<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934, FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998.


                             Commission File Number
                                     0-19659

                       CHRYSALIS INTERNATIONAL CORPORATION
             (Exact name of registrant as specified in its charter)


                    Delaware                           22-2877973
         (State or other jurisdiction of            (I.R.S. Employer
         incorporation or organization)            Identification No.)


575 Route 28, Raritan, New Jersey                         08869
(Address of principal executive offices)                 (Zip Code)

       Registrant's telephone number, including area code: (908) 722-7900


        Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.

Yes   /X/   No / /

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


   Common Stock $0.01 par value           11,451,084 shares
                                          outstanding at May 1, 1998


                                       1
<PAGE>   2
              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES

                                      INDEX

<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION                                         PAGE NO.
                                                                       --------
<S>                                                                    <C>
Item 1. Financial Statements

   Consolidated Balance Sheets -
        March 31, 1998 (unaudited) and December 31, 1997                  3

   Unaudited Consolidated Statements of Operations -
        for the three months ended March 31, 1998 and 1997                4

   Unaudited Consolidated Statement of Stockholders' Equity -
        for the three months ended March 31, 1998                         5

   Unaudited Consolidated Statements of Cash Flows -
        for the three months ended March 31, 1998 and 1997                6

   Notes to Unaudited Consolidated Financial Statements                   7-8

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations                               9 - 20

Item 3. Quantitative and Qualitative Disclosure about
        Market Risks                                                      20


PART II. OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K                                 21
</TABLE>


                                       2
<PAGE>   3
                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
                           Consolidated Balance Sheets
                      March 31, 1998 and December 31, 1997
                (in thousands except share and per share amounts)

<TABLE>
<CAPTION>
               Assets                                          March 31, 1998     December 31, 1997
                                                               --------------     -----------------
                                                                 (unaudited)
<S>                                                            <C>                <C>
Current assets
   Cash and cash equivalents                                      $ 10,688               6,925
   Trade accounts receivable, net                                    8,949               9,669
   Prepaid expenses and other current assets                         2,089               1,916
                                                                  --------             -------
      Total current assets                                          21,726              18,510

Property and equipment, net                                         14,792              15,127
Intangible assets, net                                                 786                 805
Other assets                                                           336                 338
Restricted cash                                                        460                 460
                                                                  --------             -------
                                                                  $ 38,100              35,240
                                                                  ========             =======
Liabilities and Stockholders' Equity

Current liabilities
   Short-term borrowings                                             2,824               2,377
   Note payable - related party                                        283                 291
   Current portion of long-term debt                                 1,075                 768
   Accounts payable                                                  3,124               3,204
   Accrued expenses                                                  5,659               5,567
   Deferred revenue                                                  3,304               3,524
                                                                  --------             -------
      Total current liabilities                                     16,269              15,731

Long-term debt, excluding current portion                            9,833               6,561
Deferred income taxes                                                1,436               1,646
Other liabilities                                                      639                 633
                                                                  --------             -------
      Total liabilities                                             28,177              24,571
                                                                  --------             -------

Stockholders' equity
   Serial preferred stock, $.01 par value, 5,000,000
      shares authorized; no shares issued and outstanding               --                  --
   Common stock, $.01 par value, 20,000,000 shares
      authorized; issued and outstanding 11,451,084 in 1998
      and 11,430,764 in 1997                                           114                 114
   Additional paid-in capital                                       59,224              57,768
   Cumulative comprehensive loss                                      (736)               (536)
   Employee stock purchase loans                                       (86)                (86)
   Accumulated deficit                                             (48,593)            (46,591)
                                                                  --------             -------
      Total stockholders' equity                                     9,923              10,669
                                                                  --------             -------
   Commitments and contingencies
                                                                  $ 38,100              35,240
                                                                  ========             =======
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

                                       3
<PAGE>   4
              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
                 Unaudited Consolidated Statements of Operations
                   Three months ended March 31, 1998 and 1997
                     (in thousands except per share amounts)

<TABLE>
<CAPTION>
                                                       Three months ended March 31,
                                                         1998                 1997
                                                       --------             --------
<S>                                                    <C>                  <C>
Revenues:
      Service revenue                                  $ 11,308               11,482
      Less: Reimbursed costs                             (1,859)              (1,853)
                                                       --------             --------
         Net service revenue                              9,449                9,629
      License fees                                          224                  276
                                                       --------             --------
                                                          9,673                9,905
                                                       --------             --------
Operating expenses:
      Direct costs                                        7,702                7,022
      General, administrative and marketing               3,223                2,874
      Depreciation and amortization                         493                  638
                                                       --------             --------
                                                         11,418               10,534
                                                       --------             --------

                  Loss from operations                   (1,745)                (629)
                                                       --------             --------

Other income (expense):
      Interest income                                       127                  181
      Interest expense                                     (248)                (191)
      Other                                                  (7)                   4
                                                       --------             --------
                                                           (128)                  (6)
                                                       --------             --------
      Loss before income taxes                           (1,873)                (635)

Income tax expense                                          129                    9
                                                       --------             --------

                  Net loss                             $ (2,002)            $   (644)
                                                       ========             ========

Basic loss per share                                   $   (.18)            $   (.06)
                                                       ========             ========
Weighted average shares outstanding-Basic                11,431               11,372
                                                       ========             ========
Diluted loss per share                                 $   (.18)            $   (.06)
                                                       ========             ========
Weighted average shares outstanding-Diluted              11,431               11,372
                                                       ========             ========
</TABLE>


See accompanying notes to unaudited consolidated financial statements.


                                       4
<PAGE>   5
              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
            Unaudited Consolidated Statement of Stockholders' Equity
                        Three months ended March 31, 1998
                       (in thousands except share amounts)

<TABLE>
<CAPTION>
                                                                                 Employee                           Total
                                                   Additional     Cumulative      stock                             stock-
                                      Common        paid-in      Comprehensive   purchase       Accumulated        holders'
                                       stock        capital          Loss          loan           deficit           equity
                                        ---          ------          ----           ---           -------           -------
<S>                                   <C>          <C>           <C>             <C>            <C>                 <C>
Balance, December 31, 1997              114          57,768          (536)          (86)          (46,591)           10,669

Issuance of 115 shares
  of common stock upon
  exercise of stock options              --              --            --            --                --                --

Issuance of 20,205 shares
  of common stock pursuant
  to 401(k) plan                         --              56            --            --                --                56

Translation adjustment                   --              --          (200)           --                --              (200)

Issuance of 2,000,000 warrants
  convertible to common stock
  upon exercise                          --           1,400            --            --                --             1,400

Net loss                                 --              --            --            --            (2,002)           (2,002)
                                        ---          ------          ----           ---           -------           -------

Balance, March 31, 1998                 114          59,224          (736)          (86)          (48,593)            9,923
                                        ===          ======          ====           ===           =======           =======
</TABLE>


See accompanying notes to unaudited consolidated financial statements.


                                       5
<PAGE>   6
              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
                Unaudited Consolidated Statements of Cash Flows
                   Three months ended March 31, 1998 and 1997
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                     Three months ended
                                                                                          March 31,
                                                                                    1998              1997
                                                                                  --------           -------
<S>                                                                               <C>                <C>
Cash flows from operating activities:
   Net loss                                                                       $ (2,002)             (644)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
      Non-cash items:
         Depreciation and amortization                                                 493               638
         Deferred income tax expense (benefit)                                         129              (142)
         Gain on disposal of property and equipment                                      1                 1
         Amortization of warrant value                                                  20                --
         Noncash charges                                                                56                43
      Change in operating assets and liabilities:
         Decrease in accounts receivable                                               510               418
         Increase in prepaid expenses and other current assets                        (363)             (329)
         Increase in other assets                                                      (17)              (36)
         Decrease in accounts payable                                                  (22)              (83)
         Increase (decrease) in accrued expenses                                       247              (869)
         Decrease in deferred revenue                                                 (130)             (835)
         Increase (decrease) in other liabilities                                     (116)               24
                                                                                  --------           -------
               Net cash used in operating activities                                (1,194)           (1,814)
                                                                                  --------           -------
Cash flows from investing activities:
   Decrease in restricted cash                                                          --               (39)
   Purchase of property and equipment                                                 (427)             (855)
   Proceeds from disposal of property and equipment                                     (1)               --
   Purchases of intangible assets                                                       (4)               (1)
   Proceeds from maturities of short-term investments                                   --             7,068
                                                                                  --------           -------
               Net cash provided by (used in) investing activities                    (432)            6,173
                                                                                  --------           -------

Cash flows from financing activities:
   Principal payments on short-term borrowings                                          --            (4,393)
   Principal proceeds on short-term debt                                               557                --
   Principal payments on long-term debt                                                (37)              (36)
   Proceeds from issuance of long-term debt                                          5,000                --
   Proceeds from stock options exercised                                                --                51
                                                                                  --------           -------
               Net cash provided by (used in) financing activities                   5,520            (4,378)
                                                                                  --------           -------

Effect of exchange rate changes on cash                                               (131)             (237)
                                                                                  --------           -------

Increase (decrease) in cash and cash equivalents                                     3,763              (256)

Cash and cash equivalents, beginning of period                                       6,925            10,455
                                                                                  --------           -------

Cash and cash equivalents, end of period                                          $ 10,688            10,199
                                                                                  ========           =======

Supplemental disclosure of cash flow information
    Cash paid during the period  for:
      Interest                                                                    $    163               166
      Income taxes                                                                     108                29
                                                                                  --------           -------
</TABLE>

See accompanying notes to unaudited consolidated financial statements.


                                       6
<PAGE>   7
              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
              Notes to Unaudited Consolidated Financial Statements
                                 March 31, 1998


Note 1. Statement of Accounting Presentation

      In the opinion of Chrysalis International Corporation and subsidiaries
(the "Company"), the accompanying unaudited consolidated financial statements
include all significant adjustments (consisting only of normal recurring
accruals) necessary to fairly state the Company's consolidated financial
position as of March 31, 1998, and the consolidated results of operations and
cash flows for the three month periods ended March 31, 1998 and 1997. The
unaudited consolidated financial statements have been prepared in accordance
with the requirements for Form 10-Q and, therefore, do not include all
disclosures of financial information required by generally accepted accounting
principles. The accompanying consolidated financial statements should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. The information set
forth in the accompanying consolidated balance sheet as of December 31, 1997 has
been derived from the audited consolidated balance sheet included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.

      Interim results are not necessarily indicative of the results for the full
year.

Note 2. Summary of Significant Accounting Policies

      Earnings per Share

      Earnings per share has been calculated in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings Per Share. In computing
diluted earnings per share for the quarter ended March 31, 1998 and 1997, the
denominator did not change from the computation of basic earnings per share,
because the effect of including potential common shares in this calculation,
would be antidilutive. If the effect on diluted earnings per share had not been
antidilutive, the denominator would have increased by 291,000 and 461,000 shares
for the quarter ended March 31, 1998 and 1997, respectively. This increase in
shares represents the inclusion of stock options and warrants outstanding at
March 31, 1998 and 1997 with an exercise price less then the average market
price of Chrysalis' common stock during the quarter ended March 31, 1998 and
1997, respectively.


                                       7
<PAGE>   8
              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
        Notes to Unaudited Consolidated Financial Statements (continued)
                                 March 31, 1998

Note 2. Summary of Significant Accounting Policies (Cont.)

      Comprehensive Income

      In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income ("SFAS 130"). This Statement establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. Components of comprehensive income include net
income (loss) and all other nonowner changes in equity such as the change in the
cumulative translation adjustment. Initial application of this Statement is
required for interim periods of fiscal years beginning after December 15, 1997;
however, interim period disclosure is limited to reporting a total for
comprehensive income. In accordance with SFAS 130, Chrysalis has determined
total comprehensive income (loss), would have been ($2,202,000) and ($79,000)
for the three months ended March 31, 1998 and 1997, respectively. The Company's
total comprehensive income represents net income (loss) plus the change in the
cumulative translation adjustment equity account for the periods presented.


Note 3. MDS Financing

      On March 16, 1998, the Company issued, in exchange for $5,000,000 cash, a
subordinated debenture and a warrant to purchase 2,000,000 shares of Common
Stock for $2.50 per share to a wholly-owned subsidiary of MDS Inc ("MDS"). The
terms of the subordinated debenture provide for semi-annual interest payments
with the aggregate principal amount payable on March 16, 2001. The debenture is
subordinate to certain outstanding indebtedness of the Company, including its
existing bank debt and mortgages. In addition, a portion or all of the principal
amount of the debenture may, at the option of the holder, be satisfied by
issuance of the shares of Common Stock in accordance with the terms of the
warrant. The Company will also incur non-cash charges to interest expense over
the life of the debenture related to the amortization of the value of the
warrants.


                                       8
<PAGE>   9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                 GENERAL SUMMARY

      The Company is an international contract research organization ("CRO")
providing a broad range of integrated drug development services primarily to the
pharmaceutical and biotechnology industries. This broad portfolio of drug
development services includes transgenic discovery research, preclinical
development and clinical capabilities that enable the Company to manage a
comprehensive drug development program or a client's specific requirements. The
Company utilizes its international expertise and experience in preclinical and
clinical services to provide a coordinated approach for a client to transition
its drug through various preclinical to clinical stages of development thereby
minimizing certain delays which typically occur before a new drug is introduced
to the market. In addition, the Company is the only CRO that is currently able
to use its proprietary transgenic and licensed gene targeting technology to
provide services for its clients that require transgenic animal models in order
to determine the function of human genes and identify therapeutic targets
implicated in disease and for the evaluation of therapeutic lead compounds for
further development. The Company generates substantially all of its revenues
from its drug development services and provides services for more than 250
clients in 26 countries.

      On March 16, 1998, the Company issued a $5.0 million subordinated
debenture to a wholly-owned subsidiary of MDS. As part of this transaction, the
Company also issued a warrant to purchase 2,000,000 shares of Common Stock for
$2.50 per share. In addition, the Company and MDS entered into a standstill
agreement which, among other things, governs the ownership and acquisition of
securities of the Company by MDS and its affiliates. As a part of this
transaction, MDS and the Company will explore opportunities to pursue strategic
alliances and other business opportunities with respect to their respective
operations.

      On December 18, 1996, the Company issued 2,632,600 shares of Common Stock
in connection with the acquisition (the "Acquisition") by the Company of all of
the outstanding capital stock of, or equity interests in, BioClin, Inc., a
Delaware corporation, BioClin Europe AG, a Swiss corporation, BioClin GmbH, a
German corporation, Kilmer N.V., a Netherlands Antilles corporation, and BioClin
Institute of Clinical Pharmacology GmbH, a German corporation. The Acquisition
was recorded using the "pooling-of-interests" method of accounting.

      Chrysalis is also the exclusive commercial licensee of a U.S. patent
covering DNA Microinjection, the process widely used in the pharmaceutical and
biotechnology industries to develop transgenic animals. The Company utilizes
this license for its drug development services and grants sublicenses for the
use of this technology. These sublicenses entitle the Company to receive
revenues consisting of fees and, in certain cases, royalties.

      The Company's financial statements are denominated in U.S. dollars
and, accordingly, changes in the exchange rate between non-U.S. currencies
and the U.S. dollar will affect the translation of non-U.S. revenues and
operating results into U.S. dollars for purposes of reporting the
Company's financial results.  For the three months ended March 31, 1998,


                                       9
<PAGE>   10
approximately 62% of the Company's revenues were from operations outside
the U.S.  Approximately 38% of the Company's revenues for the quarter
ended March 31, 1998 were from operations in France and denominated in
French Francs; accordingly, fluctuations in the exchange rate between the
French Franc and the U.S. dollar may have a material effect on the
Company's operating results.  See " --  Liquidity and Capital Requirements
-- Exchange Rate Fluctuations."

      In addition, the Company may be subject to foreign currency transaction
risk when the Company's multi-country contracts are denominated in a currency
other than the currency in which the Company incurs the expenses related to such
contracts. For such multi-country drug contracts, the Company seeks to require
its client to incur the effect of fluctuations in the relative values of the
contract currency and the currency in which the expenses are incurred. To the
extent the Company is unable to require its clients to incur the effects of
currency fluctuations, these fluctuations could have a material effect on the
results of operations of the Company. The Company does not currently hedge
against the risk of exchange rate fluctuations.

      The Company's contracts are typically fixed price contracts that require a
portion of the contract amount to be paid at or near the time the trial is
initiated. The Company generally bills its clients upon the completion of
negotiated performance requirements and, to a lesser extent, on a date certain
basis. Certain of the Company's contracts are subject to cost limitations which
cannot be exceeded without client approval. Because, in many cases, the Company
bears the risk of cost overruns, unbudgeted costs in connection with performing
these contracts may have a detrimental effect on the financial results of the
Company. If it is determined that a loss will result from the performance of a
contract, the entire amount of the estimated loss is charged against income in
the period in which the determination is made.

      The Company's contracts generally may be terminated with or without cause.
In the event of termination, the Company is typically entitled to all sums owed
for work performed through the notice of termination and all costs associated
with termination of the study. In addition, most of the Company's contracts
provide for an early termination fee, the amount of which usually declines as
the work progresses. The Company's service contracts also contain certain
provisions designed to address the negative impact on the Company's revenues and
profitability as a result of non-controllable delays. These provisions, however,
may not be included in all of the Company's service contracts. In any event, the
Company attempts to negotiate reimbursement of certain fees whether or not such
provisions are included in the service contract. The Company is not always
successful in negotiating such reimbursement. The loss of or delay in a large
contract or the loss of multiple contracts, however, could adversely affect the
Company's future revenues and profitability. In addition, termination or delay
in the performance of a contract occurs for various reasons, including, but not
limited to, unexpected or undesired results, inadequate patient enrollment or
investigator recruitment, production problems resulting in shortages of the drug
being tested, adverse patient reactions to the drug being tested, or the
client's decision to not proceed with a particular trial.

      Revenue for contracts is recognized on a percentage of completion basis as
work is performed. Revenue is affected by the mix of trials conducted and the
degree to which effort is expended. The Company will incur travel costs and may
subcontract with third-party investigators in connection with multi-site
clinical trials. These costs are passed through to


                                       10
<PAGE>   11
clients and, in accordance with industry practice, are included in service
revenue. The costs may vary significantly from contract to contract; therefore,
changes in service revenue may not be indicative of trends in revenue growth.
Accordingly, the Company considers net service revenue, which consists of
service revenue less these costs, as its primary measure of revenue growth.

      The Company has had, and will continue to have, certain clients from which
at least 10% of the Company's overall revenue is generated over multiple
contracts. Such concentration of business is not uncommon within the CRO
industry. For the quarter ended March 31, 1998, the Company's top five customers
accounted for approximately 44% of its combined net revenue. One customer
accounted for approximately 21% of the Company's net revenue. The Company
believes that the loss of any of these customers, if not replaced or if services
provided to existing customers are not expanded, may have a material adverse
effect on the Company. There can be no assurance that the loss of any such
customer would be replaced or services to existing customers would be expanded
on terms acceptable to the Company.

      The Company has incurred expenses during the last year expanding its
infrastructure, primarily in the clinical operations, to support global drug
development capabilities and utilizing management's resources primarily to
communicate these expanded capabilities to its existing client base and the
pharmaceutical and biotechnology industries. As a result of these efforts, the
Company believes it is capable of supporting higher revenues. However, the
Company's future operating results will be contingent upon successfully
utilizing this expanded infrastructure which will require the Company to convert
proposals into contracts and revenues. There can be no assurance that the
Company will be able to successfully utilize its expanded infrastructure or that
proposals will be converted into revenues in a timely manner. The Company's
ability to utilize its expanded infrastructure into future operating results may
also be affected by factors such as delays in initiating or completing
significant preclinical and clinical trials, the lengthening of lead times to
convert proposals into contracts and revenues, and the termination of
preclinical and clinical trials, all of which may be beyond the control of the
Company. See " -- Quarterly Results."

DISCONTINUATION OF LARGE CLINICAL TRIAL

      The Company's largest client, a leading pharmaceutical company, notified
the Company that it decided to change a clinical protocol and thereby delay a
large clinical trial which was originally expected to begin during the fourth
quarter of 1997. As a result, consistent with management's expectations, results
during the first quarter of 1998 were negatively impacted. In April 1998, the
Company was informed that the drug being developed in this trial will be
out-licensed or co-developed with a partner. There can be no assurance that
Chrysalis will be retained to assist in the further development of this drug.
This event, coupled with the strategic decision to maintain clinical
infrastructure utilized for this trial and improve the Company's ability to
compete for other large global studies, will have a significant negative impact
on the Company's results of operations for the remainder of 1998. Additionally,
while the Company has recently obtained additional clients and contracts with
long term potential, these contracts have lead times that will not result in
significant revenue in the near term. As a result, these additional contracts
are not sufficient over the near term to offset the significant loss created by
the loss of the large clinical trial.


                                       11
<PAGE>   12
                              RESULTS OF OPERATIONS

REVENUES

      Revenues were $9,673,000 for the three months ended March 31, 1998 as
compared to $9,905,000 for the same period in 1997. The Company generated
approximately 62% of its revenues from operations outside of North America and,
as a result, the Company experienced an unfavorable effect, amounting to
approximately $442,000 for the first quarter of 1998 compared to the same period
in 1997, from the currency translation of the European operations revenues from
local currencies to U.S. dollars. See " -- Liquidity and Capital Requirements -
Exchange Rate Fluctuations." After taking into account the impact of foreign
currency translations, revenues for the first quarter of 1998 would have been
approximately $10,115,000 as compared to $9,905,000 for the same period last
year. The increase in revenues, as adjusted, was primarily the result of the
following: (i) an increase in the clinical business including services provided
under contracts with the Company's largest customer, and (ii) an increase in the
Company's transgenic based services particularly those supporting functional
genomics research programs. This increase was partially offset by a decrease in
the preclinical business in Europe and North America.

      The Company's largest client, a leading pharmaceutical company, notified
the Company that it decided to change a clinical protocol and thereby delay a
large clinical trial which was originally expected to begin during the fourth
quarter of 1997. As a result, consistent with management's expectations,
revenues during the first quarter of 1998 were negatively impacted. In April
1998, the Company was informed that the drug being developed in this trial will
be out-licensed or co-developed with a partner. There can be no assurance that
Chrysalis will be retained to assist in the further development of this drug.
While the Company has recently obtained additional clients and contracts with
long term potential, these contracts have lead times that will not result in
significant revenue in the near term. As a result, these additional contracts
are not sufficient over the near term to offset the significant loss in revenues
created by the loss of the large clinical trial.


OPERATING EXPENSES

      Direct costs were $7,702,000 or approximately 80% of net revenues for the
three months ended March 31, 1998 and $7,022,000 or approximately 71% of net
revenues for the same period in 1997. The increase in these costs for the three
months ended March 31, 1998 as compared to the same period in 1997 was primarily
due to (i) investments in clinical personnel and infrastructure to support the
long-term business expansion strategy of the Company and to accommodate the
large clinical trial with a leading pharmaceutical company which was
discontinued in April 1998, and (ii) investments in personnel and infrastructure
to support the growth in the Company's transgenic based services particularly
those supporting functional genomics research programs. The increase in these
costs as a percent of revenues is due to a base cost structure of personnel,
facilities and related expenses which is capable of supporting a higher level of
business than experienced during the first three months of 1998. Although the
company has and may in


                                       12
<PAGE>   13
the future implement certain cost reduction programs, the relationship of direct
costs to revenues, expressed as a percentage, that was experienced in the first
quarter of 1998, is expected to be relatively consistent throughout the rest of
1998, because the Company expects to maintain the majority of its recently
expanded clinical infrastructure to better position the Company for long-term
growth and to improve the Company's ability to compete for other large global
studies.

      General, administrative and marketing expenses were $3,223,000 for the
three months ended March 31, 1998 versus $2,874,000 for the same period 1997.
The increase in expenses was primarily due to the increase in personnel and
related costs for marketing and business development, strategic planning,
information systems, general management and financial management activities.

      Depreciation and amortization expense decreased to $493,000 for the three
months ended March 31, 1998 versus $638,000 for the same period last year. This
decrease is the result of certain assets, associated with the Company's
preclinical European business, that were fully depreciated by 1998.

OTHER INCOME (EXPENSE)

      Other income (expense) represented expense of $128,000 for the three
months ended March 31, 1998 compared to expense of $6,000 for the same period
last year. This increase in net expense for the three months ended March 31,
1998 as compared to the same period of 1997, is primarily the result of (i) a
decrease in interest income earned in the first quarter of 1998 as a result of a
decrease in average available cash and other investment balances, and (ii) an
increase in interest expense in the first quarter of 1998 resulting from higher
outstanding debt balances. The Company expects to report an increase in net
interest expense, throughout the remainder of 1998, as a result of the above and
the issuance of the subordinated debenture and warrants in the transaction with
MDS. See " --Notes to Unaudited Consolidated Financial Statements - Note 3 - MDS
Financing."

TAXES

      The Company's foreign subsidiaries are subject to foreign income taxes
under foreign tax laws on the profits generated in such countries which in
general may not be offset by losses from operations in other countries. As a
result, the Company recorded provisions of $129,000 and $9,000, for the three
months ended March 31, 1998 and 1997, respectively, primarily associated with
the Company's French operations.

      The impact from United States federal income taxes is currently not
significant due to the Company's available net operating loss carryforwards. At
December 31, 1997, the Company has available net operating loss carryforwards of
approximately $26,434,000 for United States federal income tax purposes. Such
loss carryforwards expire through 2012. The Company also has research and
development tax credit carryforwards of approximately $3,012,000 for U.S.
federal income tax reporting purposes which are available to reduce U.S. federal
income taxes, if any, through 2011. The Company has alternative minimum tax
credit carryforwards of approximately $164,000 for U.S. federal income tax
purposes which are 


                                       13
<PAGE>   14
available to reduce U.S. federal income taxes, if any. These tax credits have an
unlimited carryforward period. The Company's acquisition of the clinical drug
development business in December 1996 resulted in an ownership change under the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the
Company's ability to utilize its net operating loss carryforwards to offset
operating profits may be subject to certain limitations in the future under the
Code. These net operating loss carryforwards may not be utilized to offset
profit in other countries.

BACKLOG

      The Company reports backlog based on anticipated net revenues from
uncompleted projects which have been authorized by the client, through a written
contract or otherwise. Once work under a letter of intent or contract commences,
net service revenue is recognized over the life of the contract using the
percentage-of-completion method of accounting. In certain cases, the Company
will commence work on a project prior to finalizing a letter of intent or
contract. Contracts included in backlog are subject to termination or delay at
any time by the client or regulatory authorities. Terminations or delays can
result from a number of factors, many of which are beyond the Company's control.
Delayed contracts remain in the Company's backlog pending determination of
whether to continue, modify or cancel the contract.

      The Company believes that its backlog as of any date is not necessarily a
meaningful indicator of future results and no assurance can be given that the
Company will be able to realize net service revenue included in backlog. As of
March 31, 1998, the Company's backlog was approximately $17.5 million compared
to approximately $41 million at December 31, 1997. This decrease in backlog
primarily reflects the cancellation of the large clinical trial See " -- General
Summary Discontinuation of Large Clinical Trial."

QUARTERLY RESULTS

      The Company's quarterly operating results are subject to variation, and
are expected to continue to be subject to variation, as a result of factors such
as delays in initiating or completing significant preclinical and clinical
trials, the lengthening of lead times to convert proposals into contracts and
revenues, termination of preclinical and clinical trials, acquisitions and
exchange rate fluctuations. Delays and terminations of studies or trials are
often the result of actions taken by clients or regulatory authorities and are
not typically subject to the control of the Company. Since a large amount of the
Company's operating costs are relatively fixed while its revenues are subject to
fluctuation, minor variations in the commencement, progress or completion of
preclinical and clinical trials may cause significant variations in quarterly
operating results. The Company expects second quarter 1998 results to be
consistent with first quarter 1998 results. See " --General Summary--
Discontinuation of Large Clinical Trial."

      The following table presents unaudited quarterly operating results for
each of the fiscal quarters of 1997 and the first quarter of 1998. In the
opinion of the Company, this information has been prepared on the same basis as
the audited consolidated financial statements of the Company and reflects all
adjustments (consisting only of normal recurring


                                       14
<PAGE>   15
adjustments) necessary for a fair presentation of results of operations for
those periods. This quarterly financial data should be read in conjunction with
the consolidated audited financial statements and notes thereto included in the
Company's 1997 Annual Report on Form 10-K. The operating results for any quarter
are not necessarily indicative of the results to be expected in any future
period.

<TABLE>
<CAPTION>
                                                             QUARTER ENDED ($000'S EXCEPT PER SHARE DATA)
                                          ---------------------------------------------------------------------------------
                                                                            (UNAUDITED)
                                          March 31,         June 30,          Sept. 30,         Dec. 31,          March 31,
                                            1997              1997              1997              1997              1998
                                          --------           -------           -------           -------           -------
<S>                                       <C>                 <C>               <C>               <C>             <C>
Net revenues                              $  9,905            10,145            10,623            11,624             9,673
Operating expenses:
     Direct costs                            7,022             7,101             7,423             7,838             7,702
     General, administrative &
          marketing                          2,874             2,976             3,123             3,442             3,223
     Depreciation & amortization               638               654               708               699               493
                                          --------           -------           -------           -------           -------
                                            10,534            10,731            11,254            11,979            11,418
Loss from operations                          (629)             (586)             (631)             (355)           (1,745)
Other income (expense):
     Interest income                           181               123                93                72               127
     Interest expense                         (191)             (165)             (206)             (213)             (248)
     Foreign currency gain                      --                --                --                11
     Other                                       4                (6)              692                (4)               (7)
                                          --------           -------           -------           -------           -------
                                                (6)              (48)              579              (134)             (128)
                                          --------           -------           -------           -------           -------
Loss before income taxes                      (635)             (634)              (52)             (489)           (1,873)
Income tax expense                               9                31                41               159               129
                                          --------           -------           -------           -------           -------
Net loss                                  $   (644)             (665)              (93)             (648)           (2,002)
                                          ========           =======           =======           =======           =======

Basic loss per share                      $  (0.06)          $ (0.06)          $ (0.01)          $ (0.06)          $ (0.18)
                                          ========           =======           =======           =======           =======
Diluted loss per share                    $  (0.06)          $ (0.06)          $ (0.01)          $ (0.06)          $ (0.18)
                                          ========           =======           =======           =======           =======
Shares used in computing
     per share amounts                      11,372            11,388            11,405            11,419            11,431
                                          ========           =======           =======           =======           =======
</TABLE>

REVENUES BY BUSINESS AND GEOGRAPHIC REGION BY QUARTER

<TABLE>
<CAPTION>
                                                  QUARTER ENDED ($000'S)
                         ---------------------------------------------------------------------
                                                      (UNAUDITED)
                         March 31,       June 30,       Sept. 30,       Dec. 31,       March 31,
                          1997            1997            1997            1997           1998
                         ------          ------          ------          ------          -----
<S>                      <C>              <C>             <C>             <C>            <C>
Preclinical              $6,720           6,708           6,476           7,355          6,043
Clinical                  2,909           3,277           3,972           4,085          3,406
Licensing/Other             276             160             175             184            224
                         ------          ------          ------          ------          -----
Total                     9,905          10,145          10,623          11,624          9,673
                         ======          ======          ======          ======          =====

International             6,779           6,661           6,168           7,170          5,952
North America             2,850           3,324           4,280           4,270          3,497
Licensing/Other             276             160             175             184            224
                         ------          ------          ------          ------          -----
Total                    $9,905          10,145          10,623          11,624          9,673
                         ======          ======          ======          ======          =====
</TABLE>


                                       15
<PAGE>   16
                       LIQUIDITY AND CAPITAL REQUIREMENTS


CASH RESERVES

      The Company finances its operations and activities by relying on (i) its
operating activities for its working capital requirements, (ii) its cash
reserves and (iii) its available lines of credit. As of March 31, 1998, the
Company had cash reserves (consisting of cash and cash equivalents, short-term
investments, marketable debt securities and restricted cash) of $11,148,000. The
Company invests its excess cash in a diversified portfolio of high-grade money
market funds, United States Government-backed securities and commercial paper
and corporate obligations. The Company's cash reserves increased by $3,763,000
during the first quarter of 1998 from the fourth quarter of 1997 primarily due
to the following: (i) the receipt of $5,000,000 related to the subordinated
debenture issued on March 16, 1998 (see " -- Liquidity and Capital resources --
Debt") partially offset by (ii) the funding of operating losses of approximately
$1,194,000 and (iii) approximately $427,000 in capital expenditures.

DEBT
        The Company has a $3.0 million line of credit with a Swiss bank. As of
March 31, 1998, the outstanding balance under this line of credit was
approximately $2,824,000. This line is secured by the clinical operation's trade
accounts receivable and a guarantee by the Company. Additionally, the Company
has lines of credit and overdraft privileges with French banks in the aggregate
amount of 10.5 million French Francs ($1.7 million at the exchange rate in
effect on March 31, 1998). At March 31, 1998, there were no short-term
borrowings outstanding under these facilities.

      On March 16, 1998, the Company issued, in exchange for $5,000,000 cash, a
subordinated debenture and a warrant to purchase 2,000,000 shares of Common
Stock for $2.50 per share, to a wholly-owned subsidiary of MDS. The terms of the
subordinated debenture provide for semi-annual interest payments with the
aggregate principal amount payable on March 16, 2001. This debenture is
subordinate to certain outstanding indebtedness of the Company, including its
existing bank debt and mortgages. In addition, a portion or all of the principal
amount of the debenture may, at the option of the holder, be satisfied by
issuance of the shares of Common Stock in accordance with the terms of the
warrant.

      In connection with the acquisition of the Company's preclinical operations
in France, included in the purchase price were promissory notes having an
aggregate principal amount of $7.0 million (the "Notes"), of which $5.0 million
remained outstanding as of December 31, 1996. In the third quarter of 1997, the
Company refinanced this debt by obtaining a five year $5.0 million term loan
from a large commercial bank, with the principal payable in quarterly
installments beginning September 1998. Interest will be paid monthly over the
life of the loan. This loan is secured by substantially all of the Company's
domestic assets, including the capital stock of its subsidiaries. The Company
was in default at December 31, 1997 under certain financial covenants set forth
in the credit agreement with respect to this term loan and obtained a waiver of
such default from the commercial bank which provided this term loan.


                                       16
<PAGE>   17
      In connection with its U.S. preclinical facility, the Company secured (i)
a $1.5 million mortgage with a bank and, (ii) a $1.2 million mortgage from a
Pennsylvania agency, which required cash collateral of $450,000. These two
loans, due in monthly installments through 2009, are secured by mortgages on the
property acquired. As of March 31, 1998 the aggregate outstanding balances under
these mortgages was approximately $2,300,000. The cash collateral on the
mortgage loan with the Pennsylvania agency is classified as restricted cash as
of March 31, 1998. Upon achievement of certain financial covenants, this
$450,000 of cash collateral will be released. Additionally, the favorable
interest rate on the mortgage with the Pennsylvania agency is subject to change
upon review by the agency of certain future conditions.

CAPITAL REQUIREMENTS

      The Company anticipates that its capital requirements for the remainder of
1998 will include costs to maintain its operating infrastructure and investments
to expand its transgenics business. The Company also anticipates that its long
term capital requirements may include investment for expansion of its operating
infrastructure to meet anticipated increased demand for drug development
services from the pharmaceutical and biotechnology industries. Additionally, in
connection with the refinancing of the Notes (see " -- Debt"), the Company has
quarterly cash requirements for the repayment of principal beginning September
1998, and monthly cash requirements for interest payments due throughout the
five year term of the loan, as well as a requirement to comply with certain
restrictive debt covenants. Furthermore, the Company will have semi-annual cash
requirements in 1998 for the payment of interest on the subordinated debenture
issued in the MDS transaction.

      In addition to the above, the Company's working capital and other capital
requirements will depend on numerous factors, including among others: success in
increasing the Company's revenues and managing its operations; maintaining its
contractual relationship with its top customer(s); exchange rate fluctuations
between the U.S. dollar and foreign currencies; investments for clinical and
preclinical strategic business objectives; investment to support the growth in
the Company's transgenic based services particularly those supporting functional
genomics research programs; the level of Company resources devoted to
management, marketing, information and data management capabilities and business
and financial administration; technological advances; and the status of
competitors; as well as the costs of potential future dispositions, acquisitions
or strategic alliances described below.

      In order to satisfy its capital requirements the Company believes it will
be required to obtain additional capital resources during 1998. The Company will
seek to obtain its capital requirements by issuing stock or other securities in
public or private equity or debt financings. In the event that the Company seeks
to issue stock or other securities, there can be no assurance that the Company
will be able to issue such stock or other securities or that any financing will
be available to the Company or that such offering or financing will be available
on acceptable terms. Additionally, the Company from time to time may engage in
discussions regarding dispositions, acquisitions or strategic alliances.
Although the Company continually considers and evaluates potential dispositions,
acquisitions or alliances and related opportunities for growth, it does not have
any understandings, arrangements or agreements with respect to any such
dispositions, acquisitions or alliances. The Company will need to finance any
such acquisition or alliance by additional public or private debt or equity
financings.


                                       17
<PAGE>   18
In the event that the Company seeks to pursue any such acquisition or alliance
requiring financing, there can be no assurance that any financing will be
available to the Company or that such financing will be available on acceptable
terms. In the event that any such financings, as described above, are not
available so that the Company may obtain during 1998 sufficient capital
resources to satisfy the Company's capital requirements, the Company will be in
default on certain financial covenants related to its existing indebtedness.

EXCHANGE RATE FLUCTUATIONS

      Approximately 62% and 68% of the Company's net revenues for the quarters
ended March 31, 1998 and 1997, respectively, were derived from the Company's
operations outside the United States. The Company's consolidated financial
statements are denominated in U.S. dollars and, accordingly, changes in exchange
rates between the applicable foreign currency and the U.S. dollar will affect
the translation of such subsidiary's financial results into U.S. dollars for
purposes of reporting the Company's consolidated financial results. Translation
adjustments are reported as a separate section of stockholders' equity.

      The Company may be subject to foreign currency transaction risks when the
Company's multi-country contracts are denominated in a currency other than the
currency in which the Company incurs the expenses related to such contracts. For
such multi-country contracts, the Company seeks to require its client to incur
the effect of fluctuations in the relative values of the contract currency and
the currency in which the expenses are incurred. To the extent the Company is
unable to require its clients to incur the effects of currency fluctuations,
these fluctuations could have a material effect on the results of operations of
the Company. The Company generally does not hedge its currency translation and
transaction exposure.

      Due to its preclinical operations in France, the percentage of the
Company's total revenues recorded in French Francs is significant. For the
quarters ended March 31, 1998 and 1997, the French operations accounted for
approximately 38% and 48% of the Company's revenues, respectively. Accordingly,
changes in the exchange rate between the French Franc and the U.S. dollar will
affect the translation of the French preclinical operation's revenues and
operating results into U.S. dollars for purposes of reporting the Company's
consolidated financial results, and also affect the U.S. dollar amounts actually
received by the Company from the French preclinical operations. Based on the
assumption that the French preclinical operations will continue to represent a
significant portion of the business of the Company, the depreciation of the U.S.
dollar against the French Franc would have a favorable impact on the Company's
revenues and an unfavorable impact on the Company's operating expenses due to
the effect of such currency translation on the French preclinical operation's
operating results; however, the appreciation of the U.S. dollar against the
French Franc would have an unfavorable impact on the Company's revenues and a
favorable impact on the Company's operating expenses.


                                       18
<PAGE>   19
      For purposes of the Company's consolidated financial results, the results
of operations of the French preclinical business denominated in French Francs
have been translated from French Francs into U.S. dollars using the following
exchange rates:

<TABLE>
<CAPTION>
                             French Franc        U.S. dollar per
         Period             per U.S. dollar       French Franc
         ------             ---------------       ------------
<S>                         <C>                  <C>
      1st quarter 1997          5.6038                .1785
      2nd quarter 1997          5.7831                .1729
      3rd quarter 1997          6.0838                .1644
      4th quarter 1997          5.8817                .1700

      1st quarter 1998          6.0948                .1641
</TABLE>

The rates in the above table represent an average exchange rate calculated using
rates quoted in The Wall Street Journal.

ACCUMULATED DEFICIT

      Since its inception in 1988 until the formation in 1994 and subsequent
sale of its partnership interest in Nextran in 1995, the Company expended
substantial funds for research and development and capital expenditures. A
significant portion of such expenditures were made to support the Company's
organ transplantation and blood substitute research and development programs,
which programs were transferred to the Nextran partnership. Historically, these
expenditures accounted for a substantial portion of the Company's accumulated
deficit. Also contributing to the accumulated deficit are the costs associated
with the development of a worldwide clinical business.

INFLATION

       The Company believes that inflation has not had a material impact on its
results of operations.

YEAR 2000

    The Company is currently taking steps to assess the Year 2000 issue from an
internal, supplier and customer perspective. Although the Company believes at
this time that neither the costs nor the expenses of the Year 2000 issue will be
material to the Company, the ultimate costs and expenses are currently unknown
and such costs or the consequences of failure to correct any Year 2000 issues
could have a material impact on Chrysalis' financial conditions, business or
operations.

NEW ACCOUNTING PRONOUNCEMENTS

    In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131"). This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual and interim financial statements.
It also establishes standards for related


                                       19
<PAGE>   20
disclosures about products and services, geographic areas and major customers.
This Statement shall be effective for financial statements for fiscal years
beginning after December 15, 1997. Financial statement disclosures for prior
periods are required to be restated. The Company is in the process of evaluating
the disclosure requirements. This statement, by its nature, will not impact the
Company's consolidated results of operations, financial position or cash flows.

FORWARD LOOKING STATEMENTS

    The statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere throughout this
Quarterly Report on Form 10-Q that are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange of 1934. These forward-looking statements
are subject to certain risks and uncertainties described below, which could
cause actual results to differ materially from those reflected in the
forward-looking statements. These forward-looking statements reflect
management's analysis, judgment, belief or expectation only as of the date
hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof or to publicly release the results of any revisions to such
forward-looking statements that may be made to reflect events or circumstances
after the date hereof. In addition to the disclosure contained herein, readers
should carefully review any disclosure of risks and uncertainties contained in
other documents the Company files or has filed from time to time with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934.

    Factors that could cause actual results to differ materially from those
reflected in the forward looking statements include, without limitation: the
degree of the Company's success in obtaining new contracts; the scope and
duration of drug development trials; the loss or downsizing of, or delay in,
existing drug development trials; the lengthening of the lead time to convert
proposals into contracts and revenues; the Company's exposure to cost overruns
under fixed-price contacts; the Company's dependence on certain clients,
especially its largest client, and on the pharmaceutical and biotechnology
industries; adverse trends in the regulatory environment, including health care
reform measures; the Company's dependence on key management personnel;
competition and consolidation in the drug development services industry;
liability for negligence or errors and omissions arising out of drug development
trials; foreign exchange rate fluctuations; and the costs associated with
dispositions or integrating future acquired businesses. In addition, the
Company's quarterly operating results will continue to be subject to variation
as a result of factors such as those discussed above in " -- Quarterly Results"
as well as the costs associated with integrating the clinical and preclinical
businesses.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

             Not required


                                       20
<PAGE>   21
                           PART II. OTHER INFORMATION


Item 6. Exhibits and Reports on Form 8-K


      a.    Exhibits

            10.1  Note and Warrant Purchase Agreement effective March 16,
               1998, by and between Panlabs International, Inc. and Chrysalis
               International Corporation incorporated herein by reference to
               Exhibit 7.2 on Schedule 13D filed March 16, 1998 by MDS Inc.

            10.2  6% Subordinated Note of Chrysalis International Corporation
               dated March 16, 1998 incorporated herein by reference to Exhibit
               7.3 on Schedule 13D filed March 16, 1998 by MDS Inc.

            10.3  Warrant Agreement effective March 16, 1998 by and between
               Panlabs International, Inc. and Chrysalis International
               Corporation incorporated herein by reference to Exhibit 7.4 on
               Schedule 13D filed March 16, 1998 by MDS Inc.

            10.4  Standstill and Confidentiality Agreement effective March 16,
               1998, by and among Panlabs International, Inc. MDS Inc. and
               Chrysalis International Corporation incorporated herein by
               reference to Exhibit 7.5 on Schedule 13D filed March 16, 1998 by
               MDS Inc.

            10.5  Security Agreement delivered by Chrysalis International
               Corporation to Panlabs International, Inc., dated March 16, 1998
               incorporated herein by reference to Exhibit 7.6 on Schedule 13D
               filed March 16, 1998 by MDS Inc.

            27    Financial Data Schedule


      b.    Reports on Form 8-K

            None.


                                       21
<PAGE>   22
                       CHRYSALIS INTERNATIONAL CORPORATION

                                   SIGNATURES


      The financial information furnished herein has not been audited. However
in the opinion of management, all significant adjustments necessary for a fair
presentation for the three month periods ended March 31, 1998 and 1997, have
been included.

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


Date: May 14, 1998         CHRYSALIS INTERNATIONAL CORPORATION



                           /s/ John G. Cooper
                           ----------------------------------------------
                           John G. Cooper
                           Senior Vice President, Chief Financial Officer
                                and Treasurer
                           (Duly Authorized Officer and Chief
                                Accounting Officer)


                                       22