<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 June 30, 2000

                                      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 August 9, 2000, the registrant had an aggregate of 16,616,860 shares of
Common Stock issued and outstanding.
<PAGE>

                                    PART I

                             FINANCIAL INFORMATION

                           PathoGenesis Corporation
               Condensed Consolidated Balance Sheets (Unaudited)


Item 1.    Financial statements
<TABLE>
<CAPTION>
                                                                                        June 30, 2000   December 31, 1999
                                                                                        --------------  ------------------
<S>                                                                                     <C>             <C>
ASSETS
Current assets:
 Cash and cash equivalents...........................................................   $   4,605,575       $  10,456,031
 Investment securities...............................................................      34,654,928          34,549,738
 Accounts receivable, net............................................................       8,914,111           6,038,299
 Interest receivable.................................................................         359,555             442,676
 Inventories.........................................................................      13,214,650          14,613,385
 Other...............................................................................       2,125,450           2,110,610
                                                                                        -------------       -------------
           Total current assets......................................................      63,874,269          68,210,739
                                                                                        -------------       -------------
Property and equipment, at cost:
 Land................................................................................       2,846,813           3,030,938
 Building and improvements...........................................................       1,366,470           1,454,850
 Leasehold improvements..............................................................      10,064,385           9,735,242
 Furniture and equipment.............................................................      18,213,760          16,948,235
                                                                                        -------------       -------------
                                                                                           32,491,428          31,169,265
 Less accumulated depreciation and amortization......................................      14,918,490          12,957,926
                                                                                        -------------       -------------
           Net property and equipment................................................      17,572,938          18,211,339
                                                                                        -------------       -------------
License rights, net..................................................................      13,105,916          13,591,321
Other assets.........................................................................       3,277,261             823,519
                                                                                        -------------       -------------
 Total assets........................................................................   $  97,830,384       $ 100,836,918
                                                                                        =============       =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable....................................................................   $     891,341       $   1,668,775
 Compensation and benefits...........................................................       2,769,426           2,524,184
 Clinical development costs..........................................................       1,262,256           1,391,383
 Accrued royalties...................................................................         968,634             906,629
 Other accrued expenses..............................................................       2,418,478           2,781,644
 Current portion of long-term liability..............................................          99,717           5,149,847
                                                                                        -------------       -------------
           Total current liabilities.................................................       8,409,852          14,422,462
                                                                                        -------------       -------------
Long-term liability, net of current portion..........................................       2,557,308                  --

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; 16,570,131 shares and 16,451,530 shares issued and
      outstanding at June 30, 2000 and December 31, 1999, respectively...............          16,570              16,452
 Additional paid-in capital..........................................................     196,225,141         194,641,919
 Deferred compensation...............................................................        (298,882)           (526,199)
 Accumulated other comprehensive loss................................................        (833,161)           (582,036)
 Accumulated deficit.................................................................    (108,246,444)       (107,135,680)
                                                                                        -------------       -------------
 Total stockholders' equity..........................................................      86,863,224          86,414,456
                                                                                        -------------       -------------
 Total liabilities and stockholders' equity..........................................   $  97,830,384       $ 100,836,918
                                                                                        =============       =============
</TABLE>

                            See accompanying notes.

                                       1
<PAGE>

                            PathoGenesis Corporation
          Condensed Consolidated Statements of Operations (Unaudited)


<TABLE>
<CAPTION>
                                                                        Three Months Ended              Six Months Ended
                                                                             June 30,                       June 30,
                                                                    ---------------------------------------------------------
                                                                       2000            1999           2000           1999
                                                                    -----------     -----------    -----------    -----------
<S>                                                                 <C>              <C>            <C>           <C>
Revenues:
   Sales........................................................    $20,186,362     $14,065,449    $39,561,109    $24,121,584
   Grants and royalties.........................................        201,783         235,600        375,467        439,863
                                                                    -----------     -----------    -----------    -----------
   Total revenues...............................................     20,388,145      14,301,049     39,936,576     24,561,447
Operating expenses:
   Cost of sales................................................      3,430,479       2,546,929      6,876,378      4,748,990
   Research and development.....................................      9,477,999       7,478,589     18,037,859     14,319,058
   Selling, general and administrative..........................      8,681,665       7,202,059     17,029,467     13,739,630
                                                                    -----------     -----------    -----------    -----------
       Total operating expenses.................................     21,590,143      17,227,577     41,943,704     32,807,678
                                                                    -----------     -----------    -----------    -----------
       Operating loss...........................................     (1,201,998)     (2,926,528)    (2,007,128)    (8,246,231)
                                                                    -----------     -----------    -----------    -----------
Other income (expense):
   Investment income, net.......................................        600,806         696,021      1,272,558      1,523,221
   Interest expense.............................................        (74,124)       (183,289)      (184,463)      (401,669)
   Other expense................................................        (67,107)        (85,804)      (191,731)      (112,584)
                                                                    -----------     -----------    -----------    -----------
       Net other income.........................................        459,575         426,928        896,364      1,008,968
                                                                    -----------     -----------    -----------    -----------
       Net loss.................................................    $  (742,423)    $(2,499,600)   $(1,110,764)   $(7,237,263)
                                                                    ===========     ===========    ===========    ===========
Loss per common share-
   basic and diluted............................................    $     (0.04)    $     (0.15)   $     (0.07)   $     (0.44)
                                                                    ===========     ===========    ===========    ===========

Weighted average common shares outstanding-
   basic and diluted............................................     16,559,486      16,394,038     16,523,793     16,386,475
</TABLE>

                            See accompanying notes.

                                       2
<PAGE>

                           PathoGenesis Corporation
          Condensed Consolidated Statements of Cash Flows (Unaudited)

<TABLE>
<CAPTION>
                                                                                              Six Months Ended
                                                                                                  June 30,
                                                                                       ------------------------------
                                                                                           2000              1999
                                                                                       ------------      ------------
<S>                                                                                    <C>               <C>
Cash flows from operating activities:
  Net loss..........................................................................   $ (1,110,764)     $ (7,237,263)

  Adjustments to reconcile net loss to net cash used in operating
   activities:
          Depreciation and amortization.............................................      1,987,105         1,682,856
          Amortization of license rights............................................        485,405           485,404
          Amortization of discount on long-term liability...........................        183,486           388,520
          Compensation expense from stock options...................................        302,317           230,479
          Loss on sale of property and equipment....................................             --            33,489
          Change in certain assets and liabilities:
                Accounts receivable.................................................     (2,883,318)        6,511,087
                Interest receivable.................................................         83,121            88,262
                Inventories.........................................................      1,397,740        (5,744,136)
                Other current assets................................................        (11,483)        1,568,842
                Other assets........................................................         86,365          (860,297)
                Accounts payable....................................................       (769,051)         (786,371)
                Compensation and benefits...........................................        245,242          (809,608)
                Clinical development costs..........................................       (128,102)          237,192
                Accrued royalties...................................................         62,005          (216,303)
                License payable.....................................................             --        (2,000,000)
                Other accrued expenses..............................................       (356,744)          (31,681)
                                                                                       ------------      ------------
                Net cash used in operating activities...............................       (426,676)       (6,459,528)
                                                                                       ------------      ------------

Cash flows from investing activities:
  Purchases of investment securities................................................    (34,618,307)      (16,163,747)
  Sales of investment securities....................................................     34,564,737        25,675,369
  Purchases of property and equipment...............................................     (1,692,916)       (2,171,234)
  Investment in AeroGen, Inc........................................................     (2,500,000)               --
                                                                                       ------------      ------------
                Net cash provided by (used in) investing activities.................     (4,246,486)        7,340,388
                                                                                       ------------      ------------

Cash flows from financing activities:
  Proceeds from issuance of common stock in connection
      with employee stock purchase plan.............................................        562,186           353,069
  Stock option and warrant exercises................................................        829,168           440,848
  Payment of long-term liability....................................................     (5,333,333)       (5,333,333)
  Proceeds from loan................................................................      2,655,314                --
  Other.............................................................................        116,986                --
                                                                                       ------------      ------------
                Net cash used in financing activities...............................     (1,169,679)       (4,539,416)
                                                                                       ------------      ------------

Effect of exchange rate changes on cash.............................................         (7,615)               --
                                                                                       ------------      ------------

                Net decrease in cash and cash equivalents...........................     (5,850,456)       (3,658,556)

Cash and cash equivalents at beginning of period....................................     10,456,031         8,139,153
                                                                                       ------------      ------------
Cash and cash equivalents at end of period..........................................   $  4,605,575      $  4,480,597
                                                                                       ============      ============
</TABLE>

                            See accompanying notes.

                                       3
<PAGE>

                           PathoGenesis Corporation
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                            JUNE 30, 2000 AND 1999


(1)  BASIS OF PRESENTATION

    We have prepared the accompanying condensed consolidated financial
statements of PathoGenesis Corporation and subsidiaries and these notes in
accordance with Securities and Exchange Commission rules and regulations for
interim financial statements.  As permitted by those rules and regulations, we
have condensed or omitted certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles.  You should read the accompanying condensed consolidated
financial statements and these notes in conjunction with our audited
consolidated financial statements for 1999 included in our annual report on Form
10-K.

    The information furnished reflects, in the opinion of our management, all
adjustments, consisting only of normal recurring items, 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)  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>
                                          June 30, 2000         December 31, 1999
                                          -------------         -----------------
<S>                                       <C>                    <C>
Finished goods                             $ 2,692,793              $ 2,433,718
Work in progress                             2,257,202                2,907,128
Raw materials and supplies                   8,264,655                9,272,539
                                           -----------              -----------

                                           $13,214,650              $14,613,385
                                           ===========              ===========
</TABLE>

LOSS PER COMMON SHARE

    We have not included options and warrants to purchase 4,041,116 and
3,466,900 shares of common stock that were outstanding during the second quarter
of 2000 and 1999, respectively, in the computation of diluted loss per share
because the representative share increments would be antidilutive.  For the same
reason, we have not included options and warrants to purchase 4,031,844 and
3,527,957 shares of common stock that were outstanding during the six-month
period ended June 30, 2000 and 1999, respectively, in the computation of diluted
loss per share.

(4)  COMPREHENSIVE LOSS

    Total comprehensive loss amounted to $946,065 and $2,690,887 for the second
quarters of 2000 and 1999, respectively.  Total comprehensive loss for the six-
month periods ended June 30, 2000 and 1999 amounted to $1,361,889 and
$7,560,946, respectively.  Our other comprehensive income (loss) is comprised of
unrealized gains and losses on available-for-sale investment securities and
foreign currency translation adjustments.

                                       4
<PAGE>

(5)  BUSINESS SEGMENTS

    In 1998, we adopted Statement of Financial Accounting Standards (SFAS) No.
131, Disclosures about Segments of an Enterprise and Related Information.  SFAS
No. 131 requires an enterprise to report segment information based on how
management internally evaluates the operating performance of its business units
(segments).  Our operations are confined to one business segment, the
development of drugs to treat chronic infectious diseases.

    The following geographic information includes sales revenue based on product
shipment destination:

<TABLE>
<CAPTION>
                                       Three Months Ended                         Six Months Ended
                                            June 30,                                  June 30,
                                 --------------------------------------------------------------------
                                     2000               1999               2000               1999
                                 -----------        -----------        -----------        -----------
<S>                             <C>                 <C>                <C>                <C>
United States                    $18,127,209        $13,648,123        $35,328,031        $23,511,392
Rest of world                      2,059,153            417,326          4,233,078            610,192
                                 -----------        -----------        -----------        -----------
 Total                           $20,186,362        $14,065,449        $39,561,109        $24,121,584
                                 ===========        ===========        ===========        ===========
</TABLE>

(6)  COLLABORATION AND INVESTMENT AGREEMENTS

    In January 2000, we entered into a collaboration with Chiron Corporation to
discover and develop new antibiotics.  The collaboration combines Chiron's
combinatorial chemistry library and expertise in high-throughput screening with
our strengths in bacterial target discovery and antibiotic development, as well
as our knowledge of the Pseudomonas aeruginosa genome.  The focus of this
collaboration is on the discovery of novel treatments for infectious diseases,
specifically antibiotics with new mechanisms of action to address serious
medical needs, such as antibiotic resistance.

    In March 2000, we entered into an agreement with AeroGen, Inc. to
collaborate on the development and registration of a product combining TOBI and
AeroGen's hand-held, portable AeroDose Inhaler.  Our goal is to reduce TOBI's
delivery time from 15-20 minutes to 5-10 minutes or less.  Under the development
and supply agreement, we will reimburse AeroGen for costs incurred in developing
the AeroDose Inhaler and will obtain worldwide exclusive distribution rights to
the product.  AeroGen will receive royalties on all product sales.  Under a
separate agreement, we invested $2.5 million in convertible preferred stock of
privately held AeroGen.  This investment is included in other assets and
accounted for under the cost method.

(7)  LOAN AGREEMENT

    In June 2000, we secured a loan from Lloyds TSB Bank PLC in the amount of
(Pounds)1,750,000 ($2,655,314) to finance the land and building occupied by
PathoGenesis Limited, a wholly owned subsidiary of PathoGenesis Corporation.
This loan is to be repaid in 180 consecutive monthly installments, with interest
payable at the bank's base rate plus 1.5% (7.5% at June 30, 2000).

(8)  LEGAL PROCEEDINGS

    On February 18, 2000, the United States District Court for the Western
District of Washington dismissed with prejudice all eight consolidated putative
class action lawsuits that had been filed in March and April 1999 against
PathoGenesis Corporation, our chief executive officer and our chief financial
officer.  The eight consolidated lawsuits purported to allege claims on behalf
of all purchasers of PathoGenesis common stock during the period January 15,
1999 to March 22, 1999.  Plaintiffs had claimed that the company and the
officers violated certain provisions of the federal securities laws by making
statements in early 1999 regarding the company's 1998 financial results.  The
court's order dismissed the consolidated cases and bars plaintiffs from filing
another lawsuit on the matter. Plaintiffs have appealed the dismissal order to
the United States Court of Appeals for the Ninth Circuit. We intend to defend
the appeal vigorously. Although we cannot ascertain the ultimate outcome of the
appeal at this time or predict with certainty the results of legal proceedings,
we currently believe that the resolution of the appeal will not have a material
adverse effect on our financial position or results of operations.

(9)  SUBSEQUENT EVENT

    On August 13, 2000, we entered into an agreement with Chiron Corporation
for Chiron to acquire all of the outstanding common stock of PathoGenesis for
approximately $700 million or $38.50 per share. The transaction will be in the
form of a cash tender offer, which is expected to close in the third or fourth
quarter, subject to customary closing conditions including necessary regulatory
approvals. The transaction has been approved by the board of directors of each
company.

                                       5
<PAGE>

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

    In addition to historical information, this quarterly report on Form 10-Q
contains forward-looking statements.  You may identify these forward-looking
statements by the use of such words as "believe," "anticipate," "expect," "plan"
and "intend," among others.  Since these statements are based on factors that
involve risks and uncertainties, they do not necessarily indicate what our
actual future results will be, and results may vary from quarter to quarter.
Important factors that could cause or contribute to material differences between
our actual results and the results expressed or implied by the forward-looking
statements include, but are not limited to, those discussed in "Item 1.
Business," "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" of our annual report on Form 10-K for 1999, and in
Exhibit 99.1 to the Form 10-K.  These factors include, but are not limited to,
uncertainties related to the fact that PathoGenesis only began commercial
operations in 1998, its dependence on TOBI(R) (tobramycin solution for
inhalation), the degree of penetration of its markets and frequency of TOBI's
use by patients, risks associated with marketing TOBI in international markets,
third party reimbursement and product pricing, seasonal impacts on
hospitalizations or exacerbations experienced by patients, variability in
wholesaler ordering patterns, drug development and clinical trials, uncertain
outcome of the U.S. and international drug approval process, competition and
alternative therapies.  We cannot assure you that TOBI -- which is currently our
only product -- will penetrate markets as planned, that our development of TOBI
for other uses will succeed or occur within anticipated time frames, or that we
will develop any of our other drug candidates successfully.

Results of Operations

   Three Months Ended June 30, 2000 and 1999

    Revenues.  Revenues in the second quarter of 2000 totaled $20.4 million,
including $20.2 million from TOBI sales.  Revenues for the corresponding period
in 1999 were $14.3 million, with $14.1 million from sales of TOBI. Significant
contributors to this growth in sales are continuing penetration of the U.S.
cystic fibrosis market and increased use of TOBI among patients with other
serious lung infections. In addition, TOBI sales in international markets have
increased significantly, and now account for approximately 10% of our total
sales. International sales revenue totaled $2.1 million in the second quarter of
2000, compared to $417,000 for the corresponding period in 1999. We expect sales
to continue to increase in the third and fourth quarters of 2000 as the use of
TOBI expands both in the U.S. and internationally.

    Operating Expenses.  We incurred total operating expenses of $21.6 million
in the second quarter of 2000, an increase of $4.4 million from $17.2 million in
the second quarter of 1999.  Cost of sales was $3.4 million for the second
quarter of 2000, up $884,000 from $2.5 million for the corresponding period in
1999.  The increase in cost of sales is directly related to the corresponding
increase in sales.  However, cost of sales as a percentage of sales declined as
sales volumes increased.  Research and development expense for the second
quarter of 2000 increased by $2.0 million to $9.5 million from $7.5 million for
the corresponding period in 1999, as we continued our investment in a number of
development programs.  These include preclinical studies and manufacturing
development on PA-1806, which we expect to enter Phase I clinical trials later
in 2000.  In addition, our program to develop the next-generation TOBI, with the
goal of improving convenience and significantly shortening the time required for
a treatment, is currently advancing on schedule.  In July 2000, we began
enrolling patients in a Phase I open-label randomized study of TOBI using a
portable inhaler made by AeroGen, Inc.  We expect our research and development
expenses to increase over the next several quarters as our efforts in these
areas progress, and as we continue our clinical trials of TOBI in cystic
fibrosis and other patients.  Selling, general and administrative expenses
increased to $8.7 million for the second quarter of 2000 from $7.2 million for
the corresponding period in 1999.  This increase is primarily attributable to an
increase in sales and marketing costs.  We have expanded and strengthened our
marketing efforts in the U.S. in order to further penetrate the cystic fibrosis
market.  In addition, we have made significant investments in establishing sales
and marketing capabilities in Europe.  We expect our selling, general and
administrative expenses to increase over the next several quarters as we
continue to expand TOBI's markets.

    Net Loss.  We had an operating loss of $1.2 million in the second quarter of
2000, a decrease of $1.7 million from the operating loss of $2.9 million in the
second quarter of 1999.  This decrease in operating loss was due to improved
TOBI sales in the second quarter of 2000.  Including net other income (primarily
income from

                                       6
<PAGE>

investment securities), our net loss for the second quarter of 2000 was
$742,000, compared to a net loss of $2.5 million for the second quarter of 1999.
In the second quarter of 2000, net investment income decreased by $95,000 to
$601,000 from $696,000 for the corresponding period in 1999. The decrease was
primarily due to lower average invested cash balances. Interest expense, most of
which represents the amortization of the discount on our obligation to the
Cystic Fibrosis Foundation, totaled $74,000 and $183,000 in the second quarters
of 2000 and 1999, respectively.

   Six Months Ended June 30, 2000 and 1999

    Revenues.  Revenues in the first six months of 2000 totaled $39.9 million,
including $39.6 million from TOBI sales.  Revenues for the corresponding period
in 1999 were $24.6 million, with $24.1 million from sales of TOBI. Significant
contributors to this improvement in revenue are increased TOBI use in the U.S.
by people with cystic fibrosis and other serious lung infections, as well as
higher TOBI sales in international markets.

    Operating Expenses.  We incurred total operating expenses of $41.9 million
in the first six months of 2000, an increase of $9.1 million from $32.8 million
in the first half of 1999.  Cost of sales was $6.9 million for the first six
months of 2000, up $2.2 million from $4.7 million for the corresponding period
in 1999.  The increase in cost of sales is directly related to the corresponding
increase in sales.  However, cost of sales as a percentage of sales declined as
sales volumes increased.  Research and development expense for the first six
months of 2000 increased by $3.7 million to $18.0 million from $14.3 million for
the first half of 1999.  This increase is primarily the result of preclinical
studies and manufacturing development on PA-1806 and our development of the
next-generation TOBI.  Selling, general and administrative expenses increased to
$17.0 million for the first six months of 2000 from $13.7 million for the
corresponding period in 1999.  This increase is primarily attributable to the
expansion of our sales and marketing efforts, both in the U.S. and
internationally.

    Net Loss.  We had an operating loss of $2.0 million in the first six months
of 2000, a decrease of $6.2 million from the operating loss of $8.2 million in
the first half of 1999.  This decrease in operating loss was due to improved
TOBI sales in the first six months of 2000.  Including net other income
(primarily income from investment securities), our net loss for the first half
of 2000 was $1.1 million, compared to a net loss of $7.2 million for the first
six months of 1999.  In the first half of 2000, net investment income decreased
by $251,000 to $1.3 million from $1.5 million for the corresponding period in
1999.  The decrease was primarily due to lower average invested cash balances.
Interest expense, most of which represents the amortization of the discount on
our obligation to the Cystic Fibrosis Foundation, totaled $184,000 and $402,000
in the first six months of 2000 and 1999, respectively.

Liquidity and Capital Resources

    Our combined cash, cash equivalents and investment securities totaled $39.3
million at June 30, 2000, a decrease of $5.7 million from the balance of $45.0
million at December 31, 1999.  We expect that these funds, in combination with
expected revenues from sales of TOBI, should be sufficient to meet our operating
expenses and capital requirements for the foreseeable future.  In addition, we
have a $10.0 million revolving line of credit from Harris Trust and Savings
Bank.

    Net cash used in operating activities totaled $427,000 for the six months
ended June 30, 2000, compared to $6.5 million for the six months ended June 30,
1999.  We incurred a $1.1 million net loss for the six months ended June 30,
2000, compared to a net loss of $7.2 million for the corresponding period in the
prior year.  Significant changes in working capital components included a $2.9
million increase in accounts receivable and a $1.4 million decrease in
inventories, compared to a $6.5 million decrease in accounts receivable and $5.7
million increase in inventories for the same period a year ago.  Also, in the
first half of 2000, we invested $2.5 million in convertible preferred stock of
privately held AeroGen, Inc.  AeroGen is the developer of the hand-held,
portable AeroDose Inhaler, which is being developed to administer our next-
generation TOBI.  In addition, we made our final installment payment of $5.3
million for the rights in TOBI acquired from the Cystic Fibrosis Foundation, and
realized proceeds of $2.7 million on a 15-year loan from Lloyds TSB Bank PLC.
At June 30, 2000, our working capital was $55.5 million and current ratio was
7.60 to 1.

                                       7
<PAGE>

    We plan to continue our policy of investing excess funds in government
securities and investment grade, interest-bearing securities, primarily those
with an expected maturity of one-and-one-half years or less.

Quantitative and Qualitative Disclosures about Market Risk

    We are exposed to the impact of interest rate changes and changes in the
market values of our investments, in addition to changes in foreign currency
exchange rates.

    Our exposure to market rate risk for changes in interest rates relates
primarily to debt securities included in our investment portfolio.  We do not
hold any derivative financial instruments.  We invest in government securities
and high-quality corporate obligations.  Investments in both fixed rate and
floating rate interest-earning instruments carry a degree of interest rate risk.
Fixed rate securities may decline in fair market value due to a rise in
prevailing interest rates, while floating rate securities may produce less
income than expected if prevailing interest rates fall.  Due in part to these
factors, our future investment income may fall short of expectations due to
changes in interest rates, or we may suffer losses in principal if forced to
sell securities which have declined in market value due to changes in interest
rates.  At June 30, 2000, we owned $2.6 million in government debt instruments
and $32.1 million in corporate debt securities.  Our exposure to losses as a
result of interest rate changes is managed through investing in securities
predominantly with maturities of one-and-one-half years or less.

    Substantially all the revenue and operating expenses of our subsidiaries are
denominated in local foreign currencies and translated into U.S. dollars at
rates of exchange approximating those existing at the date of the transactions.
Foreign currency translation primarily impacts revenue and operating expenses as
a result of exchange rate fluctuations.  Because our inventories are
manufactured in the U.S., foreign currency fluctuations generally do not affect
our cost of sales.  Our foreign currency transaction risk is primarily limited
to amounts receivable from our subsidiaries and distributors, which are
denominated in local foreign currencies.  We do not currently utilize foreign
currency hedging contracts.  If the U.S. dollar uniformly increases in strength
by 10% in 2000 relative to the currencies in which our sales are denominated,
results of operations would not be significantly impacted.

New Accounting Pronouncements

     In December 1999, the United States Securities and Exchange Commission
(SEC) released Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition
in Financial Statements, which must be applied in the fourth quarter of 2000.
SAB 101 provides guidance on revenue recognition and the SEC staff's views on
the application of accounting principles to selected revenue recognition issues.
We do not expect that the application of SAB 101 will have a material effect on
our financial statements.

     In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation. Interpretation No. 44 clarifies the application of Accounting
Principles Board Opinion No. 25 (APB 25) and is effective July 1, 2000.
Interpretation No. 44 clarifies the definition of "employee" for purposes of
applying APB 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. We do not
expect the adoption of Interpretation No. 44 to have a material impact on our
financial statements.

     In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
In May 1999, the FASB delayed the effective date of SFAS 133 to fiscal years
beginning after June 15, 2000, with interim reporting required. In June 2000,
the FASB issued SFAS 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of SFAS 133, which makes minor
modifications to SFAS 133. We do not expect that the application of SFAS 133 or
138 will have a material effect on our financial position or the results of
operations.

                                       8
<PAGE>

                                    PART II
                               OTHER INFORMATION

Item 1  Legal Proceedings

    On February 18, 2000, the United States District Court for the Western
District of Washington dismissed with prejudice all eight consolidated putative
class action lawsuits that had been filed in March and April 1999 against
PathoGenesis Corporation, our chief executive officer and our chief financial
officer.  The eight consolidated lawsuits purported to allege claims on behalf
of all purchasers of PathoGenesis common stock during the period January 15,
1999 to March 22, 1999.  Plaintiffs had claimed that the company and the
officers violated certain provisions of the federal securities laws by making
statements in early 1999 regarding the company's 1998 financial results.  The
court's order dismissed the consolidated cases and bars plaintiffs from filing
another lawsuit on the matter.  Plaintiffs have appealed the dismissal order to
the United States Court of Appeals for the Ninth Circuit.  We intend to defend
the appeal vigorously.  Although we cannot ascertain the ultimate outcome of the
appeal at this time or predict with certainty the results of legal proceedings,
we currently believe that the resolution of the appeal will not have a material
adverse effect on our financial position or results of operations.

Item 2  Changes in Securities

        NONE

Item 3  Defaults Upon Senior Securities

        NONE

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

    The annual meeting of shareholders of PathoGenesis was held on May 31, 2000.
The following summarizes the votes at the meeting:

Matter                                         For             Withheld
------                                         ---             --------

Election of Class II Directors:

   Wilbur H. Gantz                          13,338,459          162,510

   John L. Gordon                           13,339,136          161,833

   Arthur W. Nienhuis                       13,338,371          162,598

<TABLE>
<CAPTION>
                                                For           Against         Abstain        Non-Vote
                                                ---           -------         -------        --------
<S>                                          <C>              <C>             <C>             <C>
Approval of an amendment to the
   Employee Stock Purchase Plan
   to increase the common stock
   authorized for issuance under
   that plan to 450,000 shares              13,096,916        386,654          17,399              --


Ratification of the appointment of
   KPMG LLP as independent
   accountants for 2000                     13,470,333         18,844          11,792              --

</TABLE>

                                       9
<PAGE>

Item 5  Other Information

     On August 13, 2000, we entered into an agreement with Chiron
Corporation for Chiron to acquire all of the outstanding common stock of
PathoGenesis for approximately $700 million or $38.50 per share. The transaction
will be in the form of a cash tender offer, which is expected to close in the
third or fourth quarter, subject to customary closing conditions including
necessary regulatory approvals. The transaction has been approved by the board
of directors of each company.

     On August 9, 2000, TOBI(R) (tobramycin solution for inhalation) cleared the
mutual recognition process required for marketing the inhaled antibiotic in 15
additional countries in the European Union, recognizing the drug's earlier
approval by United Kingdom, the reference member state of the EU. Each
additional country is expected to issue a marketing authorization for TOBI
during the next few months.

Item 6  Exhibits and Reports on Form 8-K

    (a)  EXHIBITS

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

           2.1                  Agreement and Plan of Merger dated as of August
                                13, 2000 by and among PathoGenesis Corporation,
                                Chiron Corporation and Picard Acquisition Corp.

           4.4                  Amended and Restated PathoGenesis Corporation
                                1997 Stock Option Plan

           4.5                  Amended and Restated PathoGenesis Corporation
                                1999 Employee Stock Option Plan

          10.38                 Agreement and Plan of merger (include in
                                Exhibit 2.1)

          27.1                  Financial Data Schedule.

    (b)  REPORTS ON FORM 8-K

         PathoGenesis filed a report on Form 8-K on June 5, 2000, announcing it
         had engaged advisers to assist in the company's efforts to explore
         strategic alternatives for enhancing shareholder value.

                                       10
<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 August 14, 2000.

                                      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

                                       11