MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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.

Chiron is a diversified, science-driven, market-directed healthcare company
that applies biotechnology and other techniques of modern biology and chemistry
to develop, produce and sell products intended to improve the quality of life by
diagnosing, preventing and treating human disease. Chiron participates in four
human healthcare markets: (i) diagnostics, including blood screening tests,
automated immunodiagnostic systems, critical blood analyte systems and new
quantitative probe tests; (ii) therapeutics, with an emphasis on oncology,
serious infectious diseases and critical care diseases; (iii) adult and
pediatric vaccines; and (iv) ophthalmic surgical products, including instruments
and devices used for the surgical correction of vision and intraocular implants
to deliver drugs to the eye. Chiron also develops or acquires new technologies,
employing these technologies to discover new products for the Company or for its
partners.

BUSINESS COMBINATIONS

AGREEMENTS WITH NOVARTIS AG ("NOVARTIS")

As discussed further in Note 2 of the Notes to Consolidated Financial
Statements (collectively, the "Notes"), effective January 1, 1995, under a
series of agreements between Chiron and Novartis, successor to Ciba-Geigy Ltd.
("Ciba"), including an investment agreement, a cooperation and collaboration
agreement and a governance agreement (collectively the "Agreements"), Novartis
increased its ownership interest in Chiron common stock to 49.9 percent (now
approximately 46 percent as a result of subsequent stock issuances to parties
other than Novartis). At the same time, Chiron acquired from Novartis all of the
outstanding common stock of Chiron Diagnostics Corporation ("Chiron
Diagnostics"), formerly Ciba Corning Diagnostics Corp., and Novartis' interest
in Chiron Vaccines Company ("Chiron Vaccines"), formerly Chiron Biocine Company,
and Chiron S.p.A., formerly Biocine S.p.A., in exchange for 26.4 million
newly-issued Chiron common shares and a cash payment of $23.5 million. The
acquisitions of Chiron Diagnostics and Novartis' interests in Chiron Vaccines
and Chiron S.p.A. were accounted for under the purchase method of accounting and
resulted in a $222.9 million charge in 1995 against earnings for purchased
in-process technology. The results of operations of Chiron Diagnostics, Chiron
S.p.A. and Chiron Vaccines are included in Chiron's consolidated operating
results from January 1, 1995, forward. Chiron's share of the operating results
of Chiron S.p.A. and Chiron Vaccines were included in the Company's 1994 results
under the equity method of accounting.

During 1995, Chiron and Novartis entered into a limited liability company
agreement ("the Research Funding Agreement") to utilize research funding to be
provided by Novartis. Under the terms of the agreement, Novartis will fund from
time to time through December 31, 1999, at Chiron's request, research

and development costs for adult vaccines, pediatric vaccines and insulin-like
growth factor-1 ("IGF-1"). Annual funding amounts are subject to certain
limitations. In return, Novartis will receive an interest in a stream of
variable royalties from future worldwide sales of certain adult vaccines,
certain pediatric vaccines and IGF-1. Royalties will be paid for a minimum
period of ten years, subject to an extension under certain conditions, following
the later of October 1, 2001, or the date of the first commercial sale of
individual products covered by the agreement. In addition, Novartis will also
receive an interest in promotional rights, in countries other than in North
America and Europe, for certain adult vaccines.

Under the terms of the Research Funding Agreement, Chiron was granted an
option through December 31, 2001, to repurchase Novartis' interest, at cost plus
an agreed-upon return, as defined in the agreement. In addition, if Chiron
chooses to exercise the option, Novartis will receive an option to acquire
certain exclusive marketing rights, in countries other than those in North
America and Europe, with respect to certain adult vaccines in countries in which
Novartis has exercised its co-promotion rights. Pursuant to the agreement,
Chiron recognized $72.0 million and $27.0 million of funding from Novartis
during 1996 and 1995, respectively, as collaborative agreement revenues. Chiron
anticipates receiving substantial additional funding from Novartis in future
periods, pursuant to the terms of the Research Funding Agreement.

As discussed in Note 2 of the Notes, in November 1996, Chiron entered into
another agreement with Novartis that involved certain patent rights to herpes
simplex virus thymidine kinase ("HSV-tk"); an extension of the contract for
Chiron's promotional efforts in the United States ("U.S.") for Novartis' product
Aredia-TM- (pamidronate disodium for injection) through a co-promotion
arrangement; certain changes to the Research Funding Agreement involving
research funding; and changes to Novartis' commitment to provide debt guarantees
pursuant to the Agreements. The November 1996 agreement was primarily executed
in conjunction with a consent and agreement that resolves the Federal Trade
Commission's review of the merger between Ciba and Sandoz Ltd., which created
Novartis.

Under the November 1996 agreement, Chiron agreed to grant royalty-bearing
licenses to Rhone-Poulenc Rorer Inc. and Novartis for HSV-tk in the field of
gene therapy. As partial consideration, Novartis will pay Chiron up to $60.0
million over the next five years, $15.0 million of which relates to 1997.
Novartis also agreed to cross-license to the Company certain Novartis-controlled
gene therapy technologies.

Additionally, Novartis and the Company agreed to a modification of Chiron's
contract, which expires in March 1997 and provides Chiron with sole promotional
rights in the U.S. with respect to Novartis' product Aredia-TM-. Under the new
arrangements, Chiron, through a co-promotion arrangement with Novartis, will
promote Aredia-TM- for two years after a six-month transitional period.

Novartis and Chiron also agreed to extend the deadline for payment of the
repurchase amount under the Research Funding Agreement from January 1, 2002 to
January 1, 2005, if Chiron chooses to exercise this option. However, this will
not affect the term of the repurchase option which expires on December 31, 2001.

Novartis also agreed to extend the term during which Novartis is committed
to provide a debt guarantee from 1999 to January 1, 2008. Further, Novartis
granted an option to Chiron to increase the amount of the debt guarantee from
$425.0 million to $725.0 million with a corresponding equivalent dollar
reduction in the equity put now available to Chiron (from $500.0 million to
$200.0 million).

Also, should Chiron elect to replace certain existing convertible debt,
Novartis agreed to provide additional guarantees totaling $200.0 million for
such purposes.

Definitive agreements regarding certain aspects of the November 1996
agreement with Novartis will be drafted in 1997.

OTHER BUSINESS COMBINATIONS

As discussed further in Note 2 of the Notes, on March 31, 1995, Chiron
Vision acquired the surgical division of IOLAB from Johnson & Johnson ("J&J")
for approximately $95.0 million. The acquisition was accounted for under the
purchase method of accounting and resulted in a $10.3 million charge against
1995 earnings for purchased in-process technology. The Company recorded
additional charges in 1995 for IOLAB restructuring and integration-related
expenses totaling $16.9 million. IOLAB's results of operations are included in
Chiron's consolidated operating results from March 31, 1995, forward.

Additionally, as discussed further in Note 2 of the Notes, on September 29,
1995, Chiron acquired all of the outstanding common stock of Viagene, Inc.
("Viagene") in exchange for approximately $35.5 million in cash and 3.7 million
shares of Chiron common stock. Additionally, on September 29, 1995, unexercised
options to purchase Viagene common stock were converted into options to purchase
approximately 528,000 shares of Chiron common stock. The acquisition was
accounted for under the purchase method of accounting and resulted in a $130.3
million charge against 1995 earnings for purchased in-process technology.
Viagene's results of operations are included in Chiron's consolidated operating
results from September 29, 1995, forward. Prior to September 29, 1995, Chiron
accounted for its interest in Viagene at fair value as a marketable equity
investment.

As discussed further in Note 2, in July 1996, Chiron purchased a 49 percent
interest in the human vaccine business of Behringwerke AG, a subsidiary of
Hoechst AG, a German company. The total acquisition price, which was payable in
cash, was approximately $120.0 million, including costs directly related to the
acquisition. Under the terms of the agreement, Chiron has an option to purchase
the remaining 51 percent interest in the joint venture in March 1998, 1999, 2000
or 2001, and Behringwerke AG has the option to require Chiron to purchase the
remaining interest in March 2001. During the period of mutual ownership, Chiron
and Behringwerke AG will operate the vaccine business as a joint venture which
has been named Chiron Behring GmbH & Co. ("Chiron Behring"). Results of the
venture are reported on a one-month lag.

As discussed further in Note 4 of the Notes, in September 1996, Chiron
entered into an agreement with Biological and Popular Culture, Inc. ("BPC"), a
newly organized holding company for General Injectables & Vaccines, Inc. and
affiliated companies (collectively, "GIV"), pursuant to which GIV agreed to
perform certain distribution and promotional services for Chiron's vaccine
products in the U.S. The initial term of the service agreement is five years,
with potential one year extensions thereafter. In connection with the agreement,
Chiron invested $30.0 million in BPC, of which $13.8 million consisted of BPC
voting preferred stock, which is convertible at Chiron's option into 30 percent
of the outstanding common stock of BPC. The remainder of the $30.0 million
investment consisted primarily of interest-bearing loans. Results of the joint
business are reported on a one-quarter lag.

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 for each of the three years ended December 31:

1996 1995 1994
------------ ---------- ----------
(IN THOUSANDS)

Diagnostic products.................................... $ 566,221 $ 541,113 $ 21,678
Ophthalmic products.................................... 211,004 176,951 106,062
Vaccine products....................................... 91,934 74,837 --
Betaseron-TM- sales.................................... 67,238 67,666 100,121
Oncology products...................................... 64,078 58,042 43,254
Other products......................................... 4,352 4,244 4,851
------------ ---------- ----------
$ 1,004,827 $ 922,853 $ 275,966
------------ ---------- ----------
------------ ---------- ----------

Diagnostic product sales include direct sales and sales-type leases of
fully-automated, random-access immunodiagnostic testing systems (ACS:180-TM-,
automated chemiluminescence system) and reagents for these systems, as well as
sales of critical blood analyte systems (CBA-TM-), clinical chemistry products
and manual immunodiagnostic systems. Sales of diagnostics products increased
from $541.1 million in 1995 to $566.2 million in 1996. The increase of $25.1
million, or 5 percent, is primarily due to increased sales of branched DNA probe
tests for human immunodeficiency virus ("HIV") and increased immunodiagnostics
sales. The growth in immunodiagnostics product sales is primarily due to a 23
percent increase in reagent sales resulting from continued penetration of the
fully-automated instruments market. ACS:180-TM- placements increased 27 percent
during 1996 as compared to 1995. The increases in Chiron Diagnostics' sales were
partially offset by reduced sales of manual immunodiagnostic systems and
unfavorable foreign currency exchange rates, primarily in Japan and Germany,
which when compared to rates in effect for 1995, reduced the increase by $17.0
million.

As a result of the January 1995 acquisition of Chiron Diagnostics,
diagnostic product sales increased from $21.7 million in 1994 to $541.1 million
in 1995. The acquisition added $510.1 million of new revenues to Chiron's
operating results for 1995. Chiron Diagnostics' product sales for 1994, which
are not included in Chiron's results, were $455.7 million. Between 1994 and
1995, Chiron Diagnostics' major product lines, immunodiagnostic systems and
CBA-TM- systems, continued to increase due to increased market penetration,
particularly in international markets, ongoing menu expansion of existing ACS
systems, the introduction in 1995 of a new CBA-TM- system product line, and
favorable changes in foreign currency exchange rates between years.

Sales of ophthalmic products increased from $177.0 million in 1995 to $211.0
million in 1996. The increase of $34.0 million, or 19 percent, is primarily due
to increased sales of viscoelastic, refractive surgery products and the
Company's new Vitrasert-TM- Implant product (Cytovene-TM-; Roche Laboratories),
which is the first drug delivery system to provide local, sustained therapy for
the eye. Chiron received approval from the U.S. Food and Drug Administration
("FDA") during the first quarter of 1996 to market this product. Accordingly,
the Company recognized $12.2 million of Vitrasert-TM- Implant sales during 1996.
The 1996 results also reflect a full year of activity related to the surgical
division of IOLAB which was acquired in March 1995.

Ophthalmic sales increased from $106.1 million in 1994 to $177.0 million in
1995. The increase of $70.9 million, or 67 percent, was due to the acquisition
of the surgical division of IOLAB, the May 1994 acquisition of Laboratoires
Domilens S.A. ("Domilens"), and the continuing evolution in the marketplace
favoring foldable lens technology-based products.

Prior to Chiron's acquisition of Novartis' interest in Chiron S.p.A. on
January 1, 1995, the Company's share of the operating results of Chiron S.p.A.
was included as joint business revenues. Since January 1, 1995, Chiron S.p.A. is
consolidated with its vaccine sales reflected as a component of total vaccine
product sales. Vaccine product sales consist of sales of pediatric and flu
vaccines primarily in Italy and to certain international health services. Chiron
S.p.A.'s vaccine products include Acelluvax-TM-, a recombinant acellular
pertussis vaccine; Agrippal-TM-, a flu vaccine; and Polioral-TM-, an oral polio
vaccine. Sales of Chiron S.p.A.'s flu vaccine are seasonal, with strong sales
generally occurring during the pre-flu season in the fourth quarter of the year.
Chiron S.p.A.'s product sales for 1994, which are not included in Chiron's
results, were $56.7 million. The increase in Chiron S.p.A.'s vaccine product
sales between 1996 and 1995 and between 1995 and 1994 is due to Chiron S.p.A.'s
expansion into new export markets of its polio and other viral and bacterial
vaccines.

Under the terms of a development and supply agreement with Schering AG,
Germany ("Schering"), and its U.S. affiliate, Berlex Laboratories, Inc.
("Berlex"), Chiron manufactures Betaseron-TM- (interferon beta-1b) for Berlex.
Through December 31, 1994, Chiron manufactured Betaseron-TM- under the terms of
an amended development and supply agreement whereby the Company received payment
for the product upon shipment to Berlex. Effective January 1, 1995, Chiron
exercised its option to revert to the terms of the original Betaseron-TM- supply
agreement. Under those original terms, Chiron earns an initial partial payment
for Betaseron-TM- upon shipment to Berlex and a subsequent secondary payment for
Betaseron-TM- upon Berlex's net sales of the product to patients. Betaseron-TM-
product revenues decreased slightly from $67.7 million in 1995 to $67.2 million
in 1996. The increase in secondary payments of $24.5 million from 1995 to 1996
were primarily offset by a $24.4 million reduction in initial payments due to
lower shipments to Berlex. Betaseron-TM- revenues were significantly higher in
1994 since 1994 was the first full year of commercial shipments and as Berlex
built product inventories sufficient to supply all of the patients on the
initial enrollment list.

Future levels of Chiron's Betaseron-TM- shipments will depend upon the rate
at which new patients are enrolled from existing and future markets, the extent
to which patients, once enrolled, remain compliant with the prescribed treatment
regimen and continue to regularly receive Betaseron-TM-, and the impact of
competing products, including other beta interferon products that were approved
for sale in the U.S. during 1996. In addition, based upon the level of
inventories carried by Berlex, the timing of future shipments to Berlex and the
related revenue may vary.

Sales of oncology products, principally Proleukin-TM- (aldesleukin,
interleukin-2), increased from $58.0 million in 1995 to $64.1 million in 1996,
primarily due to a 10 percent and 13 percent increase in Proleukin-TM-
quantities sold in European and domestic markets, respectively. Average
worldwide selling prices remained roughly constant between these periods.
Oncology product sales increased from 1994 to 1995 due to an increase in
Proleukin-TM- quantities sold of 23 percent and 24 percent, respectively, in the
European and domestic markets, as well as an overall increase in average
worldwide selling prices.

The Company markets many 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 were approximately $566.6
million, $519.4 million and $71.6 million in 1996, 1995 and 1994, respectively.
International sales of diagnostic, vaccine and ophthalmic products accounted for
the majority of the increase in foreign product sales between periods. For 1996
and 1995, 56 percent of Chiron's product sales were denominated in foreign
currencies as compared to 26 percent in 1994. The net effect of changing foreign
currency exchange rates did not significantly impact total product sales in 1996
and 1994 when compared with the respective prior years. In 1995, however, total
product sales would have been 3 percent lower if exchange rates had remained the
same as in 1994. Changing currency exchange rates have had, and will continue to
have, an impact on Chiron's results. The Company's other revenues, discussed
below, are largely denominated in U.S. dollars but are impacted by the Company's
joint partners' and collaborators' non-U.S. operations.

Joint business revenues consist substantially of Chiron's one-half interest
in the pretax operating earnings of its joint diagnostics business with Ortho
Diagnostic Systems, Inc. ("Ortho"), a J&J company. Approximately 68 percent of
the sales of the Chiron-Ortho joint business arise from sales of hepatitis C
virus ("HCV") tests. The joint business also receives a royalty from Abbott
Laboratories ("Abbott") for Abbott's sales of HCV tests which use the Chiron
technology and which compete directly with tests marketed by Ortho. Results from
the joint business are recorded by Chiron on a one-month lag based upon
estimates supplied by Ortho and are subject to a final accounting during the
first quarter of the subsequent year. In 1996, Chiron recognized $3.8 million
from the final accounting related to 1995. The amounts recognized in 1995 and
1994 from the final accounting in prior years were nominal.

The Chiron-Ortho joint business revenue increased from $76.9 million in 1995
to $95.8 million in 1996. The increase was due to an increase in the volume of
HCV and HIV tests sold, the introduction of a new HIV antigen test, increased
profits from sales growth to Ortho's overseas affiliates, and a $6.9 million
settlement from Abbott in the third quarter of 1996 related to prior period
sales of HIV immunodiagnostic tests, all of which were partially offset by a
decline in certain product margins. Under the terms of the settlement agreement,
the joint business will receive an ongoing royalty from Abbott based on the sale
of products incorporating technology covered by certain Chiron HIV patents. In
1996, Chiron recognized $0.9 million as its share of the ongoing royalty from
Abbott pursuant to the terms of the settlement agreement.

Joint business revenues for the Chiron-Ortho joint business increased from
$74.3 million in 1994 to $76.9 million in 1995. The $2.6 million increase was
primarily due to an increase in the volume of HCV tests sold, increased royalty
revenues and Chiron's share of a legal settlement regarding certain European HCV
patents. These increases were offset by reduced margins resulting from the
renegotiation of a supply contract in 1994 with the American Red Cross and
increased research and development spending.

Joint business revenues also include $1.9 million, $4.1 million and $1.1
million in 1996, 1995 and 1994, respectively, from Chiron's 50 percent interest
in a generic cancer chemotherapeutics business with Ben Venue Laboratories, Inc.
("Ben Venue"). Chiron sold its interest in this business to Ben Venue in May
1996, resulting in a $12.2 million gain which was included in other expense,
net.

Also included in equity in earnings of unconsolidated joint businesses for
1996 is $4.2 million from Chiron's 49 percent share of the operating results of
the new joint venture with Behringwerke AG. Chiron acquired its interest in July
1996. The results of the venture are reported on a one-month lag.

As noted previously, prior to January 1, 1995, the Company's share of Chiron
S.p.A.'s profits were included as joint business revenue. In 1994, Chiron and
Novartis entered into a settlement agreement with the former owner of Chiron
S.p.A. regarding a dispute over representations made in connection with the
acquisition of Chiron S.p.A. Included in joint business results for 1994 was
approximately $4.8 million representing Chiron's share of this settlement.
Without the impact of the settlement, Chiron's joint business revenue from
Chiron S.p.A. for 1994 was $2.5 million.

Collaborative agreement revenue consists of fees received for research
services as they are performed, fees received for completed research or
technology, fees received upon attainment of benchmarks specified in the related
research agreements, and proceeds of sales of biological materials to research
partners for clinical and preclinical testing. Collaborative agreement revenues
increased from $58.1 million in 1995 to $122.1 million in 1996. Of the $64.0
million increase, $3.9 million and $45.0 million relate to a combinatorial
chemistry agreement with Novartis and research funding from Novartis for IGF-1
and certain adult and pediatric vaccine research programs, respectively.

Also contributing to the increase in collaborative agreement revenues are
amounts earned by Chiron's wholly-owned subsidiary, Viagene, which was acquired
in September 1995. In 1996, Chiron recognized increased revenues of $6.9 million
from Viagene's collaborative agreement with Green Cross of Japan for HIV gene
therapy research and clinical development. In 1996, Chiron also received $7.7
million under a

new collaboration with Japan Tobacco Inc. ("JT") pursuant to the terms of a
technology transfer and development agreement whereby the pharmaceutical
division of JT acquired a non-exclusive, perpetual license to apply certain of
Chiron's combinatorial chemistry technologies in JT's research and product
development programs. In addition, during 1996, Chiron received $1.8 million
from Ribozyme Pharmaceuticals Inc. for Chiron's expenditures on various gene
therapy and delivery research projects.

Collaborative agreement revenues decreased from $67.5 million in 1994 to
$58.1 million in 1995. Research funding of $27.0 million from Novartis in 1995
as well as additional funding of $5.5 million from Novartis for non-exclusive
access to Chiron's combinatorial techniques were offset by a decrease in
research funding from Chiron Vaccines. Prior to the acquisition on January 1,
1995 of Novartis' interest in Chiron Vaccines, Chiron received reimbursement for
its vaccine research expenses from Chiron Vaccines and recorded such
reimbursement as collaborative agreement revenue, which totaled $40.9 million in
1994. After the acquisition, Chiron Vaccines became a wholly-owned subsidiary of
Chiron and thus no longer provided research revenues to Chiron.

Other revenues consist principally of product royalties, laboratory services
and sales fees earned by the Company for sales and marketing services for
Aredia-TM- that were rendered on behalf of Novartis. Other revenues increased
from $39.3 million in 1995 to $83.9 million in 1996, primarily due to an
increase in sales fees of $23.5 million resulting from increased sales of
Aredia-TM- in the U.S., new royalty revenues of $13.6 million resulting from
Schering's European sales of Betaferon-TM-, and an increase of $4.8 million in
probes reference laboratory service revenues. Chiron's contract with Novartis
for exclusive promotion of Aredia-TM- in the U.S. will expire in March 1997.
Under a new agreement, the details of which will be finalized in 1997, Chiron
and Novartis will co-promote Aredia-TM- for two additional years after a
six-month transitional period.

Other revenues increased from $28.1 million in 1994 to $39.3 million in
1995. The $11.2 million increase was primarily due to an increase of $4.2
million in sales fees related to Aredia-TM- sales, an increase of $2.9 million
in probes reference laboratory services and increases in product royalty
revenues due to increased sales of recombinant human insulin and Japanese
nucleic probe products.

COSTS AND EXPENSES

Gross profit margins, which may fluctuate significantly in future periods as
the Company's product mix continues to evolve, increased from 55 percent in 1995
to 56 percent in 1996. The increase in gross profit margin percentages resulted
from the receipt of increased secondary revenues from Berlex's net sales of
Betaseron-TM-, increased sales of immunodiagnostic assays and branched DNA
probes, and improved margins arising from changes in the sales mix of ophthalmic
products and non-recurring 1995 costs resulting from the acquisition of IOLAB.
These increases were partially offset by reduced margins resulting from a change
in the mix of vaccine product sales and costs arising during the second quarter
of 1996 from temporarily idled manufacturing facilities in Italy.

Gross profit margins increased from 54 percent in 1994 to 55 percent in
1995. Higher margin diagnostic and vaccine product sales were partially offset
by the reversion to the original Betaseron-TM- supply agreement, discussed
previously, and additional operating expenses associated with the Company's
Puerto Rico manufacturing facility which was idled during 1995.

Research and development expenses increased from $343.8 million in 1995 to
$371.1 million in 1996. Chiron's research and development expenses fluctuate
from period to period depending upon the extent of clinical trial-related
activities, including the manufacturing of material; the number of products
under development and their progress; and the acquisition of companies and new
technology and licensing rights. The $27.3 million increase between years was
partially due to the acquisition of Viagene in September 1995. As a result,
Viagene, which is involved in the discovery and development of gene transfer
drugs for the treatment of severe viral infections, cancers and other diseases,
added $13.0 million of expenses in 1996. In addition, vaccine research and
development costs increased by $19.4 million in 1996. These costs

related to Chiron's effort to obtain FDA approval of Pertugen-TM-, a diphtheria,
tetanus and genetically engineered acellular pertussis ("DTaP") vaccine for
infants and children; additional amounts related to the herpes clinical trials;
and research related to hepatitis C and other new vaccines. Additionally,
diagnostics research and development increased by $16.8 million, primarily as a
result of continued improvements of existing immunodiagnostic instrument systems
and continued development of branched DNA probe tests which are used to quantify
levels of virus and other indicators of disease. The increases that resulted
from the acquisition of Viagene and increased vaccine and diagnostics research
and development costs were partially offset by reduced expenses related to
IGF-1. In 1995 Chiron incurred approximately $34.0 million related to the
funding of certain collaboration expenses related to IGF-1 and the purchase of
additional program rights from Cephalon, Inc. Additionally, in 1995 Chiron made
a $3.5 million milestone payment to DepoTech Corporation ("DepoTech") for the
research, development and marketing of products incorporating certain drug
delivery technologies developed by DepoTech. Chiron also paid G.D. Searle & Co.
$8.8 million in 1995 for the development and marketing of tissue factor pathway
inhibitor products.

Additionally, Chiron, together with J&J, co-funded the development and
introduction of a home HIV testing service business, Direct Access Diagnostics.
Chiron has an option, which will expire in May 1997, to participate as an equal
partner with J&J in this business.

Research and development expenses increased significantly from $166.2
million in 1994 to $343.8 million in 1995, largely due to the acquisitions of
Chiron Diagnostics, Chiron S.p.A. and Viagene which added $71.3 million, $25.1
million, and $6.0 million, respectively, in expenses for 1995. Adjusting for the
impact of these acquisitions, Chiron's research and development expenses
increased by $75.2 million as the Company's products in development continued to
move towards commercialization, and as the Company entered into a number of
collaborative arrangements in 1995 with other pharmaceutical and biotechnology
companies. As part of these collaborative arrangements, Chiron made various
investments in the equity securities of the collaborative partners and, in some
cases, agreed to provide specified levels of funding to the collaboration.

These new or continuing collaborations as well as the purchase of certain
program rights contributed an additional $56.0 million to research and
development expense in 1995. The Company also increased spending at Chiron
Vision by $6.2 million over that of 1994 due to a general increase in costs
resulting from the acquisition of IOLAB and inclusion of a full year of research
and development activity at Domilens.

Selling, general and administrative ("SG&A") expenses increased from $357.1
million in 1995 to $397.6 million in 1996. SG&A expenses were higher due to
selling and marketing costs to support Chiron's vaccine and diagnostic product
sales; Chiron's new Vitrasert-TM- Implant product; and increased costs in the
ophthalmic business resulting from the acquisition of IOLAB, including costs
related to an expanded international sales force. Selling and marketing expenses
continue 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.

SG&A expenses increased significantly from $110.0 million in 1994 to $357.1
million in 1995, largely due to the acquisitions of Chiron Diagnostics and
Chiron S.p.A., which added $179.5 million and $18.2 million, respectively, in
SG&A expenses in 1995. SG&A expenses in the ophthalmic business were higher in
1995 due to the acquisition of IOLAB and increased costs related to the
ophthalmic sales force, resulting from the integration of Chiron Vision's
operations with IOLAB.

The $365.3 million write-off of purchased in-process technology in 1995
consisted of $222.9 million related to the acquisitions of Chiron Diagnostics,
Chiron S.p.A. and Chiron Vaccines; $130.3 million for the acquisition of
Viagene; and $10.3 million for the acquisition of IOLAB. Also included was $1.8
million related to the acquisition of an additional interest in a subsidiary of
Chiron Vision. The fair value of the net assets acquired in the acquisitions of
Chiron Diagnostics, Chiron S.p.A., Chiron Vaccines and IOLAB, including
in-process technology, were estimated based on independent valuations of the
acquired net

assets. The fair value of the net assets acquired in the Viagene acquisition
were determined to be equal to book value as Viagene was an early-stage company
with no intangible assets other than in-process technology. Amounts allocated to
base technology for Chiron Diagnostics, Chiron S.p.A. and IOLAB were $21.6
million, $6.6 million and $27.0 million, respectively, and are being amortized
over periods ranging from 10 to 15 years using the straight-line method.
Approximately $15.2 million was allocated to goodwill for IOLAB and is being
amortized over 15 years using the straight-line method.

In 1995, costs related to the Novartis transaction consist primarily of
employee payments and related tax liabilities and legal and investment advisor
fees. Under the Agreements reached with Novartis, Novartis reimbursed the
Company $24.8 million for a portion of the employee payments and such
reimbursement was recorded as a capital contribution.

Restructuring and reorganization costs in 1995 represent certain accrued
costs of integrating the acquired businesses with Chiron's existing businesses,
costs related to the idling of the Company's Puerto Rico manufacturing facility
and the scaling-back of manufacturing operations at the Company's Amsterdam
facility, and costs related to the write-down of duplicate facilities at the
Company's Emeryville, California, headquarters. Also included was a charge
related to the change in plans to expand the Company's Emeryville research and
administrative facilities. Of the $39.1 million in total charges in 1995,
approximately $27.1 million related to write-downs of assets, including $8.0
million related to the change in plans for expansion of the Company's research
and administrative facilities. The remaining charges of $12.0 million consisted
of employee costs of $5.5 million and lease termination and other costs of $6.5
million. At December 31, 1996, the accrual for restructuring and reorganization
costs totaled $7.4 million and consisted primarily of $2.5 million of lease
termination costs and $3.7 million related to the idling of the Puerto Rico
manufacturing facility. The liability for the lease termination costs will be
settled over the life of the lease terms which expire through 2012. The accrual
for the Puerto Rico manufacturing facility is expected to be settled in 1997.

Other operating expenses consist primarily of the amortization of purchased
technologies, goodwill and other intangible assets. Other operating expenses
slightly increased in 1996 to $14.9 million from $12.6 million in 1995. The
increase in other operating expenses from $5.1 million in 1994 to $12.6 million
in 1995 was the result of increased amortization of purchased technologies,
goodwill and other intangible assets arising from the 1995 acquisitions of
Chiron Diagnostics, Chiron S.p.A. and IOLAB.

OTHER ITEMS

Other expense, net, generally consists of investment income on the Company's
cash and investment balances, interest expense on outstanding debt obligations
and other non-operating gains and losses.

The increase of $2.1 million in other expense, net, between 1995 and 1996
was primarily due to $1.3 million of increased interest expense, $8.6 million of
lower investment income, $1.3 million of expense associated with the write-down
of certain investments, and $1.1 million of foreign exchange losses, all of
which were partially offset by a $12.2 million gain arising from the sale of the
Company's 50 percent interest in a generic cancer chemotherapeutics business in
May 1996.

Other expense, net, decreased in 1995 to $8.3 million from $10.4 million in
1994 primarily due to a $3.0 million gain on the sale of land. Additional
interest expense incurred in 1995 as a result of debt assumed in connection with
the acquisitions of Chiron Diagnostics and Chiron S.p.A. was offset by increased
investment income.

The provision for income taxes in 1996 and 1995 consisted primarily of
foreign taxes on certain foreign operations of the Company. The amount of
foreign taxes provided significantly increased since the January 1995
acquisition of Chiron Diagnostics and Chiron S.p.A., each of which have
operations in foreign countries upon which income tax is provided. The provision
for 1996 also includes $7.4 million for federal taxes. No provision for federal
taxes was recorded in 1995. Contributing to the change in the effective tax

rate from 1994 to 1995 is the write-off of purchased in-process technologies in
1995, substantially all of which was not deductible for income tax purposes and
thus did not create a tax benefit in 1995. The provision for 1994 was primarily
due to federal and state taxes.

LIQUIDITY AND CAPITAL RESOURCES

Chiron's capital requirements are generally funded from debt borrowings and
sales of equity. In addition to these sources of capital, future capital
requirements may be financed through a combination of debt, utilization of
research funding from Novartis, possible off-balance-sheet financing, cash
generated from operations and the use of existing cash and investment balances.
Chiron's cash and investments, which totaled $128.8 million at December 31,
1996, are invested in a diversified portfolio of investment grade financial
instruments, including money market instruments, corporate notes and bonds,
government or government agency securities, or 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.

Chiron attempts to reduce its exposure to fluctuations in foreign currency
exchange rates by entering into forward currency contracts ("forwards") and
average rate put options ("options"). The Company is primarily exposed to
fluctuations in currencies in western European countries and Japan. Forwards are
used to hedge balance sheet exposure resulting from completed transactions
denominated in a foreign currency, and options are used to hedge certain
anticipated transactions. Forward contracts are settled quarterly, and option
contracts expire quarterly over a 12 month period. As of December 31, 1996, the
Company held forward contracts totaling $70.9 million, and had no options
outstanding. In January 1997, the Company purchased option contracts that have a
contract value of $88.0 million and mature in various quarters through December
1997.

As circumstances dictate, management reviews the carrying value of all
facilities, including the Company's idle pharmaceutical fill and finishing
facility in Puerto Rico. The primary purpose of these reviews is to determine
whether an impairment of the carrying value has occurred in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The reviews consider, among other factors, the Company's global manufacturing
needs and plans for existing commercial products, as well as products in
development, and the projected undiscounted net cash flows that would be
generated from the operations at each facility. The estimates used in the
reviews are dependent upon several key assumptions, including management's best
estimates of the projected level of demand for the Company's products, product
pricing, success of clinical trials, timing of regulatory approval, and the
introduction of competing products. Additionally, management is in the process
of expanding its reviews to include the impact of potentially acquiring the
remaining 51 percent interest in the Chiron Behring joint venture.

Management has concluded that no impairment of the carrying value of its
facilities has occurred. There, however, can be no assurance that global
manufacturing needs for existing products will continue unchanged and product
development programs will be successful. Accordingly, changes in assumptions and
manufacturing plans, needs and capacity may occur in the future which may
require a reduction of the carrying value of certain facilities to their fair
value.

During 1996, Chiron continued the expansion of certain vaccine production
facilities in Italy as well as the expansion of its research and development and
certain administrative facilities near the Company's headquarters in Emeryville,
California. The expansion of the Emeryville facilities is projected to occur in
stages over the next thirty years. In June 1996, Chiron entered into a
seven-year operating lease agreement with a group of financial institutions to
rent a research and development facility that is currently under construction as
part of the Emeryville expansion project. Under the terms of this agreement, the
financial

institutions committed $195.0 million towards the total cost of the project. No
lease payments will be required during the construction period which is expected
to be completed by the end of 1998.

During 1996, Chiron expanded its short-term borrowing capacity in the U.S.
by entering into two additional, separate one-year revolving, unsecured credit
agreements with major financial institutions. These facilities bring the total
committed, unsecured short-term revolving facilities available to the Company to
$200.0 million in the U.S. Credit facilities available outside the U.S. total
$117.0 million. The credit facilities in the U.S. are guaranteed by Novartis. As
of December 31, 1996, the Company had $137.5 million of short-term borrowings
outstanding.

During 1996, Chiron selectively entered into cross currency interest rate
swaps ("swaps") to modify the interest and currency characteristics of specific
outstanding debt obligations. During the second quarter of 1996, Chiron entered
into a one-year swap agreement with a notional amount of $24.9 million,
effectively converting debt denominated in U.S. dollars to Japanese yen and
lowering the effective variable interest rate. During July 1996, Chiron also
entered into swap agreements that mature in July 2001 with an aggregate notional
amount of $112.6 million, effectively converting debt denominated in U.S.
dollars to German marks and modifying the interest rate from a variable rate to
a fixed German mark rate of 6.2 percent.

Chiron's liquidity may be further impacted 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
equity investments in collaborative partners.

During the year ended December 31, 1996, cash and investments in marketable
debt securities decreased by $95.1 million. The decrease was primarily due to
$120.2 million of capital expenditures and $130.7 million of acquisition-related
activity. These expenditures were offset by cash generated from operations of
$51.6 million, net debt borrowings of $77.8 million and $46.0 million of
proceeds related to the issuance of common stock under the Company's stock
option and employee stock purchase plans.

During the year ended December 31, 1995, cash and investments in marketable
debt securities decreased by $186.1 million. The decrease was primarily due to
$101.1 million of capital expenditures, $113.5 million of acquisition-related
activity and $34.0 million of cash used in operations. These expenditures were
offset by $40.4 million of proceeds related to the issuance of common stock
under the Company's stock option and employee stock purchase plans and a $24.8
million capital contribution from Novartis.

During the year ended December 31, 1994, cash and investments in marketable
debt securities decreased by $124.2 million. The decrease was primarily due to
$105.7 million of capital expenditures, $41.7 million of acquisition-related
activity and $6.5 million of repayments of outstanding debt obligations. These
expenditures were offset by $15.2 million of cash generated from operations and
$27.1 million of proceeds related to the issuance of common stock under the
Company's stock option and employee stock purchase plans.

In January 1997, Chiron entered into an agreement to purchase a
manufacturing facility and related buildings in Emeryville, California for $29.8
million. The Company had previously leased these facilities under a long-term
capital lease obligation. Chiron subsequently paid this amount and accordingly
eliminated the capital lease obligation.

Chiron believes that its cash and investments, funds provided by operations
and capital market transactions which may be guaranteed by Novartis will be
sufficient to meet its cash requirements during the upcoming twelve months and
through the foreseeable future.

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 first quarter of 1997, 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:

- 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 regulatory requirements for production of the Company's DTaP
and adjuvanted flu vaccines, approval for Myotrophin-TM-, a drug under
development by Chiron and Cephalon, Inc., for which additional clinical
trials may be required by the FDA, and approval for Quantiplex-TM- for HIV
and follow-on bDNA probe products, for which the FDA may require
substantial additional process and systems validation.

- 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 commercialize successfully 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.

- 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 and sales of certain of the
Company's products including, for example, off-label sales of
pharmaceuticals and research use only sales of diagnostic tests and
systems.

- The ability and willingness of customers to substitute competitive
products for the Company's products once 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.

- 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.

- Decline in the Betaseron-TM- customer base in the U.S.; the extent to
which patients, once enrolled, remain compliant with the prescribed
treatment regimen and continue to regularly receive

Betaseron-TM-; the impact of competing products, including other beta
interferon products; pricing,
promotional and marketing decisions by the Company's partner, Schering.

- 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.

- Underutilization of the Company's existing or new manufacturing facilities
or of any facility expansions, resulting in production inefficiencies and
higher costs; start-up costs and inefficiencies and delays and increased
depreciation costs in connection with the start of production in new
plants and expansions.

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

- Changes in the Company's plans involving the utilization of the Company's
long-lived assets in response to changes in market and other conditions.

- Increased financing costs resulting from the expanded use of debt for
operating and acquisition-related activities.

- Amount and rate of growth in Chiron's selling, general and administrative
expenses; and 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 newly acquired
businesses.

- The acquisition of fixed assets and other assets, including inventories
and receivables; and the making or incurring of any expenditures and
expenses, including, among others, depreciation and research and
development expenses; any revaluation of assets, including, among others,
the Company's investments in the equity securities of other companies with
whom it collaborates, or related expenses, and the amount of, and any
changes to, tax rates.

- The ability or inability of Chiron to obtain, or hedge against, foreign
currency, foreign exchange rates and fluctuations in those rates.

- 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.

CHIRON CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS

(IN THOUSANDS, EXCEPT SHARE DATA)

DECEMBER 31,
----------------------------
1996 1995
------------- -------------

Current assets:
Cash and cash equivalents................................................... $ 68,114 $ 74,318
Short-term investments in marketable debt securities........................ 38,694 61,066
------------- -------------
Total cash and short-term investments..................................... 106,808 135,384
Accounts receivable, net of allowances of $20,692 in 1996 and $18,524 in
1995:
Related parties........................................................... 61,187 30,157
Unrelated parties......................................................... 290,784 255,622
------------- -------------
351,971 285,779
Inventories................................................................. 180,534 165,941
Other assets:
Related parties........................................................... 5,000 --
Unrelated parties......................................................... 52,455 49,899
------------- -------------
57,455 49,899
------------- -------------
Total current assets...................................................... 696,768 637,003
Noncurrent investments in marketable debt securities.......................... 22,027 88,833
Property, plant, equipment and leasehold improvements, at cost:
Land and buildings.......................................................... 231,998 208,233
Laboratory, production and office equipment................................. 381,421 292,828
Leasehold improvements...................................................... 114,282 95,472
Construction in progress.................................................... 69,120 62,046
------------- -------------
796,821 658,579
Less accumulated depreciation and amortization.............................. (213,217) (140,761)
------------- -------------
Net property, plant, equipment and leasehold improvements................. 583,604 517,818
Purchased technology, net of accumulated amortization of $28,089 in 1996 and
$21,508 in 1995............................................................. 65,592 80,600
Other intangible assets, net of accumulated amortization of $38,382 in 1996
and $27,712 in 1995......................................................... 76,669 71,571
Investments in equity securities and affiliated companies:
Related parties............................................................. 133,123 4,850
Unrelated parties........................................................... 51,205 49,509
------------- -------------
184,328 54,359
Other assets:
Related parties............................................................. 12,724 1,846
Unrelated parties........................................................... 46,958 37,817
------------- -------------
59,682 39,663
------------- -------------
$ 1,688,670 $ 1,489,847
------------- -------------
------------- -------------
(Continued)

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

CHIRON CORPORATION

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE DATA)

DECEMBER 31,
----------------------------
1996 1995
------------- -------------

Current liabilities:
Accounts payable............................................................ $ 96,157 $ 81,081
Accrued compensation and related expenses................................... 56,387 56,994
Short-term borrowings....................................................... 137,467 50,036
Current portion of unearned revenue......................................... 19,638 20,838
Taxes payable............................................................... 33,715 27,551
Other current liabilities................................................... 129,805 132,095
------------- -------------
Total current liabilities................................................. 473,169 368,595
Long-term debt:
Payable to Novartis......................................................... 66,305 62,949
Unrelated parties........................................................... 353,284 350,299
------------- -------------
419,589 413,248
Other noncurrent liabilities.................................................. 31,057 35,943
------------- -------------
Total liabilities......................................................... 923,815 817,786
------------- -------------

Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; none
outstanding............................................................... -- --
Common stock, $0.01 par value; 499,500,000 shares authorized; 170,675,375
outstanding (41,737,849 outstanding at December 31, 1995)................. 1,707 417
Restricted common stock, $0.01 par value; 500,000 shares authorized; none
outstanding............................................................... -- --
Additional paid-in capital.................................................. 1,774,406 1,727,711
Accumulated deficit......................................................... (1,032,554) (1,087,699)
Cumulative foreign currency translation adjustment.......................... (6,318) 721
Unrealized gain from investments............................................ 28,574 31,262
Notes receivable from stock sales........................................... (960) (351)
------------- -------------
Total stockholders' equity................................................ 764,855 672,061
------------- -------------
$ 1,688,670 $ 1,489,847
------------- -------------
------------- -------------

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

CHIRON CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
------------ ------------ ---------

Revenues:
Product sales, net:
Related parties........................................................ $ 20,013 $ 21,483 $ 11,787
Unrelated parties...................................................... 984,814 901,370 264,179
------------ ------------ ---------
1,004,827 922,853 275,966
Equity in earnings of unconsolidated joint businesses.................... 102,061 80,356 82,395
Collaborative agreement revenues:
Related parties........................................................ 93,686 45,920 52,015
Unrelated parties...................................................... 28,419 12,161 15,486
------------ ------------ ---------
122,105 58,081 67,501
Other revenues:
Related parties........................................................ 32,387 11,156 5,439
Unrelated parties...................................................... 51,464 28,136 22,678
------------ ------------ ---------
83,851 39,292 28,117
------------ ------------ ---------
Total revenues......................................................... 1,312,844 1,100,582 453,979
------------ ------------ ---------
Expenses:
Cost of sales............................................................ 438,885 415,798 128,209
Research and development................................................. 371,103 343,752 166,175
Selling, general and administrative...................................... 397,563 357,066 109,990
Write-off of purchased in-process technologies........................... -- 365,286 --
Costs related to Novartis transaction.................................... -- 49,407 2,117
Restructuring and reorganization charges................................. -- 39,056 --
Other operating expenses................................................. 14,911 12,645 5,088
------------ ------------ ---------
Total expenses......................................................... 1,222,462 1,583,010 411,579
------------ ------------ ---------
Income (loss) from operations.............................................. 90,382 (482,428) 42,400
Other expense, net......................................................... (10,408) (8,346) (10,403)
------------ ------------ ---------
Income (loss) before income taxes.......................................... 79,974 (490,774) 31,997
Provision for income taxes................................................. 24,829 21,689 13,672
------------ ------------ ---------
Net income (loss).......................................................... $ 55,145 $ (512,463) $ 18,325
------------ ------------ ---------
------------ ------------ ---------
Net income (loss) per share................................................ $ 0.31 $ (3.15) $ 0.13
------------ ------------ ---------
------------ ------------ ---------
Weighted average number of shares used in calculating per share amounts.... 177,052 162,442 137,172
------------ ------------ ---------
------------ ------------ ---------

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

CHIRON CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS)

CUMULATIVE
FOREIGN UNREALIZED NOTES
COMMON STOCK ADDITIONAL CURRENCY GAIN (LOSS) RECEIVABLE
---------------------- PAID-IN ACCUMULATED TRANSLATION FROM FROM STOCK
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT INVESTMENTS SALES
--------- ----------- ----------- ------------ ----------- ----------- -----------

Balances at December 31, 1993....... 32,677 $ 327 $ 1,124,743 $ (593,561) $ (9,220) $ -- $ --
Exercise of stock options, including
tax effect........................ 394 4 21,943 -- -- -- --
Exercise of warrants................ 150 1 7,874 -- -- -- --
Employee stock purchase plan........ 158 2 7,382 -- -- -- --
Foreign currency translation
adjustment........................ -- -- -- -- 7,501 -- --
Unrealized loss from investments.... -- -- -- -- -- (12,690) --
Net income.......................... -- -- -- 18,325 -- -- --
--------- ----------- ----------- ------------ ----------- ----------- -----
Balances at December 31, 1994....... 33,379 334 1,161,942 (575,236) (1,719) (12,690) --
Issuance of common stock to
Novartis.......................... 6,600 66 407,484 -- -- -- --
Capital contribution by Novartis.... -- -- 24,845 -- -- -- --
Issuance of common stock and stock
options related to the Viagene
acquisition....................... 916 9 91,393 -- -- -- --
Exercise of stock options, including
tax effect........................ 670 6 32,921 -- -- -- --
Exercise of warrants................ -- -- 97 -- -- -- --
Employee stock purchase plan........ 173 2 9,029 -- -- -- --
Foreign currency translation
adjustment........................ -- -- -- -- 2,440 -- --
Unrealized gain from investments.... -- -- -- -- -- 43,952 --
Loans to employees for stock sales.. -- -- -- -- -- -- (351)
Net loss............................ -- -- -- (512,463) -- -- --
--------- ----------- ----------- ------------ ----------- ----------- -----
Balances at December 31, 1995....... 41,738 417 1,727,711 (1,087,699) 721 31,262 (351)
Exercise of stock options, including
tax effect........................ 2,219 22 26,481 -- -- -- --
Exercise of warrants................ 61 -- 1,570 -- -- -- --
Employee stock purchase plan........ 1,443 15 19,897 -- -- -- --
Additional shares issued in four-
for-one stock split............... 125,214 1,253 (1,253) -- -- -- --
Foreign currency translation
adjustment........................ -- -- -- -- (7,039) -- --
Unrealized loss from investments.... -- -- -- -- -- (2,688) --
Loans to employees for stock sales.. -- -- -- -- -- -- (609)
Net income.......................... -- -- -- 55,145 -- -- --
--------- ----------- ----------- ------------ ----------- ----------- -----
Balances at December 31, 1996....... 170,675 $ 1,707 $ 1,774,406 $(1,032,554) $ (6,318) $ 28,574 $ (960)
--------- ----------- ----------- ------------ ----------- ----------- -----
--------- ----------- ----------- ------------ ----------- ----------- -----

TOTAL
----------

Balances at December 31, 1993....... $ 522,289
Exercise of stock options, including
tax effect........................ 21,947
Exercise of warrants................ 7,875
Employee stock purchase plan........ 7,384
Foreign currency translation
adjustment........................ 7,501
Unrealized loss from investments.... (12,690)
Net income.......................... 18,325
----------
Balances at December 31, 1994....... 572,631
Issuance of common stock to
Novartis.......................... 407,550
Capital contribution by Novartis.... 24,845
Issuance of common stock and stock
options related to the Viagene
acquisition....................... 91,402
Exercise of stock options, including
tax effect........................ 32,927
Exercise of warrants................ 97
Employee stock purchase plan........ 9,031
Foreign currency translation
adjustment........................ 2,440
Unrealized gain from investments.... 43,952
Loans to employees for stock sales.. (351)
Net loss............................ (512,463)
----------
Balances at December 31, 1995....... 672,061
Exercise of stock options, including
tax effect........................ 26,503
Exercise of warrants................ 1,570
Employee stock purchase plan........ 19,912
Additional shares issued in four-
for-one stock split............... --
Foreign currency translation
adjustment........................ (7,039)
Unrealized loss from investments.... (2,688)
Loans to employees for stock sales.. (609)
Net income.......................... 55,145
----------
Balances at December 31, 1996....... $ 764,855
----------
----------

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

CHIRON CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------

Cash flows from operating activities:
Net income (loss)......................................................... $ 55,145 $ (512,463) $ 18,325
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........................................... 112,326 99,097 49,429
Gain on sale of interest in affiliated company.......................... (12,226) -- --
Write-off of purchased in-process technologies.......................... -- 365,286 --
Write-offs of fixed assets.............................................. 5,031 18,400 --
Reserves................................................................ 16,895 11,321 15,892
Deferred income taxes................................................... 6,972 9,041 --
Write-down of investments in equity securities.......................... 2,243 -- 11,607
Undistributed earnings of affiliates.................................... (6,841) (3,944) (5,666)
Changes, excluding effect of acquisitions, to:
Accounts receivable................................................... (75,825) 2,000 (58,019)
Inventories........................................................... (48,545) (36,094) (7,394)
Other current assets.................................................. (20,187) (21,462) (13,692)
Accounts payable and accrued expenses................................. 11,427 7,719 8,535
Payable to Chiron Vaccines............................................ -- -- 1,658
Other current liabilities............................................. 1,921 21,808 2,542
Current portion of unearned revenue................................... (1,162) 5,979 (10,132)
Other noncurrent liabilities.......................................... 4,379 (719) 2,086
---------- ---------- ----------
Net cash provided by (used in) operating activities................. 51,553 (34,031) 15,171
---------- ---------- ----------
Cash flows from investing activities:
Purchases of investments in marketable debt securities.................... (55,008) (158,533) (180,365)
Proceeds from sale and maturity of investments in marketable debt
securities.............................................................. 143,922 334,117 232,900
Businesses acquired, net of cash acquired................................. (374) (112,633) (17,726)
Capital expenditures...................................................... (120,162) (101,052) (105,691)
Proceeds from sale of interest in affiliated company...................... 14,000 -- --
Purchases of investments in equity securities and affiliated companies.... (130,308) (900) (24,010)
Increase in other assets.................................................. (33,573) (3,773) (12,525)
---------- ---------- ----------
Net cash used in investing activities............................... (181,503) (42,774) (107,417)
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings (payments) under line of credit arrangements............... (12,606) 4,686 --
Proceeds from issuance of short-term debt................................. 100,000 -- --
Proceeds from issuance of common stock.................................... 45,995 40,421 27,126
Proceeds from capital contribution from Novartis.......................... -- 24,845 --
Repayment of notes payable and capital leases............................. (9,643) (3,705) (6,520)
---------- ---------- ----------
Net cash provided by financing activities........................... 123,746 66,247 20,606
---------- ---------- ----------
Net decrease in cash and cash equivalents........................... (6,204) (10,558) (71,640)
Cash and cash equivalents at beginning of the year.......................... 74,318 84,876 156,516
---------- ---------- ----------
Cash and cash equivalents at end of the year................................ $ 68,114 $ 74,318 $ 84,876
---------- ---------- ----------
---------- ---------- ----------

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Chiron Corporation (the "Company" or "Chiron") is a science-driven,
market-directed healthcare company that applies biotechnology and other
techniques of modern biology and chemistry to develop, produce and sell products
intended to improve the quality of life by diagnosing, preventing and treating
human disease. Chiron participates in four human healthcare markets:
diagnostics, therapeutics, pediatric and adult vaccines, and ophthalmic surgical
products. Chiron also develops or acquires new technologies, employing these
technologies to discover and develop new products for the Company or for its
partners.

Chiron's diagnostics business includes automated immunodiagnostic systems,
new quantitative probe tests and critical blood analyte systems which are used
by hospitals to diagnose and monitor patients in critical care settings. Chiron
also provides blood screening tests, used to detect the presence of the human
immunodeficiency virus ("HIV"), hepatitis viruses and retroviruses, through its
joint business with Ortho Diagnostic Systems, Inc. ("Ortho"), a Johnson &
Johnson ("J&J") company. Chiron's therapeutics business emphasizes oncology,
serious infectious diseases and critical care diseases and provides products to
hospitals and large clinics in the United States ("U.S.") and Europe. Chiron's
vaccines business is based primarily on the sale of adult and pediatric and flu
vaccines in Italy and Germany and to certain international health service
organizations. Chiron is also involved in the development and marketing of new
pediatric and adult vaccines. Through its ophthalmic business, Chiron provides
products for the surgical correction of vision, as well as intraocular implants
that deliver drugs to the eye. Chiron's ophthalmic business markets its products
in the U.S., Europe, and other geographic regions.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments in joint
ventures, partnerships and interests in which Chiron has an equity interest of
50 percent or less are accounted for using either the equity or cost method. For
those investments that are accounted for under the cost method, Chiron applies
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
as appropriate. Certain foreign subsidiaries and investments in affiliated
companies are accounted for either on a one-month or one-quarter lag.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.

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

FISCAL YEAR

During 1995, the Company changed its fiscal year from a December 31 calendar
year-end to a 52 or 53-week year ending on the Sunday nearest the last day in
December of each year. Therefore, the 1996 and 1995 fiscal years ended on
December 29, 1996 and December 31, 1995, respectively. Both fiscal years were

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
52 weeks long. For presentation purposes, dates used in the consolidated
financial statements and notes refer to the calendar month end.

CASH EQUIVALENTS AND INVESTMENTS

All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents. Cash equivalents and
short-term investments consist principally of money market instruments which
include corporate notes, corporate bonds, commercial paper, and government or
government agency securities. Noncurrent investments consist principally of
corporate notes, corporate bonds, government or government agency securities and
investments in equity securities and affiliated companies.

INVENTORIES

Pharmaceutical inventories are stated at the lower of cost or market using
the average cost method or, in the case of vaccine products, using the last-in,
first-out ("LIFO") method. Diagnostic and ophthalmic products are valued at
cost, using the first-in, first-out ("FIFO") method which is less than market
value. Inventories consist of the following at December 31:

1996 1995
---------- ----------
(IN THOUSANDS)

Finished goods.................................... $ 94,875 $ 96,327
Work in process................................... 45,874 36,560
Raw materials..................................... 39,785 33,054
---------- ----------
$ 180,534 $ 165,941
---------- ----------
---------- ----------

PROPERTY, PLANT, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Depreciation on property, plant and equipment, including assets held under
capital leases, is computed by the straight-line method over the estimated
useful lives of the assets (3 to 20 years for equipment and 15 to 40 years for
buildings). Capitalized start-up costs for completed manufacturing facilities
are amortized over 3 years. Leasehold improvements are amortized on a
straight-line basis over the remaining fixed lease term or asset life, whichever
is shorter.

LONG-LIVED ASSETS, INCLUDING INTANGIBLE ASSETS

In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company reviews, as circumstances dictate, the carrying
amount of its intangible assets and manufacturing facilities, including the
Company's idle pharmaceutical fill and finishing facility in Puerto Rico. The
purpose of these reviews is to determine whether the carrying amounts are
recoverable. Recoverability is determined by comparing the projected
undiscounted net cash flows of the long-lived assets against their respective
carrying amounts. The amount of impairment, if any, is measured based on the
excess of the carrying value over the fair value.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As they relate to the Company's manufacturing facilities, management's
reviews consider, among other factors, the Company's global manufacturing needs
and plans for existing commercial products, as well as products in development.
The estimates used in the reviews are dependent upon several key assumptions,
including the projected level of demand for the Company's products, product
pricing, success of clinical trials, timing of regulatory approval and the
introduction of competing products. Additionally, management is in the process
of expanding its reviews to include the impact of potentially acquiring the
remaining 51 percent interest in the Chiron Behring joint venture (see Note 2).

Management believes that no impairment of the carrying value of long-lived
assets, including intangible assets, has occurred. However, there can be no
assurance that global manufacturing needs for existing products will continue
unchanged and product development programs will be successful. Excess
manufacturing capacity may occur in the future requiring an adjustment of the
carrying value of certain facilities to their fair value.

Intangible assets consist primarily of purchased technologies, goodwill and
patents and are amortized on a straight-line basis over their estimated useful
lives ranging from 3 to 17 years. Amortization expense for the years ended
December 31, 1996, 1995 and 1994 was $18.7 million, $19.2 million, and $9.5
million, respectively. Amortization of purchased technologies and goodwill is
primarily included in "Other operating expenses" and amortization of patents is
primarily included in "Research and development" expense in the Consolidated
Statements of Operations.

REVENUE

"Product sales, net" in the Consolidated Statements of Operations consists
of revenue from product sales which is generally recognized upon shipment;
revenue from service contracts which is recognized ratably over the life of the
contract; and revenue from the sale of equipment under sales-type leases which
is recognized at the inception of the lease. During 1994, Chiron recognized
Betaseron-TM- revenues under the terms of an amended supply agreement whereby
Chiron recognized the majority of its Betaseron-TM- revenues upon shipment of
the product to its marketing partner. During 1995, the Company reverted to the
terms of the original supply agreement, under which Chiron recognizes a partial
share of Betaseron-TM- revenues upon shipment and an additional share upon
subsequent sale of the product by its marketing partner.

"Equity in earnings of unconsolidated joint businesses" represents the
Company's share of the operating results generated by its commercial joint
businesses. "Collaborative agreement revenues" are earned and recognized based
upon work performed, upon the sale of product rights, upon shipment of product
for use in preclinical and clinical testing or upon the attainment of benchmarks
specified in the related agreements. Under contracts where reimbursement is
based upon work performed, the related research and development expenses were
$103.8 million, $51.8 million and $72.4 million in 1996, 1995 and 1994,
respectively. "Other revenues" consist primarily of product royalty payments
under license agreements, laboratory services, fees for sales and marketing
services performed and grants from government agencies, and are recognized when
earned.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PER SHARE DATA

Per share data is based on the weighted average number of common and
dilutive common equivalent shares outstanding. Common equivalent shares result
from the assumed exercise of outstanding stock options and warrants that have a
dilutive effect when applying the treasury stock method. Shares assumed to be
issued upon conversion of the Company's convertible debentures are not included
for any of the periods presented since their inclusion would be anti-dilutive.
Fully diluted per share data has not been presented, as the amounts would not
differ materially from primary per share data.

At the annual meeting of stockholders in May 1996, stockholders approved an
amendment to the Company's restated certificate of incorporation, increasing the
number of authorized common shares from 100 million to 500 million.
Subsequently, Chiron's Board of Directors declared a 4-for-1 stock split
effected in the form of a dividend on the Company's common stock that was
distributed on August 2, 1996, to stockholders of record on July 19, 1996. As a
result, the Company increased its common stock balance by $1.3 million for the
par value of the common stock issued to effect the stock split, and
correspondingly reduced additional paid-in capital. The exercise prices for all
warrants and stock options and the convertible bond conversion rates were
adjusted for the effect of the split. All references in these financial
statements to share and per share amounts have been retroactively restated to
reflect the increased number of common shares outstanding.

STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which defines a fair value method of accounting for
stock-based awards. As permitted by SFAS 123, the Company elected to continue to
follow the existing accounting requirements for stock options and other
stock-based awards contained in APB Opinion No. 25, "Accounting for Stock Issued
to Employees." However, the Company has provided in Note 8 the required pro
forma disclosures pursuant to SFAS 123.

STATEMENT OF CASH FLOWS

Supplemental disclosure to the Consolidated Statements of Cash Flows is as
follows for the years ended December 31:

1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)

Tax effect of stock option deductions................... $ 1,398 $ 912 $ 9,895
Cash paid for interest, net of amounts capitalized...... 19,354 18,603 12,866
Cash paid for income taxes.............................. 14,505 8,597 1,263

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Supplemental disclosure regarding noncash investing and financing activities
is as follows for the years ended December 31:

1996 1995 1994
--------- ----------- ----------
(IN THOUSANDS)

Acquisitions:
Fair value of assets acquired......................... $ 2,143 $ 962,124 $ 42,810
Liabilities assumed................................... (1,769) (289,025) (24,103)
Acquisition costs..................................... -- (6,013) --
Stock and options issued.............................. -- (498,952) --
Carrying value of original investment................. -- (14,130) --
--------- ----------- ----------
Total cash paid......................................... $ 374 $ 154,004 $ 18,707
--------- ----------- ----------
--------- ----------- ----------

As further described in Note 2, effective January 1, 1995, under a series of
agreements between Chiron and Novartis AG and its affiliates ("Novartis"),
successor to Ciba-Geigy Ltd. ("Ciba"), Chiron acquired all of the outstanding
common stock of Chiron Diagnostics Corporation ("Chiron Diagnostics"), formerly
Ciba Corning Diagnostics Corp., and Novartis' interests in Chiron Vaccines
Company ("Chiron Vaccines"), formerly Chiron Biocine Company, and Chiron S.p.A.,
formerly Biocine S.p.A., in exchange for 26.4 million newly-issued shares of
Chiron common stock and a cash payment of $23.5 million. The fair value of
assets acquired in the transaction was $694.9 million, and liabilities of $261.5
million were assumed by the Company.

During 1995, Chiron acquired the ophthalmic surgical products division of
IOLAB from J&J for approximately $95.0 million in cash. The fair value of assets
acquired in the transaction (including goodwill and purchased in-process
technology) was $108.8 million, and liabilities of $12.8 million were assumed by
the Company.

In September 1995, Chiron acquired all of the outstanding common stock of
Viagene, Inc. ("Viagene"), not previously owned by the Company, in exchange for
approximately $35.5 million in cash and 3.7 million shares of Chiron common
stock. Additionally, unexercised options to purchase Viagene stock were
converted into options to purchase approximately 528,000 shares of Chiron common
stock. The fair value of assets acquired (including purchased in-process
technology) was $158.5 million, and liabilities of $14.7 million were assumed by
the Company.

During 1994, Chiron acquired all of the common stock of Laboratoires
Domilens S.A. for approximately $18.7 million in cash. The fair value of assets
acquired (including goodwill) was $42.8 million, and liabilities of $24.1
million were assumed by the Company.

FOREIGN CURRENCY

Local foreign currencies are generally considered to be the functional
currency of the Company's foreign subsidiaries and equity investments.
Accordingly, the assets and liabilities of subsidiaries and equity investments
denominated in foreign currencies are translated at the exchange rates in effect
at the appropriate year-end. The revenues and expenses of such subsidiaries and
investments are translated at the average exchange rates for the period of
operation. Adjustments resulting from such translations are

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included in "Cumulative foreign currency translation adjustment," a separate
component of stockholders' equity.

FINANCIAL INSTRUMENTS

FOREIGN CURRENCY CONTRACTS. A portion of the Company's operations consist
of manufacturing and sales activities in foreign countries. As a result, the
Company's financial results will be affected by changes in foreign currency
exchange rates. The Company is primarily exposed to fluctuations in currencies
in western European countries and Japan.

To provide an economic hedge against fluctuations in foreign currency
exchange rates, the Company enters into forward currency contracts ("forwards")
and starting in 1996, purchases average rate put options ("options"). These
financial instruments are not used for trading or speculative purposes. The
Company has established a control environment that includes policies and
procedures for risk assessment and the approval, reporting and monitoring of
foreign currency hedging activities.

Forwards are used to hedge material foreign currency denominated receivables
and payables. They are generally settled at the end of each quarter with gains
or losses recorded in "Other expense, net," to offset gains or losses on foreign
currency receivables and payables.

The Company has purchased, and may in the future purchase, options to reduce
the exchange rate impact of a strengthening U.S. dollar on the underlying hedged
amounts. Counterparties to these hedging agreements are major international
financial institutions. The Company's financial statement exposure is limited to
the amount paid for the options. The cost of the options, which is recorded in
"Other current assets" is deferred and amortized over the relevant term of the
period hedged. As of December 31, 1996, there were no options outstanding.

Foreign currency transaction gains and (losses), net of the impact of
hedging, were a net ($1.7) million in 1996 and were not significant in 1995 and
1994.

CROSS CURRENCY INTEREST RATE SWAPS. The Company selectively enters into
cross currency interest rate swaps ("swaps") through major financial
institutions to modify the interest and/or currency characteristics of specific
outstanding debt obligations. Each swap agreement corresponds to all or a
portion of the principal balance and term of a specific debt obligation. These
swap agreements involve the exchange of interest payments denominated in
different currencies, based upon the terms described in the swap agreements,
with an exchange of the underlying notional principal amounts upon maturity. The
net difference between the interest amounts paid and received is recognized as
interest expense. The related interest amount payable or receivable from the
major financial institutions is included in other current liabilities or assets.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash investments and trade accounts
receivable. The Company invests cash which is not required for immediate
operating needs principally in a diversified portfolio of financial instruments
issued by institutions with investment-grade credit ratings. By policy, the
amount of credit exposure to any one

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
institution is limited. These investments are generally not collateralized and
primarily mature within three years. The Company has not experienced any
significant realized losses on these investments.

The Company has not experienced any credit losses from its accounts
receivable from joint business partners or collaborative research agreements,
and none are currently expected. Other accounts receivable arise from product
sales to customers. The Company performs ongoing credit evaluations of these
customers and generally does not require collateral. Reserves are maintained for
potential trade receivable credit losses, and such losses have been within
management's expectations.

RETIREMENT SAVINGS PLAN

The Company maintains a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code. The plan covers substantially all full-time
U.S. employees. Participating employees may defer a portion of their pretax
earnings up to the Internal Revenue Service annual contribution limit. The
Company matches employee contributions according to a specified formula. The
Company's matching contributions totaled $6.2 million, $5.3 million and $1.8
million in 1996, 1995 and 1994, respectively.

MAJOR CUSTOMERS

During 1996, no single customer contributed ten percent or more to total
revenues. As discussed in Notes 2 and 4, Novartis is a related party and
contributed less than ten percent of total revenues in 1996 and 1995, and 11
percent in 1994. As discussed in Note 4, J&J and its affiliates are related
parties and collectively contributed less than ten percent of total revenues in
1996 and 1995, and 22 percent in 1994. Sales of Betaseron-TM- to Chiron's
marketing partner accounted for less than ten percent of total revenues in 1996
and 1995, and 23 percent in 1994.

NOTE 2--BUSINESS COMBINATIONS

AGREEMENTS WITH NOVARTIS

Effective January 1, 1995, under a series of agreements between Chiron and
Novartis, including an investment agreement, a cooperation and collaboration
agreement and a governance agreement (collectively, the "Agreements"), Novartis
increased its ownership interest in Chiron common stock to 49.9 percent (now
approximately 46 percent as a result of subsequent stock issuances to parties
other than Novartis), partially through a tender offer for approximately 38
percent of Chiron's outstanding common stock for $29.25 per share. At the same
time, Chiron acquired from Novartis all of the outstanding common stock of
Chiron Diagnostics and Novartis' interest in Chiron Vaccines and Chiron S.p.A.,
in exchange for 26.4 million newly-issued Chiron common shares and a cash
payment of $23.5 million. Prior to the acquisition, Chiron Vaccines and Chiron
S.p.A. were joint businesses between Chiron and Novartis with each having a 50
percent ownership interest.

In connection with the Agreements, Novartis agreed to guarantee $425.0
million of new debt for Chiron, agreed to provide $250.0 million (which may be
increased to $300.0 million subject to certain reductions in the debt guarantee)
over five years in support of research at Chiron, and provided Chiron with the
option to issue up to $500.0 million of new equity to Novartis. Additionally,
under the terms of the Agreements, Novartis is entitled to name three members to
Chiron's Board of Directors and has limited rights to review and approve certain
Chiron transactions.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 2--BUSINESS COMBINATIONS (CONTINUED)
During 1995, Chiron and Novartis entered into a limited liability company
agreement (the "Research Funding Agreement") to utilize research funding to be
provided by Novartis. Under the terms of the agreement, Novartis will fund from
time to time through December 31, 1999, at Chiron's request, research and
development costs for adult vaccines, pediatric vaccines and insulin-like growth
factor-1 ("IGF-1"). Annual funding amounts are subject to certain limitations.
In return, Novartis will receive an interest in a stream of variable royalties
from future worldwide sales of certain adult vaccines, certain pediatric
vaccines and IGF-1. Royalties will be paid for a minimum period of ten years,
subject to an extension under certain conditions, following the later of October
1, 2001, or the date of the first commercial sale of individual products covered
by the agreement. In addition, Novartis will also receive an interest in
promotional rights, in countries other than in North America and Europe, for
certain adult vaccines.

Certain guarantees stated within the Agreements were subsequently modified
on November 27, 1996 in conjunction with a consent and agreement that resolves
the Federal Trade Commission's review of the merger between Ciba and Sandoz
Ltd., which created Novartis. Under the November 27, 1996 agreement, Chiron
agreed to grant royalty-bearing licenses to Rhone-Poulenc Rorer Inc. and
Novartis for certain patent rights on the herpes simplex virus thymidine kinase
gene in the field of gene therapy. As partial consideration, Novartis will pay
the Company up to $60.0 million over the next five years, $15.0 million of which
relates to 1997. Novartis also agreed to cross-license to the Company certain
Novartis-controlled gene therapy technologies.

Additionally, Novartis and the Company agreed to a modification of Chiron's
contract, which expires in March 1997 and provides for sole promotional rights
in the U.S. with respect to Novartis' product Aredia-TM- (pamidronate disodium
for injection). Under the new arrangements, Chiron, through a co-promotion
arrangement with Novartis, will promote Aredia-TM- for two years after a
six-month transitional period.

Also, should Chiron elect to replace certain existing convertible debt,
Novartis agreed to provide additional guarantees totaling $200.0 million for
such purposes.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 2--BUSINESS COMBINATIONS (CONTINUED)

Definitive agreements covering certain aspects of the November 1996
agreement with Novartis will be drafted in 1997.

ACQUISITIONS OF CHIRON DIAGNOSTICS AND INTERESTS IN CHIRON VACCINES AND
CHIRON S.P.A.

The acquisitions of Chiron Diagnostics and Novartis' interests in Chiron
Vaccines and Chiron S.p.A. (the "Acquisitions") were accounted for under the
purchase method of accounting. The purchase price of approximately $433.4
million was allocated to the acquired assets and assumed liabilities based upon
their estimated fair value on the acquisition date. The fair value of the net
assets acquired in the Acquisitions, including purchased in-process technology,
was estimated based on an independent valuation of the acquired net assets. The
aggregate purchase price of approximately $433.4 million was less than the fair
value of the net assets acquired by approximately $57.3 million. This amount was
ratably allocated as a reduction of the noncurrent assets of the acquired
companies. In connection with the acquisition, liabilities were assumed as
follows:

(IN THOUSANDS)

Fair value of assets acquired, net of negative goodwill....................... $ 694,895
Common stock issued........................................................... (407,550)
Cash paid..................................................................... (23,504)
Acquisition costs............................................................. (2,304)
--------------
Liabilities assumed........................................................... $ 261,537
--------------
--------------

As part of the purchase accounting, Chiron recognized as an expense the
amount allocated to purchased in-process technology, resulting in a noncash
charge against earnings of $222.9 million. Other transaction-related charges
totaling $49.4 million related to employee payments and the related taxes, and
legal and investment advisor fees were also recognized as expenses. Novartis
agreed to reimburse the Company $24.8 million for a portion of the employee
payments and such reimbursement has been recorded as a capital contribution.
Other purchased intangible assets of approximately $25.6 million consisting of
base technology are being amortized over their estimated useful lives of 10 to
15 years, using the straight-line method.

The operations of Chiron Diagnostics, Chiron Vaccines and Chiron S.p.A. are
included in Chiron's consolidated operating results from January 1, 1995
forward. Chiron's interest in the operating results of Chiron Vaccines and
Chiron S.p.A. were included in the Company's 1994 operating results under the
equity method of accounting.

ACQUISITION OF IOLAB

On March 31, 1995, Chiron acquired the ophthalmic surgical product division
of IOLAB from J&J for approximately $95.0 million. The acquisition was accounted
for under the purchase method of accounting, and accordingly, IOLAB's financial
results have been included in Chiron's consolidated results of operations from
the date of purchase. The purchase price was allocated to the acquired assets
and assumed liabilities based upon their estimated fair value on the acquisition
date. The fair value of the net assets

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 2--BUSINESS COMBINATIONS (CONTINUED)
acquired, including in-process technology, was estimated based on independent
valuations of the acquired net assets. In connection with the acquisition,
liabilities were assumed as follows:

(IN THOUSANDS)

Fair value of assets acquired................................................. $ 108,768
Cash paid..................................................................... (95,000)
Acquisition costs............................................................. (1,013)
--------------
Liabilities assumed........................................................... $ 12,755
--------------
--------------

The amount allocated to purchased in-process technology of $10.3 million was
charged against earnings in the first quarter of 1995. Other purchased
intangible assets of approximately $46.5 million consisting of base technology,
goodwill, trade name and a customer list are being amortized over their
estimated useful lives of 10 to 15 years using the straight-line method. Also,
the Company recorded additional charges for IOLAB restructuring and
integration-related expenses totaling $16.9 million in 1995 (Note 3).

ACQUISITION OF VIAGENE

On September 29, 1995, Chiron acquired all of the outstanding common stock
of Viagene, not previously owned by the Company, in exchange for approximately
$35.5 million in cash and 3.7 million shares of Chiron common stock.
Additionally, on September 29, 1995, unexercised options to purchase Viagene
common stock were converted into options to purchase approximately 528,000
shares of Chiron common stock. Viagene is a biotechnology company involved in
the discovery, development and commercialization of gene transfer products for
the treatment or prevention of severe viral infections, cancers and other
diseases. Prior to the acquisition, Chiron had an ongoing collaboration with
Viagene in the area of gene therapy and, pursuant to the collaboration
arrangement, held an investment in the outstanding voting stock of Viagene with
a carrying value, net of unrealized gains and a realized loss, of approximately
$14.1 million as of September 29, 1995.

The Viagene acquisition has been accounted for under the purchase method of
accounting. The purchase price of approximately $143.7 million was allocated to
the acquired assets and assumed liabilities based upon their estimated fair
value on the acquisition date. In connection with the acquisition, liabilities
were assumed as follows:

(IN THOUSANDS)

Fair value of assets acquired................................................. $ 158,461
Carrying value of original investment in Viagene.............................. (14,130)
Common stock and options issued............................................... (91,402)
Cash paid..................................................................... (35,500)
Acquisition costs............................................................. (2,696)
--------------
Liabilities assumed........................................................... $ 14,733
--------------
--------------

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 2--BUSINESS COMBINATIONS (CONTINUED)
As part of the purchase accounting, Chiron recognized as an expense the
amount allocated to purchased in-process technology in the third quarter of
1995. This resulted in a noncash charge against earnings of $130.3 million. The
results of operations of Viagene are included in Chiron's consolidated operating
results from September 29, 1995 forward.

PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma information presents the results of
operations of Chiron, Chiron Diagnostics, Chiron Vaccines, Chiron S.p.A. and
Viagene for the years ended December 31, 1995 and 1994, with pro forma
adjustments as if the acquisitions had been consummated as of the beginning of
the periods presented. This pro forma information does not purport to be
indicative of what would have occurred had the acquisitions been made as of
those dates or of results which may occur in the future. The pro forma
information does not include the write-off of purchased in-process technology of
$222.9 million or other transaction-related costs totaling $49.4 million
(related to employee payments and the related taxes, and investment advisor and
legal fees) which were recognized as expense during 1995, relating to the
acquisition of Chiron Diagnostics, Chiron Vaccines and Chiron S.p.A. Also, the
pro forma information does not include the write-off of purchased in-process
technology related to the Viagene acquisition of $130.3 million.

YEAR ENDED DECEMBER 31,
------------------------
1995 1994
------------ ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)

Total revenues...................................................... $ 1,107,958 $ 968,568
Income (loss) before non-recurring charges.......................... (127,212) 17,806
Income (loss) before non-recurring charges per share................ (0.78) 0.11

AGREEMENT WITH BEHRINGWERKE AG

Effective July 1, 1996, Chiron purchased a 49 percent interest in the human
vaccine business of Behringwerke AG, a subsidiary of Hoechst AG, a German
company. Chiron accounts for its interest under the equity method. The total
acquisition price, which was payable in cash, was approximately $120.0 million,
including costs directly related to the acquisition. This amount has been
reflected as a component of "Investments in equity securities and affiliated
companies" in the accompanying Consolidated Balance Sheets. Of the total
acquisition price, approximately $97.0 million was allocated to various
intangible assets such as goodwill, trademarks and patents, and is being
amortized on a straight-line basis over lives ranging from 5 to 20 years.

Under the terms of the agreement, Chiron has an option to purchase the
remaining 51 percent interest in the joint venture in March 1998, 1999, 2000 or
2001, and Behringwerke AG has the option to require Chiron to acquire the
remaining 51 percent interest in March 2001. During the period of mutual
ownership, Chiron and Behringwerke AG will operate the vaccine business as a
joint venture, which has been named Chiron Behring GmbH & Co. ("Chiron
Behring").

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 2--BUSINESS COMBINATIONS (CONTINUED)
The joint venture will pay to Behringwerke AG an annual royalty comprised of
a percentage of the excess of net sales of certain Chiron vaccine products in
Germany over forecasted amounts for the years 1997 through 2001.

In 1996, Chiron recognized $4.2 million as its share of the joint venture's
results, which includes amortization of the aforementioned intangible assets, as
"Equity in earnings of unconsolidated joint businesses." The results of the
joint venture are reported on a one-month lag.

NOTE 3--RESTRUCTURING AND REORGANIZATION COSTS

During 1995, Chiron recorded $39.1 million in restructuring and
reorganization charges, including $16.9 million arising from the acquisition and
integration of IOLAB (Note 2), representing the expected costs of integrating
the acquired business with Chiron's existing business as well as write-downs of
certain previously capitalized costs. Of the total charge of $39.1 million, $8.0
million was due to a change in plans to expand the Company's Emeryville research
and development facilities and $7.7 million was related to the idling of the
Company's Puerto Rico manufacturing facility. The majority of these
facility-related charges, as well as $3.7 million of other facility related
charges, were paid in 1995. Employee termination costs related to the Company's
restructuring were not significant.

Of the $16.9 million recorded as a result of the acquisition of IOLAB,
approximately $6.7 million related to write-downs of previously capitalized
facility and inventory costs. The remaining $10.2 million consisted of $5.5
million of employee termination costs and $4.7 million of lease termination and
other costs. Chiron Vision is consolidating its European intraocular lens
manufacturing operations into its facility in Lyon, France, and the North
American manufacturing operations into its facility in Claremont, California.
The related workforce reduction was the result of increased manufacturing
efficiencies as plants were closed, a concentration of research and development
efforts and an elimination of overlap in sales and marketing and general and
administrative areas.

At December 31, 1996, the accrual for restructuring and reorganization costs
totaled $7.4 million and consisted primarily of $2.5 million of lease
termination costs and $3.7 million related to the idling of the Puerto Rico
manufacturing facility. The liability for the lease termination costs will be
settled over the life of the lease terms which expire through 2012. The accrual
for the Puerto Rico manufacturing facility is expected to be settled in 1997.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 3--RESTRUCTURING AND REORGANIZATION COSTS (CONTINUED)
The current status of the accrued restructuring charges is summarized below:

AMOUNT OF AMOUNT AMOUNT TO
TOTAL UTILIZED BE UTILIZED
RESTRUCTURING THROUGH IN FUTURE
CHARGE DECEMBER 31, 1996 PERIODS
------------- ----------------- -----------
(IN THOUSANDS)

Chiron Vision restructuring charges:
Employee-related costs....................... $ 5,506 $ (5,506) $ --
Facility and lease termination costs......... 6,242 (3,730) 2,512
Duplicate and excess inventory............... 3,476 (2,888) 588
Other........................................ 1,724 (1,369) 355
------------- -------- -----------
16,948 (13,493) 3,455
Puerto Rico manufacturing facility............. 7,650 (3,988) 3,662
Postponement of Emeryville facility
expansion.................................... 7,990 (7,990) --
Amsterdam manufacturing facilities............. 1,000 (1,000) --
Other facility related......................... 3,718 (3,718) --
Other.......................................... 1,750 (1,510) 240
------------- -------- -----------
$ 39,056 $ (31,699) $ 7,357
------------- -------- -----------
------------- -------- -----------

NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS

GENERAL

The Company has entered into a number of collaborative arrangements with
other pharmaceutical and biotechnology companies for the development and
marketing of certain technologies and products. The majority of these
collaborations are in the development or clinical trial phase. Chiron and its
collaborative partners generally contribute certain technologies and research
efforts to the collaboration. In addition, Chiron and its collaborative partners
commit, subject to certain limitations and cancellation clauses, to share in the
funding of the collaborations' ongoing research and clinical trial costs.
Chiron, under certain of the arrangements, has purchased equity securities,
including common and preferred stock and warrants to purchase common and
preferred stock, of the collaborative partner.

DIAGNOSTIC JOINT BUSINESS

In 1989, Chiron entered into an agreement with Ortho to jointly develop,
manufacture and market certain immunoassay diagnostic products. Under the terms
of the agreement, Chiron receives 50 percent of the pretax operating profits
generated by the joint business and is reimbursed for its continuing research,
development and manufacturing costs. Ortho and Chiron also licensed Abbott
Laboratories ("Abbott") and Pasteur Sanofi Diagnostics to sell their own
immunoassay diagnostic tests for hepatitis C ("HCV"), using certain technology
from the joint business.

Chiron records its share of profits of the Chiron-Ortho diagnostic business
on a one-month lag using estimates provided by Ortho. These estimates are
subject to a final adjustment 90 days after the end of each calendar year, and
profit sharing distributions are payable to Chiron within 90 days after the end
of

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
each quarter. At December 31, 1996 and 1995, $24.4 million and $19.6 million,
respectively, were due from Ortho for profit sharing and reimbursement of costs.
Chiron's 50 percent share of the profits from the joint business was $95.8
million in 1996, which includes $3.8 million for the final 1995 accounting and
$6.9 million for a settlement from Abbott related to prior period sales of HIV
immunodiagnostic tests. In 1995, Chiron recognized $76.9 million, of which $1.8
million was a result of the final 1994 accounting. In 1994, Chiron recognized
$74.3 million as its share of the profits, including a negligible adjustment
relating to the final 1993 accounting. Revenues recognized under the cost
reimbursement portion of the agreement with Ortho for collaborative research
were $8.6 million, $9.6 million and $8.5 million in 1996, 1995 and 1994,
respectively. Revenues recognized under the cost reimbursement portion of the
agreement with Ortho for product sales were $15.0 million, $16.1 million and
$11.8 million in 1996, 1995 and 1994, respectively.

CEPHALON, INC. ("CEPHALON")

In January 1994, Chiron and Cephalon established a collaboration for the
research, development and marketing of certain products for the treatment of
neurological disorders. Under the terms of the agreement, Chiron and Cephalon
will each contribute certain technology and licenses and will share profits
equally. Each party was responsible for its own collaboration-related expenses,
subject to certain conditions, until total collaboration-related expenses were
either equalized or until the products reached commercialization. The expenses
were equalized during 1995, and thereafter, all expenses are shared equally.
Chiron invested $15.0 million in the equity securities of Cephalon in 1994.
Expenses recognized by Chiron related to this agreement for the years ended
December 31, 1996, 1995 and 1994, were $20.4 million, $34.1 million and $5.4
million, respectively.

DEPOTECH CORPORATION ("DEPOTECH")

In March 1994, Chiron entered into an agreement with DepoTech for the
research, development and marketing of certain products incorporating certain
drug delivery technologies developed by DepoTech, and in some cases, certain of
Chiron's therapeutic compounds. Under the terms of the agreement, Chiron agreed
to make specified payments to DepoTech upon the attainment of product
development milestones, and agreed to fund all or a portion of the development
costs of the collaboration in exchange for marketing rights to the resulting
commercial products. In addition, the parties agreed to share in the revenues of
any resulting commercial products. During 1994, Chiron invested $3.5 million in
the equity securities of DepoTech. In 1995, DepoTech reached the first
milestone, and accordingly, a warrant to purchase capital stock of DepoTech was
converted into a technology license fee, and Chiron commenced funding its
portion of development costs, resulting in a $3.5 million charge to research and
development expense for the year ended December 31, 1995. In 1996, Chiron
recognized expenses of $5.0 million related to this agreement.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)

G.D. SEARLE & CO. ("SEARLE")

In October 1994, Chiron entered into a collaboration agreement with Searle
for the research, development and marketing of Tissue Factor Pathway Inhibitor.
Under the terms of the agreement, Chiron made a $3.5 million payment to Searle,
which was expensed in 1994. Except for this payment, each party agreed to fund
its own collaboration-related expenses through 1994. Beginning in 1995,
development expenses are shared equally by the parties. In 1995, in addition to
funding its equal share of continuing development expenses, Chiron exercised its
option to accelerate the funding of certain development expenses of Searle in
exchange for a right of first negotiation to manufacture certain clinical
supplies. Accordingly, Chiron paid $8.8 million to Searle in 1995 which was
recorded as research and development expense. Expenses of $14.6 million were
recognized by Chiron related to this agreement in 1996.

PROGENITOR, INC. ("PROGENITOR")

In March 1995, the Company reached an agreement with Progenitor, a
subsidiary of Interneuron Pharmaceuticals, Inc., to collaborate in the
development and commercialization of therapeutic and vaccine products
incorporating Progenitor's proprietary gene therapy technology. Under the
agreement, Chiron received a license to Progenitor's nonviral gene expression
system for use in the development of products for the treatment of certain
cancers and cardiovascular disorders, development of infectious disease vaccines
and for development of certain other gene therapy products. Chiron has the right
to manufacture and market any resulting products of the collaboration. In return
for the license and other rights, Chiron made an initial license payment of $2.5
million to Progenitor, which was recorded as research and development expense in
1995. During 1996, Chiron paid $0.5 million to Progenitor which was recorded as
research and development expense. Under the agreement, Chiron is required to
make certain additional license and milestone payments to Progenitor. In
addition, Progenitor will receive a royalty from any commercial sales of
products resulting from the collaboration.

GENELABS TECHNOLOGIES, INC. ("GENELABS")

In March 1995, the Company reached an agreement with Genelabs, whereby
Chiron and Genelabs cross-licensed certain rights to HCV; hepatitis G virus
("HGV"), a hepatitis virus discovered by Genelabs; human T-cell leukemia virus -
I ("HTLV-I") and human T-cell leukemia virus - II ("HTLV-II") diagnostic tests.
Under the agreement, Chiron acquired certain rights to develop and market
diagnostic products for the detection of HGV, HTLV-I and HTLV-II. In return,
Genelabs acquired development and marketing rights in Asia, except Japan, for
certain products incorporating Chiron's HCV technology. Ortho, Chiron's joint
diagnostic business partner, agreed to participate as Chiron's equal partner in
the collaboration with Genelabs and therefore will share equally in all payments
under the agreement, including equity investments. Chiron and Ortho agreed to
pay $5.0 million in up front license fees and up to $9.0 million in HGV
development milestones. Chiron and Ortho also agreed to invest a total of $10.0
million in the equity securities of Genelabs. Also, under the terms of the
agreement, Chiron and Ortho have the option to acquire substantially all of the
diagnostics business of Genelabs in the year 2000 through the conversion of the
$10.0 million equity investment for approximately one-half of the business and
an additional payment equal to the then fair market value of the remaining half.
Under a separate agreement, Chiron agreed to pay Genelabs $1.0 million in cash
in exchange for a right of first refusal to obtain an exclusive license to
Genelabs' HGV technology for use in vaccines. Chiron paid Genelabs a total of
$8.5 million during 1995

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
pursuant to the terms of these agreements. Of this total, $2.1 million was
recorded as an investment in securities of Genelabs and $6.4 million was
recorded as research and development expense. No amounts were incurred in 1996
related to this collaboration.

NEW YORK UNIVERSITY ("NYU")

In March 1995, the Company reached an agreement with NYU for the license of
optical mapping technology for use by Chiron and its sublicensee, Novartis, in
the development of diagnostics, therapeutics and vaccines, and Chiron also
acquired the right to commercialize a potential optical mapping instrument.
Under the terms of the agreement, Chiron made a $5.0 million initial payment to
NYU, which was recorded as research and development expense in 1995, for the
license and for funding certain research facilities at NYU. If Chiron and NYU
both agree to continue development of the instrument, Chiron will be obligated
to make milestone payments totaling $4.0 million to NYU and will make royalty
payments to NYU based upon any future product sales of the instrument, subject
to certain minimum royalties. In addition, Novartis has agreed to make certain
further research payments to NYU in connection with development of the
instrument in exchange for the sublicense and in exchange for royalty payments
by Chiron to Novartis based upon sales of the instrument. The amount of expenses
incurred in 1996 related to this collaboration was not significant.

NOVARTIS

In November 1995, Chiron and Novartis entered into a collaboration agreement
through which Novartis acquired a non-exclusive, perpetual license to broadly
apply Chiron's combinatorial chemistry technologies in Novartis' research
programs. In addition, Chiron and Novartis agreed to collaborate on the
identification of new drug candidates for specific disease targets. In exchange
for these rights, Novartis agreed to pay certain license, milestone and royalty
payments to Chiron.

In addition, Novartis agreed to make certain payments to Chiron in exchange
for access to Chiron's technology, chemical libraries and exclusive rights
relating to specific drug discovery targets. Novartis was also granted the right
to develop and market products resulting from the drug discovery targets in
exchange for certain milestone and royalty payments to Chiron. Chiron was
granted commercialization rights to products developed for non-competing
indications, subject to the payment of royalties to Novartis. Novartis also
agreed to fund Chiron's activities relating to the collaboration for a period of
three years, and up to five years at Novartis' option.

Under the terms of the agreement, Novartis will pay $26.0 million to Chiron
over a five-year period, subject to certain adjustments, in exchange for the
non-exclusive, perpetual license to utilize Chiron's combinatorial chemistry
techniques. In 1996 and 1995, Chiron recognized $9.4 million and $5.5 million,
respectively, related to the agreement as "Collaborative agreement revenues" in
the accompanying Consolidated Statements of Operations.

JAPAN TOBACCO INC. ("JT")

In March 1996, the Company and JT entered into a technology transfer and
development agreement whereby the pharmaceutical division of JT acquired a
non-exclusive, perpetual license to apply certain of Chiron's combinatorial
chemistry technologies in JT's research and product development programs. Both

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
Chiron and JT will share in certain improvements to the technology made by
either party, subject to certain conditions. The agreement provides an initial
technology transfer term of two years and may be extended at the option of JT
for an additional two years. In 1996, Chiron recognized collaborative agreement
revenues from JT of $7.7 million.

NOVARTIS AND FOCAL INC. ("FOCAL")

In April 1996, Chiron, Novartis and Focal entered into an agreement in the
area of restenosis, the reclosure of arteries following angioplasty. Chiron and
Novartis will each individually utilize its own cardiovascular drugs together
with Focal's drug delivery technology to develop products designed to prevent
restenosis. Under the terms of the agreement, Chiron and Novartis will receive
exclusive worldwide rights to Focal's technology in selected restenosis fields
for their respective drug compounds entered into the research program. Chiron
and Novartis will be individually responsible for developing and marketing the
resulting products, and Focal will retain manufacturing rights for the final
products. Chiron and Novartis will jointly provide funding for certain
preclinical studies, after which each company will fund development for its own
products. Each company will also be individually responsible to make milestone
payments to Focal for its products developed, totaling $10.0 million per
product. In 1996, Chiron incurred $0.3 million for its share of costs related to
this agreement which was recorded as "Research and development" expense.

RIBOZYME PHARMACEUTICALS INC. ("RPI")

Since 1994, Chiron and RPI have been involved in several collaborations. In
an agreement entered into in May 1996, Chiron and RPI agreed to collaborate to
use RPI's ribozyme technology to determine the function of a number of genetic
sequences. Chiron will select a certain number of gene sequences and RPI will
synthesize ribozymes that will selectively inhibit the action of the target
sequences in Chiron's assays. Chiron will have the option to develop, and, in
certain circumstances, manufacture ribozymes or other products found to be
important in disease pathology. Under the terms of the agreement, Chiron will
pay RPI for the ribozymes used in the research and make milestone payments
depending upon the number of products successfully developed. Chiron also agreed
to pay RPI royalties from the sale of commercialized products. The royalty
payments will be reduced by up to 50 percent of the milestone payments made as
they relate to specific products. In 1996, Chiron incurred $1.8 million of
expenses related to the various collaboration agreements with RPI.

GENERAL INJECTABLES & VACCINES, INC. ("GIV")

In September 1996, Chiron entered into an agreement with Biological and
Popular Culture, Inc. ("BPC"), a newly organized holding company for GIV and
affiliated companies, pursuant to which GIV and its affiliates agreed to perform
certain distribution and promotional services for Chiron's vaccine products in
the U.S. The initial term of the service agreement is five years, with potential
one-year extensions thereafter.

In connection with the agreement, Chiron invested $30.0 million in BPC, of
which $13.8 million consisted of BPC voting preferred stock, which is
convertible at Chiron's option into 30 percent of the outstanding common stock
of BPC. Alternatively, Chiron, at its option, may require BPC to redeem the
preferred stock at par plus accrued dividends of 8 percent at a future date. Of
the preferred stock

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
investment, a significant amount represents excess purchase price and is being
amortized over 15 years. The remainder of the $30.0 million investment consisted
primarily of two interest-bearing loans to BPC and its subsidiaries with various
maturities. Chiron agreed to make additional capital contributions in the event
BPC exceeds certain earnings requirements and which BPC agreed to use to repay
one of the two loans.

In 1996, Chiron recognized $0.2 million as its share of BPC's results, which
includes amortization of the aforementioned intangible assets, as "Equity in
earnings of unconsolidated joint businesses." Chiron's share of BPC's results
are reported on a one-quarter lag.

In January 1997, BPC repaid one of the two interest-bearing loans which
totaled $5.0 million. Chiron then advanced this same amount to BPC as a
prepayment for future distribution and promotional services.

BEN VENUE LABORATORIES, INC. ("BEN VENUE")

Effective May 1, 1996, Chiron sold its 50 percent interest in a generic
cancer chemotherapeutics business to Ben Venue, Chiron's joint venture partner,
for $14.0 million in cash, resulting in a $12.2 million gain which has been
included in "Other expense, net" in the accompanying Consolidated Statements of
Operations.

NOTE 5--FAIR VALUE OF FINANCIAL INSTRUMENTS

MARKETABLE SECURITIES

In accordance with the requirements of SFAS 115, the Company has classified
its investments in certain debt and equity securities as "available-for-sale."
Such investments are recorded at fair value based upon year-end quoted market
prices, with unrealized gains and losses, deemed by the Company as temporary in
nature, reported as a separate component of stockholders' equity.

Available-for-sale securities consist of the following at December 31:

1996 1995
-------------------------------------------------- --------------------------------------------------
ADJUSTED UNREALIZED UNREALIZED FAIR ADJUSTED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
----------- ----------- ------------- --------- ----------- ----------- ------------- ---------
(IN THOUSANDS)

U.S. Government....... $ 30,179 $ 17 $ (151) $ 30,045 $ 69,659 $ 298 $ (125) $ 69,832
Mortgage-backed....... 7,913 22 (1) 7,934 11,317 17 (43) 11,291
Corporate debt........ 32,803 2 (92) 32,713 130,150 128 (213) 130,065
----------- ----------- ----- --------- ----------- ----------- ----- ---------
70,895 41 (244) 70,692 211,126 443 (381) 211,188
Equity................ 17,665 28,777 -- 46,442 9,100 31,200 -- 40,300
----------- ----------- ----- --------- ----------- ----------- ----- ---------
$ 88,560 $ 28,818 $ (244) $ 117,134 $ 220,226 $ 31,643 $ (381) $ 251,488
----------- ----------- ----- --------- ----------- ----------- ----- ---------
----------- ----------- ----- --------- ----------- ----------- ----- ---------

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 5--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
These securities are classified in the Consolidated Balance Sheets as
follows at December 31:

1996 1995
---------- ----------
(IN THOUSANDS)

Cash equivalents...................................................... $ 9,971 $ 61,289
Short-term investments in marketable debt securities.................. 38,694 61,066
Noncurrent investments in marketable debt securities.................. 22,027 88,833
Investments in equity securities and affiliated companies............. 46,442 40,300
---------- ----------
$ 117,134 $ 251,488
---------- ----------
---------- ----------

The cost and estimated fair value of available-for-sale debt securities by
contractual maturity consist of the following at December 31, 1996:

ADJUSTED FAIR
COST VALUE
--------- ---------
(IN THOUSANDS)

Due in one year or less................................................. $ 47,854 $ 47,732
Due in one to three years............................................... 15,128 15,026
--------- ---------
62,982 62,758
Mortgage-backed securities.............................................. 7,913 7,934
--------- ---------
$ 70,895 $ 70,692
--------- ---------
--------- ---------

The proceeds received from the sale and maturity of securities held as
available-for-sale were $143.9 million, $334.1 million and $232.9 million during
1996, 1995 and 1994, respectively. During 1996, the gross realized gains and
gross realized losses on sales of securities held as available-for-sale were not
significant. During 1995, the gross realized gains and gross realized losses on
sales of securities held as available-for-sale were $0.4 million and $3.5
million, respectively. Gross realized gains and losses during 1994 were not
significant. The cost of securities sold is based on the specific identification
method. The change in the net unrealized holding gain on available-for-sale
securities, included as a separate component of stockholders' equity, was ($2.7)
million, $44.0 million and ($12.7) million for 1996, 1995 and 1994,
respectively.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 5--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

OTHER FINANCIAL INSTRUMENTS

The carrying amounts and fair values of the Company's financial instruments
other than those accounted for in accordance with SFAS 115 are as follows at
December 31:

1996 1995
---------------------- ----------------------
CARRYING/ CARRYING/
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)

Nonmarketable equity investments:
(accounted for under the cost method)...... $ 4,763 $ 9,003 $ 9,209 $ 11,559
Notes receivable............................. 20,478 20,518 3,519 3,073
Deposits..................................... 3,549 3,413 4,643 4,509
Long-term debt:
Convertible subordinated debentures........ 319,713 325,293 312,467 360,677
Notes payable.............................. 65,964 65,964 64,755 64,741
Foreign currency hedging contracts (off-
balance sheet financial instruments)....... 70,883 70,883 65,106 65,188

The fair value of nonmarketable equity investments that are accounted for
using the cost method are primarily based on estimated market prices determined
by a broker. The carrying value of variable rate notes receivable approximates
fair value due to the market based nature of these instruments. The fair values
of the notes payable and deposits are based on the discounted value of expected
future cash flows using current rates for assets and liabilities with similar
maturities. The fair value of convertible subordinated debentures is based on
the market price at the close of business on the last day of the fiscal year.
The fair value of the foreign currency hedging contracts is based on the
exchange rate in effect on the last business day of the year. The notional
amount approximates the fair value as the majority of the contracts were entered
into shortly before year-end.

Included in current assets and current liabilities are certain other
financial instruments whose carrying values approximate fair value due to the
short-term nature of such instruments.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 6--DEBT OBLIGATIONS AND CAPITAL LEASES

Long-term debt and capital lease obligations consist of the following at
December 31:

1996 1995
---------- ----------
(IN THOUSANDS)

1.9 percent convertible subordinated debentures....................... $ 230,587 $ 225,215
5.25 percent convertible subordinated debentures...................... 89,126 87,252
Capital lease obligations............................................. 34,999 38,940
Note payable to Novartis.............................................. 57,159 54,016
Other notes payable................................................... 10,734 14,765
---------- ----------
422,605 420,188
Less current portion.................................................. 3,016 6,940
---------- ----------
$ 419,589 $ 413,248
---------- ----------
---------- ----------

CONVERTIBLE SUBORDINATED DEBENTURES

In 1993, Chiron issued 1.9 percent convertible subordinated debentures with
a face value of $253.9 million and a yield to maturity of 4.5 percent. The notes
are convertible, at the holders' option, into common stock at 34.4 shares per
$1,000 principal amount and are due in November 2000. Interest is paid
semi-annually. The debentures may be redeemed by the Company at any time, at a
redemption price starting at $905.78 per $1,000 principal amount increasing to a
redemption price equal to 100 percent of the principal amount at maturity. The
debentures are carried net of an initial issue discount of $39.3 million which
is being accreted over the life of the debentures using the interest method.
Debentures with a carrying value of $9.1 million and $8.9 million were held by
Novartis at December 31, 1996 and 1995, respectively.

As a result of the 1991 merger with Cetus Corporation ("Cetus"), the Company
has outstanding 5.25 percent convertible subordinated debentures, which are due
in 2002, have a face value of $100.0 million and are convertible at the holders'
option at any time into common stock at 32.4 shares per $1,000 principal amount.
Interest is paid annually. At the option of the Company, the debentures may be
redeemed at any time at face value. These debentures are carried at a discount
and the difference between the face value of the debentures and their present
value is being accreted over the remaining term of the debentures using the
interest method.

CAPITAL LEASE OBLIGATIONS

Capital lease obligations consist primarily of one lease involving a Chiron
manufacturing facility and other related buildings in Emeryville, California.
The lease obligation bears interest at 10.5 percent and matures in 2004. In
January 1997, Chiron entered into an agreement to purchase the facility and
related buildings for $29.8 million. Chiron subsequently paid this amount and
accordingly eliminated this obligation.

At December 31, 1996 and 1995, the gross amount of land, buildings and
equipment leased under noncancelable capital leases totaled $22.1 million and
$23.8 million, respectively, and accumulated depreciation totaled $8.9 million
and $5.2 million, respectively. Future payments under capital lease obligations
(including interest of approximately $1.5 million) are as follows: 1997--$1.6
million, 1998--

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 6--DEBT OBLIGATIONS AND CAPITAL LEASES (CONTINUED)
$1.7 million, 1999--$0.8 million, 2000--$0.6 million, 2001--$0.5 million and
$1.9 million thereafter. These amounts do not include the recent settlement of
the lease obligation described above.

NOTES PAYABLE

The note payable to Novartis for approximately $57.2 million at December 31,
1996 was assumed by the Company as part of the acquisition of Chiron
Diagnostics. The note bears interest at a variable rate based on LIBOR
(approximately 5.7 percent at December 31, 1996) and is due in 2000 together
with accrued interest.

At December 31, 1996, the Company had various other notes payable with an
average interest rate of 5.3 percent and maturities ranging from 1997 through
2014. Future maturities of notes payable are as follows: 1997--$1.7 million,
1998--$1.7 million, 1999--$1.8 million, 2000--$1.9 million, 2001--$1.9 million
and $1.7 million thereafter.

SHORT-TERM BORROWINGS

Short-term borrowings totaled $137.5 million as of December 31, 1996,
consisting of borrowings of $100.0 million under the Company's U.S. credit
facilities, $36.0 million under the Company's credit facilities outside the U.S.
and a $1.5 million obligation to Novartis.

Under three separate revolving, committed, unsecured credit agreements with
major financial institutions, the Company can borrow up to $200.0 million in the
U.S. These credit facilities are guaranteed by Novartis, have various maturities
through July 1997, and provide for various borrowing rate options, as defined in
the agreements. As of December 31, 1996, the interest rate on the outstanding
borrowings was tied to U.S. dollar LIBOR (5.7 percent).

Additionally, the Company has credit facilities available outside the U.S.
that allow for total borrowings of $117.0 million at December 31, 1996. These
revolving facilities are unsecured and are primarily maintained for Chiron
Diagnostics and Chiron S.p.A. As of December 31, 1996, the average interest rate
on the outstanding borrowings was 6.1 percent.

CROSS CURRENCY INTEREST RATE SWAPS

In May 1996, the Company entered into a swap agreement that matures in June
1997 with a notional amount of $24.9 million. The Company effectively converted
debt denominated in U.S. dollars to Japanese yen. The agreement provides for the
Company to make quarterly interest payments based on a variable rate tied to
three-month Japanese LIBOR (0.5 percent at December 31, 1996) while receiving
interest based on a variable rate tied to three-month U.S. dollar LIBOR (5.7
percent at December 31, 1996).

In July 1996, the Company also entered into swap agreements that mature in
July 2001 with an aggregate notional amount of $112.6 million. The Company
effectively converted debt denominated in U.S. dollars to German marks. The
agreements provide for the Company to make quarterly interest payments based
upon a fixed German mark rate of 6.2 percent while receiving interest based on a
variable rate tied to three-month U.S. dollar LIBOR.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 7--COMMITMENTS AND CONTINGENCIES

LEASES

Chiron leases laboratory, office and manufacturing facilities, land and
equipment under noncancelable operating leases which expire at various times
through 2037. Rent expense under these leases was $32.6 million, $28.0 million
and $12.7 million in 1996, 1995 and 1994, respectively.

Future minimum lease payments under these leases are as follows: 1997--$30.3
million, 1998-- $26.4 million, 1999--$20.6 million, 2000--$15.9 million,
2001--$10.5 million and $29.8 million thereafter.

Additionally, in June 1996, the Company entered into a seven-year operating
lease agreement with a group of financial institutions to rent a research and
development facility that is currently under construction in Emeryville,
California. Under the terms of the lease agreement, the financial institutions
have committed $195.0 million toward the total construction cost of the project.
No lease payments are required during the construction period which is expected
to last less than three years. Thereafter, rent amounts will be due quarterly,
based upon the total construction costs incurred. Assuming that construction is
completed on schedule and assuming a current interest rate of 6.0 percent,
future minimum lease payments would be $11.7 million annually, beginning in the
fourth quarter of 1998.

Under this lease arrangement, which has been guaranteed by Novartis through
December 31, 1999, the Company has the option to purchase the constructed
properties. Alternatively, Chiron can cause the property to be sold to a third
party. The Company is also contingently liable under residual value guarantees
in the event of market value declines.

EQUIPMENT LEASING

Chiron Diagnostics is the lessor of certain equipment to customers under
sales-type leases as defined in Statement of Financial Accounting Standards No.
13, "Accounting for Leases." The current portion of the net investment in
sales-type leases is included in "Accounts receivable" and the long-term portion
is included in "Other assets" in the accompanying Consolidated Balance Sheets.
The components of the net investment in sales-type leases were as follows at
December 31:

1996 1995
--------- ---------
(IN THOUSANDS)

Minimum rentals receivable.............................................. $ 36,314 $ 40,842
Less unearned interest income........................................... 3,127 3,359
--------- ---------
Net investment in sales-type leases..................................... $ 33,187 $ 37,483
--------- ---------
--------- ---------

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)

Included in the net investment in sales-type leases amounts are deferred
service revenues of $6.3 million and $8.3 million at December 31, 1996 and 1995,
respectively. Such amounts are recognized as product sales revenue ratably over
the life of the service contracts.

Future minimum rentals receivable under these leases at December 31, 1996,
are as follows: 1997-- $8.4 million, 1998--$14.3 million, 1999--$8.6 million,
2000--$4.0 million and 2001--$1.0 million.

CETUS HEALTHCARE LIMITED PARTNERSHIPS

Pursuant to certain agreements between the Company and the former partners
of Cetus Healthcare Limited Partnership ("CHLP"), the Company is obligated to
fund development of certain CHLP products through regulatory approval if, based
on the Company's assessment, the products are believed to be technically
feasible and commercially viable. Because of the inherent uncertainties both as
to the likelihood of any particular product continuing to be viewed as
technically feasible and commercially viable and as to the cost of developing
any particular product through regulatory approval, the Company is unable to
estimate future costs of developing the products subject to this obligation. In
addition, the former partners of CHLP are entitled to payments on net sales,
royalties or other fees received by Chiron for certain products.

In December 1990, Cetus exercised its purchase options to acquire all the
limited partners' interest in Cetus Healthcare Limited Partnership II. The
former partners are entitled to receive a fixed percentage of the net sales of
certain products in Europe (through December 31, 2005) and the United States
(until certain aggregate returns are realized).

OTHER COMMITMENTS

In connection with the expansion of its manufacturing capabilities, the
Company has various commitments under construction contracts totaling
approximately $17.9 million at December 31, 1996. The Company also has
performance bonds outstanding in the amount of $7.0 million as of December 31,
1996, primarily in connection with sales to public health authorities.

In June 1996, Chiron S.p.A. entered into an agreement to purchase in 1998
the manufacturing and administrative facilities in Siena, Italy which are
currently leased. The purchase price is approximately $34.0 million and is
payable in Italian lira. The purchase price will be reduced by certain amounts
due from the seller through the date of the purchase.

NOTE 8--STOCKHOLDERS' EQUITY

STOCK COMPENSATION PLANS

At December 31, 1996, the Company has four stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans other than
for performance-based awards and share rights.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation cost for the Company's other stock-based plans been
determined based upon the fair value method prescribed under SFAS 123, the
Company's net income (loss) and related net income (loss) per share would have
been reduced to the following pro forma amounts below:

1996 1995
--------- -----------

Net income (loss)--in thousands
As reported......................................................... $ 55,145 $ (512,463)
Pro forma........................................................... $ 27,579 $ (529,759)

Net income (loss) per share
As reported......................................................... $ 0.31 $ (3.15)
Pro forma........................................................... $ 0.16 $ (3.26)

FIXED STOCK OPTION PLANS

The Company's fixed stock option plan provides for the grant to employees of
either nonqualified or incentive options and provides for the grant to
directors, consultants and contractors of nonqualified options. Incentive
options are to be granted at not less than the fair market value of common stock
at the date of grant and nonqualified options at not less than 85 percent of
such fair market value. Options are exercisable based on vesting terms
determined by Chiron's Board of Directors (generally 4 years) and option terms
cannot exceed ten years.

Initially, the Company's stock option plan had reserved and available for
issuance 18.0 million shares of Chiron common stock and restricted common stock
plus any remaining shares of common stock and restricted stock remaining for
issuance under former option plans. This amount is increased annually by a
number of shares equal to 1.5 percent of the number of shares of common stock
outstanding plus shares issuable upon conversion or exercise of outstanding
warrants, options and convertible securities. For 1996, this increase in shares
available for grant was 3.1 million. At December 31, 1996, a total of 5.8
million shares were available for grant.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the stock option activity is as follows:

1996 1995 1994
------------ ------------ ------------

Outstanding options at January 1,....................................... 23,337,652 19,787,536 17,370,472
Granted............................................................... 6,582,769 10,507,616 4,667,928
Forfeited............................................................. (1,159,973) (1,207,336) (675,336)
Surrendered against payment by Novartis............................... (363,525) (3,070,960) --
Exercised............................................................. (2,098,550) (2,679,204) (1,575,528)
------------ ------------ ------------
Outstanding options at December 31,..................................... 26,298,373 23,337,652 19,787,536
------------ ------------ ------------
------------ ------------ ------------
Options exercisable at year-end......................................... 11,411,534 8,859,788 10,267,220
Average exercise price of:
Outstanding options at year-end....................................... $ 16.80 $ 14.76 $ 12.82
Options granted....................................................... $ 22.25 $ 16.33 $ 17.67
Options forfeited..................................................... $ 19.11 $ 16.89 $ 14.61
Options exercised..................................................... $ 11.02 $ 10.61 $ 8.20
Weighted-average fair value of options granted during the year
calculated pursuant to SFAS 123....................................... $ 8.90 $ 7.33 $ --

The weighted-average fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for 1996 and 1995: expected volatility of 35
percent; risk-free interest rate of 6.3 percent; and an average expected life of
5 years.

The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1996:

OPTIONS OUTSTANDING
- -------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE AS OF DEC. CONTRACTUAL EXERCISE AS OF DEC. EXERCISE
PRICES 31, 1996 LIFE PRICE 31, 1996 PRICE
- ------------------ ------------ --------------- ----------- ------------ -----------

Less than $13..... 8,005,011 6.26 $ 10.64 4,509,962 $ 9.25
13 to 18.......... 7,278,832 6.81 15.59 4,920,638 15.35
18 to 23.......... 8,444,802 8.90 20.56 1,837,740 21.09
Greater than 23... 2,569,728 9.11 27.36 143,194 25.30
------------ --- ----------- ------------ -----------
26,298,373 7.53 $ 16.80 11,411,534 $ 14.00
------------ --- ----------- ------------ -----------
------------ --- ----------- ------------ -----------

EMPLOYEE STOCK PURCHASE PLAN

Chiron has a stock purchase plan for U.S. employees in which eligible
employees may participate through payroll deductions. A total of 7.0 million
shares have been reserved for issuance under the plan, of which 2.4 million
shares were available for purchase at December 31, 1996. At the end of each
quarter, funds deducted from participating employees' salaries are used to
purchase common stock at 85 percent of

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
the lower of market value at the quarterly purchase date or the employees'
eligibility date for participation. Purchases of shares made under the plan were
1.4 million in 1996, 0.7 million in 1995 and 0.6 million in 1994.

Under SFAS 123, pro forma compensation cost is recognized for the fair value
of the employees' purchase rights, which was estimated using the Black-Scholes
model with the following assumptions for 1996 and 1995: an expected life of one
year; expected volatility of 35 percent; and a risk-free interest rate of 5.7
percent. The weighted-average fair value of those purchase rights granted was
$4.78 per share in 1996 and 1995.

PERFORMANCE-BASED STOCK PLAN

In 1996, the stockholders approved an amendment to the Company's stock
option plan, allowing certain executives to receive performance units.
Performance units are stock awards for which vesting is contingent upon the
attainment of certain pre-established performance goals over a specified period,
as established by the Compensation Committee of the Board of Directors.
Currently, the performance units are based on total shareholder return over a
three year period as measured against certain published benchmark indices that
are representative of the Company's peer group.

In order for there to be a payout, Chiron's shareholder return must be
within 15 percent of the three-year rolling weighted-average of the benchmark
indices. In accordance with APB Opinion No. 25, compensation expense related to
these awards is based on the extent to which the performance criteria are met.
Through December 31, 1996, no expense was recognized in the accompanying
consolidated financial statements.

In 1996, the Company awarded performance units on 64,400 shares of common
stock. None of the units were exercisable at year-end. Pursuant to SFAS 123, the
weighted-average fair value of the awards was $7.57 per unit, based upon the
following assumptions: risk-free interest rate of 6 percent; expected volatility
of 35 percent; and an expected life of 3 years.

SHARE RIGHTS

In 1996, the stockholders also approved an amendment to the Company's stock
option plan, permitting the award of share rights. Share rights are awarded by
the Compensation Committee of the Board of Directors to certain key individuals,
allowing them the right to receive shares of the Company's stock. In 1996, the
Company awarded non-employee directors 10,320 share rights in aggregate and a
key executive 40,000 share rights that vest over five years and at the end of
five years, respectively. The value of the share rights is recognized ratably
over the related vesting periods and in 1996 the Company recognized $0.1 million
of compensation expense.

COMMON STOCK WARRANTS

As a result of the merger with Cetus, warrants to purchase 600,000 shares of
Chiron common stock are outstanding at December 31, 1996. The exercise price of
the warrants is $13.13 and the warrants expire in July 2001. The warrants are
currently exercisable.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
NOTES RECEIVABLE FROM STOCK SALES

The notes receivable are due from certain key employees, resulting from the
exercise of stock options. The notes are full recourse promissory notes, bearing
interest at a rate of approximately six percent and are primarily collateralized
by the stock issued upon the exercise of the stock options. The notes are due
through June 1998.

NOTE 9--INCOME TAXES

For financial reporting purposes, "Income (loss) before income taxes"
includes the following components for the years ended December 31:

1996 1995 1994
---------- ----------- ---------
(IN THOUSANDS)

United States............................................. $ 94,609 $ (492,842) $ 36,829
Foreign................................................... (14,635) 2,068 (4,832)
---------- ----------- ---------
$ 79,974 $ (490,774) $ 31,997
---------- ----------- ---------
---------- ----------- ---------

COMPONENTS OF PROVISION FOR INCOME TAXES

Significant components of the provision for income taxes are as follows for
the years ended December 31:

1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)

Current:
Federal.................................................... $ 1,544 $ -- $ 10,741
State...................................................... 1,455 1,807 2,227
Foreign.................................................... 11,293 9,901 266
--------- --------- ---------
14,292 11,708 13,234
Deferred:
Foreign.................................................... 759 1,260 --
Charge in lieu of taxes resulting from recognition of
acquired tax benefits that are allocated to reduce
noncurrent intangible assets related to the acquired
entity..................................................... 9,778 8,721 438
--------- --------- ---------
Provision for income taxes................................... $ 24,829 $ 21,689 $ 13,672
--------- --------- ---------
--------- --------- ---------

The benefit related to tax deductions for the Company's stock option plans
is recorded as an increase to additional paid-in capital when realized. Tax
benefits of approximately $1.4 million in 1996, $0.9 million in 1995 and $9.9
million in 1994 were realized.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 9--INCOME TAXES (CONTINUED)
RATE RECONCILIATION

The reconciliation of the provision for income taxes, computed at the
statutory U.S. income tax rate, to the reported amounts is as follows for the
years ended December 31:

1996 1995 1994
---------- ----------- ---------
(IN THOUSANDS)

Federal tax provision (benefit) at statutory rates............................ $ 27,991 $ (171,771) $ 11,199
Tax effect of write-off of purchased in-process technology.................... -- 127,850 --
State taxes, net of federal benefit........................................... 1,593 4,895 2,300
Foreign income taxes.......................................................... 15,841 16,794 266
Losses of foreign subsidiaries not providing benefit in current year.......... 5,122 (724) 2,247
Amortization of intangible assets............................................. 884 696 927
Effect of net operating loss carryforward..................................... -- 31,691 --
Nontaxable earnings of joint business......................................... -- -- (2,547)
Nondeductible expenses related to Novartis transaction........................ -- 9,308 875
Utilization of deferred tax assets not previously benefited................... (28,065) -- (2,246)
Other......................................................................... 1,463 2,950 651
---------- ----------- ---------
Provision for income taxes.................................................... $ 24,829 $ 21,689 $ 13,672
---------- ----------- ---------
---------- ----------- ---------

SUMMARY OF DEFERRED INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 9--INCOME TAXES (CONTINUED)
purposes and the tax effects of net operating loss and credit carryforwards.
Significant components of the Company's deferred income tax liabilities and
assets are as follows at December 31:

1996 1995
----------- -----------
(IN THOUSANDS)

Deferred income tax liabilities:
Basis differences--purchase accounting............................ $ 23,813 $ 19,537
Patent costs expensed for tax purposes............................ 8,715 7,205
Other............................................................. 4,944 5,036
----------- -----------
37,472 31,778
Deferred income tax assets:
Basis differences--purchase accounting and intangibles............ 93,493 89,074
Depreciation and purchased technologies........................... 5,864 22,345
Reserves and expense accruals..................................... 67,672 43,458
Net operating loss carryforwards.................................. 133,502 128,681
Business credit carryforwards..................................... 36,179 26,162
Other............................................................. 11,161 12,498
----------- -----------
347,871 322,218
Less valuation allowance.......................................... (305,703) (286,757)
----------- -----------
42,168 35,461
----------- -----------
Net deferred income tax asset....................................... $ 4,696 $ 3,683
----------- -----------
----------- -----------

The net change in the valuation allowance for the years ended December 31,
1996, 1995 and 1994, was an increase of $18.9 million, an increase of $139.0
million and a decrease of $13.9 million, respectively.

Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets at December 31, 1996 will be allocated as follows:

(IN THOUSANDS)

Income tax benefit............................................................ $ 225,864
Goodwill and other noncurrent intangible assets............................... 24,240
Additional paid-in capital.................................................... 55,599
--------------
$ 305,703
--------------
--------------

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 9--INCOME TAXES (CONTINUED)
TAX OPERATING LOSS AND CREDIT CARRYFORWARDS

The following presents the carryforwards which are available to offset
future income tax liabilities at December 31, 1996:

(IN THOUSANDS)

Federal net operating loss carryforwards expiring from 2002 through 2010...... $ 214,070
State net operating loss carryforwards expiring from 1997 through 2010........ 47,219
Foreign net operating loss carryforwards principally carried forward
indefinitely................................................................ 149,584
Federal tax credit carryforwards expiring from 1997 through 2009.............. 22,779
State tax credit carryforwards expiring from 1997 through 2010................ 13,400

NOTE 10--OTHER EXPENSE, NET

Other expense, net, consists of the following for each of the years ended
December 31:

1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)

Interest and dividend income.............................. $ 12,057 $ 21,463 $ 20,343
Capitalized interest...................................... -- 420 4,405
Interest expense and related costs on convertible
debentures.............................................. (18,103) (17,827) (16,782)
Write-downs of investments................................ (1,529) (200) (11,607)
Interest expense on the debt obligation to Novartis....... (3,407) (3,543) --
Other interest expense.................................... (9,231) (8,842) (3,404)
Gain on sale of interest in affiliated company............ 12,226 -- --
Net realized gain (loss) on sale of debt securities....... 41 (3,037) (2,234)
Realized/unrealized gain (loss) on foreign exchange
transactions............................................ (1,262) (193) 156
Other..................................................... (1,200) 3,413 (1,280)
---------- ---------- ----------
$ (10,408) $ (8,346) $ (10,403)
---------- ---------- ----------
---------- ---------- ----------

NOTE 11--GEOGRAPHIC AREA INFORMATION

Chiron operates in the global healthcare industry in four major markets:
diagnostics, ophthalmics, vaccines and therapeutics. The Company is a
multinational corporation with operations in many countries including the U.S.,
Canada, Japan, France, Germany, the United Kingdom, Italy, The Netherlands and
Australia. Transfers between geographic areas represent intercompany sales and
are accounted for based on established sales prices between related companies.
In computing earnings from operations for foreign subsidiaries, no allocations
of general corporate expenses or interest have been made. Identifiable assets of
foreign geographic areas relate to the operating assets of the Company's
subsidiaries in those countries. Domestic assets consist of all operating assets
of the Company located within the U.S.

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 11--GEOGRAPHIC AREA INFORMATION (CONTINUED)
Results of foreign operations for 1996 and 1995 consist of ophthalmic and
oncology sales in addition to sales of vaccines and diagnostic products. Results
of foreign operations for 1994 consist primarily of ophthalmic and oncology
product sales.

Information about the Company's operations in different geographic areas is
as follows for each of the years ended December 31:

DOMESTIC EUROPE ASIA/PACIFIC OTHER ELIMINATIONS CONSOLIDATED
--------- --------- ----------- --------- ------------ ------------
(IN THOUSANDS)

1996:
Sales to unaffiliated customers.......... $ 740,453 $ 408,282 $ 142,965 $ 21,144 $ -- $1,312,844
Transfers between geographic areas....... 225,713 92,211 139 -- (318,063) --
--------- --------- ----------- --------- ------------ ------------
Total revenue............................ 966,166 500,493 143,104 21,144 (318,063) 1,312,844
Net income (loss)........................ 87,012 (20,058) 2,045 (257) (13,597) 55,145
Identifiable assets...................... 2,164,792 374,552 66,230 19,311 (936,215) 1,688,670

1995:
Sales to unaffiliated customers.......... $ 592,524 $ 348,392 $ 136,668 $ 22,998 $ -- $1,100,582
Transfers between geographic areas....... 178,084 46,819 586 -- (225,489) --
--------- --------- ----------- --------- ------------ ------------
Total revenue............................ 770,608 395,211 137,254 22,998 (225,489) 1,100,582
Net loss................................. (453,524) (37,234) (1,222) (4,898) (15,585) (512,463)
Identifiable assets...................... 1,900,794 292,628 87,684 12,272 (803,531) 1,489,847

1994:
Sales to unaffiliated customers.......... $ 379,917 $ 65,569 $ 5,322 $ 3,171 $ -- $ 453,979
Transfers between geographic areas....... 22,919 1,108 1,370 -- (25,397) --
--------- --------- ----------- --------- ------------ ------------
Total revenue............................ 402,836 66,677 6,692 3,171 (25,397) 453,979
Net income (loss)........................ 25,356 (3,456) (732) (1,327) (1,516) 18,325
Identifiable assets...................... 1,091,648 62,034 1,345 (1,017) (104,268) 1,049,742

Revenues by customer location, including both local revenues and exports
from other locations, were as follows for each of the years ended December 31:

1996 1995 1994
------------ ------------ ----------
(IN THOUSANDS)

North America......................................... $ 569,247 $ 502,090 $ 344,569
Europe................................................ 508,064 367,521 86,804
Asia and Pacific Basin................................ 197,421 169,367 17,982
South America, Africa and Other....................... 38,112 61,604 4,624
------------ ------------ ----------
$ 1,312,844 $ 1,100,582 $ 453,979
------------ ------------ ----------
------------ ------------ ----------

NOTE 12--LEGAL PROCEEDINGS

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

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 12--LEGAL PROCEEDINGS (CONTINUED)
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 13--QUARTERLY FINANCIAL DATA (UNAUDITED)

1996
----------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenues..................................... $ 369,809 $ 321,549 $ 315,735 $ 305,751
Gross margin from product sales.............. 153,038 132,669 143,955 136,280
Net income................................... 15,269 11,778 15,355 12,744
Net income per share......................... .09 .07 .09 .07

1995
------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
---------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenues................................... $ 325,897 $ 274,688 $ 281,752 $ 218,246
Gross margin from product sales............ 145,846 127,798 139,786 93,627
Net income (loss).......................... 17,592 (145,107) 830 (385,778)
Net income (loss) per share................ 0.10 (0.90) 0.01 (2.41)

As Chiron expands its presence in international markets, particularly
European markets, seasonal fluctuations in product sales and the related gross
margin amounts have become more significant. As a result of this and other
factors, Chiron's results in any one quarter are not necessarily indicative of
results expected for a full year. Accordingly, the Company should be evaluated
on the basis of annual financial information.

As discussed in Notes 2 and 3, the first quarter of 1995 included a $230.7
million write-off of purchased in-process technology related to the acquisitions
of Chiron Diagnostics, Novartis' interests in Chiron Vaccines and Chiron S.p.A.,
and IOLAB. The first quarter of 1995 also included other charges related to the
Novartis transaction totaling $49.5 million, and restructuring-related charges
of $37.6 million. The third quarter of 1995 included a $130.3 million write-off
of purchased in-process technology related to the Viagene acquisition.

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Chiron Corporation:

We have audited the accompanying consolidated balance sheets of Chiron
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chiron
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

San Francisco, California
January 31, 1997

CHIRON CORPORATION
MARKET PRICE OF COMMON STOCK

The common stock of Chiron Corporation is traded in the NASDAQ National
Market System under the symbol CHIR. As of December 31, 1996, there were 8,139
holders of record of Chiron common stock, 775 remaining holders of record of
Cetus common stock and 16 remaining holders of Viagene common stock. The Company
has declared no cash dividends since its inception and does not expect to pay
any dividends in the foreseeable future. The quarterly high and low closing
sales price of Chiron common stock for 1996 and 1995 are shown below.

1996 1995
----------------- -----------------
HIGH LOW HIGH LOW
------- ------- ------- -------

First Quarter........................... $29 1/2 $23 1/4 $20 1/4 $13
Second Quarter.......................... 26 5/8 23 17 1/4 12
Third Quarter........................... 25 1/8 17 1/2 25 1/2 15 5/8
Fourth Quarter.......................... 23 18 1/8 28 1/2 20 3/4