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

                              __________________

                                   FORM 10-Q


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

     For the Quarterly Period Ended March 31, 1998

                                      OR

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


                        COMMISSION FILE NUMBER 0-27150

                                        
                              __________________

                           PATHOGENESIS CORPORATION
            (Exact name of Registrant as specified in its charter)

                 Delaware                                    91-1542150
       (State or other jurisdiction of                    (I.R.S. Employer
        incorporation or organization)                 Identification Number)

              201 ELLIOTT AVENUE WEST, SEATTLE, WASHINGTON  98119
              (Address of Principal Executive Offices)    (Zip Code)

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 467-8100

                                        
                              __________________

  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 _____
                                               ---

  On May 8, 1998, the registrant had an aggregate of 16,249,935 shares of Common
Stock issued and outstanding.
<PAGE>
 
                                           PART I
  
                                    FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS       PATHOGENESIS CORPORATION
                                 CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                       March 31, 1998          December 31, 1997        
                                                                    --------------------     ---------------------     
                                                                         (Unaudited)                                   
<S>                                                                 <C>                      <C>                       
ASSETS                                                                                                                 
Current assets:                                                                                                        
  Cash and cash equivalents.....................................          $  1,467,265           $   5,171,591         
  Investment securities.........................................            66,313,271              73,869,541         
  Accounts receivable, net......................................            10,001,529                      --         
  Interest receivable...........................................               652,832                 656,396         
  Inventories...................................................             6,070,696               4,935,758         
  Other.........................................................             1,785,674               2,556,409         
                                                                          ------------           -------------         
       Total current assets.....................................            86,291,267              87,189,695         
                                                                          ------------           -------------         
Restricted securities...........................................               675,000                 675,000         
Property and equipment, at cost:                                                                                       
  Leasehold improvements........................................             8,747,732               7,941,149         
  Furniture and equipment.......................................             9,335,441               8,805,566         
                                                                          ------------           -------------         
                                                                            18,083,173              16,746,715         
  Less accumulated depreciation and amortization................             7,759,331               7,138,050         
                                                                          ------------           -------------         
       Net property and equipment...............................            10,323,842               9,608,665         
                                                                          ------------           -------------         
Other assets, net...............................................               113,414                 122,189         
                                                                          ------------           -------------         
  Total assets..................................................          $ 97,403,523           $  97,595,549         
                                                                          ============           =============         
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                   
Current liabilities:                                                                                                   
  Accounts payable..............................................          $    925,180           $   1,168,865         
  Compensation and benefits.....................................               892,993               1,461,167         
  Clinical development costs....................................             1,653,693               2,885,107         
  Other accrued expenses........................................             3,211,826               2,591,660         
                                                                          ------------           -------------         
       Total current liabilities................................             6,683,692               8,106,799         
                                                                          ------------           -------------         
Stockholders' equity:                                                                                                  
  Preferred stock, $0.01 par value.  Authorized                                                                        
   1,000,000 shares; none issued and outstanding................                    --                      --         
  Common stock, $0.001 par value.                                                                                      
   Authorized 60,000,000 shares; 16,245,548 shares and                                                                 
    16,238,649 shares issued and outstanding at                                                                        
   March 31, 1998 and December 31, 1997, respectively...........                16,246                  16,239         
                                                                                                                       
  Additional paid-in capital....................................           191,707,694             191,613,454         
  Deferred compensation.........................................            (1,195,519)             (1,295,145)        
  Accumulated other comprehensive income (loss) --                                                                     
   unrealized gain (loss) on investment securities..............                29,983                 (22,635)        
  Accumulated deficit...........................................           (99,838,573)           (100,823,163)        
                                                                          ------------           -------------         
  Total stockholders' equity....................................            90,719,831              89,488,750         
                                                                          ------------           -------------         
  Total liabilities and stockholders' equity....................          $ 97,403,523           $  97,595,549         
                                                                          ============           =============          
</TABLE>

                            See accompanying notes.
<PAGE>

                           PATHOGENESIS CORPORATION
               CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                             Three Months Ended
                                                                                  March 31,
                                                                        --------------------------
                                                                            1998          1997
                                                                        ------------   -----------
<S>                                                                     <C>            <C>
Revenues:
  Sales.........................................................        $14,527,031    $        --
  Grants and royalties..........................................            137,866         86,238
                                                                        -----------    -----------
       Total revenues...........................................         14,664,897         86,238
Operating expenses:
  Cost of sales.................................................          2,669,816             --
  Research and development......................................          6,575,404      5,822,712
  Selling, general and administrative...........................          5,533,230      1,340,646
                                                                        -----------    -----------
       Total operating expenses.................................         14,778,450      7,163,358
                                                                        -----------    -----------
       Operating loss...........................................           (113,553)    (7,077,120)
                                                                        -----------    -----------
Other income (expense):
  Investment income, net........................................          1,131,643        882,053
  Other expense.................................................            (33,500)       (30,821)
                                                                        -----------    -----------
       Net other income.........................................          1,098,143        851,232
                                                                        -----------    -----------

       Net income (loss)........................................        $   984,590    $(6,225,888)
                                                                        ===========    ===========
Income (loss) per common share -- basic and diluted.............        $      0.06    $    $(0.43)
                                                                        ===========    ===========
Weighted average common shares outstanding:
  Basic.........................................................         16,243,147     14,383,942
  Diluted.......................................................         17,146,495     14,383,942
</TABLE>

                            See accompanying notes.

                                       2
<PAGE>
 
                            PATHOGENESIS CORPORATION
               CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                        Three Months Ended                     
                                                                                             March 31,                          
                                                                           -------------------------------------------        
                                                                                  1998                     1997                 
                                                                           -------------------        ----------------        
<S>                                                                        <C>                        <C>    
Cash flows from operating activities:
  Net income (loss).............................................                $    984,590          $ (6,225,888)
 
  Adjustments to reconcile net income (loss) to net cash used in 
  operating activities:     
    Depreciation and amortization...............................                     621,281               444,805
    Amortization of investment premiums (discounts).............                          --               (32,724)
    Compensation expense from stock options.....................                      99,626                    --
    Loss on sale of property and equipment......................                          --                 8,321
    Change in certain assets and liabilities:
      Accounts receivable.......................................                 (10,001,529)                   --
      Interest receivable.......................................                       3,564               (30,125)
      Inventories...............................................                  (1,134,938)                   --
      Other current assets......................................                     770,735               200,035
      Other assets, net.........................................                       8,775               (34,363)
      Accounts payable..........................................                    (243,685)              303,697
      Compensation and benefits.................................                    (568,174)              (56,443)
      Clinical development costs................................                  (1,231,414)              400,782
      Other accrued expenses....................................                     620,166               (35,860)
      Long-term liability.......................................                          --               (73,705)
                                                                                ------------          ------------
       Net cash used in operating activities....................                 (10,071,003)           (5,131,468)
                                                                                ------------          ------------
 
Cash flows from investing activities:
  Purchases of investment securities............................                 (24,455,090)          (33,588,098)
  Sales of investment securities................................                  32,063,978            18,390,069
  Purchases of property and equipment...........................                  (1,336,458)             (941,541)
  Proceeds from sale of furniture and equipment.................                          --                 2,000
                                                                                ------------          ------------
       Net cash provided (used) in investing activities.........                   6,272,430           (16,137,570)
                                                                                ------------          ------------
 
Cash flows from financing activities:
  Net proceeds from issuance of common stock....................                          --            53,385,142
  Proceeds from exercise of stock options.......................                      94,247                    --
                                                                                ------------          ------------
       Total cash provided by financing activities..............                      94,247            53,385,142
                                                                                ------------          ------------
 
       Net increase (decrease) in cash and cash
       equivalents..............................................                  (3,704,326)           32,116,104
Cash and cash equivalents at beginning of period................                   5,171,591            14,785,818
                                                                                ------------          ------------
Cash and cash equivalents at end of period......................                $  1,467,265          $ 46,901,922
                                                                                ============          ============
</TABLE>

                            See accompanying notes.
<PAGE>
 
                           PATHOGENESIS CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            MARCH 31, 1998 AND 1997


(1)  BASIS OF PRESENTATION

     The accompanying consolidated financial statements of PathoGenesis
Corporation and related notes have been prepared in accordance with Securities
and Exchange Commission rules and regulations for interim financial statements.
As permitted by those rules and regulations, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The accompanying consolidated financial statements and these notes should be
read in conjunction with the Company's audited consolidated financial statements
for 1997 and the related notes included in the Company's annual report on Form
10-K.

     The information furnished reflects, in the opinion of management, all
adjustments necessary for a fair presentation of the results for the interim
periods presented.  Interim results are not necessarily indicative of results
for a full year.

(2)  REVENUES

     Product sales are recognized when product is shipped.  The Company performs
ongoing credit evaluations of its customers and does not require collateral.
Product sales are recorded net of reserves for estimated chargebacks, returns,
discounts and rebates.  Allowance for discounts, returns, bad debts, chargebacks
and rebates, which are netted against accounts receivable, totaled $1,317,068 at
March 31, 1998.

     Revenues received under grant and royalty agreements are recognized based
on the terms of the underlying agreements.

(3)  INVENTORIES

     Inventories are stated at the lower of cost, as determined by the first-in,
first-out method, or market.  Inventories consisted of the following:

<TABLE>
<CAPTION>
                                             March 31, 1998        December 31, 1997                
                                             --------------        -----------------                
<S>                                          <C>                   <C>                              
Finished goods                                $  864,812               $2,096,300                    
Work in progress                               3,022,432                  733,068                    
Raw materials and supplies                     2,183,452                2,106,390                    
                                              ----------               ----------                    
                                                                                                     
                                              $6,070,696               $4,935,758                    
                                              ==========               ==========                     
</TABLE>
<PAGE>
 
(4)  STATEMENT RE COMPUTATION OF PER SHARE INCOME (LOSS)

                    COMPUTATION OF PER SHARE INCOME (LOSS)

<TABLE>
<CAPTION>
                                                                       Three Months Ended March 31,                   
                                                                  --------------------------------------              
                                                                        1998                   1997                         
                                                                  ----------------        --------------              
<S>                                                               <C>                     <C> 
Basic income (loss) per share computation:
 Numerator:
      Net income (loss)                                             $   984,590              $(6,225,888)  
                                                                    -----------              -----------   
 Denominator:                                                                                              
      Weighted-average common shares                                 16,243,147               14,383,942   
                                                                    -----------              -----------   
      Basic income (loss) per share                                                                             
                                                                    $      0.06              $     (0.43)  
                                                                    ===========              ===========   
Diluted income (loss) per share computation:                                                               
 Numerator:                                                                                                
      Net income (loss)                                             $   984,590              $(6,225,888)  
                                                                    -----------              -----------   
 Denominator:                                                                                              
      Weighted-average common shares                                 16,243,147               14,483,942   
      Effect of dilutive securities:                                                                           
        Common stock warrants                                            35,318                       --   
        Stock options                                                   868,030                       --   
                                                                    -----------              -----------   
      Dilutive potential common shares                                  903,348                       --   
                                                                    -----------              -----------   
      Denominator for diluted income (loss) per share                17,146,495               14,383,942   
                                                                    -----------              -----------   
      Diluted income (loss) per share                               $      0.06              $     (0.43)  
                                                                    ===========              ===========   
</TABLE>

Options and warrants to purchase 102,905 and 1,656,972 shares of common stock
that were outstanding during the first quarter of 1998 and 1997, respectively,
were not included in the computation of diluted income (loss) per share because
the representative share increments would be antidilutive.

(5)  COMPREHENSIVE INCOME

     As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, which establishes
new rules for the reporting and display of comprehensive income and its
components.  Statement 130 requires companies to report, in addition to net
income, other components of comprehensive income including unrealized gains or
losses on available-for-sale securities.  During the first quarter of each of
1998 and 1997, total comprehensive income (loss) amounted to $1,037,208 and
$(6,327,218), respectively.  Adoption of this disclosure standard had no effect
on the Company's results of operations or financial position as reported in the
consolidated financial statements.

                                       5
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     Statements in this quarterly report on Form 10-Q that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, including statements regarding future
revenues, expenses and profits.  These forward-looking statements are subject to
known and unknown risks, uncertainties or other factors which may cause the
actual results of the Company to be materially different from historical results
or any results expressed or implied by the forward-looking statements.  Factors
that could cause actual results to differ materially include, but are not
limited to, uncertainties related to the fact that PathoGenesis began commercial
operations only recently, its dependence on TOBI, third party reimbursement and
product pricing, government regulation, drug development and clinical trials,
competition and alternative therapies.  Further information regarding these and
other factors is discussed in PathoGenesis' 1997 annual report on Form 10-K,
which was filed with the Securities and Exchange Commission.

OVERVIEW

     The Company was organized in December 1991 to develop novel drugs to treat
serious, chronic human infectious diseases where there is a significant need for
improved therapy. From its incorporation through the end of 1997, the Company
engaged primarily in research, development, clinical trials and administrative
activities.

     In December 1997, the United States Food and Drug Administration (FDA)
approved the Company's first drug, TOBI(TM) (tobramycin solution for
inhalation). TOBI is a stable, premixed, proprietary formulation of the
antibiotic tobramycin for delivery by inhalation using a nebulizer. The drug is
indicated for the management of cystic fibrosis patients with Pseudomonas
aeruginosa (P. aeruginosa). The Company began marketing TOBI in the U.S. in
January 1998. In March 1998, the Company filed for approval to market TOBI to
cystic fibrosis patients in Canada. It expects to apply for regulatory approval
in the United Kingdom in the fourth quarter of 1998.

     Currently, the Company is investigating TOBI in patients with
bronchiectasis (a form of severe chronic bronchitis) and tuberculosis and is
developing a second drug candidate, PA-1648, an oral drug candidate that may be
a potential replacement for the antibiotic rifampin in tuberculosis treatment.
The Company hopes to report the results of all three trials by year-end.  In
addition, the Company is developing other inhaled and oral drug candidates for
lung infections.

RESULTS OF OPERATIONS

     The first quarter of 1998 was a period of transition for the Company.  For
the first time since incorporation, the Company had revenue from sales of a drug
product.  It also achieved overall profitability for the first time.
Nevertheless, the Company reported an operating loss of $113,553.  This result
reflects a planned increase in operating expenses and costs incurred in
manufacturing and launching TOBI, including expenses associated with
establishing a sales force.  In addition, the Company continued to engage in
research and development to develop potential products.  However, when net other
income was included, the Company earned a modest profit.  Based on the current
TOBI sales trend, the Company anticipates that it will be profitable for 1998,
although there can be no assurance that the Company will achieve a profit.

                                       6
<PAGE>
 
     Revenues.  Revenues in the first quarter of 1998 totaled $14,664,897,
including $14,527,031 from TOBI sales.  The balance of $137,866 was generated by
research grants and royalties.  Revenues for the corresponding period in 1997
were $86,238, which were entirely generated by research grants and royalties.
The Company plans to add three salespersons to its current sales force of 21 to
accelerate TOBI's market penetration.  The Company expects TOBI sales in the
second and third quarters to be in roughly the same range as the first quarter.
Third quarter sales may not exceed second quarter sales.  This is because cystic
fibrosis patients are less likely to visit their doctors in the summer, as a
result of which the Company expects fewer new patients to begin taking TOBI in
mid-year.  That fact also means it is likely that more new patients will start
treatment with TOBI in the fall and winter, which may strengthen fourth quarter
sales.  However, there can be no assurance that actual sales of TOBI will meet
the Company's expectations.

     Operating Expenses.  The Company incurred total operating expenses of
$14,778,450 in the first quarter of 1998, more than double the amount
($7,163,358) for the corresponding period in 1997.  The cost of manufacturing
and marketing TOBI accounted for the major part of the increase.  In addition,
research and development expenses increased as the Company continued to develop
new drug candidates.  Because total operating expenses in the first quarter of
1998 included one-time TOBI costs, expenses should moderate in the remainder of
1998.  However, there can be no assurance that future developments will not
result in cost increases.

     The cost of goods sold was $2,669,816 in the first quarter of 1998.  The
Company did not have any such cost in the corresponding period in 1997.
Selling, general and administrative expenses increased to $5,533,230 in the
first quarter of 1998 from $1,340,646 for the corresponding period in 1997.  The
increase in those expenses reflects the costs associated with establishing and
supporting a sales force.  The Company expects these costs to moderate in the
remainder of the year.

     Research and development expense for the first quarter increased by
$752,692 to $6,575,404 in 1998 from $5,822,712 for the corresponding period in
1997.  Such increase was primarily due to ongoing Phase II clinical trials of
TOBI for bronchiectasis and tuberculosis, as well as a Phase II clinical trial
of PA-1648.

     Net Income (Loss).  Operating loss decreased significantly in the first
quarter of 1998, to $113,553 from $7,077,120 for the corresponding period in
1997, due to revenues generated from TOBI sales.  Including net other income,
the Company had net income of $984,590, compared to a net loss of $6,225,888 for
the first quarter of 1997.  Other income primarily represents income from the
Company's investment securities.  In the first quarter of 1998, net investment
income increased by $249,590 to $1,131,643 from $882,053 for the corresponding
period in 1997.  Such increase was due primarily to higher average invested cash
balances.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has financed its operations since incorporation primarily by
the issuance of equity securities.

     The Company's combined cash, cash equivalents and investment securities
totaled $67,780,536 at March 31, 1998, a decrease of $11,260,596 from the
balance at December 31, 1997.  The primary uses of cash and investments during
the quarter ended March 31, 1998, were to finance the Company's operations and
working capital requirements.  Net cash used in operating activities totaled
$10,071,003 for the three months ended March 31, 1998, as compared to $5,131,468
in the three months ended March 

                                       7
<PAGE>
 
31, 1997. The increase principally resulted from the launch of TOBI at the
beginning of 1998. In the first quarter of 1998, accounts receivable and
inventories increased by $10,001,529 and $1,134,938, respectively. Total current
liabilities decreased by $1,423,107 in the three months ended March 31, 1998, as
compared to an increase of $612,176 in the first quarter of 1997. At March 31,
1998, the Company had working capital of $79,607,575 and a current ratio of
12.91 to 1.

     The Company plans to continue its policy of investing excess funds in
government securities and investment grade, interest-bearing securities
primarily with an expected maturity of one-and-one-half years or less.

                                       8
<PAGE>
 
                                    PART II

                               OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

     (a)  EXHIBITS

          Exhibit
          Number                Description of Exhibit
          ------                ----------------------

           3.1(d)   Composite Certificate of Incorporation, as amended
                   
           10.29*   Processing Services Agreement dated as of May 5, 1998
                    between the Company and Automatic Liquid Packaging, Inc.
                   
           27.1     Financial Data Schedule (for EDGAR filing only)

     (b)  REPORTS ON FORM 8-K

          None

* Confidential treatment requested; confidential portions filed separately with
  the Securities and Exchange Commission.

                                       9
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 13, 1998.

                                PATHOGENESIS CORPORATION

                                By: /s/ Wilbur H. Gantz
                                    --------------------------------
                                    Wilbur H. Gantz
                                    Chairman and Chief Executive Officer



                                By: /s/ Alan R. Meyer
                                    ---------------------------------
                                    Alan R. Meyer
                                    Executive Vice President and
                                       Chief Financial Officer

                                       10