million in the
first half of 1998 as compared with $14.9 million in the first half of 1997. In
the first half of 1998, the primary use of cash was the repayment of $137.0
million of short-term debt, $100.0 million of which was outstanding under the
Company's U.S. credit facilities and was repaid utilizing a portion of the
proceeds from the sale of Chiron Vision. In the first half of 1997, the primary
use of cash was Chiron's purchase of a previously leased manufacturing facility
and related buildings in Emeryville, California for $29.8 million. Also
contributing to cash provided by financing activities were proceeds of
$26.0 million and $29.7 million in the first half of 1998 and 1997,
respectively, from issuance of common stock under the Company's stock option and
employee stock purchase plans.

In January 1998, the Company's Board of Directors authorized the purchase
of up to 2.5 million shares of Chiron common stock from time to time on the open
market in order to offset the dilution associated with the operation of the
Company's stock option and employee stock purchase plans and the granting of
share rights. The Board of Directors has authorized such purchases through
January 1999. To date, no shares have been purchased.

Chiron believes that its cash and investments, funds provided by operations
and capital market transactions will

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<PAGE>

be sufficient to meet its cash requirements during the upcoming twelve months
and through the foreseeable future.

BORROWING ARRANGEMENTS Under two separate revolving, committed, unsecured
credit agreements with major financial institutions, Chiron can borrow up to
$200.0 million in the U.S. These agreements, guaranteed by Novartis, which
allow for borrowings of up to $100.0 million each, mature in March 1999 and
February 2003. No borrowings were outstanding under these credit agreements at
June 30, 1998. Under Chiron's credit arrangements outside the U.S., borrowings
of $17.5 million were outstanding at June 30, 1998.

OTHER COMMITMENTS In the third quarter of 1998, Chiron and Gen-Probe, Inc.
("Gen-Probe"), a wholly owned subsidiary of Chugai Pharmaceutical Co., Ltd.,
signed an agreement to form a strategic alliance to develop, manufacture and
market nucleic acid probe assay systems for blood screening and certain areas
of diagnostics. Under the terms of the agreement, Chiron will market and
sell products that utilize the Company's intellectual property relating to
HCV and HIV and Gen-Probe's patented transcription-mediated amplification
(TMA), target capture, hybridization protection assay (HPA) and dual kinetic
assay (DKA) technologies. In exchange for the rights to Gen-Probe's
technology, Chiron paid $10.0 million upon signing the agreement, which will
be recorded as a component of "Other intangible assets, net" in the Company's
consolidated balance sheet at September 30, 1998. This asset will be utilized
across a broad base of technology within the Company's blood screening and
nucleic acid diagnostic businesses. In addition, Chiron is obligated to pay
an additional $15.0 million 30 days after Gen-Probe's submission of an
investigational new drug application to the FDA and another $10.0 million
upon Gen-Probe's receipt of marketing approval from the FDA. The agreement
also provides certain provisions for additional cost sharing and royalties
upon the commercialization of specified products.

Effective July 1, 1998, Chiron and International Business Machines
Corporation ("IBM") executed a ten-year information technology services
agreement. Under this agreement, IBM will provide Chiron with a full range
of information services, including designing and deploying a company-wide
distributed network system, establishing a comprehensive help-desk operation,
and developing a standardized desk-top platform using IBM workstations.
Chiron may terminate this agreement beginning July 1, 1999, with no less than
180 days prior notice to IBM, subject to certain termination charges. Through
July 1, 1999, Chiron's payments to IBM will total $19.3 million. If Chiron
does not terminate this agreement prior to expiration, payments to IBM will
approximate $138.8 million in aggregate. Payments to IBM are subject to
adjustment depending upon the levels of services and infrastructure equipment
provided by IBM.

Chiron's liquidity may be further affected in future periods by its
decision to fund its share of expenses in certain of its joint ventures and
collaboration arrangements. Over the next several years, Chiron anticipates
funding collaborations with a number of its research partners, and may make
additional investments in collaborative partners. The Company also expects to
incur substantial capital spending in future periods.

MARKET RISK MANAGEMENT The Company's cash flow and earnings are subject
to fluctuations due to changes in foreign currency exchange rates, interest
rates, and fair value of equity securities held. The Company attempts to
limit its exposure to some or all of these market risks through the use of
various financial instruments, as more fully described in Part II, Item 7A.,
"Quantitative and Qualitative Disclosures About Market Risk," of Chiron's
Annual Report on Form 10-K for the fiscal year ended December 28, 1997. To
manage foreign currency exchange risks, Chiron enters into forward foreign
currency contracts ("forwards") and cross currency interest rate swaps
("swaps"), and purchases foreign currency option contracts ("options").
Chiron does not use any of these derivative instruments for trading or
speculative purposes.

On April 1, 1998, the Company entered into a series of swaps to modify the
interest and currency characteristics of certain assets and liabilities
denominated in a nonfunctional currency. The objective of the swaps entered
into by the Company is to fix the interest rate and currency rate exposures
associated with the Company's wholly owned German subsidiary. The exposures are
denominated in Deutsche marks and have a notional amount of $114.2 million at
June 30, 1998.

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<PAGE>

The Company has exposure to changes in interest rates in both its
investment portfolio and certain floating rate liabilities and real estate
commitments. The Company maintains investment portfolio holdings of various
issuers, types and maturities. These securities are generally classified as
available-for-sale and consequently, are recorded on the balance sheet at
fair value with unrealized gains or losses reported as a separate component
of stockholders' equity. Other-than-temporary losses are recorded against
earnings in the same period the loss was deemed to have occurred. The
Company does not currently hedge this exposure and there can be no assurance
that other-than-temporary losses will not have a material adverse impact on the
Company's results of operations in the future. The Company also has
short-term debt obligations and certain real estate lease commitments with
interest rates or payments tied to the London Interbank Offered Rate (LIBOR).

YEAR 2000 Chiron is dependent on a number of computer systems and
applications to conduct its business. In the past, many computer programs
were written using two digits rather than four to identify the relevant year.
These programs may not be able to distinguish between 21st and 20th century
dates (for example, "00" may be read as the year 1900 when the year 2000 is
intended). This could result in significant system failures or
miscalculations. Accordingly, the Company is currently developing a
comprehensive risk-based plan designed to make its computer systems,
applications, facilities and instruments installed in customer facilities
Year 2000 compliant. The plan covers three phases including (i) planning,
(ii) assessment, and (iii) implementation. The Company has substantially
completed the planning phase and is currently in the assessment phase, which
is targeted to be completed in the third quarter of 1998. The implementation
phase is targeted to be completed by mid-1999. The Company is utilizing both
internal and external resources to prepare for the year 2000. The Company
believes that it should be able to substantially complete the implementation
of critical internal aspects of its Year 2000 plan prior to the commencement
of the year 2000. Even with substantial completion of internal remediation
plans, the Company's customers, suppliers and distributors also present risk
of their own year 2000 compliance over which the Company has no control.
Accordingly, there can be no assurance that such Year 2000 issues will be
resolved in 1999. If not resolved, these issues could have a material
adverse impact on the Company's operations.

The Company has initiated communications with its critical suppliers
and other external relationships to determine the extent to which the Company
may be vulnerable to such parties' failure to resolve their own Year 2000
issues. Where practicable, the Company will assess and attempt to mitigate
its risks with respect to the failure of these entities to be Year 2000
compliant. The effect, if any, on the Company's results of operations from
the failure of such parties to be Year 2000 compliant, cannot be reasonably
estimated.

The Company may incur significant costs in identifying and resolving Year
2000 issues, including internal staff costs as well as consulting and other
expenses. In addition, the appropriate course of action may include replacing
or upgrading systems or equipment at a substantial cost to the Company. Failure
of the Company to successfully complete its implementation of an integrated
information system, which is a key element in the Company's Year 2000
remediation program, may have a material adverse impact on the Company's
operations. The Company is currently evaluating the costs associated with
preparing for the Year 2000 and expects these costs to be reasonably estimable
upon the completion of the assessment phase. Currently, all costs are
anticipated to be funded through operations.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

Chiron wishes to caution stockholders and investors that the following
important factors, among others, in some cases have affected, and in the future
could affect, Chiron's actual results and could cause Chiron's actual
consolidated results for the third quarter of 1998, and beyond, to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, Chiron. The statements under this caption are intended to serve as
cautionary statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The following information is not intended to limit in any
way the characterization of other statements or information under other captions
as cautionary statements for such purpose:

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<PAGE>

- - The financial and operational impacts of the establishment of a joint
venture or other transaction involving significant portions of Chiron's
diagnostics business, and the restructuring and realignment of Chiron's
remaining operations.

- - Delays, difficulties or failure in obtaining regulatory approval (including
approval of its systems, procedures and facilities for production) for the
Company's products. These may include, for example, approval of the
Company's Italian manufacturing facilities and processes as satisfying U.S.
regulatory requirements for production of the Company's diphtheria, tetanus
and genetically engineered acellular pertussis and adjuvanted flu vaccines,
approval for Myotrophin-Registered Trademark- for which additional clinical
trials may be required by the FDA, approval for DepoCyt-TM- (injectable
sustained-release cytarabine), and approval for Quantiplex-Registered
Trademark- assays for HIV and follow-on bDNA probe products, for which the
FDA may require substantial additional process and systems validation.

- - Charges that may be incurred or accrued as a result of the implementation
of restructuring plans, including possible disposal of excess manufacturing
and other general facilities, or as a result of the underutilization of
manufacturing and other general facilities, including facility expansions.

- - The ability of the Company to successfully complete its implementation of
an integrated information system, which is a key element in the Company's
Year 2000 remediation program.

- - Costs of remediation related to issues that may be identified or incurred
as a result of the Company's ongoing evaluation of its Year 2000
compliance, and the potential exposure to failures by third parties to
properly remediate their own Year 2000 issues.

- - Inability to maintain or initiate third party arrangements which generate
revenues, in the form of license fees, research and development support,
royalties, sales fees and other payments, in return for rights in
technology or products under development or promotional or other services
provided by the Company.

- - The issuance and use of patents and proprietary technology by Chiron and
its competitors, including the possible negative effect on the Company's
ability to develop, manufacture and sell its products if it is unable to
obtain licenses to patents which may be required for such products.

- - Failure of corporate partners to successfully commercialize the Company's
products or to retain and expand the markets served by the commercial
collaborations; conflicts of interest, priorities and commercial strategies
which may arise between the Company and such corporate partners, including
conflicts as to the strategy for realizing value arising from evolving
opportunities.

- - Delay, difficulty or inability on acceptable terms to resolve conflicts
with partners, including resolution of litigation initiated by Chiron
against Ortho seeking to compel arbitration regarding access to hepatitis
and retrovirus immunodiagnostic tests for use on Chiron's ACS:Centaur-TM-
immunoassay system.

- - Delays or difficulties in developing and acquiring technology and technical
and managerial personnel to manufacture and/or deliver the Company's
products in commercial quantities at reasonable costs and in compliance
with applicable quality assurance and environmental regulations and
governmental permitting requirements.

- - Possible changes in laws, regulations and guidelines of regulatory
agencies, which may affect the development, manufacture and sale of the
Company's products.

- - The ability and willingness of customers to substitute competitive products
for the Company's products if other products for similar indications are
approved for marketing.

- - Difficulties in obtaining key raw materials and supplies of acceptable
quality used in the manufacture of the Company's products.

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<PAGE>

- - Increased costs of development, regulatory approval, manufacture, sales,
and marketing associated with the introduction of novel products and
fluctuation of such costs between periods.

- - Difficulties in launching or marketing the Company's products, many of
which are novel products based on biotechnology, and unpredictability of
customer acceptance of such products.

- - The impact of competing products, and inventory management practices,
pricing, promotional and marketing decisions by the Company's partners,
Schering AG for Betaseron-Registered Trademark- and Johnson & Johnson for
PDGF.

- - Changes in the product mix of the Chiron-Ortho joint business, whereby the
proportion of higher margin HCV tests sold relative to other lower margin
products decreases; continued margin erosion of HCV tests.

- - Continued increases in research and development spending in order to
develop new products and increase market share.

- - Continued or increased pressure to reduce selling prices of the Company's
products.

- - The cost of acquiring in-process technology, either by license,
collaboration or purchase of another entity.

- - The impact of unusual or infrequent charges resulting from Chiron's ongoing
evaluation of its business strategies and organizational structures,
including the continued costs of integration of acquired businesses.

- - Revaluation of assets, including, among others, the Company's investments
in the equity securities of other companies with whom it collaborates, or
related expenses.

- - Changes to tax rates or possible future changes to conditions of certain
tax rulings obtained by the Company or its subsidiaries, or outcomes of
present or future examinations by tax authorities.

- - The costs and other effects of legal and administrative cases and
proceedings (whether civil, such as product-related or environmental, or
criminal); settlements and investigations; developments or assertions by or
against Chiron relating to intellectual property rights and licenses.

- - Seasonal fluctuations in product sales and resulting gross margin amounts.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

A discussion of the Company's exposure to, and management of, market risk
appears in Part 1, Item 2 of this Quarterly Report on Form 10-Q under the
heading "Market risk management."

PART II

ITEM 1. LEGAL PROCEEDINGS.

The Company is party to certain lawsuits and legal proceedings, which are
described in Part I, Item 3, "Legal Proceedings," of the Company's Annual Report
on Form 10-K for the year ended December 28, 1997. No material developments
in the area of legal proceedings have occurred since such Form 10-K was filed
except as described in the Company's Form 10-Q for the three months ended
March 29, 1998 and except as follows:

F. HOFFMANN-LAROCHE

As described below, Chiron is involved in certain litigation in the
United States, The Netherlands, Japan, and Germany with F. Hoffmann-LaRoche
AG and several of its affiliated companies concerning infringement and/or
validity of certain Chiron patents related to HCV technology. It is not known
when nor on what bases any of these litigation matters will be concluded.

On January 27, 1998, Chiron initiated an action against F.
Hoffmann-LaRoche, Ltd., several of its affiliated companies (collectively,
"Roche") and Daniel Bradley in the United States District Court for the
Northern District of California. The Company asserts that Roche's manufacture
and sale of Amplicor HCV-TM- Test and Amplicor HCV Monitor-TM- Test
constitutes infringement of Chiron's U.S. Patent Nos. 5,712,088 (the "'088
patent") and 5,714,596 (the "'596 patent"). The action also asserts that
Bradley breached a settlement agreement, that Roche wrongfully induced this
breach, and that Bradley committed slander of title with respect to Chiron's
HCV

27
<PAGE>

technology. The action seeks damages, injunctive relief, and a declaratory
judgment that Chiron is the sole and exclusive owner of its HCV technology.
Roche filed a counterclaim requesting a declaratory judgment of
non-infringement and invalidity and also alleging infringement of U.S. Patent
No. 5,580,718 (the "'718 patent"), owned by Hoffmann-LaRoche, Inc., which
allegedly relates to nucleic acid-based assays for the detection of HCV. The
counterclaim of infringement seeks damages and injunctive relief. Chiron is
defending on the basis of invalidity and non-infringement of the '718 patent,
and seeks a declaration of invalidity of U.S. Patent No. 5,527,669 (the "'669
patent"), a related patent also owned by Hoffmann-LaRoche.

On February 3, 1998, Chiron filed an action in The District Court of The
Hague, The Netherlands against F. Hoffmann-LaRoche AG, several of its
affiliated companies (collectively, "Roche AG"), and one of Roche AG's Dutch
customers asserting Roche AG's infringement of the Company's European Patent
0 318 216 (the "'216 patent") relating to HCV nucleic acid technology.
Chiron seeks a cross-border injunction with effect in a number of European
countries, prohibiting the sale of Roche AG's Amplicor HCV-TM- Test and
Amplicor HCV Monitor-TM- Test. Trial of this matter is set for October 1998.
In a separate proceeding, Roche AG and Chiron are appealing the European
Patent Office's Opposition Division's decision upholding the '216 patent in
amended form.

On April 16, 1998, Chiron filed suit against Nippon Roche K.K. in the
Tokyo District Court in Japan for infringement of Japanese patent number
2,656,995 (the "'995 patent"), relating to HCV nucleic acid technology. The
suit seeks injunctive relief preventing the sale of Roche AG's Amplicor
HCV-TM- Test and Amplicor HCV Monitor-TM- Test by Nippon Roche and damages.

On January 9, 1997, Chiron, together with Ortho Diagnostic Systems,
Inc., filed suit against F. Hoffmann-LaRoche AG in the Regional Court, 4th
Civil Division, Dusseldorf, Germany, for infringement of the '216 patent. The
suit seeks damages and injunctive relief preventing further manufacture or
sale of infringing HCV immunoassay kits by Roche.

CONNAUGHT LABORATORIES, LIMITED

On June 17, 1997, Chiron S.p.A. filed an action in the Tribunale di
Milano, Italy, against Connaught challenging the validity of the Italian
counterpart of Connaught's European Patent 0 527 753 (the "'753 patent").
The '753 patent claims allegedly relate to the pertactin protein of
BORDETELLA PERTUSSIS. Connaught counterclaimed for infringement of the '753
patent and seeks an injunction and damages. On February 25, 1998, Chiron
S.p.A. filed a second action in the Tribunale di Milano, Italy, against
Connaught challenging the validity of the Italian counterpart of Connaught's
European Patent 0 322 115 (the "'115 patent") which allegedly relates to
pertussis toxin mutants. These two proceedings are expected to be
consolidated at a hearing on November 10, 1998. It is not known when nor
under what basis these matters will be concluded.

On July 17, 1997, Connaught filed suit in the Landgericht Dusseldorf,
Germany, against Chiron Behring GmbH, Chiron S.p.A., and Behringwerke AG
asserting imminent infringement of the '115 patent. Connaught seeks to prevent
introduction of TriAcelluvax-TM- in Germany. Also, Connaught seeks damages and
an order from the German court enjoining Chiron S.p.A. from manufacturing and
selling TriAcelluvax-TM- in both Germany and Italy. It is not known when nor
under what basis litigation will be concluded.

On December 3, 1997, Chiron filed an action in the District Court of The
Hague, The Netherlands, against Connaught to revoke the Dutch counterpart of the
'115 patent on grounds of invalidity. It is not known when nor under what basis
the litigation will be concluded.

ORTHO DIAGNOSTIC SYSTEMS, INC.

On February 17, 1998, Chiron filed a lawsuit against Ortho Diagnostic
Systems, Inc. in the United States District Court for the Northern District
of California. The suit concerns certain issues relating to the conduct of
the parties' joint business and seeks to compel arbitration of those issues.
A motion to compel arbitration is scheduled in September 1998. It is not
known when nor on what basis this matter will be concluded.

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

The Annual Meeting of Stockholders of Chiron Corporation was held on May
14, 1998. The following items were voted upon by the stockholders:

(a) A proposal to elect directors of the Company for the term of office
specified below.

The persons listed below were the only nominees, and each of such persons
was elected, as indicated below:

28
<PAGE>

(i) Three directors were elected to hold office for three years until
2001, and (ii) one director was elected to hold office for two years until
2000. Each of such persons received the following number of votes:

For Withheld
DIRECTORS ----- --------
----------
<S> <C> <C>
Mr. Vaughn D. Bryson 163,621,859 2,716,111

Mr. Pierre E. Douaze 164,281,817 2,056,153

Dr. Edward E. Penhoet 164,280,611 2,057,359

Mr. Sean P. Lance 164,272,583 2,065,387
</TABLE>

b) A proposal to ratify the selection of KPMG Peat Marwick LLP as
independent auditors for the Company for the fiscal year ending January 3,
1999, was approved by the stockholders. The following votes were cast as to
such proposal: For: 165,788,928; Against: 352,755; Abstain: 196,287;
Broker Non-Votes: 0.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) EXHIBITS.

Exhibit
Number Exhibit
--------- ----------
<S> <C>
3.01 Restated Certificate of Incorporation of the
Registrant, as filed with the Office of the
Secretary of State of Delaware on August 17, 1987,
incorporated by reference to Exhibit 3.01 of the
Registrant's Form 10-K report for fiscal year
1996.

3.02 Certificate of Amendment of Restated Certificate
of Incorporation of the Registrant, as filed with
the Office of the Secretary of State of Delaware
on December 12, 1991, incorporated by reference to
Exhibit 3.02 of the Registrant's Form 10-K report
for fiscal year 1996.

3.03 Bylaws of the Registrant, as amended.

3.04 Certificate of Amendment of Restated Certificate
of Incorporation of the Registrant, as filed with
the Office of the Secretary of State of Delaware
on May 22, 1996, incorporated by reference to
Exhibit 3.04 of the Registrant's Form 10-Q report
for the period ended June 30, 1996.

4.01 Indenture, dated as of May 21, 1987, between Cetus
Corporation and Bankers Trust Company, Trustee,
incorporated by reference to Exhibit 4.01 of the
Registrant's Form 10-Q report for the period ended
September 30, 1994.

4.02 First Supplemental Indenture, dated as of December
12, 1991, by and among Registrant, Cetus
Corporation, and Bankers Trust Company,
incorporated by reference to Exhibit 4.02 of
Registrant's Form 10-K report for fiscal year
1997.

4.03 Second Supplemental Indenture, dated as of March
25, 1996, by and among the Registrant, Cetus
Oncology Corporation (formerly Cetus Corporation),
and Bankers Trust Company, incorporated by

29
<PAGE>

reference to Exhibit 4.03 of the Registrant's Form 10-Q
report for the period ended June 30, 1996.

4.04 Indenture, dated as of November 15, 1993, between
Registrant and The First National Bank of Boston,
as Trustee, incorporated by reference to Exhibit
4.03 of the Registrant's Form 10-K report for
fiscal year 1993.

4.05 $1,000,000 County of Lorain, Ohio Variable Rate Industrial
Revenue Bonds dated as of July 1, 1984, due July 1, 2014,
incorporated by reference to Exhibit 4.06 of the
Registrant's Form 10-Q report for the period ended April 2,
1995. The Registrant agrees to furnish to the Commission
upon request a copy of such agreement which it has elected
not to file under the provisions of Regulation
601(b)(4)(iii).

4.06 $1,000,000 Walpole Industrial Development Authority 6.75%
Industrial Revenue Bonds dated as of July 1, 1979, due July
1, 2004, incorporated by reference to Exhibit 4.07 of the
Registrant's Form 10-Q report for the period ended April 2,
1995. The Registrant agrees to furnish to the Commission
upon request a copy of such agreement which it has elected
not to file under the provisions of Regulation
601(b)(4)(iii).

11 Statement of Computation of Earnings per Share.

27 Financial Data Schedule for Six Months ended June 28, 1998.
</TABLE>

(b) REPORTS ON FORM 8-K.

On June 3, 1998, Chiron Corporation ("Chiron") filed an Amendment No.1
to its Current Report on Form 8-K reporting under Item 2 the financial
statements and information relating to Chiron's acquisition of Hoechst AG's
51 percent interest in Chiron Behring GmbH & Co KG, as required under Rule
3-05(b)(2)(ii) of Regulation S-X.

30
<PAGE>

CHIRON CORPORATION

June 28, 1998

SIGNATURES

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

CHIRON CORPORATION

DATE: August 7, 1998 BY: /s/ SEAN P. LANCE
---------------------- ----------------------
Sean P. Lance
President and Chief
Executive Officer

DATE: August 7, 1998 BY: /s/ JAMES R. SULAT
---------------------- ----------------------
James R. Sulat
Chief Financial Officer

<PAGE>

CHIRON CORPORATION

AMENDED AND RESTATED BYLAWS

INDEX

<TABLE>
<S> <C> <C>
ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 Registered Office . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.3 Governance Agreement. . . . . . . . . . . . . . . . . . . . . . .1

ARTICLE II MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . .2
2.1 Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.2 Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . .2
2.3 Annual Meeting Notice . . . . . . . . . . . . . . . . . . . . . .2
2.4 List of Stockholders Entitled to Vote . . . . . . . . . . . . . .2
2.5 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . .3
2.6 Special Meeting Notice. . . . . . . . . . . . . . . . . . . . . .3
2.7 Special Meeting Business. . . . . . . . . . . . . . . . . . . . .3
2.8 Quorum and Adjourned Meetings . . . . . . . . . . . . . . . . . .3
2.9 Votes Required. . . . . . . . . . . . . . . . . . . . . . . . . .4
2.10 Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.11 Consent to Shareholder Action . . . . . . . . . . . . . . . . . .5
2.12 Nomination of Directors . . . . . . . . . . . . . . . . . . . . .5
2.13 Stockholder Proposals . . . . . . . . . . . . . . . . . . . . . .6

ARTICLE III BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . .6
3.1 Number, Tenure and Qualification. . . . . . . . . . . . . . . . .6
3.2 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.3 Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.4 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . .7
3.5 First Meeting . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.6 Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . . .8
3.7 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . .8
3.8 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.9 Action without Meeting. . . . . . . . . . . . . . . . . . . . . .9
3.10 Participation by Telephone. . . . . . . . . . . . . . . . . . . .9
3.11 Committees. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.12 Committee Minutes . . . . . . . . . . . . . . . . . . . . . . . 10
3.13 Compensation of Directors . . . . . . . . . . . . . . . . . . . 10
3.14 Removal of Directors. . . . . . . . . . . . . . . . . . . . . . 10
3.15 Approval Required for Certain Actions . . . . . . . . . . . . . 11
3.16 Strategic Planning Process. . . . . . . . . . . . . . . . . . . 11
3.17 Operating Planning Process. . . . . . . . . . . . . . . . . . . 11
3.18 Measurement Standards . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C>
ARTICLE IV NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.1 Delivery. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.2 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.1 Number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.3 Other Officers. . . . . . . . . . . . . . . . . . . . . . . . . 13
5.4 Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.5 Term; Vacancies . . . . . . . . . . . . . . . . . . . . . . . . 13
5.6 Chairman. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.7 Vice Chairman . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.8 President . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.9 Execution of Documents. . . . . . . . . . . . . . . . . . . . . 14
5.10 Vice President. . . . . . . . . . . . . . . . . . . . . . . . . 14
5.11 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.12 Assistant Secretary . . . . . . . . . . . . . . . . . . . . . . 15
5.13 Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.14 Disbursement of Funds; Reports. . . . . . . . . . . . . . . . . 16
5.15 Bond. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.16 Assistant Treasurer . . . . . . . . . . . . . . . . . . . . . . 16

ARTICLE VI CERTIFICATES OF STOCK . . . . . . . . . . . . . . . . . . . . . 17
6.1 Certificate of Stock. . . . . . . . . . . . . . . . . . . . . . 17
6.2 Facsimile Signatures. . . . . . . . . . . . . . . . . . . . . . 18
6.3 Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . 18
6.4 Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . . 19
6.5 Fixing Record Date. . . . . . . . . . . . . . . . . . . . . . . 19
6.6 Registered Stockholders . . . . . . . . . . . . . . . . . . . . 19

ARTICLE VII GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . 20
7.1 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.2 Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.3 Checks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.4 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.5 Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.6 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 21
7.7 Books and Records . . . . . . . . . . . . . . . . . . . . . . . 22

ARTICLE VIII AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>

<PAGE>

AMENDED AND RESTATED BYLAWS
OF
CHIRON CORPORATION

ARTICLE I

OFFICES AND OTHER ARRANGEMENT

1.1 REGISTERED OFFICE. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.

1.2 OTHER OFFICES. The Corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.

1.3 GOVERNANCE AGREEMENT. The Corporation is party to that certain
Governance Agreement dated as of November 20, 1994 (as the same shall be amended
from time to time, the "Governance Agreement") among CIBA-GEIGY Limited, a
corporation organized under the laws of Switzerland, Ciba-Geigy Corporation, a
New York corporation, and the Corporation. The Governance Agreement contains
certain provisions regarding the ongoing governance and operations of the
Corporation, which are incorporated in these Bylaws as provided below. All
capitalized terms used in these Bylaws and not otherwise defined herein shall
have the meanings assigned to them in the Governance Agreement.

<PAGE>

ARTICLE II

MEETINGS OF STOCKHOLDERS

2.1 PLACE. All meetings of the stockholders for the election of
directors shall be held in the City of Emeryville, State of California, at such
place as may be fixed from time to time by the Board of Directors, or at such
other place either within or without the State of Delaware as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting. Meetings of stockholders for any other purpose may be held at
such time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.

2.2 ANNUAL MEETINGS. Annual meetings of stockholders shall be held on
the third Thursday in May if not a legal holiday, and, if a legal holiday, then
on the next secular day following, at 10:00 A.M., or such other date and time as
shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting, at which the stockholders shall elect by a plurality
vote a board of directors, and transact such other business as may properly be
brought before the meeting.

2.3 ANNUAL MEETING NOTICE. Written notice of the annual meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten (10) nor more
than sixty (60) days before the date of the meeting.

2.4 LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer who has charge
of the stock ledger of the Corporation shall prepare and make, at least ten (10)
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder

<PAGE>

and the number of shares registered in the name of each stockholder. Such
list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at
least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice
of the meeting, or, if not so specified, at the place where the meeting is to
be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.

2.5 SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be called
by the President or Secretary at the request in writing of a majority of the
Board of Directors. Such request shall state the purpose or purposes of the
proposed meeting.

2.6 SPECIAL MEETING NOTICE. Written notice of a special meeting
stating the place, date and hour of the meeting and the purpose or purposes for
which the meeting is called, shall be given not less than ten (10) nor more than
sixty (60) days before the date of the meeting, to each stockholder entitled to
vote at such meeting.

2.7 SPECIAL MEETING BUSINESS. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the notice.

2.8 QUORUM AND ADJOURNED MEETINGS. The holders of a majority of the
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business, except as otherwise provided by
statute or by the certificate of

<PAGE>

incorporation. If, however, such quorum shall not be present or represented
at any meeting of the stockholders, the stockholders entitled to vote thereat
who are present in person or represented by proxy shall have power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may
be transacted which might have been transacted at the meeting as originally
noticed. If the adjournment is for more than thirty (30) days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.

2.9 VOTES REQUIRED. When a quorum is present at any meeting, the vote
of the holders of a majority of the stock having voting power present in person
or represented by proxy shall decide any question brought before such meeting,
provided, however, that the vote of the holders of a majority of the stock
having voting power present in person or represented by proxy and actually
voting on the merits of the question and not abstaining or withholding authority
to vote shall decide the election of any director and any question submitted for
a vote by act of the Board of Directors, pursuant to Section 3.8 of the Bylaws
provided, further, however, that if the question is one upon which by express
provision of law or of the Certificate of Incorporation or these Bylaws, a
different vote is required, such express provision shall govern and control the
decision of such question.

2.10 VOTING. Unless otherwise provided in the Certificate of
Incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in

<PAGE>

person or by proxy for each share of the capital stock having voting power
held by such stockholder, but no proxy shall be voted on after three (3)
years from its date, unless the proxy provides for a longer period.

2.11 CONSENT TO SHAREHOLDER ACTION. Unless otherwise provided in the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders of the Corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.

2.12 NOMINATION OF DIRECTORS. Nominations for election to the Board of
Directors must be made by the Board of Directors or by any stockholder of any
outstanding class of capital stock of the Corporation entitled to vote for the
election of directors. Nominations, other than those made by the Board of
Directors of the Corporation, must be preceded by notification in writing in
fact received by the Secretary of the Corporation not less than twenty (20) days
prior to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to serve
as a director if so elected and the following information as to each proposed
nominee and as to each person, acting alone or in conjunction with one or more
other persons as a partnership, limited partnership,

<PAGE>

syndicate or other group, who participates or is expected to participate in
making such nomination or in organizing, directing or financing such
nomination or solicitation of proxies to vote for the nominee.

2.13 STOCKHOLDER PROPOSALS. Proposals regarding matters other than
nomination of directors and other than those made by the Board of Directors of
the Corporation, must be preceded by notification in writing in fact received by
the Secretary of the Corporation not less than twenty (20) days prior to any
annual meeting of stockholders. Such notification shall contain the following
information as to the proposed action:

(a) a description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting,

(b) the name and address as they appear on the corporation's books of the
stockholder proposing such business,

(d) any material interest of such stockholder in such business.

The presiding officer of the meeting shall have the authority to determine
and declare to the meeting that a matter not preceded by notification made in
accordance with the foregoing procedure shall be disregarded.

ARTICLE III

BOARD OF DIRECTORS

3.1 NUMBER, TENURE AND QUALIFICATION. The number of directors which
shall constitute the whole board shall be eleven (11). Section 2.01 of the
Governance

<PAGE>

Agreement sets forth certain provisions regarding the number, tenure and
qualification of directors, which provisions are incorporated herein and made
a part of these Bylaws. Subject to said Section 2.01 and except as otherwise
provided in Section 3.2 of this Article III, the number of directors shall be
determined by resolution of the Board of Directors or by the stockholders at
the annual meeting of the stockholders, and each director elected shall hold
office until his or her successor is elected and qualified or until his
earlier resignation, removal from office, death or incapacity. Directors need
not be stockholders.

3.2 VACANCIES. Section 2.01 of the Governance Agreement sets forth
certain provisions regarding filling vacancies and newly created directorships
on the Board of Directors, which provisions are incorporated herein and made a
part of these Bylaws. All vacancies and newly created directorships shall be
filled in accordance with the terms of said Section 2.01.

3.3 POWERS. The business of the Corporation shall be managed by or
under the direction of its Board of Directors, which may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
statute or by the Certificate of Incorporation or by these Bylaws directed or
required to be exercised or done by the stockholders.

3.4 PLACE OF MEETINGS. The Board of Directors of the Corporation may
hold meetings, both regular and special, either within or without the State of
Delaware.

3.5 FIRST MEETING. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly

<PAGE>

elected Board of Directors, or in the event such meeting is not held at the
time and place so fixed by the stockholders, the meeting may be held at such
time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors, or as shall be
specified in a written waiver signed by all of the directors.

3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may
be held without notice of such time and at such place as shall from time to time
be determined by the Board.

3.7 SPECIAL MEETINGS. Special meetings of the Board may be called by
the President on four (4) days' notice to each director by mail or forty-eight
(48) hours' notice to each director either personally or by telegram; special
meetings shall be called by the President or Secretary in like manner and on
like notice on the written request of two (2) directors unless the Board
consists of only one director, in which case special meetings shall be called by
the President or Secretary in like manner and on like notice on the written
request of the sole director.

3.8 QUORUM. At all meetings of the Board a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the Board of Directors, except as may be
otherwise specifically provided by statute or by the Certificate of
Incorporation. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the

<PAGE>

meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.

3.9 ACTION WITHOUT MEETING. (a) Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.

(b) Section 2.03(d) of the Governance Agreement sets forth certain
provisions regarding the requirement that action by the committees of the Board
of Directors be taken at a meeting thereof, which provisions are incorporated
herein and made a part of these Bylaws.

3.10 PARTICIPATION BY TELEPHONE. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.

3.11 COMMITTEES. Section 2.03 of the Governance Agreement provides that
the following committees of the Board of Directors shall be formed and
administered: (i) an Audit Committee; (ii) a Nominating Committee; (iii) a
Strategic Planning Committee; (iv) a Compensation Committee; and (v) a Stock
Option Plan Administration

<PAGE>

Committee. Such committees of the Board of Directors shall be formed,
maintained and administered in accordance with the terms of said Section 2.03
of the Governance Agreement, which provisions are incorporated herein and
made a part of these Bylaws. All committees of the Board of Directors not
specifically provided for in said Section 2.03 shall be constituted in
accordance with Section 2.03(c) of the Governance Agreement.

3.12 COMMITTEE MINUTES. Each committee shall keep regular minutes of
its meetings and report the same to the Board of Directors when required.

3.13 COMPENSATION OF DIRECTORS. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.

3.14 REMOVAL OF DIRECTORS. Section 2.01 of the Governance Agreement
sets forth certain provisions regarding the number, tenure and qualification of
directors, which provisions are incorporated herein and made a part of these
Bylaws. Subject to said Section 2.01 and unless otherwise restricted by the
Certificate of Incorporation or by these Bylaws, any director or the entire
Board of Directors may be removed, with or without cause, by the holders of a
majority of shares entitled to vote at an election of directors.

<PAGE>

3.15 APPROVAL REQUIRED FOR CERTAIN ACTIONS. Section 2.04 of the
Governance Agreement sets forth certain approval rights for Ciba and the
Investor Directors with respect to certain actions proposed to be taken or
affected by the Corporation or any of its Subsidiaries. Neither the Corporation
nor any of its Subsidiaries shall take or effect any of such actions without
having first obtained such approvals.

3.16 STRATEGIC PLANNING PROCESS. Section 2.10 of the Governance
Agreement sets forth certain provisions regarding the preparation from time to
time of a three-year Strategic Plan by the management of the Corporation and the
consideration and approval of such Strategic Plan by the Board of Directors,
which provisions are incorporated herein and made a part of these Bylaws.

3.17 OPERATING PLANNING PROCESS. Section 2.11 of the Governance
Agreement sets forth certain provisions regarding the preparation from time to
time of an Operating Plan by the management of the Corporation and the
consideration and approval of such Operating Plan by the Board of Directors,
which provisions are incorporated herein and made a part of these Bylaws.

3.18 MEASUREMENT STANDARDS. Section 2.12 of the Governance Agreement
sets forth certain provisions regarding the adoption of Measurement Standards by
the Board of Directors for each fiscal year. In addition, such Section 2.12
sets forth certain provisions regarding approval rights and procedures to be
followed in the event that Measurement Standards shall not have been approved by
the Board of Directors in a timely manner or in the event that the Measurement
Standards shall not have been met at any time by the Corporation. Said
provisions are incorporated herein and made a part of these Bylaws.

<PAGE>

ARTICLE IV

NOTICES

4.1 DELIVERY. Whenever, under the provisions of the statutes or of the
Certificate of Incorporation or of these Bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail addressed to such
director or stockholder at his address as it appears on the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.

4.2 WAIVER. Whenever any notice is required to be given under the
provisions of the statutes or of the Certificate of Incorporation or of these
Bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.

ARTICLE V

OFFICERS

5.1 NUMBER. The officers of the Corporation shall be chosen by the
Board of Directors and shall be a President and a Secretary. The Board of
Directors may elect from among its members a Chairman of the Board and a Vice
Chairman of the Board. The Board of Directors may also choose one or more Vice
Presidents, Assistant Secretaries, Treasurers, and Assistant Treasurers. Any
number of offices may be held by the same person, unless the Certificate of
Incorporation or these Bylaws otherwise provide.

<PAGE>

5.2 APPOINTMENT. The Board of Directors at its first meeting after
each annual meeting of stockholders shall choose a President and a Secretary and
may choose a Vice President and a Treasurer. Nothing in these Bylaws shall
limit the authority of the Board of Directors to determine from time to time the
powers and duties of any officer, employee or agent of the Corporation.

5.3 OTHER OFFICERS. The Board of Directors may appoint such other
officers and agents as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board of Directors.

5.4 SALARIES. The salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors.

5.5 TERM; VACANCIES. The officers of the Corporation shall hold office
until their successors are chosen and qualify. Any officer elected or appointed
by the Board of Directors may be removed at any time by the affirmative vote of
a majority of the Board of Directors. Any vacancy occurring in any office of
the Corporation may only be filled by the Board of Directors.

5.6 CHAIRMAN. The Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors at which the Chairman shall be present. The
Chairman shall have and may exercise such powers as are, from time to time,
assigned to the Chairman by the Board of Directors and as may be provided by
law.

<PAGE>

5.7 VICE CHAIRMAN. The Vice Chairman shall have and may exercise such
powers as are from time to time assigned to the Vice Chairman by the Board of
Directors. In the absence of the Chairman of the Board, the Vice Chairman of
the Board shall preside at all meetings of the Board of Directors at which the
Vice Chairman shall be present.

5.8 PRESIDENT. The President shall be the Chief Executive Officer of
the Corporation and may exercise such powers as are, from time to time, assigned
to the President by the Board of Directors.

5.9 EXECUTION OF DOCUMENTS. The President shall execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation.

5.10 VICE PRESIDENT. In the absence of the President or in the event
that the President is unable or refuses to act, the Vice President, if any (or
in the event there be more than one Vice President, the Vice Presidents in the
order designated by the Board of Directors, or in the absence of any
designation, then in the order of their election), shall perform the duties of
the President, and when so acting, shall have all of the powers of and be
subject to all of the restrictions upon the President. The Vice President shall
perform such other duties and shall have such other powers as the President may
from time to time prescribe.

<PAGE>

5.11 SECRETARY. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the Corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose supervision the Secretary shall be. The Secretary
shall have custody of the corporate seal of the Corporation and the Secretary,
or an Assistant Secretary, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the
Secretary's signature or by the signature of such Assistant Secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the Corporation and to attest the affixing by such officer's signature.

5.12 ASSISTANT SECRETARY. The Assistant Secretary, or if there be more
than one, the Assistant Secretaries in the order determined by the Board of
Directors (or if there be no such determination, then in order of their
election) shall, in the absence of the Secretary or in the event of the
Secretary's inability or refusal to act, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such other
powers as the President may from time to time prescribe.

5.13 TREASURER. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable

<PAGE>

effects in the name and to the credit of the Corporation in such depositories
as may be designated by the Board of Directors.

5.14 DISBURSEMENTS OF FUNDS; REPORTS. The Treasurer shall disburse the
funds of the Corporation as may be ordered by the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the President and
the Board of Directors, at its regular meetings, or when the Board of Directors
so requires, an account of all his transactions as Treasurer and of the
financial condition of the Corporation.

5.15 BOND. If required by the Board of Directors, the Treasurer shall
give the Corporation a bond (which shall be renewed every six years) in such sum
and with sure surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of that office and for the
restoration to the Corporation, in case of the Treasurer's death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in possession or under control of the Treasurer
belonging to the Corporation.

5.16 ASSISTANT TREASURER. The Assistant Treasurer, or if there shall be
more than one, the Assistant Treasurers in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the Treasurer or in the event of the
Treasurer's inability or refusal to act, perform the duties and exercise the
powers of the Treasurer and shall perform such other powers as the President may
from time to time prescribe.

<PAGE>

ARTICLE VI

CERTIFICATES OF STOCK

6.1 CERTIFICATE OF STOCK. Every holder of stock in the Corporation
shall be entitled to have a certificate, signed by, or in the name of the
Corporation by, the Chairman or Vice Chairman of the Board of Directors, or the
President or a Vice President and the Treasurer or an Assistant Treasurer, or
the Secretary or an Assistant Secretary of the Corporation, certifying the
number of shares owned by such stockholder in the Corporation.

Certificates may be issued for partly paid shares and in such case upon the
face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.

If the Corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the Corporation shall issue to represent such class or
series of stock,

<PAGE>

a statement that the Corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.

6.2 FACSIMILE SIGNATURES. Any or all of the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar as of the date of issue.

6.3 LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or such owner's legal representative, to advertise the same in
such manner as it shall require and/or to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.

<PAGE>

6.4 TRANSFER OF STOCK. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.

6.5 FIXING RECORD DATE. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
The record date for determining stockholders entitled to give consent to
corporate action in writing without a meeting, when no prior action by the Board
of Directors is necessary, shall be the day on which the first written consent
is given. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.

6.6 REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends and to vote as such owner, and to hold liable for
calls and assessments a

<PAGE>

person registered on its books as the owner of shares and shall not be bound
to recognize any equitable or other claim to or interest in such share or
shares on the part of any person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE VII

GENERAL PROVISIONS

7.1 DIVIDENDS. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property or in shares of the capital
stock, subject to the provisions of the Certificate of Incorporation.

7.2 RESERVES. Before payments of any dividend, there may be set aside
out of any funds of the Corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purposes as the directors shall think conducive to the interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.

7.3 CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.

<PAGE>

7.4 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.

7.5 SEAL. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the Corporation and the year of its organization.
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.

7.6 INDEMNIFICATION. The Corporation shall indemnify to the full extent
permitted by, and in the manner permissible under, the laws of the State of
Delaware any person made, or threatened to be made, a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that such person, his testator or intestate is or was a director of
the Corporation or any predecessor of the Corporation or served any other
enterprise as a director or officer at the request of the Corporation or any
predecessor of the Corporation. Expenses incurred by a director of the
Corporation in defending a civil or criminal action, suit or proceeding by
reason of the fact that such director is or was a director of the Corporation
(or was serving at the Corporation's request as a director or officer of another
corporation) shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director to repay such amount if it shall ultimately be
determined that such director is not entitled to be indemnified by the
Corporation as authorized by relevant sections of the General Corporation Law of
Delaware.

<PAGE>

The foregoing provisions of this Article VII shall be deemed to be a
contract between the Corporation and each director who serves in such capacity
at any time while this Bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.

The Board of Directors in its discretion shall have power on behalf of the
Corporation to indemnify any person, other than a director, made a party to any
action, suit or proceeding by reason of the fact that such person, his testator
or intestate, is or was an officer or employee of the Corporation.

The foregoing rights of indemnification shall not be deemed exclusive of
any other right to which any director may be entitled apart from the provisions
of this Article VII.

7.7 BOOKS AND RECORDS. Any stockholder or any director shall have the
right to inspect the books and records of the Corporation to the full extent
permitted by, and subject to the terms and conditions of, the General
Corporation Law of Delaware.

<PAGE>

ARTICLE VIII

AMENDMENTS

8.1 These Bylaws may be altered, amended or repealed or new bylaws may
be adopted by the stockholders or by the Board of Directors, when such power is
conferred upon the Board of Directors by the Certificate of Incorporation at any
regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new bylaws be contained in the
notice of such special meeting. If the power to adopt, amend or repeal bylaws
is conferred upon the Board of Directors by the Certificate of Incorporation it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal bylaws. Notwithstanding any provision in these Bylaws to the contrary,
in no event so long as the Governance Agreement shall be in effect shall any
provision of these Bylaws be altered, amended or repealed or new bylaws adopted
by the stockholders or by the Board of Directors in a manner that would be
inconsistent with the terms and conditions of the Governance Agreement.

<PAGE>

EXHIBIT 11

CHIRON CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>

THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
----------- ---------- --------- --------
<S> <C> <C> <C> <C>
Earnings per share:

Income from continuing operations
available to common stockholders $ 25,387 $ 14,813 $ 14,536 $ 31,188
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic income per share $ 0.14 $ 0.09 $ 0.08 $ 0.18
--------- --------- --------- ---------
--------- --------- --------- ---------

Diluted income per share $ 0.14 $ 0.08 $ 0.08 $ 0.18
--------- --------- --------- ---------
--------- --------- --------- ---------

Net income available to common
stockholders $ 25,387 $ 15,742 $ 79,868 $ 31,078
--------- --------- --------- ---------
--------- --------- --------- ---------

Basic income per share $ 0.14 $ 0.09 $ 0.45 $ 0.18
--------- --------- --------- ---------
--------- --------- --------- ---------

Diluted income per share $ 0.14 $ 0.09 $ 0.44 $ 0.18
--------- --------- --------- ---------
--------- --------- --------- ---------

Shares used in earnings per share computations:

Weighted-average common shares
outstanding 177,308 172,996 176,725 172,270
Effect of dilutive securities:
Options and equivalents 2,585 3,771 2,703 4,149
Warrants 187 188 188 192
Performance units - 56 - 36
--------- --------- --------- ---------

Weighted-average common shares
outstanding plus assumed conversions 180,080 177,011 179,616 176,647
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHIRON
CORPORATION'S UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET DATED JUNE 30,
1998 AND UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998<F5>
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998<F5>
<CASH> 158,120
<SECURITIES> 254,859<F1>
<RECEIVABLES> 328,132
<ALLOWANCES> 0
<INVENTORY> 170,231
<CURRENT-ASSETS> 848,427
<PP&E> 765,364
<DEPRECIATION> 283,432
<TOTAL-ASSETS> 1,802,840
<CURRENT-LIABILITIES> 378,088
<BONDS> 402,312<F2>
0
0
<COMMON> 1,775
<OTHER-SE> 987,615<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,802,840
<SALES> 442,042
<TOTAL-REVENUES> 574,437
<CGS> 191,418
<TOTAL-COSTS> 191,418
<OTHER-EXPENSES> 212,223<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,347
<INCOME-PRETAX> 19,154
<INCOME-TAX> 4,618
<INCOME-CONTINUING> 14,536
<DISCONTINUED> 65,332
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,868
<EPS-PRIMARY> 0.45<F6>
<EPS-DILUTED> 0.44<F7>
<FN>
<F5>ACTUAL FISCAL YEAR END WILL BE, AND PERIOD END WAS, JAN-03-1999 AND
JUN-28-1998, RESPECTIVELY. FOR PRESENTATION PURPOSES, DATES USED IN THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES REFER TO THE FISCAL MONTH END.
<F1>CONSISTS OF BOTH SHORT-TERM AND NONCURRENT INVESTMENTS IN MARKETABLE DEBT
SECURITIES.
<F2>CONSISTS OF CONVERTIBLE SUBORDINATED DEBENTURES, CAPITAL LEASE OBLIGATIONS AND
NOTES PAYABLE, NET OF CURRENT MATURITIES.
<F3>CONSISTS OF ADDITIONAL PAID-IN CAPITAL, ACCUMULATED DEFICIT AND ACCUMULATED
OTHER COMPREHENSIVE LOSS.
<F4>CONSISTS OF RESEARCH AND DEVELOPMENT, WRITE-OFF OF PURCHASED IN-PROCESS
TECHNOLOGIES, RESTRUCTURING AND REORGANIZATION CHARGES AND OTHER OPERATING EXPENSES.
<F6>REPRESENTS BASIC NET INCOME PER SHARE. BASIC INCOME PER SHARE FROM CONTINUING
OPERATIONS AND BASIC INCOME PER SHARE FROM DISCONTINUED OPERATIONS WERE $0.08
AND $0.37, RESPECTIVELY.
<F7>REPRESENTS DILUTED NET INCOME PER SHARE. DILUTED INCOME PER SHARE FROM
CONTINUING OPERATIONS AND DILUTED INCOME PER SHARE FROM DISCONTINUED OPERATIONS
WERE $0.08 AND $0.36, RESPECTIVELY.
</FN>

</TABLE>