<PAGE>

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 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, 1998

                                       OR

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

     For the transition period from __________________to_______________________


                       Commission file number:  001-12229

                                  DEPUY, INC.
             (Exact Name of Registrant as Specified in Its Charter)
<TABLE>
 
<S>                                                                      <C>
               DELAWARE                                                      35-1989795
 (State or Other Jurisdiction of Incorporation                 (I.R.S. Employer Identification No.)
  or Organization)  
  
        700 ORTHOPAEDIC DRIVE, WARSAW, INDIANA                              46581-0988
     (Address of Principal Executive Offices)                                (Zip Code)
 
     Registrant's Telephone Number, Including Area Code:                 (219) 267-8143
</TABLE>

          Indicate by check [X] 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 
         ---       ---
     

          The number of shares of Common Stock, par value $.01 per share,
     outstanding as of August 12, 1998 was 98,841,680.
<PAGE>
 
PART I. - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
                                  DEPUY, INC.
                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)
<TABLE>
<CAPTION>
 
                                                                            June 30,
                                                                              1998       December 31,
                                                                          (Unaudited)        1997*
                                                                          ------------   -------------
<S>                                                                      <C>            <C>
  ASSETS                                                                 
  CURRENT ASSETS                                                         
  Cash and cash equivalents                                                $   94,177      $  215,567
  Short-term investments                                                        5,027           4,925
  Accounts receivable, net of allowances                                 
   of $16,247 (1998) and $17,722 (1997)                                       175,799         132,204
  Amounts receivable from affiliates                                              150               -
  Inventories at lower of cost or market                                      213,898         169,735
  Deferred income taxes                                                       113,304          52,839
  Prepaid expenses and other current assets                                    30,837          30,136
                                                                           ----------    ------------
       Total current assets                                                   633,192         605,406
                                                                           ==========    ============
  NONCURRENT ASSETS                                                      
  Goodwill, net of accumulated amortization                              
   of $82,432 (1998) and $74,570 (1997)                                       429,080         341,710
  Other intangible assets, net of accumulated                            
   amortization of $4,049 (1998) and $3,820 (1997)                            151,674           3,528
  Deferred income taxes                                                        18,749          15,584
  Investment in affiliate                                                         331           1,610
  Other assets                                                                 15,608           8,865
                                                                           ----------    ------------
                                                                              615,442         371,297
                                                                         
  Property, plant and equipment, net                                          113,383         103,954
                                                                           ----------    ------------
         Total assets                                                      $1,362,017      $1,080,657
                                                                           ==========    ============
                                                                         
  LIABILITIES AND SHAREHOLDERS' EQUITY                                   
  CURRENT LIABILITIES                                                    
  Short-term debt payable to affiliates                                   $         -      $    1,497
  Short-term debt                                                              83,370          23,696
  Accounts payable                                                             35,227          36,296
  Dividends payable to shareholders                                                 -          11,836
  Amounts payable to affiliates, net                                                -             493
  Income taxes payable                                                         45,010          33,696
  Accrued royalties                                                            26,937          23,115
  Accrued employee compensation                                                26,726          23,005
  Other accrued expenses                                                       69,767          48,532
                                                                           ----------    ------------
       Total current liabilities                                              287,037         202,166
                                                                           ----------    ------------
  NONCURRENT LIABILITIES                                                 
  Long-term debt                                                              263,398          68,189
  Long-term employee benefits                                                  20,739          20,097
  Noncurrent deferred income taxes                                             67,796           8,243
  Other noncurrent liabilities                                                 21,725          14,458
                                                                           ----------    ------------
       Total noncurrent liabilities                                           373,658         110,987
                                                                           ----------    ------------
  CONTINGENCIES (NOTE 6)                                                 
                                                                         
  MINORITY INTEREST                                                             4,944           5,386
                                                                           ----------    ------------
  SHAREHOLDERS' EQUITY                                                   
  Common stock, $.01 par value;                                          
   130,000,000 shares authorized; shares outstanding                 
   of 98,816,286 (1998) and 98,679,874 (1997)                                     988             987
  Additional paid-in capital                                                  695,359         676,649
  Retained earnings                                                            50,858         128,058
  Accumulated other comprehensive income                                      (50,827)        (43,576)
                                                                           ----------    ------------
       Total shareholders' equity                                             696,378         762,118
                                                                           ----------    ------------
         Total liabilities and shareholders' equity                        $1,362,017      $1,080,657
                                                                           ==========    ============
</TABLE>
*The balance sheet at December 31, 1997 has been derived from the audited
 financial statements at that date.

      See accompanying notes to these Consolidated Financial Statements.
<PAGE>
 
                                  DEPUY, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
               (Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
 
                                                                      Three Months Ended       Six Months Ended   
                                                                            June 30,                June 30,               
                                                                     ---------------------   ---------------------
                                                                        1998        1997        1998        1997     
                                                                     ----------   --------   ----------   --------   
<S>                                                                  <C>          <C>        <C>          <C>        
                                                                                                                     
Net sales                                                             $219,178    $204,744    $426,509    $392,586   
                                                                      
Cost of sales                                                           65,802      67,439     126,370     123,440   
                                                                      --------    --------    --------    --------
     Gross profit                                                      153,376     137,305     300,139     269,146   
                                                                      --------    --------    --------    --------   
                                                                                                                     
Selling, general and administrative expenses                            79,911      76,634     157,530     146,165   
Research and development expenses                                        7,363       7,809      14,572      13,641   
Amortization of goodwill and intangible assets                           4,787       4,412       8,429       7,591   
Special items, net (Note 3)                                                  -       7,551      23,996       8,459   
Acquired in-process research and development (Note 2)                  131,000           -     131,000           -   
                                                                      --------    --------    --------    --------   
                                                                                                                     
     Operating (loss) income                                           (69,685)     40,899     (35,388)     93,290   
                                                                      --------    --------    --------    --------   
                                                                                                                     
Interest expense, affiliate                                                  -         236          54         684   
Interest expense, other                                                  2,511       1,346       4,244       2,090   
Other income, net                                                        1,369         835       4,160       3,157   
                                                                      --------    --------    --------    --------   
     (Loss) income before taxes, minority interest expense and                                                       
       equity in (loss) earnings of unconsolidated affiliate           (70,827)     40,152     (35,526)     93,673   
                                                                      --------    --------    --------    --------   
                                                                                                                     
Provision for income taxes                                              24,378       7,617      40,500      29,928   
Minority interest expense                                                  695         595       1,358         968   
Equity in (loss) earnings of unconsolidated affiliate                     (148)        556         184         984   
                                                                      --------    --------    --------    --------   
                                                                                                                     
     Net (loss) income                                                $(96,048)   $ 32,496    $(77,200)   $ 63,761   
                                                                      ========    ========    ========    ========    
 
Basic and diluted (loss) earnings per share                           $  (0.97)   $   0.33    $  (0.78)   $   0.65
                                                                      ========    ========    ========    ========
 
Weighted-average number of common shares outstanding                    98,809      98,580      98,761      98,580
                                                                      ========    ========    ========    ========
</TABLE> 

      See accompanying notes to these Consolidated Financial Statements.

<PAGE>
 
                                  DEPUY, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (Unaudited, in thousands)

<TABLE>
<CAPTION>
 
                                                                          Six Months Ended
                                                                              June 30,
                                                                  ----------------------------------
                                                                       1998               1997
                                                                  --------------       -------------
<S>                                                                    <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 
Net (loss) income                                                     $ (77,200)          $  63,761
Adjustments to reconcile net (loss) income to                                                      
 net cash provided by operating activities:                                                       
  Depreciation and amortization                                          17,665              16,891
  Gain on sale of assets                                                      -             (32,122)
  Deferred income taxes                                                  (2,120)            (22,091)
  Capital contribution for Corange Service Awards                        15,865                   -
  Acquired in-process research and development                          131,000                   -
  Other, net                                                               (440)              1,233
  Changes in operating assets and liabilities, net of effects                                      
   of acquisitions and divestitures:                                                               
     Accounts receivable                                                (25,069)             (5,136)
     Inventories                                                        (14,630)              6,996
     Amounts payable to/or receivable from affiliates, net                 (606)             (1,159)
     Prepaid expenses and other current assets                             (189)              4,058
     Other noncurrent assets                                              2,123               8,274
     Accounts payable                                                    (2,192)             (5,395)
     Accrued employee compensation and other                             12,480              12,157
     Other noncurrent liabilities                                           868              14,501
     Income taxes payable                                                 8,707              14,720
                                                                      ---------           ---------
                                                                                                   
     Net cash provided by operating activities                           66,262              76,688
                                                                      ---------           ---------
                                                                                                   
CASH FLOWS FROM INVESTING ACTIVITIES                                                               
                                                                                                   
Capital expenditures                                                    (12,249)            (12,331)
Business acquisitions, net of cash acquired                            (341,146)           (144,417)
Purchases of short-term investments, net                                    (79)               (749)
Proceeds from sale of assets                                                  -              45,517
                                                                      ---------           ---------
                                                                                                   
     Net cash used for investing activities                            (353,474)           (111,980)
                                                                      ---------           ---------
                                                                                                   
CASH FLOWS FROM FINANCING ACTIVITIES                                                               
                                                                                                   
Payments of short-term debt                                             (17,140)            (27,637)
Proceeds from issuance of short-term debt                                   330               4,388
Payments of long-term debt                                               (6,702)            (28,493)
Proceeds from issuance of long-term debt                                200,068               3,870
Net proceeds from issuance of stock                                       2,846                   -
Dividends paid                                                          (11,836)               (300)
                                                                      ---------           ---------
                                                                                                   
     Net cash provided by (used for) financing activities               167,566             (48,172)
                                                                      ---------           ---------
                                                                                                   
Effect of exchange rate changes on cash                                  (1,744)             (1,502)
                                                                      ---------           ---------
                                                                                                   
     Decrease in cash and cash equivalents                             (121,390)            (84,966)
                                                                                                   
Cash and cash equivalents at beginning of period                        215,567             209,387
                                                                      ---------           ---------
                                                                                                   
Cash and cash equivalents at end of period                            $  94,177           $ 124,421
                                                                      =========           ========= 
 
</TABLE>
       See accompanying notes to these Consolidated Financial Statements.
<PAGE>
 
                                  DEPUY, INC
                CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                           (Unaudited, in thousands)

<TABLE>
<CAPTION>

                                                                                                      Accumulated
                                                                            Additional                   Other            Total
                                 Shareholder's      Common      Common       Paid-in      Retained    Comprehensive    Shareholders'
                                 Net Investment     Shares       Stock       Capital      Earnings       Income           Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>          <C>         <C>            <C>          <C>            <C> 
BALANCE AT DECEMBER 31, 1995       $ 378,099            -        $   -       $      -       $     -      $       -      $         -
------------------------------------------------------------------------------------------------------------------------------------
Net income for the period             89,640
Dividends to affiliate                (8,553)
Change in net transfers             
    to affiliate                      44,063
Foreign currency translation           
    adjustments                        4,727
Unrealized gain on securities             44
Capital contributions 
    from affiliates                    4,564   
Capitalization resulting from 
   reorganization and Initial       
     Public Offering                (512,584)       98,580         986         675,144            -        (24,983)         651,147 
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 30, 1996,
  EFFECTIVE DATE OF INITIAL
  PUBLIC OFFERING                          -        98,580         986         675,144            -        (24,983)         651,147
------------------------------------------------------------------------------------------------------------------------------------
  Comprehensive income:
     Net income for the period                                                                17,108                         17,108
     Other comprehensive income                                                                              2,373            2,373
                                                                                            ----------------------------------------
     Total comprehensive income                                                               17,108         2,373           19,481
                                                                                            ----------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996               -        98,580         986         675,144        17,108       (22,610)         670,628
------------------------------------------------------------------------------------------------------------------------------------
  Comprehensive income:
     Net income for the year                                                                 122,786                        122,786
     Other comprehensive loss                                                                              (20,966)         (20,966)
                                                                                            ----------------------------------------
     Total comprehensive income                                                              122,786       (20,966)         101,820
                                                                                            ----------------------------------------
  Cash dividends declared                                                                    (11,836)                       (11,836)
  Exercise of stock options and
    issuance of other stock awards                      13                         525                                          525
  Common stock issued for purchase 
    under the Employee Stock Purchase Plan              87           1           1,553                                        1,554
  Other                                                                           (573)                                        (573)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997               -        98,680         987         676,649       128,058       (43,576)         762,118
------------------------------------------------------------------------------------------------------------------------------------
  Comprehensive income:
   Net loss for the period                                                                   (77,200)                       (77,200)
   Other comprehensive loss                                                                                 (7,251)          (7,251)
                                                                                            ----------------------------------------
   Total comprehensive loss                                                                  (77,200)       (7,251)         (84,451)
                                                                                            ----------------------------------------
  Exercise of stock options and 
    issuance of other stock awards                     136           1          2,845                                         2,846
  Capital contribution
    for Corange Service Awards                                                 15,865                                        15,865
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998           $       -        98,816       $ 988       $695,359       $ 50,858      ($50,827)     $   696,378
------------------------------------------------------------------------------------------------------------------------------------
 
</TABLE>
       See accompanying notes to these Consolidated Financial Statements.
<PAGE>
 
                                  DEPUY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Unaudited, in thousands, except share data)
                                 June 30, 1998


NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of DePuy,
Inc. (the "Company") have been prepared in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X and, therefore, do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements.  In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for the periods reported have
been included.  The results of operations for any interim period are not
necessarily indicative of the results to be expected for the full year.  For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's 1997 Annual Report on Form 10-K.

NOTE 2 - ORGANIZATION / ACQUISITIONS

DePuy, Inc. was formed as the result of a worldwide reorganization completed by
its parent, Corange Limited ("Corange"), to realign its worldwide orthopaedic
operations into a stand-alone entity in order to sell shares of the realigned
entity to the public through an Initial Public Offering ("IPO").  Prior to the
public offering, various actions were taken to form the Company including (i)
the consolidation of the worldwide operations of DePuy under Corange U.S.
Holdings, Inc., an Indiana corporation ("CUSHI"), (ii) the transfer of
Boehringer Mannheim Corporation ("BMC") out of the CUSHI consolidated group and
(iii) the merging of CUSHI into DePuy, Inc., which was created on July 26, 1996
for purposes of becoming the holding company for the DePuy worldwide operations,
the effect of which was to reincorporate CUSHI in Delaware under the name
"DePuy, Inc."  None of these actions involved outside minority shareholders.
Accordingly, the consolidation of the entities was accounted for on a
predecessor basis.

Pursuant to a registration statement filed with the Securities and Exchange
Commission that became effective on October 30, 1996, the Company issued,
through an Initial Public Offering, 7,780,000 shares of its common stock at
$17.50 per share which generated net proceeds after expenses, discounts and
commissions of approximately $126,000.  In November 1996, an additional 800,000
shares were sold pursuant to an underwriter's over allotment provision
generating net proceeds of approximately $13,000.  The Company used the net
proceeds from the sale of shares of its common stock to fund part of the cost of
the Landanger-Camus ("Landanger") acquisition in April 1997 and part of the
AcroMed acquisition in June 1998.

On April 2, 1997, the Company purchased 89.6% of the shares of Landanger, or
1,939,452 shares, which were held by members of the Landanger family and certain
minority shareholders.  The purchase was followed by a tender offer whereby the
Company acquired the remaining 10.4% of the shares, which were owned by the
public.  The total purchase price, including acquisition costs, approximated
$150,000.  Goodwill totaling $123,489 was recorded as a result of this
acquisition under the purchase method of accounting. The acquisition was funded
partly through external financing and partly with cash received from the IPO.
Landanger, headquartered in France, is a manufacturer of hip implants and a
distributor of orthopaedic devices and supplies.

The operating results of Landanger have been included in the consolidated
statements of income from the date of acquisition. On the basis of a pro forma
consolidation of the results of operations (unaudited), as if the acquisition
had taken place at the beginning of 1996, consolidated net sales of the Company
would have been $792,938 for the year ended December 31, 1997 and $788,064 for
the same period in 1996 (translated at the average exchange rate for 1997 and
1996, respectively). Consolidated pro forma income and earnings per share would
not have been materially different from the reported amounts for the years 1997
and 1996.
<PAGE>
 
                                  DEPUY, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

These unaudited pro forma consolidated results of operations have been prepared
for comparative purposes only and include certain adjustments, such as
additional amortization expense as a result of goodwill, an adjustment for
discontinued businesses and increased interest expense on acquisition debt.  In
management's opinion, the pro forma consolidated results of operations are not
necessarily indicative of the actual results that would have occurred had the
acquisition been consummated on January 1, 1996 or of future operations of the
combined companies under the ownership and operation of the Company.

On May 24, 1997, the shareholders of Corange entered into an agreement to sell
100% of its shares to an indirect subsidiary of Roche Holding Ltd ("Roche"), a
multinational company and world leader in research-based healthcare. This
transaction closed on March 5, 1998, upon approval from various regulatory
agencies.  The purchase price, after contractually agreed price adjustments,
totaled approximately $10.2 billion.   As a result of this transaction, Roche,
through its ownership of Corange, holds an approximate 84% interest in the
Company.  The Company continues to operate as an independent organization and
represents an additional segment for Roche.  Headquartered in Basel,
Switzerland, Roche is an international company with principal businesses in
pharmaceuticals, diagnostics, vitamins and fine chemicals, and fragrances and
flavors. See Footnote 9 for discussion on Subsequent Events.

On June 3, 1998, the Company purchased the equity of AcroMed Corporation
("AcroMed") for approximately $340,000, including acquisition costs. Goodwill
totaling $93,000 was recorded as a result of this acquisition under the purchase
method of accounting. The transaction also resulted in the recording of one-time
charges of approximately $131,000 primarily related to the cost of acquired in-
process research and development, and $149,000 was recorded as an intangible
asset related to the value of existing AcroMed products, partially offset by an
associated deferred tax liability of $60,000. The acquisition was funded partly
through external financing consisting of a $300,000 revolving line of credit and
partly with cash received from the IPO. AcroMed, headquartered in Cleveland,
Ohio, manufactures and distributes spinal implant medical devices to treat a
range of conditions including degenerative diseases, deformities, traumas/tumors
and cervical applications. For its fiscal year ended June 30, 1997, AcroMed
reported net sales of $91,200 and net loss of approximately $51,100. Excluding
nonrecurring charges primarily related to product liability settlements, AcroMed
would have reported net income of approximately $14,200 (unaudited).

The operating results of AcroMed have been included in the consolidated
statements of income from the date of acquisition. On the basis of a pro forma
consolidation of the results of operations (unaudited), as if the acquisition
had taken place at the beginning of 1997, consolidated net sales of the Company
would have been $468,331 for the six months ended June 30, 1998 and $438,952 for
the same period in 1997. Consolidated pro forma income and earnings per share,
including the write-off of in-process research and development, would have been
($83,494) or ($.84) per share, and $60,668 or $.62 per share for the six months
ended June 30, 1998 and 1997, respectively. For pro forma effect of full year
1997 see the Company's Current Report on Form 8-K dated June 3, 1998, as
amended.

These unaudited pro forma consolidated results of operations have been prepared
for comparative purposes only and include certain adjustments, such as
additional amortization expense as a result of goodwill and other intangibles,
an adjustment for deferred taxes and increased interest expense on acquisition
debt. In management's opinion, the pro forma consolidated results of operations
are not necessarily indicative of the actual results that would have occurred
had the acquisition been consummated on January 1, 1997 or of future operations
of the combined companies under the ownership and operation of the Company.

The Company's primary business is the development, manufacture and sale of
orthopaedic joint implants (primarily hips, knees and shoulders), spinal
implants, related surgical instruments, trauma products and sports medicine soft
goods.
<PAGE>
 
                                  DEPUY, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 3 - SPECIAL ITEMS

Effective March 28, 1997, the Company completed the sale of the pharmaceutical
business of DePuy International Limited.  The pharmaceutical and related
businesses achieved 1996 sales of approximately $14,000, principally from
infection control and skin treatment products sold to hospitals in the United
Kingdom.  The transaction was completed through a management buy-out and
resulted in a one-time, pretax gain of $8,000.  In addition, the Company
recognized special charges totaling $8,900 during the first quarter of 1997,
primarily related to the cost of instrumentation sets acquired and written off
in connection with reorganizing various distribution channels to increase
implant sales.

Effective May 29, 1997, the Company entered into an agreement to sell the
healthcare business of DePuy International Limited. The healthcare and related
businesses achieved 1996 sales of approximately $17,000 principally from
incontinence care products sold to hospitals in the United Kingdom. The
transaction resulted in a one-time gain of $26,900. In addition, the Company
recognized special charges totaling $34,500 during the second quarter of 1997,
consisting of a $17,400 charge to recognize minimum obligations to former
distributors, a $7,900 provision for impairment in value of assets primarily
related to foreign operations, a $5,200 provision for integration and
reorganization expenses within existing DePuy entities as a consequence of the
Landanger acquisition, and a $4,000 provision for purchased research and
development.

During March 1998, certain employees of DePuy, Inc. and its subsidiaries
received, in connection with the sale of the Corange group to Roche, special
monetary awards in recognition of their services to the Corange group of
companies. DePuy recorded an approximate $24,000 pretax operating expense
related to the awards during the first quarter of 1998.  The payment of these
awards had no cash impact on the Company since they were funded through a
$15,900 capital contribution received from Corange representing the estimated
after-tax cash flow effect to the Company.  The expense recorded during the
first six months of 1998 for these special awards, as well as the related tax
benefits, represent the estimated cost to the Company since the final accounting
has not yet been completed.

NOTE 4 - INVENTORIES

Inventories consisted of the following:

<TABLE>
<CAPTION>
 
                                     June 30,   December 31,
                                       1998         1997    
                                     --------   ------------
              <S>                    <C>        <C>         
              Finished products      $175,793       $136,170
              Work in process          11,353         13,387
              Raw materials            26,752         20,178
                                     --------       --------
                                      213,898       $169,735
                                     ========       ========
</TABLE>

NOTE 5 - INCOME TAXES

The difference between the Company's effective and statutory tax rates is
primarily attributable to the tax effects of the Corange special service awards
and the acquired in-process research and development recorded in the first six
months of 1998, from which reduced or no tax benefits were derived, and to the
gains realized on the sale of the Company's pharmaceutical and healthcare
businesses during the first six months of 1997. The gains on the pharmaceutical
and healthcare businesses, as described in Note 3, were subject to tax at a rate
lower than the statutory tax rate. In addition, the effective tax rate is
impacted by state income taxes, nondeductible goodwill, and the effect of
international operations.


<PAGE>
 
                                  DEPUY, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 6 - CONTINGENCIES

The Company is subject to a number of investigations, lawsuits and claims during
the normal course of business.  Management does not expect that resulting
liabilities beyond provisions already recorded will have a materially adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.  The loss provisions recorded have not been reduced for any
material amounts of anticipated insurance recoveries.

NOTE 7 - ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130") and No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131").  These Statements establish standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements and establish standards for the way that
public business enterprises report information about operating segments in
annual financial statements, respectively. Both of these pronouncements became
effective for financial statements for fiscal years beginning after December 15,
1997 and are also required for interim financial reporting. FAS 131 is not
required for interim financial reporting in the initial year of adoption. The
Company has provided the required disclosures as prescribed in FAS 130 in its
financial statements for the first six months of 1998 and intends to provide the
required disclosure for FAS 131 in the Company's 1998 annual financial
statements.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133,  "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). This Statement, which must be adopted for
fiscal quarters of fiscal years beginning after June 15, 1999, standardizes the
accounting for derivative instruments by requiring that an entity recognize
those items as assets or liabilities in the statement of financial position and
measure them at fair value. The Company does not believe that the adoption of
this standard will have a material effect on its results of operations.

NOTE 8 - COMPREHENSIVE INCOME

The changes in the components of accumulated other comprehensive income for the
first six months of 1998 and 1997 were $7,251 and $13,251, respectively.
Comprehensive income consisted of the following:

<TABLE>
<CAPTION>
 
                                                         June 30,    June 30, 
                                                           1998        1997   
                                                         ---------   ---------
          <S>                                            <C>         <C>      
          Cumulative translation adjustment               ($7,465)   ($13,256)
          Net unrealized appreciation on securities           214           5 
                                                         --------    --------
                                                          ($7,251)   ($13,251) 
                                                         ========    ======== 
</TABLE>

NOTE 9 - SUBSEQUENT EVENTS

On July 21, 1998, DePuy, Inc. and Johnson & Johnson, a multinational company and
manufacturer of health care products, entered into a definitive agreement under
which Johnson & Johnson will make a tender offer for all of the outstanding
shares of the Company for $35.00 per share, for an aggregate transaction value
of $3.5 billion. Simultaneously, Johnson & Johnson and Roche, of Basel,
Switzerland, entered into an agreement under which Roche, which owns
approximately 84% of the outstanding shares of DePuy, has agreed to tender all
of its shares. Johnson & Johnson is the world's most comprehensive and broadly
based manufacturer of health care products for the consumer, pharmaceutical and
professional markets.
<PAGE>
 
Item 2.  Management's Discussion and Analysis of Financial Conditions and
Results of Operations

Results of Operations

Overview
--------

DePuy, Inc. (the "Company") is one of the world's leading designers,
manufacturers and distributors of orthopaedic devices and supplies.  The
Company's products include joint reconstructive devices such as hip, knee and
shoulder implants; spinal implants; trauma devices; sports medicine products,
including knee braces and other soft good supplies; and various other
orthopaedic and operating room products. The Company sells and distributes its
products in all major markets throughout the world.  During both the first six
months of 1998 and the year 1997, 51% of worldwide sales were to customers
within the United States, with the remaining 49% of total sales being to
customers located primarily in European and Asia/Pacific countries.

On October 30, 1996, the Company issued 8.6 million new shares of common stock,
and Corange Limited ("Corange"), which directly or indirectly owned 100% of the
shares of the Company, sold 7.0 million previously outstanding shares to the
public through an Initial Public Offering ("IPO") at an offering price of $17.50
per share.  The issuance of stock generated net proceeds to the Company after
expenses, discounts and commissions of approximately $139 million.

Prior to the public offering, the Company was operated as the orthopaedic
division of Corange. This division comprised various legal entities that were
engaged, or partly engaged, in the orthopaedic business and were owned by a
number of different entities within the Corange group. As a result of a pre-
offering reorganization, (i) the non-U.S. entities (or in certain cases, the
assets thereof) that were involved in the orthopaedic business were transferred
into the Company's U.S. consolidated group, (ii) Boehringer Mannheim
Corporation, the U.S. operating subsidiary of the Boehringer Mannheim companies,
which were under common control with the DePuy companies, was transferred
outside the Company's U.S. consolidated group and (iii) the Company was
reincorporated in Delaware.

Certain transactions occurring during 1998 and 1997 affect the comparison of
financial results for the first six months of 1998 as compared to the same
period in the prior year.  In 1998 the Company acquired AcroMed Corporation
("AcroMed"), a manufacturer of spinal implant medical devices located in
Cleveland, Ohio, for approximately $340 million, including acquisition costs.
This acquisition, which occurred in June 1998,  contributed approximately 3%
additional sales growth for the six months ended June 30, 1998. In April 1997,
the Company acquired Landanger-Camus ("Landanger"), a leading manufacturer of
hip implants located in France, for approximately $150 million. This acquisition
contributed approximately 4% additional sales growth for the six months ended
June 30, 1998. In addition, the Company sold its international healthcare and
pharmaceutical businesses during the first half of 1997.  These divestitures
caused sales to decline by approximately 3% during the first six months of 1998.
<PAGE>
 
The following table summarizes the selected financial information expressed as a
percentage of net sales for each reporting period:

<TABLE>
<CAPTION>
 
                                                                    Percentage of Net Sales    Percentage of Net Sales
                                                                      Three Months Ended          Six Months Ended
                                                                           June 30,                    June 30,
                                                                    -------------------------------------------------
                                                                      1998         1997           1998         1997
                                                                    --------     --------       ---------    --------
<S>                                                                  <C>           <C>            <C>          <C>
Net sales                                                             100.0 %      100.0 %        100.0 %     100.0 %   
Cost of sales                                                          30.0         32.9           29.6        31.4    
                                                                    -------      -------        -------      ------    
     Gross profit                                                      70.0         67.1           70.4        68.6    
                                                                    -------      -------        -------      ------    
Selling, general & administrative expenses                             36.5         37.4           36.9        37.2    
Research and development expenses                                       3.4          3.8            3.4         3.5    
Amortization of goodwill and intangible assets                          2.2          2.2            2.0         1.9    
Acquired in-process research and development and                                                                     
 other special items, net                                              59.7          3.7           36.4         2.2    
                                                                    -------      -------        -------      ------    
     Operating (loss) income                                          (31.8)        20.0           (8.3)       23.8    
                                                                    -------      -------        -------      ------    
Interest expense                                                        1.1          0.8            1.0         0.7    
Other income, net                                                       0.6          0.4            1.0         0.8    
                                                                    -------      -------        -------      ------    
     (Loss) income before taxes, minority interest expense                                                                
     and equity in (loss) earnings of unconsolidated affiliate        (32.3)        19.6           (8.3)       23.9    
                                                                    -------      -------        -------      ------    
Provision for income taxes                                             11.1          3.7            9.5         7.6    
Minority interest expense                                               0.3          0.3            0.3         0.3    
Equity in (loss) earnings of unconsolidated affiliate                  (0.1)         0.3              -         0.2    
                                                                    -------      -------        -------      ------    
     Net (loss) income                                                (43.8)%       15.9 %        (18.1)%      16.2 %   
                                                                    =======      =======        =======      ======       
</TABLE> 

The following table summarizes sales by product line and geographic location:
 
<TABLE> 
<CAPTION> 
                                                                    Three Months Ended          Six Months Ended        
                                                                         June 30,                    June 30,        
                                                                   --------------------        -------------------        
                                                                     1998         1997           1998        1997        
                                                                   -------      -------        -------      ------        
<S>                                                                <C>          <C>            <C>          <C> 
Reconstructive products                                            $ 143.8      $ 145.6        $ 289.3      $272.8        
Spinal implants                                                       29.9         15.1           49.0        29.0        
Trauma products                                                       17.5         14.8           34.8        30.0        
Sports medicine                                                       12.4         12.4           25.4        24.7        
Other products                                                        15.6         16.8           28.0        36.1        
                                                                   -------      -------        -------      ------        
                                                                                                                          
      Total sales                                                  $ 219.2      $ 204.7        $ 426.5      $392.6        
                                                                   =======      =======        =======      ======        
                                                                                                                          
U.S. sourced sales                                                 $ 125.5      $ 107.9        $ 239.0      $217.2        
International sourced sales                                           93.7         96.8          187.5       175.4        
                                                                   -------      -------        -------      ------        
                                                                                                                          
      Total sales                                                  $ 219.2      $ 204.7        $ 426.5      $392.6        
                                                                   =======      =======        =======      ======        
                                                                                                                          
Sales to customers located in the United States                    $ 114.0      $  99.9        $ 219.6      $200.8        
Sales to customers located outside the United States                 105.2        104.8          206.9       191.8        
                                                                   -------      -------        -------      ------        
                                                                                                                          
      Total sales                                                  $ 219.2      $ 204.7        $ 426.5      $392.6        
                                                                   =======      =======        =======      ======        
</TABLE>
<PAGE>
 
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997

Net sales were $426.5 million for the six months ended June 30, 1998,
representing an increase of $33.9 million, or 9% over the same period in the
prior year. Continued penetration of the spinal implant market caused total
sales to increase by 5%, with the acquisition of AcroMed in June 1998
contributing 3% of this growth. The acquisition of Landanger in April 1997
resulted in additional sales growth of 4%. The effects of foreign exchange rates
in 1998 compared with 1997 and the sale of the pharmaceutical and healthcare
businesses resulted in an unfavorable impact on sales of 3% and 3%,
respectively. The remaining 6% increase primarily related to the growth in sales
of hip and knee replacements in the joint reconstructive product line and to
higher sales of various products in the trauma product line.

The components of the worldwide sales improvement were as follows:


<TABLE>

                   <S>                                        <C> 
                   Acquisitions                                7%               
                   Volume and product mix                      5%               
                   Net pricing changes                         3%               
                   Effect of foreign exchange rates           -3%               
                   Divestitures                               -3%               
</TABLE>

U.S. sourced sales to unaffiliated customers rose $21.8 million, or
approximately 10%, during the six months ended June 30, 1998. This growth was
primarily attributable to the acquisition of AcroMed effective June 1, 1998 and
to increased sales of other spinal products, including the new Peak polyaxial
anterior cervical plate, and the continued penetration of this fast-growing
segment of the U.S. orthopaedics market. Increased sales of joint reconstructive
implants and trauma products also contributed to the sales growth for the
period.

International sourced sales to unaffiliated customers rose $12.1 million, or 7%,
during the six months ended June 30, 1998. This increase in sales was primarily
attributable to the acquisition of Landanger in April 1997 resulting in
international sales growth of 9%. The continued expansion in the European and
Asia/Pacific regions also caused sales to grow by 6% and 5%, respectively,
exclusive of the effects of foreign exchange and divestitures. The negative
effect of foreign exchange rates partially offset the overall increase in
international sales by 7% and divestitures caused international sales to decline
by 6%.

The Company's gross profit for the six months ended June 30, 1998 was $300.1
million, or 70.4% of sales, as compared to 68.6% of sales for the comparable
six-month period. During the first six months of 1997, certain one-time
inventory adjustments related to discontinued, obsolete and excess products were
recorded resulting in a 1.5% decrease in gross margin. Excluding this unusual
item, margins improved by .3% in 1998 as compared to the prior year, partly due
to the sale of the pharmaceutical and healthcare businesses during 1997 which
historically had realized significantly lower gross margins than the core
orthopaedic products sold by the Company. In addition, product mix and price
increases occurring during the first six months of the year contributed to the
increase in gross margins.

Selling, general and administrative expenses totaled $157.5 million for the
first six months of 1998, or 36.9% of sales, as compared to 37.2% reported in
the same period of the prior year. This decrease was attributable to lower legal
fees in 1998 and higher general and administrative expenses during the first six
months of 1997 attributable to the Landanger acquisition, partially offset by
higher marketing and consulting fees, and increased investments in international
information systems during the current year.

Research and development expenses increased to $14.6 million, or 3.4% of sales
during the first six months of 1998, as compared to 3.5% reported in the same
period in 1997.  The Company continues to make investments in technological
advancements in order to remain competitive in the orthopaedic market and to
provide its customers with the latest technology available.
<PAGE>
 
Amortization of goodwill and intangibles totaled $8.4 million for the first six
months of the year, representing a $.8 million increase compared to the same
period in the prior year. This increase was primarily attributable to the
recording of the additional goodwill related to the acquisition of Landanger in
April 1997 and of AcroMed in June 1998, partially offset by lower amortization
resulting from the sale of the healthcare and pharmaceutical businesses during
the first six months of 1997.

The acquired in-process research and development of $131.0 million reported
during the first six months of 1998 consisted primarily of a one-time charge
related to the purchase of AcroMed. Special items, net, of $24.0 million
represents monetary awards received, in connection with the sale of Corange to
Roche Holding Ltd ("Roche"), by certain employees of the Company in recognition
of their services to the Corange group of companies. This one-time charge
represents an estimate for the first six months of 1998 since the final
accounting has not yet been completed.

During the first six months of 1997, the special items, net, of $8.5 million
includes an $8.0 million gain on the sale of the pharmaceutical business of
DePuy International Limited, effective March 28, 1997, and a $26.9 million gain
on the sale of the healthcare business of DePuy International Limited, effective
May 29, 1997. These gains were partially offset by special charges totaling
$43.4 million including:

     . $8.9 million of costs incurred to reorganize the distribution channels of
       the Company,
     . a $17.4 million charge to recognize minimum obligations to former
       distributors,
     . a $7.9 million provision for impairment in value of assets primarily
       related to foreign operations,
     . a $5.2 million provision for integration and reorganization expenses
       within existing DePuy entities as a consequence of the Landanger
       acquisition, and
     . a $4.0 million provision for purchased research and development.     

These items are described in more detail in Note 3 to the financial statements.

Interest expense was $4.3 million through June 30, 1998 representing a $1.5
million increase compared to the same period in the prior year. This higher
interest expense was due to additional debt acquired related to the purchases of
Landanger and AcroMed, partially offset by a reduction in outstanding debt
balances as a result of increased internal funding of short-term financial
requirements.

Other income, net, totaled $4.2 million for the first six months of the year as
compared to $3.2 million reported in the prior year, representing an increase of
$1.0 million. This increase mainly resulted from higher interest income related
to larger invested cash balances and improved interest rates.

The effective income tax rate for the first six months of 1998 was (114.0%) as
compared to 31.9% reported in the same period of the prior year. Excluding the
tax effects of the special employee recognition awards and the one-time charge
for acquired in-process research and development, the effective rate would have
been 40.7% for the first six months of the current year. The 8.8 percentage
point increase in the rate was primarily the result of the lower tax rate
applied to the gains realized on the sale of the healthcare and pharmaceutical
businesses during the first six months of 1997.

The Company reported a net loss for the six months ended June 30, 1998 of $77.2
million. Excluding special items and acquired in-process research and
development, net income would have been $70 million, or 16.4% of sales,
representing 10% growth over the prior year.  This increase was attributable to
a 12% increase in operating profit, excluding special items, partially offset by
a higher effective income tax rate. Earnings per share for the first six months
of 1998, excluding special and nonrecurring items, would have been $.71,
representing a 9% increase over the prior year.
<PAGE>
 
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997

Net sales were $219.2 million for the quarter ended June 30, 1998, representing
an increase of $14.4 million, or 7% over the same period in the prior year.
Continued penetration of the spinal implant market caused total sales to
increase by 7%, including 5% attributable to the acquisition of AcroMed in June
1998. The effects of foreign exchange rates in 1998 compared with 1997 and the
sale of the healthcare business resulted in an unfavorable impact on sales of 3%
and 2%, respectively. The remaining 5% increase primarily related to the growth
in sales (excluding the effects of foreign currency) of hip and knee
replacements in the joint reconstructive product line and to continued growth in
the trauma market.

The components of the worldwide sales improvement were as follows:

<TABLE> 

<S>                                                      <C> 
           Acquisitions                                   5%
           Volume and product mix                         5%
           Net pricing changes                            2%
           Effect of foreign exchange rates              -3%
           Divestitures                                  -2% 
</TABLE> 

U.S. sourced sales to unaffiliated customers rose $17.6 million, or
approximately 16% during the quarter ended June 30, 1998.  This growth was
primarily attributable to the AcroMed acquisition and increased sales of spinal
products, including the new Peak polyaxial anterior cervical plate and continued
penetration of this fast-growing segment of the U.S. orthopaedics market.
Increased sales of joint reconstructive implants and trauma products also
contributed to the sales growth for the quarter.

International sourced sales to unaffiliated customers decreased $3.1 million, or
3%, during the quarter ended June 30, 1998.  This decrease in sales was
primarily attributable to the negative effect of foreign exchange rates and
divestitures causing sales to decline by 6% and 4%, respectively.  The continued
expansion in the European and Asia/Pacific regions caused sales to grow by 3%
and 4%, respectively, exclusive of the effects of foreign exchange and
divestitures.

The Company's gross profit for the three months ended June 30, 1998 was $153.4
million, or 70.0% of sales, as compared to 67.1% of sales for the comparable
three-month period. This increase in gross margin as a percent of sales
primarily resulted from one-time inventory adjustments related to discontinued,
obsolete and excess products resulting in a 2.8% decrease in margin during the
three months ended June 30, 1997. Excluding this item, gross margins improved by
 .1% for the quarter, partly the result of the sale of the healthcare business
during 1997 which historically had realized significantly lower gross margins
than the core orthopaedic products sold by the Company.

Selling, general and administrative expenses totaled $79.9 million for the
second quarter of 1998, or 36.5% of sales, as compared to 37.4% reported in the
same period of the prior year. The lower expenses partly resulted from decreased
legal fees, partially offset by higher consulting fees.

Research and development expenses decreased to $7.4 million, or 3.4% of sales
during the second quarter of 1998, as compared to 3.8% reported during the same
period in 1997 due to the timing of expenditures. The Company continues to make
investments in technological advancements in order to remain competitive in the
orthopaedic market and to provide its customers with the latest technology
available.

The amortization of goodwill and intangibles totaled $4.8 million for the three
months ended June 30, 1998, representing a $.4 million increase compared to the
same period in the prior year.  This increase was primarily attributable to the
recording of additional goodwill related to the acquisition of AcroMed in June
1998, partially offset by lower amortization resulting from the sale of the
healthcare business during the second quarter of 1997.
<PAGE>
 
Acquired in-process research and development reported during the second quarter
of 1998 of $131.0 million primarily represents the write-off of in-process
research and development related to the purchase of AcroMed. During the second
quarter of 1997, special items, net, includes a $26.9 million gain on the sale
of the healthcare business of DePuy International Limited, effective May 29,
1997, described in Note 3 to the financial statements. This gain was partially
offset by special charges totaling $34.5 million primarily resulting from:

     . a $17.4 million charge to recognize minimum obligation to former
       distributors,
     . a $7.9 million provision for impairment in value of assets primarily
       related to foreign operations,
     . a $5.2 million provision for integration and reorganization expenses
       within existing DePuy entities as a consequence of the Landanger
       acquisition, and
     . a $4.0 million provision for purchased research and development.       

Interest expense was $2.5 million for the quarter, representing a $.9 million
increase compared to the same period in the prior year. This higher interest
expense was due to additional debt acquired related to the purchases of
Landanger and AcroMed, partially offset by a reduction in outstanding debt
balances as a result of increased internal funding of short-term financial
requirements.

Other income, net, totaled $1.4 million for the second quarter of the year as
compared to $0.8 million of income reported in the prior year, representing an
increase of $0.6 million. This increase was attributable to higher interest
income resulting from larger invested cash balances and improved interest rates.

The effective income tax rate for the second quarter of 1998 was (34.4%) as
compared to 19.0% reported in the same period of the prior year.  Excluding the
tax effects of the one-time charge for in-process research and development, the
effective rate would have been 40.5% for the second quarter of the current year.
Excluding the special items, the effective income tax rate for the second
quarter of 1997 was 42.5%. The 2.0 percentage point reduction in the rate
resulted primarily from the tax effects of the financing structure related to
the Landanger acquisition and other effects of international operations.

The Company recognized a net loss for the three months ended June 30, 1998 of
$96.0 million. Excluding non-recurring items, net income would have been $35.3
million, or 16.1% of sales, representing 9% growth over the prior year.  This
increase was attributable to a 14% increase in operating profit, excluding non-
recurring items. Earnings per share for the second quarter of 1998, excluding
special items, would have been $.36, representing a 9% increase over the prior
year.

LIQUIDITY AND CAPITAL RESOURCES

Cash generated from operations, along with available credit lines, are the
principal sources of funding available to the Company and provide adequate
liquidity to meet its operational needs. Cash and cash equivalents totaled $94.2
million at June 30, 1998, compared with $215.6 million at December 31, 1997. The
decrease is primarily due to partially funding the AcroMed acquisition with
existing cash.

Net proceeds received from the IPO in October 1996 totaled approximately $139
million. This cash was used to fund part of the cost of the Landanger and
AcroMed acquisitions.

Working capital at June 30, 1998 was $146.2 million, representing a $257.0
million decrease from December 31, 1997. This decrease primarily resulted from
the utilization of excess cash to fund part of the AcroMed acquisition and an
increase in short-term debt. The annualized inventory turnover ratio for the six
months ended June 30, 1998 was 1.3, down from the 1.7 level reported during the
six months ended June 30, 1997. The annualized accounts receivable turnover rate
was 5.7 for the first six months of 1998, down from 5.9 in the same period in
1996.
<PAGE>
 
Operating activities generated $66.3 million of cash in the first six months of
1998 as compared to $76.7 million in the same period in the prior year. The
lower cash flows during the first six months of the year resulted primarily from
changes in working capital.

Cash flows used for investing activities totaled $353.5 million through the
second quarter of 1998, including $341.2 million paid for acquisitions (net of
cash received), primarily AcroMed, and $12.3 million of capital expenditures. In
the first six months of 1997, cash flows used for investing activities totaled
$112.0 million including $144.4 million paid in consideration for the
acquisition of Landanger (net of cash received), capital expenditures of $12.3
million and purchases of short-term investments of $.8 million, partially offset
by proceeds received from the sale of the pharmaceutical and healthcare
businesses of DePuy International Limited of $45.5 million.

Cash flows provided by financing activities were $167.6 million in 1998 and
included a net increase in debt of $176.6 million and $2.8 million of proceeds
received from the issuance of stock related to the exercise of stock options and
other stock activity, partially offset by $11.8 million of dividends. The
increase in debt was due to additional financing obtained to partially fund the
AcroMed acquisition. During the first six months of 1997, cash flows used for
financing activities totaled $48.2 million and included a net decrease in debt
of $47.9 million and dividends of $.3 million.

The Company declared an annual cash dividend of $.12 per share in October 1997
which was paid in January 1998. The Board of Directors will determine each year
the amount of dividends to be paid, if any, based upon cash funds available.
Capital expenditures are expected to be approximately $37 million in 1998,
primarily consisting of purchases of machinery and equipment and accounting
software. In addition to these funding requirements, the Company expects to
continue to evaluate future acquisitions to expand its business.

The Company has historically been able to fund its capital and operating needs
through its cash flows from operations and expects to be able to continue to do
so in the future. The Company believes that with its current cash position and
its ability to obtain additional cash, either through the issuance of additional
shares of the common stock or utilization of credit lines, it has the ability to
fund future acquisitions. As described in Note 2 to the financial statements,
the Company recently obtained a $300 million revolving line of credit to fund
the AcroMed acquisition, of which $200 million has been utilized.


FACTORS AFFECTING FUTURE PERFORMANCE

Although management believes that the Company will continue to be a world leader
in the orthopaedic industry with strong financial performance, there are many
risks and uncertainties which may change this outlook and affect the Company's
performance over the next several years. The following discussion points out
certain items which may affect DePuy and summarizes management's expectations
regarding these issues. The Company cannot guarantee that these expectations
will be realized, nor can it predict what future affect these items will have on
its performance.  Other risk factors may also exist which have not been
identified either in this discussion or in the Company's Form 10-K.

The orthopaedic industry within the United States has been greatly influenced by
the effects of healthcare reform and the advent of managed care. The enforcement
of strict cost controls and the market trends toward discounted prices have
affected all competitors in the orthopaedic industry. The Company experienced a
gradual leveling of prices during 1997 and believes that in 1998 prices may
increase very slightly. Although the Company does not anticipate that these
pricing issues will emerge again in the near future, there can be no guarantee
of such market trends.
<PAGE>
 
The advent of managed care and the related pressures on cost containment have
also resulted in increased involvement in the purchasing decisions by hospital
buying groups and higher numbers of national purchasing contracts. These
contracts require manufacturers to provide significant price discounts on their
products in return for preferred supplier arrangements. The Company believes
that the high levels of product sales to such groups and the opportunity for
increased market share can offset the financial impact of discounting products.
However, the extent to which buying groups are able to obtain compliance from
the various institutions within their organizations, as anticipated under such
preferred supplier agreements, varies considerably depending on the particular
buying group. Over the last year the Company has experienced a lower rate of
compliance in the U.S. under certain contracts. If these contracts do not
produce higher levels of compliance in the future, the sales growth and the
financial results of the Company may be adversely impacted.

A significant portion of the Company's business is performed outside the United
States, primarily in Europe and Asia/Pacific countries, where sales and other
transactions are denominated in foreign currencies. Based upon the recent
volatility in the foreign currency markets, currency rate fluctuations could
have a negative impact on future sales and earnings growth. The Company
occasionally hedges certain foreign currency transactions where it is deemed
prudent, in an effort to protect its profit levels. However, there is no
guarantee that such hedges can be obtained or that they will protect the Company
from future losses resulting from foreign currency fluctuations.

The orthopaedic industry is highly competitive and is characterized by
innovation, technological change and advancement. The Company currently competes
with a number of companies and can provide no assurance that its competitors
will not succeed in developing technologies and products that are more effective
than the Company's or that would render the Company's technology or products
obsolete or uncompetitive.

The Company's sales growth and continued success in the U.S. depends largely
upon marketing arrangements with independent sales associates, who are managed
by a Company employee or by an independent agent. The sales associates' sales
and service expertise and relationships with the customers in the marketplace
are critical to the continued success of the Company and its ability to maintain
market share. Due to the extreme competitiveness in the orthopaedic market,
there can be no guarantee that the Company will be able to retain the associates
currently marketing its products or will be able to attract new associates to
grow the business. If the Company is unable to maintain the relationships
currently existing with its sales representatives and associates, this could
have a material adverse effect on the Company's business and results of
operations.

The Company holds U.S. and foreign patents and regularly applies for new patents
related to certain systems, components and instrumentation for its products.
Recently the medical device industry has experienced extensive litigation
regarding patents and other intellectual property rights. There can be no
assurance as to the protection provided by these patents nor that the Company
will not become subject to patent infringement claims or litigation in the
future to determine the priority of inventions. If such claims result in
lawsuits, the Company may incur substantial legal expenses which may affect its
financial performance. In addition, the Company holds licenses from third
parties to utilize certain patents and technology applied to the design of some
of its devices. The loss of such licenses would prevent the Company from
manufacturing and selling certain products, which could have a material adverse
effect on the Company's business.

The Company's products are subject to extensive regulation in the United States
by the federal Food and Drug Administration (the "FDA") and, in some
jurisdictions, by state authorities. There can be no assurance that the FDA will
act favorably or quickly in its review of the Company's regulatory filings or
that significant difficulties and costs will not be encountered by the Company
in its efforts to obtain necessary FDA clearance on its products. In addition,
the FDA may require the Company to conduct additional product testing or perform
more clinical studies. The FDA may also place significant limitations upon the
intended use of the Company's products as a condition to clearance. These
additional requirements or restrictions may have an impact on the Company's
ability to manufacture and sell certain products which could have a material
adverse effect on the Company's financial results.
<PAGE>
 
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software issues. The Company believes that major areas of
potential business impact have been identified and remedial actions are being
considered. Based upon current assessments, the Company believes that future
financial results will not be materially affected by Year 2000 issues. Most of
these issues will be resolved through the purchase of new software systems which
will be capitalized and depreciated over the life of such systems. There will be
certain costs incurred related to the modification of existing software, but
these costs are estimated to be immaterial to the financial results of the
Company. However, there can be no guarantee that the Company's current
assessment will be achieved.  Actual results could differ materially from such
assessments.

The pending acquisition of DePuy by Johnson & Johnson, as described in Note 9 to
the financial statements, may have an impact on future growth strategies and
operations of the Company dependent upon the guidance provided by the new owner.

Item 3 - Quantitative and Qualitative Disclosure About Market Risk

         Not Applicable
<PAGE>
 
PART II - OTHER INFORMATION


Item 1 - Legal Proceedings

         Not Applicable

Item 2 - Changes in Securities and Use of Proceeds

         Pursuant to the Company's Registration Statement on Form S-1
         (Registration Statement No. 333-09345) which became effective on
         October 30, 1996, the Company issued 8,580,000 shares of common stock,
         including shares issued pursuant to the exercise of an underwriters'
         over allotment option. The offering generated net proceeds to the
         Company after expenses, discounts and commissions of approximately $139
         million. The Company used a portion of the net proceeds to partially
         fund the acquisition of Landanger-Camus in April 1997 and the remainder
         of the net proceeds to partially fund the acquisition of AcroMed in
         June 1998. The net proceeds to the Company from the offering have been
         completely applied to the aforesaid uses.

Item 3 - Defaults Upon Senior Securities

         Not Applicable

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

         On April 30, 1998, the Company held its annual meeting of shareholders,
         at which meeting the shareholders elected Messrs. Richard C. Bolesky,
         Gerald C. Hanes and Robert Volz, M.D. as Class II directors for three
         year terms. The votes were 95,836,762, 95,836,622 and 95,827,112 shares
         for, 0, 0 and 0 shares against, 220,275, 220,415 and 229,925 shares
         abstaining, and 0, 0 and 0 shares broker nonvotes, respectively.
         Messrs. James A. Lent, Anthony Williams, Richard A. Gilleland, M.L.
         Lowenkron and Michael J. Dormer continued as directors of the Company.
         In a subsequent meeting, the board of directors of the Company elected
         Dr. Fritz Gerber and Dr. Franz B. Humer as directors of DePuy, Inc.
         effective April 30, 1998.

         In addition to the election of directors, the shareholders took the
         following actions:

         (1) approved a change to the last sentence of the first paragraph of
             Section 4.1 of the DePuy, Inc. Employee Stock Option/Purchase Plan
             to increase the maximum number of shares to be issued under the
             Plan with respect to the 1997 annual offering to 200,000 with a
             vote of 95,775,439 shares in favor, 261,612 shares opposed,
             19,986 shares abstaining and 0 shares broker nonvotes; and

         (2) confirmed the appointment of Price Waterhouse LLP as auditor for
             the Company for the year ended December 31, 1998 with a vote of
             96,042,137 shares in favor, 6,325 shares opposed, 8,575 shares
             abstaining and 0 shares broker nonvotes.

Item 5 - Other Information

         Not Applicable

<PAGE>
 
Item 6 - Exhibits and Reports on Form 8-K

         (a) Exhibits

             4.1  Revolving Credit Agreement among DePuy, Inc. as Borrower, the
                  Lenders named therein and The First National Bank of Chicago,
                  as Agent, dated as of May 29, 1998.
 
             27.1 Financial Data Schedule

         (b) Reports on Form 8-K

             During the three-month period ended June 30, 1998, the Company
             filed one Report on Form 8-K, dated June 3, 1998, reporting under
             Item 2. Acquisition and Disposition of Assets, related to the
             Company's acquisition of AcroMed Corporation. The Company filed an
             amendment to the Form 8-K on August 14, 1998, reporting the
             financial statements and pro forma financial information required
             by Item 7 of Form 8-K.
<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.


Date: August 14, 1998                    DEPUY, INC.

                                         By:    /s/ Steven L. Artusi
                                              ---------------------------------
                                              Steven L. Artusi
                                                Senior Vice President,
                                                General Counsel and Secretary



Date: August 14, 1998                    By:    /s/ Thomas J. Oberhausen
                                              ---------------------------------
                                              Thomas J. Oberhausen
                                                Senior Vice President and
                                                Chief Financial and Accounting 
                                                Officer
<PAGE>
 
                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 

Exhibit No.                      Description                        Page No.
-----------                      -----------                        --------
<S>             <C>                                                 <C> 
    4.1         Revolving Credit Agreement among DePuy, Inc. as Borrower, the Lenders named therein
                and The First National Bank of Chicago, as Agent, dated as of May 29, 1998.

    27.1        Financial Data Schedule
</TABLE>