<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
  [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
       EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                                      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 0-11103
 
                                CENTOCOR, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
            PENNSYLVANIA                               23-2117202
   (STATE OR OTHER JURISDICTION OF      (I.R.S. EMPLOYER IDENTIFICATION NO.)
   INCORPORATION OR ORGANIZATION) 
   
 
          200 GREAT VALLEY PARKWAY                         19355-1307
                 MALVERN, PA                               (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 651-6000
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
          TITLE OF EACH CLASS           NAME OF EXCHANGE ON WHICH REGISTERED
                 None                              Not Applicable
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                   SERIES A PREFERRED STOCK PURCHASE RIGHTS
                               (TITLE OF CLASS)
 
                    COMMON STOCK, PAR VALUE $.01 PER SHARE
                               (TITLE OF CLASS)
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X]  No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  The aggregate market value of the 69,585,224 shares of voting stock held by
non-affiliates of the registrant as of February 6, 1998 was $2,787,758,037.
 
  Common Stock outstanding at February 6, 1998: 70,178,634 shares.
 
                     DOCUMENTS INCORPORATED BY REFERENCE:
 
  Portions of the following document are incorporated by reference in this
Report on Form 10-K:
 
  Proxy Statement for the Annual Meeting of Shareholders to be held on May 13,
1998--Part III, Items 10, 11, 12 and 13.
 
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<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
  Centocor, Inc. ("Centocor" or the "Company") is a biopharmaceutical company
the mission of which is to develop or otherwise acquire and commercialize
novel therapeutic and diagnostic products and services that solve critical
needs in human healthcare, with a primary technology focus on monoclonal
antibodies and DNA-based products.
 
  The Company has two therapeutic products approved for sale and several
product candidates in various stages of development. ReoPro(R) (Abciximab) is
marketed by Eli Lilly and Company ("Lilly") and sold in the United States and
Europe for the reduction of acute ischemic cardiac complications in patients
undergoing percutaneous coronary intervention ("PCI") such as angioplasty
procedures, and for those patients with unstable angina who are refactory to
conventional therapy for whom PCI is planned within twenty-four hours.
Panorex(R) (Edrecolomab) is marketed by Glaxo Wellcome plc and sold in Germany
as an adjuvant therapy in the treatment of post-operative colorectal cancer.
The Company has filed a Biologics License Application ("BLA") with the Food
and Drug Administration ("FDA") for Avakine(TM) for the treatment of moderate
to severe Crohn's disease, including fistulizing Crohn's disease. The Company
also is conducting studies for Avakine in the treatment of rheumatoid
arthritis. Panorex and Avakine (Infliximab) are trademarks of Centocor. ReoPro
is a trademark of Lilly. The Company also markets several diagnostic products
for cancer in the United States, Europe and Japan and has a cardiovascular
diagnostic product candidate under development.
 
  At December 31, 1997, Centocor had approximately 640 full-time employees. To
complement its own expertise in various fields, Centocor utilizes scientific
consultants and other advisors, many of whom have formal consulting agreements
with Centocor.
 
  Centocor was incorporated in Pennsylvania in 1979 and maintains its
principal executive offices at 200 Great Valley Parkway, Malvern,
Pennsylvania, 19355. Its telephone number is (610) 651-6000. The Company also
maintains facilities in Leiden, The Netherlands, and an office in Tokyo,
Japan.
 
  This annual report on Form 10-K and the documents incorporated herein by
reference contain forward- looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about the company's industry, management's beliefs and certain
assumptions made by the Company's management. Investors are cautioned that
matters subject to forward-looking statements involve risks and uncertainties
including economic, competitive, governmental, technological and other factors
which may affect the Company's business and prospects. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Such risks and uncertainties
include those associated with (i) the timing, completion and outcome of
clinical trials for, regulatory approval of and market acceptance of the
Company's products; (ii) the strength of the Company's patent position; (iii)
the Company's plan to forward integrate into direct commercialization of
certain products; (iv) the Company's ability to construct and maintain
manufacturing facilities that meet regulatory requirements and satisfy the
Company's inventory needs; (v) the Company's dependence on its collaborative
partners; (vi) uncertainties regarding health care reform and reimbursement
from third party payors; (vii) changes in the competitive environment in which
the Company operates; (viii) the outcome of pending litigation and (ix) the
potential for product liability claims. Therefore, actual results may differ
materially from those expressed or forecasted in any such forward-looking
statements. Unless required by law, the Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
 
                                       1
<PAGE>
 
COMPANY STRATEGY
 
  The Company's strategy is to identify proprietary high value-added product
opportunities, and to commercialize those opportunities by focusing on
clinical development, manufacturing and market development. The Company seeks
to license or otherwise acquire technology and product candidates from
research institutions and other sources, in addition to conducting selected
basic research. In an effort to reach the market in an expeditious manner, and
establish itself as the market leader, the Company's clinical development and
regulatory strategy for its therapeutic products under development is to
pursue initial approval for a narrowly defined indication. The Company then
seeks to expand the indication for which the products may be marketed by
conducting additional clinical trials and providing health economic data in
support of the product's utility.
 
  Consistent with its strategy, the Company maintains and generally seeks
strategic alliances with major pharmaceutical companies for the
commercialization and marketing of certain of its therapeutic products,
pursuant to which the Company and its respective partner jointly focus on the
continued clinical and market development for the product, while the Company's
partner primarily conducts the marketing, promotion and distribution of such
product. The Company maintains and seeks distribution agreements for its
diagnostic products with companies having established positions and
distribution networks in applicable market segments. The Company may directly
market and promote one or more products in the United States in the future.
The Company intends to undertake directly the marketing in the United States
of Avakine and its cardiovascular diagnostic candidate.
 
RECENT DEVELOPMENT--PENDING ACQUISITION OF RETAVASE
 
  General. The Company has entered into a definitive agreement (the "Purchase
Agreement") with Roche Healthcare Limited ("Roche Healthcare"), a Bermuda
corporation and a subsidiary of Roche Holding Ltd., a Swiss corporation
("Roche"), to acquire the exclusive United States and Canadian product rights
for Retavase (releplase), a leading acute-care cardiovascular drug, and other
related assets (collectively, the "Retavase Assets") for $335,000,000 in cash
(the "Acquisition"). Retavase is a fibrinolytic ("clot-buster") product, which
is administered usually in the hospital emergency room, for the treatment of
acute myocardial infarction (heart attack). Retavase activates plasminogen,
which in turn cleaves fibrin, the substance which binds clots. The drug is
produced by a recombinant DNA process.
 
  The Company has the opportunity to acquire the Retavase Assets because Roche
is expected to divest them as a condition of Roche's acquisition of Corange
Limited ("Corange"), the parent company of Boehringer Mannheim GmbH
("Boehringer Mannheim"), which currently owns the Retavase Assets. Roche owns
a majority interest in Genentech, Inc. ("Genentech"), the maker of Activase, a
competing product. Centocor is named as an approved purchaser of Retavase
Assets in a proposed consent decree submitted to the Federal Trade Commission
("FTC") by Roche (the "Consent Decree"). Consummation of the Acquisition is
dependent on FTC acceptance of the Consent Decree, completion by Roche of the
Corange transaction and satisfaction of certain other regulatory requirements
and customary closing conditions. Subject to fulfillment of these conditions,
Centocor expects the Acquisition to close late in the first quarter of 1998.
There can be no assurance, however, that the Acquisition will close during the
first quarter of 1998 or at all.
 
  Retavase was approved by the Food and Drug Administration ("FDA") for sale
in the United States in 1996 and was launched by Boehringer Mannheim in
January 1997. Retavase has been shown in clinical trials to be comparable in
its efficacy and safety profile to Activase, the present market leader. In the
GUSTO III clinical trial, a large clinical trial in which Retavase was
compared to Activase, the overall mortality rate for Retavase was 7.43%
compared to 7.22% for Activase; the total intracrannial hemorrhage rate for
Retavase was 0.91% compared to 0.88% for Activase; and the total stroke rate
for Retavase was 1.67% and 1.83% for Activase. Retavase has the important
advantage of being administered through bolus injections rather than the more
complicated infusion administration required for Activase. Based on industry
data, Centocor believes that Retavase achieved a 12% share of the United
States fibrinolytics market in 1997, a market which is estimated to be
approximately $300,000,000 in sales. Approval for sale of the drug in Canada
was granted in 1997. The Company plans to distribute Retavase in Canada
through a partner, and currently is evaluating possible alliances.
 
  Centocor believes that the Acquisition provides a rare strategic
opportunity. It will enhance Centocor's role in the cardiovascular field,
building on the growing use of ReoPro, Centocor's drug for preventing artery
 
                                       2
<PAGE>
 
reclosure in conjunction with angioplasty. With Retavase, a product early in
its life cycle, Centocor would add to its portfolio a clot-busting drug
appropriate for use in the hospital emergency room.
 
  The Acquisition also provides the Company with the opportunity to accelerate
its forward integration in the marketplace. Centocor has extended offers of
employment, conditioned on closing of the Acquisition, to many of the
Boehringer Mannheim sales personnel who have been successful in launching
Retavase and increasing its market share. The Company expects to co-promote
Retavase with DuPont Merck Pharmaceutical Company ("DuPont Merck") pursuant to
an assignment of DuPont Merck's existing agreement with Boehringer Mannheim.
Ultimately, approximately 200 Centocor employees may be involved in the
commercialization of Retavase.
 
  Because of the complementary nature of Retavase and ReoPro in the
cardiovascular field, the Company believes the joint promotion of Retavase and
ReoPro could result in increased market penetration for ReoPro. Accordingly,
the Company has agreed in principle with Lilly to jointly promote ReoPro
following closing of the Acquisition through Lilly's existing ReoPro sales
force and the Company's Retavase sales force.
 
  The Company believes a further advantage of the Acquisition lies in the
possibility that ReoPro and Retavase, administered in combination, will prove
to have a therapeutic advantage over monotherapy for acute myocardial
infarction patients. Two Phase II clinical trials currently are underway to
evaluate the approach of using a product such as ReoPro in conjunction with a
fibrinolytic product in the management of heart attack patients. There can be
no assurance, however, that a ReoPro/Retavase combination therapy will prove
to be safe and effective, will receive FDA approval or, even if approved,
ultimately will achieve market acceptance.
 
  Finally, Retavase would complement the current plans of Centocor's
subsidiary, Centocor Diagnostics, Inc., to develop and commercialize a
platelet-activation diagnostic test that is intended to aid in the
identification of heart attack patients from among those presenting with chest
pains in the hospital emergency room.
 
  Purchase Agreement. Of the $335,000,000 purchase price under the Purchase
Agreement, Centocor will pay Roche Healthcare $315,000,000 to acquire
assignments or licenses of patents and patent applications, trademarks,
product registrations, manufacturing technology and know-how, research and
development materials and various Boehringer Mannheim contracts necessary to
manufacture Retavase and to sell it in the United States and Canada. Centocor
also will acquire various tangible assets and databases used by Boehringer
Mannheim in its commercialization of the product in the United States.
Additionally, Centocor will place $20,000,000 of the purchase price in escrow
(the "Escrow Amount"), as described below. The terms of this escrow under
which the Escrow Amount will be handled are to be set forth in an arrangement
to be negotiated in good faith by Centocor and Roche Healthcare. Centocor also
will pay an agreed unit price for the existing inventory of Retavase in the
United States.
 
  The Purchase Agreement requires that Centocor establish and qualify, either
directly or through contract manufacturers, arrangements for the manufacture
of Retavase for sale in the United States within four years of the
consummation of the Acquisition (subject to extension by the FTC for up to two
additional one year periods if it appears that the required FDA approvals are
likely to be obtained within such extended time period) (the "Transfer
Period"). Under the Purchase Agreement, Centocor will be entitled to a refund
of the Escrow Amount upon the achievement of certain manufacturing milestones.
Roche will cooperate in Centocor's establishment of manufacturing arrangements
by providing training and other assistance and has agreed to maintain assets
sufficient to supply Retavase for the Transfer Period. Centocor must be
successful in establishing such manufacturing arrangements by the end of the
Transfer Period or the Retavase Assets will revert to Roche, which must then
divest them to another party.
 
  The FTC may terminate the Purchase Agreement and the Retavase Assets would
revert to Roche if the Company (i) voluntarily ceases for at least sixty (60)
days to sell or pursue good faith efforts to sell Retavase in the United
States at any time prior to obtaining all necessary FDA approvals to
manufacture Retavase for sale in the United States (the "FDA Approvals"); (ii)
fails to pursue good faith efforts to obtain the FDA Approvals; or (iii) fails
to obtain the FDA Approvals within four years of the date of the Consent
Decree.(subject to extension by the FTC for up to two additional one year
periods if it appears that the required FDA approvals are likely to be
obtained within such extended time period) In such events, Centocor would not
be refunded the purchase price. In addition, the FTC may withdraw its approval
after the expiration of the required 60-day public comment period. In the
event the FTC so withdraws its approval, the
 
                                       3
<PAGE>
 
Acquisition would be unwound, and the Company would transfer back to Roche
Healthcare the Retavase Assets and Roche Healthcare would refund the purchase
price to the Company.
 
  In the event that Centocor commercializes any product (other than Retavase)
using any of the patents included in the Retavase Assets or otherwise exploits
the rights it acquires from Roche with respect to a product other than
Retavase, the Company will be required to pay Roche a royalty based on a
percentage of the net sales of any such products or a percentage of the
royalties received by the Company in respect of such products.
 
  The Purchase Agreement contains customary representations and warranties, as
well as indemnification provisions relating to breaches of representations and
warranties and certain other obligations of the parties.
 
  Description of Genentech Patent Suits. In a suit filed in the United States
District Court for the District of Massachusetts, Genentech charges Boehringer
Mannheim GmbH and Boehringer Mannheim Corporation with infringement of five
patents. The Court directed the parties to address initially three of the
patents (United States Patents Nos. 4,432,832, 5,034,225 and 4,511,502),
reserving two for later disposition (United States Patents No. 5,221,619 and
5,185,259).
 
  The defendants have denied infringement and raised various affirmative
defenses and counterclaims. Genentech seeks judgment of infringement, an
injunction, treble damages, and costs including attorney's fees. Defendants
seek a declaration of invalidity, unenforceability and non-infringement,
damages under the antitrust laws and a state statute and costs, including
attorney's fees.
 
  The Court conducted a Markman hearing as to the first three patents in order
to construe the claims of the patents and subsequently issued an opinion and
order which has limited the construction of the claims advanced by Genentech.
Thereafter, the Court entertained argument on motions by the defendants for
summary judgment as to the same three patents, but has not yet issued an
opinion. It is not clear, therefore, whether there will be issues which must
be tried.
 
  The patent litigation in Germany consists of a number of different
proceedings: 1) an infringement suit by Genentech and its licensee against
Boehringer Mannheim GmbH based on the European patent EP 0 093 619 and an
extension based on patents EP 0 217 379 and EP 0 228 862; 2) a nullity suit by
Boehringer Mannheim against the patent EP 0 093 619; 3) a nullity suit by
Boehringer Mannheim against the patent EP 0 217 379; and 4) an appeal by
Boehringer Mannheim from the decision of the European Patent Office arising
from Boehringer Mannheim's opposition to the patent EP 0 228 862. The nullity
suits and the opposition appeal challenge the validity of the patents in issue
or seek construction of the claims in a manner which would exclude Retavase.
 
  The infringement suit based on the patent EP 0 093 619 has been stayed
pending the outcome of the corresponding nullity action. A hearing that was to
take place in the nullity action in February 1998 has been postponed. The
Court in the infringement action based on patents EP 0 217 379 and EP 0 228
862 has directed certain questions to an expert yet to be appointed. No report
is expected from the expert until at least the end of 1998. A July 1998
hearing date has been fixed on Boehringer Mannheim's nullity suit against the
patent EP 0 217 379 but no date has been set for or the appeal in the
opposition proceedings with regard to patent EP 0 228 862.
 
  If any of the German patent proceedings remain pending at the date when
Centocor is no longer dependent on the supply of Retavase by Boehringer
Mannheim, the defense and risk of the remaining proceedings will revert to
Boehringer Mannheim.
 
  Under the Purchase Agreement, Centocor will be required to assume
responsibility for Retavase-related patent infringement litigation instituted
in the United States and Germany against Boehringer Mannheim by Genentech. The
cost of such litigation will be shared equally by Roche and the Company and
Roche is committed
 
                                       4
<PAGE>
 
to assist Centocor in the litigation by making available, at Roche's expense,
witnesses and documents. If, as a result of (i) a binding determination
(including a permanent, temporary or preliminary injunction for so long as
such injunction is not stayed or vacated) in connection with the Genentech
Patent Litigation (a "Binding Determination") or (ii) a settlement of the
Genentech Patent Litigation (a "Settlement"), the Company is unable during the
life of the relevant Genentech patents to engage in the manufacture or sale of
Retavase in the United States and Canada, Roche Healthcare would be required
to reimburse to the Company up to 100% of the purchase price under the
Purchase Agreement (excluding the Escrow Amount) depending upon the length of
the period for which the Company's manufacturing and sale activities are
prohibited. Furthermore, Roche Healthcare would be required under the Purchase
Agreement to indemnify the Company for (i) any damages (including lost
profits) and (ii) any reasonable royalty payments, for which the Company may
become liable to Genentech as a result of a Binding Determination or a
Settlement. Roche Healthcare's total purchase price reimbursement and
indemnification obligations relating to the Genentech Patent Litigation are
limited to an aggregate of 125% of the total purchase price under the Purchase
Agreement, excluding any portion of the Escrow Amount previously returned to
the Company. In the event the governance agreement between Roche and Genentech
allows Roche to control Genentech or in the event Roche obtains 100% of the
stock of Genentech, Roche will cause the patent litigation to be dismissed
with prejudice and will cause Genentech not to institute any additional
infringement litigation relating to Retavase.
 
  In addition to the indemnification and purchase price reimbursement
arrangements relating to the pending Genentech litigation, Roche Healthcare
will indemnify Centocor against certain other future infringement claims
related to Retavase by third parties (if any), subject to certain limitations;
and Roche further agrees that it will not institute Retavase-related claims
based on any Roche patents or patent applications existing as of the closing
date.
 
  Supply Agreement and Transition Services Agreement. During the Transfer
Period, Boehringer Mannheim will continue to supply Retavase to Centocor from
its facilities in Germany at an agreed price per unit pursuant to an agreement
to be executed and delivered at or before the closing of the Acquisition (the
"Supply Agreement"). In the Supply Agreement, Boehringer Mannheim will
represent and warrant that the products supplied to Centocor will meet FDA
approved specifications and will provide the Company with customary
indemnities, including for damages that result from the failure of the product
to meet FDA approved specifications.
 
  In addition to the Supply Agreement, for a period of up to six months after
closing, Boehringer Mannheim will provide certain transition services to
Centocor, including accepting orders and invoices on behalf of Centocor,
collection services and customer complaints and inquiries, to facilitate the
transfer of responsibility for sale and distribution of the product.
 
  Keep Well Agreement. Pursuant to the terms of the Purchase Agreement, Roche
will execute and deliver a keep well agreement (the "Keep Well Agreement")
with Roche Healthcare. Under the Keep Well Agreement,
 
                                     4--1
<PAGE>
 
Roche will be required to own directly or indirectly all of the outstanding
shares of stock of Roche Healthcare having the right to vote for members of
the Board of Directors of Roche Healthcare. Roche also will be required to
cause Roche Healthcare to maintain a consolidated net worth of at least
$1,000,000 at all times. The Keep Well Agreement may be modified, amended or
terminated by the written agreement of Roche and Roche Healthcare; provided,
however, that no such modification, amendment or termination shall have any
adverse effect on the ability of Roche Healthcare to meet its obligations to
the Company under the indemnity provisions of the Purchase Agreement without
the written consent of the Company. The Keep Well Agreement will be governed
by the laws of Bermuda. The Keep Well Agreement will not constitute a
guarantee by Roche of the payment of any obligation, indebtedness or liability
of Roche Healthcare. The Company is not a party to the Keep Well Agreement and
will have no right to enforce the Keep Well Agreement against Roche.
 
  Financing. Consummation of the Acquisition is not conditioned upon the
receipt by the Company of financing sufficient to fund the purchase price. The
Company has, however, received a commitment letter from a leading investment
bank pursuant to which such investment bank has committed to purchase from
Centocor securities in an amount sufficient to provide $335,000,000 of net
proceeds to the Company. The Company intends to finance the Acquisition
through the issuance of Convertible Subordinated Debentures in an unregistered
offering. See "--Unaudited Pro Forma Condensed Consolidated Financial Data."
 
  Risks. There are specific risks associated with the Acquisition. The
transaction may not close or, even if closed, it may have to be unwound if,
after the sixty day notice and comment period following FTC acceptance of the
agreement with Roche containing the Consent Decree, the FTC withdraws its
consent. Because of competitive reasons, product acceptance, cost
reimbursement or other reasons, Retavase may not achieve and maintain sales
levels sufficient to enable Centocor to reach its financial targets with
respect to the product. While Centocor believes that the acquisition of
Retavase will strengthen its ReoPro position and sales and will permit
Centocor to realize other benefits described previously, there can be no
assurance that any such benefits will be achieved. Notwithstanding the
indemnification and cost reimbursement commitments of Roche Healthcare, there
can be no assurance that Centocor will not suffer adverse consequences on
account of the Genentech patent infringement litigation referred to above.
There can be no assurance that Centocor will be successful in transferring the
manufacture of Retavase from Boehringer Mannheim within the four year period
(and any extensions) provided in the agreement with Roche Healthcare and under
the proposed Consent Decree. In that event, the Retavase Assets would revert
to Roche, which would then have to divest them to another party. And, there
can be no assurance that the patent applications and patent application
licenses relating to Retavase to be transferred to the Company will result in
patents being issued or that the transferred patents, patent applications and
patent licenses will afford protection against competitors with similar
technology. And, there can be no assurance that third parties will not assert
intellectual property claims, in addition to the Genentech Litigation, that
could adversely affect the Company's ability to manufacture, use and sell
Retavase.
 
                                       5
<PAGE>
 
           UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
 
  The following unaudited pro forma condensed consolidated financial data (the
"Pro Forma Financial Data") have been derived by the application of pro forma
adjustments to the historical financial statements of the Company for 1997.
The unaudited pro forma consolidated statement of operations data for the year
ended December 31, 1997 assumes the Acquisition and the related financing had
occurred as of the beginning of the year. The unaudited pro forma condensed
consolidated balance sheet as of December 31, 1997 assumes the Acquisition and
the related financing occurred on that date.
 
  The pro-forma adjustments are based upon certain historical unaudited
financial information of the Retavase business and on certain Company
estimates of expenses it would have incurred had the Acquisition occurred as
of the beginning of the year. The adjustments to the pro forma consolidated
statement of operations data exclude the effects of (i) the write off of
acquired in-process research and development of approximately $138,500,000 and
(ii) a tax benefit of approximately $20,000,000. The pro forma adjustments are
described in the accompanying notes.
 
  The Pro Forma Financial Data is subject to numerous assumptions and
estimates that are subject to change and, in many cases, are beyond the
control of the Company. The Pro Forma Financial Data do not purport to
represent what the Company's results of operations would have been if the
Acquisition had occurred as of the date indicated or what results will be for
any future periods. The Pro Forma Financial Data should be read in conjunction
with the historical financial statements of the Company and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this Annual Report on Form 10-K.
 
                                       6
<PAGE>
 
                                CENTOCOR, INC.
 
              PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA
                (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31, 1997
                                   -----------------------------------------
                                   CENTOCOR, INC.  PRO FORMA
                                     HISTORICAL   ADJUSTMENTS    AS ADJUSTED
                                   -------------- -----------    -----------
<S>                                <C>            <C>            <C>
Revenues:
  Sales...........................    $196,354      $44,800 (1)   $241,154
  Contracts.......................       4,430          --           4,430
                                      --------     --------       --------
                                       200,784       44,800        245,584
Costs and Expenses:
  Costs of sales..................      77,958        5,400 (2)     83,358
  Research and development........      68,623        3,900 (3)     72,523
  Marketing, general and
   administrative.................      40,917       59,600 (4)    100,517
                                      --------     --------       --------
                                       187,498       68,900        256,398
Other income (expenses):
  Interest income.................       9,607          --           9,607
  Interest expense................      (3,938)     (21,000)(5)    (24,938)
  Loss on sale of facility and
   related business...............      (4,565)         --          (4,565)
  Other...........................      (3,260)         --          (3,260)
                                      --------     --------       --------
                                        (2,156)     (21,000)       (23,156)
                                      --------     --------       --------
Net income (loss).................    $ 11,130     $(45,100)      $(33,970)
                                      ========     ========       ========
Basic earnings (loss) per share...    $   0.16                    $  (0.49)
                                      ========                    ========
Diluted earnings (loss) per
 share............................    $   0.16                    $  (0.49)
                                      ========                    ========
Weighted average number of shares
 outstanding......................      69,809                      69,809
                                      ========                    ========
Weighted average common and
 dilutive equivalent shares
 outstanding......................      71,770                      69,809 (6)
                                      ========                    ========
</TABLE>
--------
(1) Based on historical sales information for 1997.
(2) Based on (i) the pricing structure in the Supply Agreement to be entered
    into by Centocor and Boehringer Mannheim and (ii) royalty agreements
    currently in place with respect to the product.
(3) Based on estimated increases in costs associated with additional quality
    assurance and regulatory personnel.
(4) Adjustments to marketing, general and administrative expenses reflect the
    following:
  (i) $21,700 represents the estimated increase in product salesforce and
      related costs.
  (ii) $17,000 represents 1997 historic external marketing and promotional
       costs.
  (iii) $13,300 represents (a) increased amortization expense related to
        $176,500 of intangible assets acquired (based on the product purchase
        price of $335,000 less the $20,000 escrow deposit less an estimated
        one time charge for in-process research and development of $138,500
        and an average useful life of fifteen years) and (b) amortization of
        $10,500 in assumed debt issuance costs over 7 years.
  (iv) $6,100 represents estimated 1997 expenses based on the co-promotional
       agreement currently in place with DuPont Merck.
  (v) $1,500 represents estimated 1997 expenditures related to patent
      litigation.
(5) Represents interest expense on $350,000 of convertible subordinated
    debentures at an assumed interest rate of 6%; does not reflect any
    interest expense that would be incurred upon the exercise of any over-
    allotment option.
(6) The as adjusted share amount does not assume the exercise of stock options
    or warrants as their effect would be antidilutive.
 
                                       7
<PAGE>
 
                                 CENTOCOR, INC.
 
                 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
                           (UNAUDITED, IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                              AS OF DECEMBER 31, 1997
                                       -----------------------------------------
                                       CENTOCOR, INC.  PRO FORMA
                                         HISTORICAL   ADJUSTMENTS    AS ADJUSTED
                                       -------------- -----------    -----------
<S>                                    <C>            <C>            <C>
Assets
Current assets
  Cash and cash equivalents...........    $ 85,565     $  4,500 (1)   $ 90,065
  Short-term investments..............     109,108          --         109,108
  Other current assets................      60,172          --          60,172
                                          --------     --------       --------
                                           254,845        4,500        259,345
Property, plant and equipment, net....      77,014          --          77,014
Long-term investments.................      11,957          --          11,957
Intangible and other assets...........      61,288      207,000 (2)    268,288
                                          --------     --------       --------
Total Assets..........................     405,104      211,500        616,604
                                          ========     ========       ========
Liabilities and Shareholders' Equity
Current liabilities
  Accounts payable....................    $ 15,651          --        $ 15,651
  Accrued expenses and other current
   liabilities........................      70,003          --          70,003
  Notes payable.......................       5,940          --           5,940
                                          --------     --------       --------
                                            91,594          --          91,594
Long-term debt........................      54,765      350,000 (3)    404,765
Other liabilities.....................         910          --             910
Shareholders' equity..................     257,835     (138,500)(4)    119,335
                                          --------     --------       --------
Total Liabilities and Shareholders'
 Equity...............................     405,104      211,500        616,604
                                          ========     ========       ========
</TABLE>
--------
(1) Represents the cash proceeds from the issuance of $350,000 in convertible
    subordinated debentures, net of estimated issuance costs of $10,500, less
    the $335,000 paid under the Purchase Agreement.
(2) Represents acquired intangibles and an escrow deposit based on the product
    purchase price of $335,000 less an estimated one time charge for in-process
    research and development of $138,500, and debt issuance costs of $10,500.
(3) Represents the issuance of $350,000 in convertible subordinated debentures.
(4) Represents a one time charge of $138,500 for acquired in-process research
    and development.
 
                                       8
<PAGE>
 
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
 
  The following table summarizes Centocor's products and selected product
candidates. This table is qualified in its entirety by reference to the more
detailed descriptions included elsewhere in this Annual Report on Form 10-K.
 
<TABLE>
<CAPTION>
 PRODUCT/PRODUCT CANDIDATE        INDICATION                          STATUS (1)
 -------------------------        ----------                          ----------
 <C>                       <S>                        <C>
 THERAPEUTIC:
    ReoPro..............   Percutaneous Coronary      Marketed (U.S., Europe)
                           Intervention (PCI)
                           High risk angioplasty      Phase II (Japan)
                           Unstable angina (U.A.)     Marketed (U.S., Europe)
                           when PCI planned
                           Acute myocardial           Phase II
                           infarction
                           Adjuvant therapy with      Phase III
                           stents
                           Stroke                     Phase II
                           Medical treatment of       Phase III planned
                           U.A.
    Panorex.............   Adjuvant therapy for       Marketed (Germany)
                           post-operative             Phase III (U.S., Europe)
                           colorectal cancer
    Avakine.............   Moderate to severe         BLA filed (U.S.)
                           Crohn's disease
                           including fistula
                           Chronic Crohn's disease    Phase III (planned)
                                                      Phase II (Japan)
                           Chronic rheumatoid         Phase III
                           arthritis
                                                      Phase II (Japan)
    Corsevin M..........   Thrombosis                 Phase I
    Gene Vaccines.......   Colorectal cancer (CEA)    Phase I
                           Prostate cancer (PSA)      Phase I planned
                           Lung cancer (MUC-1)        Phase I planned
--------
(1) Phase III clinical trial indicates that the product is being tested in
    humans for safety and efficacy in an expanded patient population at
    multiple clinical sites. Phase I and Phase II clinical trials indicate
    that the product is being tested in humans to evaluate safety, dosage and,
    to some extent, efficacy, in a limited patient population.
 
<CAPTION>
 PRODUCT/PRODUCT CANDIDATE        INDICATION                            STATUS
 -------------------------        ----------                            ------
 DIAGNOSTIC:
 <C>                       <S>                        <C>
    CA 125 II...........   Ovarian cancer
                           monitoring                 Marketed (U.S., Europe, Japan)
    CA 19-9.............   Pancreatic cancer
                           monitoring                 Marketed (Europe, Japan)
    CA 15-3.............   Breast cancer monitoring   Marketed (U.S., Europe, Japan)
    CA 72-4.............   Gastrointestinal cancer
                           monitoring                 Marketed (Europe, Japan)
    P-glycoCHEK.........   Resistance to chemo-       Sold for investigational use (Europe, Japan)
                            therapeutic drug
                            detection
    CYFRA 21-1..........   Non-small cell lung        Marketed (Europe, Japan)
                           cancer
    P-selectin Profile..   Platelet function          Clinical development
                           monitoring
</TABLE>
 
 Therapeutic Products
 
  Sales of the Company's therapeutic products were approximately $164,577,000
and $90,742,000 for the years ended December 31, 1997 and 1996, respectively.
 
                                       9
<PAGE>
 
  ReoPro(R) (Abciximab). ReoPro is a chimeric monoclonal antibody fragment
that binds to GP IIb/IIIa receptors on the surface of platelets, thereby
inhibiting platelet aggregation. When platelets are stimulated, a number of
different types of surface receptors are exposed that cause further platelet
aggregation, including the glycoprotein ("GP") IIb/IIIa receptors. Anti-
platelet agents such as ReoPro are used in the treatment of cardiovascular
disease to prevent blood clots. The three main markets for these agents are
PCI, unstable angina and heart attack. Effective platelet inhibiting treatment
has been shown to be effective in PCI and in unstable angina to prevent
resulting heart attacks and death. Abrupt reclosure during PCI can result in
death, myocardial infarction, the need for emergency coronary bypass surgery
or repeat PCI. Powerful agents are also needed to enhance treatment of
myocardial infarction by opening the clotted artery and preventing reocclusion
following drug therapy or PCI. ReoPro is effective in inhibiting blood
clotting by inhibiting the aggregation of platelets.
 
  Following the successful completion of the EPIC Phase III clinical trial of
ReoPro and subsequent U.S. Food and Drug Administration approval, the Company
commenced commercial sales of ReoPro in January 1995 for patients who are at
high risk for abrupt artery closure following angioplasty. In November 1997,
the Company announced that the FDA cleared the way for the expanded use of
ReoPro. The new labeling allows physicians to use ReoPro as adjunctive therapy
to prevent cardiac ischemic complications in a broad range of patients
undergoing PCI, as well as in unstable angina patients not responding to
conventional medical therapy for whom PCI is planned within twenty-four hours.
ReoPro is currently marketed in a number of countries within North America,
South America and Europe as well as several other markets throughout the
world. Under a Sales and Distribution Agreement between Lilly and the Company,
Lilly is the exclusive worldwide distributor of ReoPro except in Japan where
the product, if approved, will be exclusively distributed by Fujisawa
Pharmaceutical Co., Ltd. ("Fujisawa"). The Company plans to jointly promote
ReoPro in the United States with Lilly. See "Recent Developments" and
"Business--Marketing and Sales." Pursuant to those agreements, Lilly is
assisting the Company in the regulatory filings and continuing development of
ReoPro for additional clinical indications and Fujisawa is assisting the
Company in the regulatory filings and development of ReoPro in Japan.
 
  The expanded labeling for ReoPro is based on the results of two major
clinical studies, EPILOG and CAPTURE.
 
  EPILOG (Evaluation of PTCA to Improve Long-term Outcome by c7E3 GP IIb/IIIa
Receptor Blockade), published in June 1997 in The New England Journal of
Medicine, showed that a broad range of angioplasty patients treated with
ReoPro and low-dose, weight-adjusted heparin had more than a 50% relative
reduction at 30 days in their risk of the composite endpoint of death or heart
attack compared with placebo. In the ReoPro group, 3.8% of patients suffered
one of these events, compared with 9.1% of patients in the placebo group. The
clinical benefits of ReoPro were similar, irrespective of the type of coronary
intervention used (balloon angioplasty, atherectomy, stent placement).
 
  Results from the EPILOG trial show that bleeding, the most common side
effect associated with ReoPro therapy, can be reduced by the use of modified
dosing regimens and specific patient management techniques. In EPILOG, the
incidence of major bleeding in patients treated with ReoPro and low-dose,
weight-adjusted heparin was not significantly different from that in patients
receiving placebo.
 
  The CAPTURE (c7E3 Fab Anti-Platelet Therapy in Unstable Refractory Angina)
study, published in May 1997 in The Lancet, showed that in patients with
unstable angina who did not respond to conventional medical therapy, an 18-24
hour infusion of ReoPro prior to PCI and concluding one hour after the
procedure reduced the risk of the composite endpoint of death, heart attack or
the need for another emergency procedure such as repeat angioplasty or bypass
surgery by nearly 30%, compared with placebo, at 30 days.
 
  The Company and Lilly are evaluating other potential indications for ReoPro,
including the medical therapy of unstable angina, acute myocardial infarction
and thrombotic strokes. The Company is currently conducting two Phase II
trials with ReoPro in combination with thrombolytic therapy for patients
suffering acute myocardial infarction. Additionally, the Company and Lilly are
conducting the EPILOG Stent Phase III trial to evaluate the
 
                                      10
<PAGE>
 
effects of ReoPro in conjunction with stents. The Company and Fujisawa are
currently conducting Phase II clinical trials of ReoPro in Japan.
 
  The Company estimates that in the United States there were about 500,000
angioplasties performed last year. In addition, in the United States, the
annual incidence of unstable angina is about 1 million, acute myocardial
infarction (heart attack) 1 million, stroke 500,000 and peripheral vascular
disease 500,000. All of these procedures and/or conditions are impacted by
platelet activation and as a result, ReoPro may have utility.
 
  In addition to conducting studies to test the efficacy of ReoPro, the
Company has conducted a health economic study, based on the EPIC trial (high-
risk angioplasty), which has been cleared for promotional use by the FDA and
which indicates that the use of ReoPro is cost effective and may allow
hospitals to manage their resources more effectively and reduce the amount of
time patients spend in the hospital. In the EPILOG trial (all angioplasty),
major bleeding events in patients receiving ReoPro were at essentially the
same level as in patients receiving placebo. The decreased need for blood
transfusions may result in additional cost savings to hospitals.
 
  Avakine (TM) (Infliximab). The Company is currently developing Avakine, also
known as cA2, a chimeric monoclonal antibody that binds to tumor necrosis
factor alpha, which is believed to be critical to the human body's reaction to
inflammation. Avakine is primarily targeted for the treatment of rheumatoid
arthritis and inflammatory bowel diseases such as Crohn's disease. Avakine
works by binding to TNF-a on the cell membrane, neutralizing TNF-a in the
blood and destroying TNF-producing cells.
 
  In December 1997, the Company filed a Biologics License Application with the
U.S. Food and Drug Administration for Avakine for the treatment of moderate to
severe Crohn's disease, including fistulizing Crohn's disease. The Company
plans to file for regulatory approval in Europe during the first half of 1998.
 
  Crohn's disease is a chronic and debilitating disorder characterized by
inflammation of the gastrointestinal tract, and complicated, in some patients,
by the appearance of fistulas--painful extensions that occur between the bowel
and the skin, mostly in the perianal area, causing drainage of mucous and/or
fecal material.
 
  Clinical trial data were presented at the American College of
Gastroenterology meeting in November 1997 which showed that, following a
series of three infusions with 5 mg/kg, 68% of Avakine-treated Crohn's
patients experienced closure of at least 50% of fistulas for at least two
consecutive follow-up visits, (i.e. for at least one month) compared with 26%
of placebo patients (p=0.002). Similarly, 55% of patients treated with the
same drug regimen experienced closure of all their fistulas at one or more
follow-up visits compared with 13% of placebo patients (p=0.001). All of these
patients had previously failed standard treatment. Onset of clinical benefit
was rapid, with the vast majority of patients achieving a response within two
weeks. The average duration of closure was three months.
 
  Previous clinical trial results among patients with moderate to severe
Crohn's disease that had failed to respond to standard treatment were
published in the October 9, 1997 edition of The New England Journal of
Medicine. These data showed that after a single infusion of 5 mg/kg of
Avakine, 82% of patients achieved statistically significant improvement
(p<0.001) in disease activity (defined as a ^70 point reduction from baseline
in the Crohn's disease activity index (CDAI) at 4 weeks) and 48% of patients
achieved disease remission (CDAI<150 at 4 weeks)(p<0.001). Following four
additional infusions, given eight weeks apart, Avakine maintained the initial
treatment response and more Avakine-treated patients achieved remission.
 
  According to Company estimates, in the United States there are approximately
one million patients with severe rheumatoid arthritis. The Company also
believes that in the United States there are approximately 315,000 patients
with Crohn's disease in its moderate-to-severe form. Centocor intends to
continue studies for expanded indications of Crohn's disease. Studies are also
ongoing for Avakine in the treatment of rheumatoid arthritis.
 
  The Company intends to market and distribute Avakine in the United States
through its own direct sales force. The Company has entered into a
distribution agreement with Tanabe Seiyaku Co., Ltd. ("Tanabe") under
 
                                      11
<PAGE>
 
which Tanabe has commenced Phase II clinical testing and has the right to
distribute Avakine in Japan. Additionally, the Company is seeking to enter
into a distribution arrangement with a partner regarding Avakine for other
parts of the world.
 
  Panorex(R). (Edrecolomab) Panorex is a monoclonal antibody that targets
metastatic colon cancer cells. The Panorex antibody binds to colon cancer
cells and destroys them using various immunologic mechanisms including
complement and/or antibody dependent cellular cytotoxicity. Both mechanisms
result in the death of the cancer cells. In patients with colorectal cancer,
it is thought that small numbers of cells break away from the primary tumor
and spread to other sites such as bone marrow, where they can be detected as
"micrometastatic cells" even after surgical removal of the primary tumor. It
is thought that the Panorex antibody binds to these "micrometastatic cells"
and destroys them, leading to the prolonged survival observed in patients
treated with Panorex. Panorex is the first monoclonal antibody product
approved for cancer. In December 1994, the Paul Ehrlich Institute, the German
regulatory body for vaccines and antibodies, granted the Company marketing
authorization for the use of Panorex as an adjuvant therapy in the treatment
of post-operative colorectal cancer. During 1993, the Company and Glaxo
Wellcome entered into an alliance agreement for the development and marketing
of certain of the Company's monoclonal antibody-based cancer therapeutic
products, including Panorex. Pursuant to that agreement Glaxo Wellcome is the
worldwide distributor of Panorex. See "Business--Marketing and Sales." The
Company commenced commercial sales of Panorex in Germany in February 1995.
 
  In a Phase III trial conducted in Germany, Panorex showed a five-year 30%
mortality benefit and 27% reduction in tumor recurrences. Glaxo Wellcome is
conducting additional Phase III trials for Panorex, with a three-year survival
end-point, in North America, Europe and certain other countries, evaluating
patients with colorectal cancer, and also is conducting earlier stage trials
in Japan.
 
  Corsevin M. The Company is developing Corsevin M, an anti-factor VII
chimeric monoclonal antibody product intended to be used as an anticoagulant.
Factor VII is one of the primary factors that play a role in the blood
clotting process. The Company is evaluating protocols for additional clinical
trials.
 
  Gene Vaccines. The Company is developing genetic DNA-based products
employing commonly available methods to direct the injected DNA to its target
site. The Company has licensed GeneVax technology from a private company, in
which the Company holds a significant equity investment. Under that license,
the Company has certain rights to develop the GeneVax technology in the cancer
field. The Company has supplemented this technology license by acquiring
complementary technologies from other companies and institutions. The Company
expects to initially focus its development efforts on vaccines for prostate
and colorectal cancer. In 1997, the Company commenced Phase I clinical trials
to evaluate vaccines for colorectal cancer.
 
 Diagnostic Products
 
  Sales of the Company's diagnostics products were approximately $31,777,000
and $41,388,000 for the years ended December 31, 1997 and 1996, respectively.
 
  In-vitro diagnostic products are used to test patient blood samples outside
the body to detect or monitor disease. In this area, the Company has focused
principally on developing cancer diagnostic assays, and other in-vitro
diagnostic products for infectious disease. The reclassification by the FDA in
September 1996 of tumor markers used for monitoring patients with previously
diagnosed cancer may increase the likelihood and speed of approval for
products within this classification in the United States. A number of the
Company's diagnostic assays including CA 125 II, CA 15-3, CA 19-9, CA 72-4 and
CYFRA 21-1 fall under this tumor marker classification. The Company currently
manufactures and sells the following in-vitro diagnostic products:
 
  CA 125 II Ovarian Cancer Test. CA 125 II, a second generation assay which
aids in the detection of residual epithelial ovarian cancer following first-
line therapy, is sold in the United States, certain European countries and
Japan. CA 125 II is one of only six cancer diagnostics products approved for
sale in the United States.
 
                                      12
<PAGE>
 
  CA 19-9 Pancreatic Cancer Test. CA 19-9, which aids in the monitoring of
pancreatic cancer, is sold in certain European countries and Japan.
 
  CA 15-3 Breast Cancer Test. CA 15-3, which aids in the monitoring of breast
cancer, is sold in the United States, certain European countries and Japan.
 
  CA 72-4 Gastric Cancer Test. CA 72-4, which aids in the monitoring of
gastrointestinal cancer, is sold in certain European countries and Japan.
 
  P-glycoCHEK Multidrug Resistance Test. P-glycoCHEK, which detects a cellular
protein associated with resistance to chemotherapeutic drugs, is sold for
investigational use in certain European countries and Japan.
 
  CYFRA 21-1 Non-Small Cell Lung Cancer Test. CYFRA 21-1, which aids in the
monitoring of non-small cell lung cancer, is sold in certain European
countries and Japan.
 
  In June 1997, the Company sold a manufacturing facility in the United
Kingdom and its related infectious disease product line. Sales of this product
line were $886,000 and $3,253,000 for the six months ended June 30, 1997 and
the year ended December 31, 1996, respectively.
 
  P-selectin Profile. In connection with the development and marketing of
ReoPro, the Company has recognized the importance of platelet function in
cardiovascular disease. Based upon its knowledge in this area, the Company is
developing assays intended to enable interventional cardiologists to assess
rapidly platelet function and to perform better risk stratification of
patients with potentially serious cardiovascular disease. Additionally, the
Company is collaborating in the development of devices which, if developed,
may permit medical experts to monitor platelet activity and the effect of
drugs such as ReoPro with the same precision with which they currently
evaluate other aspects of blood coagulation and treatment. The Company
believes that the availability of this type of monitoring may address
currently unmet medical needs in the hospital emergency room, catheterization
lab and coronary care unit. There can be no assurance that the Company will be
able to complete the development of these programs or obtain the regulatory
approvals necessary for the commercial sale of products.
 
  The Company is currently developing a point-of-care ("POC") cardiovascular
diagnostic test, the P-selectin Profile, designed to allow emergency room
physicians to rapidly and accurately rule in for further treatment patients
suffering form Acute Coronary Syndrome ("ACS") and rule out for non-cardiac
treatment or early discharge patients not suffering ACS. The test is further
designed to determine whether patients suffering ACS are suffering a
myocardial infarction ("heart attack"), for whom immediate treatment is
critical to survival, or unstable angina ("UA"), for whom immediate or longer
term treatment is warranted. A heart attack is a condition where the heart
muscle is deprived of oxygen, usually due to the blockage of an artery,
resulting in irreversible heart muscle damage or potentially death. UA is
severe and constant pain and constriction about the heart caused by an
insufficient supply of blood to the heart. Current tests for a heart attack
include electrocardiograms ("ECG"), which initially fail to diagnose one-half
of heart attack cases, and cardiac enzymes, which begin to detect a heart
attack only after irreversible damage to the heart muscle has occurred. Based
on patient trials conducted to date, the Company believes that the P-selectin
Profile offers a unique opportunity to improve the quality of care for ACS
patients by complementing existing ECG and cardiac enzyme technologies and to
reduce the costs of unnecessary testing and admissions for patients not
suffering ACS.
 
MARKETING AND SALES
 
  In the therapeutic area, the Company maintains separate arrangements with
major pharmaceutical companies for each of its two commercialized products,
pursuant to which, in each case, the Company and its respective partner
jointly focus on the continued clinical and market development for the
product, while the Company's partner primarily conducts the marketing,
promotion and distribution of the product. The Company intends to market and
distribute Avakine in the United States through its own direct sales force and
intends to enter into a
 
                                      13
<PAGE>
 
distribution arrangement in Europe. In the diagnostics area, the Company
maintains distribution agreements with companies that have established
positions and distribution networks in relevant market segments. The Company
intends to market and distribute the P-selectin Profile directly in the United
States and to seek a distribution partner in other parts of the world. The
Company is highly dependent upon the ability of its marketing partners to
develop and expand markets for the Company's products.
 
  Pursuant to the agreements between Lilly and the Company, Lilly is the
exclusive worldwide distributor of ReoPro except in Japan, where the product,
if approved, will be exclusively distributed by Fujisawa. The Company sells
ReoPro to Lilly for Lilly's further sale to the end market. The Company is
principally responsible for developing and manufacturing ReoPro and for
securing regulatory approvals. Lilly is principally responsible for the
marketing, selling and distribution of ReoPro, except in Japan. The Company
plans to jointly promote ReoPro in the United States with Lilly. See "Recent
Developments."
 
  Pursuant to the Company's agreement with Fujisawa, consummated in August
1996, Fujisawa became the exclusive distributor of ReoPro in Japan. Following
approval of ReoPro for sale in Japan, if obtained, the Company will sell
ReoPro to Fujisawa for Fujisawa's further sale to the end market in Japan.
Fujisawa and the Company are co-developing ReoPro in Japan and will seek
jointly to secure regulatory approvals.
 
  Pursuant to the Company's agreement with Glaxo Wellcome, Glaxo Wellcome is
the exclusive worldwide distributor for Panorex. The Company sells Panorex to
Glaxo Wellcome for Glaxo Wellcome's further sale to the end market. Glaxo
Wellcome is responsible for the continuing clinical development, marketing,
sales and distribution of Panorex. The Company is principally responsible for
manufacturing Panorex, providing limited clinical support and securing
regulatory approvals.
 
  During 1997 and 1996, approximately 81% and 67%, respectively, of the
Company's total product sales were to one customer, Lilly. During 1995,
approximately 50% of the Company's total product sales were to three customers
as follows: 24% to Lilly, 11% to Glaxo Wellcome and 15% to Toray-Fuji Bionics,
Inc.
 
  Certain financial information by geographic area as well as major customer
information is set forth in Part II, Item 8. "Financial Statements and
Supplementary Data", Note 12--Geographic and Customer Information.
 
  The Company has no significant product backlog.
 
RESEARCH AND DEVELOPMENT
 
  Centocor's research and development activities focus primarily on monoclonal
antibody technology and proprietary techniques to modify monoclonal antibodies
in search of optimal therapeutic agents. Centocor believes that there is
significant potential for using monoclonal antibodies to develop human health
care products. While the specificity of monoclonal antibodies makes them
attractive candidates for therapeutic product development, antibody-based
products generally must be administered by injection, usually in a hospital
setting, and are therefore used principally to treat acute diseases. The
Company's ability to select effective hybridomas and to produce antibodies
from them is central to its business. An understanding of the structure and
function of antibodies is necessary in order to modify them for incorporation
into diagnostic or therapeutic products. The Company has developed techniques
for characterizing an antibody with respect to its structure, specificity and
binding ability which are used in an effort to select the best antibody for a
particular application.
 
  The Company carries out research efforts in the use of recombinant DNA
techniques to manipulate the genetic structure of antibody-producing cells.
These efforts are intended to create re-engineered antibodies that combine the
desired properties of more than one antibody, or the desired properties of
antibodies and other system-regulating biochemicals such as enzymes.
 
  The Company has also expanded its research platform to include the field of
DNA-based products for both therapeutic and diagnostic applications.
 
 
                                      14
<PAGE>
 
  For the three years ended December 31, 1997, 1996 and 1995, the Company's
research and development expenses were $68,623,000, $56,787,000 and
$66,235,000, respectively.
 
PATENTS AND LICENSING ARRANGEMENTS
 
  Products currently being marketed, developed or considered for development
by the Company are in the area of biotechnology, an area in which there are
extensive patent filings. The patent position of biotechnology firms generally
is highly uncertain and involves complex legal and factual questions. To date,
no consistent policy has emerged regarding the breadth of claims allowed in
biotechnology patents. Accordingly, there can be no assurance that patent
applications owned or licensed by the Company will result in patents being
issued or that, if issued, such patents will afford protection against
competitors with similar technology. In addition, there can be no assurance
that products covered by such patents, or any other products developed by the
Company or subject to licenses acquired by the Company, will not be covered by
third party patents, in which case continued development and marketing of such
products would require a license under such patents. There can be no assurance
that such required licenses will be available to the Company or its licensees
on acceptable terms.
 
  Other entities have filed applications for or have been issued patents and
are expected to obtain additional patents to which the Company may need to
acquire rights. The extent to which the Company may need to obtain rights to
any such patents or to contest their scope or validity will depend on final
product formulation and other factors. The ability to license any such patents
and the likelihood of successfully contesting the scope or validity of such
patents are uncertain and the costs associated therewith may be significant.
If the Company is required to acquire rights to valid and enforceable patents
but cannot do so at a reasonable cost, the Company's ability to manufacture or
market its products in the country of issuance of any such patent may be
materially adversely affected.
 
  There has been substantial litigation regarding patent and other
intellectual property rights in the biotechnology industry. Litigation may be
necessary to enforce certain intellectual property rights of the Company. Any
such litigation could result in substantial cost to and diversion of effort by
the Company.
 
  Centocor currently licenses the majority of the cell lines used to produce
its monoclonal antibodies from research institutions pursuant to long-term
licenses for which it is generally obligated to pay royalties based upon sales
of products incorporating such antibodies. There can be no assurance that
others will not acquire rights to such cell lines in the future.
 
GOVERNMENTAL REGULATION
 
  Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of the
Company's products and in ongoing research and product development activities.
All of the Company's therapeutic products and most of the Company's diagnostic
products will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products are subject to
rigorous preclinical and clinical testing and other premarket approval
requirements by the FDA and regulatory authorities in other countries. Various
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, recordkeeping and marketing of such products. The lengthy
process of seeking these approvals, and the subsequent compliance with
applicable statutes and regulations, require the expenditure of substantial
resources. The Company believes it is currently in compliance with such
statutes and regulations. Any failure by the Company to obtain, or any delay
in obtaining, regulatory approvals could materially adversely affect the
Company and the Company's marketing partners' ability to market the Company's
products.
 
  The activities required before a pharmaceutical product may be marketed in
the United States begin with preclinical testing. Preclinical tests include
laboratory evaluation of product chemistry and animal studies to assess the
potential safety and efficacy of the product and its formulations. The results
of these studies must be submitted to the FDA as part of an Investigational
New Drug application, which must be reviewed by the FDA
 
                                      15
<PAGE>
 
before proposed clinical testing can begin. Typically, clinical testing
involves a three-phase process. In Phase I, clinical trials are conducted with
a small number of subjects to determine the early safety profile and the
pattern of drug distribution and metabolism. In Phase II, clinical trials are
conducted with groups of patients afflicted with a specified disease in order
to determine preliminary efficacy, optimal dosages and expanded evidence of
safety. In Phase III, large scale, multicenter, comparative clinical trials
are conducted with patients afflicted with a target disease in order to
provide enough data to evaluate statistically the efficacy and safety of the
product, as required by the FDA. The results of the preclinical and clinical
testing of a chemical pharmaceutical product are then submitted to the FDA in
the form of a New Drug Application ("NDA"), or for a biological pharmaceutical
product in the form of a Biological License Application ("BLA"), for approval
to commence commercial sales. In responding to an NDA or BLA, the FDA may
grant marketing approval, request additional information or deny the
application if it determines that the application does not satisfy its
regulatory approval criteria. There can be no assurance that any approval
required by the FDA will be obtained on a timely basis, if at all.
 
  Among the conditions for NDA or BLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures
conform on an ongoing basis with Good Manufacturing Practices ("GMP"). Before
approval of the BLA, the FDA will perform a prelicensing inspection of the
facility to determine its compliance with GMP and other rules and regulations.
In complying with GMP, manufacturers must continue to expend time, money and
effort in the area of production and quality control to ensure full
compliance. After the establishment is licensed for the manufacture of any
product, it is subject to periodic inspections by the FDA.
 
  The requirements such as those described above which the Company must
satisfy to obtain regulatory approval by governmental agencies in other
countries prior to commercialization of its products in such countries can be
rigorous, costly and uncertain.
 
  The Company is also subject to various laws and regulations relating to safe
working conditions, laboratory and manufacturing practices, the experimental
use of animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents,
used in connection with the Company's research. The Company believes it is
currently in compliance with all such laws and regulations. The extent of
additional governmental regulation that might result from any legislative or
administrative action cannot be accurately predicted. Additionally, the
European Union is considering regulations which could lead to the ban of
products using certain raw materials. The Company's products currently utilize
these raw materials and such regulation, if enacted, could prevent the sale of
such products in Europe.
 
  The levels of revenues and profitability of biopharmaceutical companies may
be affected by the continuing efforts of government and third party payors to
contain or reduce the costs of health care through various means. For example,
in certain foreign markets, pricing or profitability of therapeutic and other
pharmaceutical products is subject to governmental control. In the United
States, there have been, and the Company expects that there will continue to
be, a number of federal and state proposals to implement similar governmental
control. While the Company cannot predict whether any such legislative or
regulatory proposals will be adopted, the adoption of such proposals could
have a material adverse effect on the Company. In addition, in both the United
States and elsewhere, sales of therapeutic and other pharmaceutical products
are dependent in part on the availability of reimbursement to the consumer
from third party payors, such as government and private insurance plans. Third
party payors are increasingly challenging the prices charged for medical
products and services. There can be no assurance that either of the
therapeutic products the Company has brought to market or any therapeutic
product candidates the Company may bring to market in the future will be
considered cost effective and that reimbursement to the consumer will be
available or will be sufficient to allow the Company to sell its products on a
competitive and profitable basis.
 
SIGNIFICANT COMPETITION AND TECHNOLOGICAL CHANGE
 
  Monoclonal antibody, genetic vaccine, peptide technology and other
innovations in biotechnology are being examined, evaluated and practiced in
biology research laboratories throughout the United States and in many
 
                                      16
<PAGE>
 
other countries, including laboratories of other biotechnology companies and
major pharmaceutical firms, many of which have greater resources than
Centocor.
 
  Several established pharmaceutical companies have internal research and
development groups, and alliances with other biotechnology companies, and are
seeking to develop monoclonal antibody-based, genetic vaccine-based, peptide-
based and other biological products. In addition, a number of companies have
recently entered the biological products field, some through acquisition or
merger, and more may be expected to do so in the future. As a result, Centocor
anticipates that new biological products will be developed by others.
 
  Centocor's management believes that its ability to compete in its targeted
markets will depend upon, among other things, its ability to develop or
acquire, produce and market innovative products. Centocor's management also
believes that significant competition will come from established
pharmaceutical companies that have greater capital resources, manufacturing
and marketing experience, research and development staffs, sales forces and
production facilities than Centocor. Such competition is expected to be in the
form of a variety of therapeutic products, which may include monoclonal
antibody-based, genetic vaccine-based and peptide-based products. There can be
no assurance that the activities of others will not render Centocor's products
or technologies obsolete or uncompetitive.
 
ITEM 2. PROPERTIES
 
  The Company owns four buildings in Malvern, Pennsylvania, and leases one
other building at this location. These buildings contain Centocor's corporate
offices, research and development laboratories, marketing offices, and certain
manufacturing facilities. Space is available in these buildings for future
expansion.
 
  The Company owns a biopharmaceutical manufacturing facility in Leiden, The
Netherlands, for the production of monoclonal antibody-based products using a
proprietary cell-culture system. This facility has been inspected and approved
by the FDA and the equivalent European regulatory agencies. The Company also
leases research and development laboratories and office space at this
location. The Company manufactures diagnostics products at its facilities in
Malvern, Pennsylvania. The Company's diagnostic manufacturing facility has
received ISO-9001 certification.
 
  Each of the Company's lease agreements with respect to its leased facilities
is a triple net lease with a remaining term of at least 4 years, under which
the Company is responsible for all operating expenses of the facility.
 
  The Company expects its total investment in property, plant and equipment to
increase in 1998 by up to approximately $100,000,000 to support its
manufacturing capacity expansion plans in Europe and the establishment of a
U.S. biopharmaceutical manufacturing facility in Malvern to support ReoPro and
Avakine production requirements.
 
ITEM 3. LEGAL PROCEEDINGS
 
  In October 1992, the Company was served with a complaint filed by the Velos
Group, a Maryland partnership ("Velos") in the U.S. District Court for the
District of Maryland. The complaint primarily alleged that the Company
breached certain provisions of a license agreement between Velos and the
Company pursuant to which the Company has exclusive rights to U.S. Patent No.
5,057,598, as well as various patent applications and foreign patents. The
complaint sought declaratory relief and monetary relief in excess of
$100,000,000, and requested that the Company place in escrow one-half of the
amounts received by the Company in 1992 pursuant to its agreements with Lilly.
Over the course of the litigation, plaintiff asserted eleven different claims
for relief and the Company asserted affirmative defenses and a counterclaim
against Velos with respect to the license agreement. After rulings on motions
for summary judgment filed by both sides, the majority of plaintiff's claims
were dismissed. The case proceeded to trial on February 18, 1997 on
plaintiff's four remaining claims under the license agreement and on the
Company's affirmative defenses and counterclaim. The parties agreed that
 
                                      17
<PAGE>
 
plaintiff's claim for attorneys fees under the license agreement would be
severed to await the outcome of the trial. On March 4, 1997, the jury returned
a verdict which, had it become the final judgment of the Court, would have
rendered the Company liable to pay plaintiff approximately $4,000,000 plus
interest and fees and expenses pursuant to the license agreement. The Company
then filed post-trial motions. On September 12, 1997, the Court entered
judgment as a matter of law in Centocor's favor, notwithstanding the verdict,
with respect to one of Velos' claims that would have resulted in liability of
$2,972,806, but the Court denied the motions relating to Centocor's
affirmative defenses. The amended judgment against Centocor was in the amount
of $1,352,689. In addition, Centocor would have remained liable for future
minimum annual royalty payments under the license agreement. Both Centocor and
Velos have appealed the judgment. Subsequent to the filing of notices of
appeal, and in the fourth quarter of 1997, the parties engaged in mediation at
the request of the Court of Appeals and discussed certain terms of a possible
settlement. Since December 31, 1997, the parties have been negotiating further
the terms of a possible settlement.
 
  In July 1995, PaineWebber Development Corporation, a wholly-owned subsidiary
of Paine Webber Group Inc., caused suits to be filed against the Company by
two research and development partnerships formed in the mid-1980s by
PaineWebber and managed by it since then. The two PaineWebber partnerships
(PaineWebber R&D Partners, L.P. and PaineWebber R&D Partners II, L.P.) were,
respectively, investors in Centocor Partners II, L.P. ("CPII") and Centocor
Partners III, L.P. ("CPIII"), research partnerships for which PaineWebber
acted as the sales agent and in other capacities. The Company purchased the
limited partners' interests in CPII in February 1992 and that partnership was
then dissolved. The Company purchased the Class A and Class C limited
partners' interests in CPIII in January 1997 and, purchased the Class B
limited partnership interest in CPIII in May 1997. See Note 7--Intangible and
other assets.
 
  The suit by PaineWebber R&D Partners, L.P., was filed in the Supreme Court
of the State of New York, County of New York, and was brought as a class
action on behalf of all former limited partners of CPII. The complaint charges
that some portion of the $100,000,000 paid by Lilly to the Company in July
1992 constituted revenues to the Company for the licensing, sublicensing or
sale of HA-1A (Centoxin) and that the Company is obligated to pay a percentage
thereof to the former limited partners of CPII, in addition to amounts already
paid. The Company moved to dismiss the New York suit on the ground that it was
brought in an inconvenient forum and that motion was granted. The suit was
then refiled in the Delaware Superior Court. Prior to the New York action, a
similar suit was filed by another former CPII partner, Jerome J. Petrisko, in
the Court of Common Pleas of Chester County, Pennsylvania. Petrisko was
subsequently allowed to intervene in the Delaware action and the Chester
County action was dismissed. The PaineWebber and Petrisko actions have been
consolidated and the action has been certified as a class action. The Company
has filed an affirmative defense and counterclaim based on unjust enrichment
which seek a setoff on any recovery by the class. Discovery has been
completed. In November 1997, Centocor filed a motion for summary judgment as
to certain claims asserted in plaintiffs' complaint. Argument on the motion
was held on December 29, 1997. The Court has not yet ruled on the motion. A
trial in this action is scheduled to commence on March 16, 1998. The Company
believes that these actions are without merit and intends to defend them
vigorously.
 
  The suit by PaineWebber R&D II, L.P. ("PWR&DII") was filed in the Court of
Chancery of the State of Delaware. In the complaint in this action, the
plaintiff seeks to sue derivatively on behalf of CPIII. CPIII is named as a
nominal defendant and the Company and Centocor Development Corporation III
("CDCIII"), a wholly owned subsidiary of the Company which acts as the general
partner of CPIII, are named as defendants against whom relief is sought. The
claim in this case is that at least $25,000,000 of the money paid by Lilly to
the Company in 1992 represented profits from the marketing of ReoPro,
obligating the Company to pay a portion thereof to CPIII, and that the Company
is obligated to pay an increased percentage of the profits from ReoPro to the
former CPIII limited partners going forward. The Company answered the
complaint in the Delaware action and filed a cross-claim against nominal
defendant CPIII and a third-party complaint against PaineWebber Group Inc. and
PaineWebber Development Corporation. The cross-claim seeks an offset against
any damages awarded the partners based on theories of unjust enrichment and
quasi contract. The third-party claims (later amended to add additional
theories of liability and to make PaineWebber, Inc. an additional third-party
defendant) seek to
 
                                      18
<PAGE>
 
hold the PaineWebber entities liable for some or all of any alleged injury to
the partnership. On November 1, 1995, an additional suit was commenced in the
Delaware Court of Chancery by John E. Abdo, a limited partner of CPIII,
against the Company, CDCIII and certain of their officers and directors. The
complaint, filed derivatively on behalf of CPIII, asserts claims, inter alia,
for breach of contract, breach of fiduciary duty, common law fraud, and
conspiracy and aiding and abetting. The Company answered this complaint and
also filed a cross-claim against nominal defendant CPIII and a third party
complaint against PaineWebber Group Inc. and PaineWebber Development
Corporation, later amended to add additional theories of liability and to name
PaineWebber, Inc. as a further third-party defendant. Abdo moved to amend his
complaint to assert claims against the persons appointed by PaineWebber to the
CDCIII Board of Directors. That motion was granted. Motions to disqualify
PWR&DII from serving as the derivative plaintiff were filed in July 1996 by
CPIII and in August 1996 by Centocor and CDCIII. Abdo joined those motions. No
decision has been issued on those motions. The case brought by PWR&DII has
been settled, subject to final approval of the settlement by the Court. Abdo
and Pharmaceutical Partners II, L.P., a limited partnership which has
purchased CPIII limited partnership interests, objected to the settlement.
They were permitted to take discovery regarding the settlement and have sought
to take additional discovery. A hearing on the adequacy and fairness of the
settlement was held on September 4, 1997. No decision has been rendered. See
Note 7--Intangible and Other Assets.
 
  On January 19, 1998, a purported class action captioned Surgener v.
Centocor, Inc. and David P. Holveck was filed in the United States District
Court for the Eastern District of Pennsylvania. Other similar suits were filed
thereafter. The complaints in these actions charge the Company and its chief
executive officer with having violated the federal securities laws. Plaintiffs
seek to represent a class of those who purchased Centocor stock between
December 2, 1997, and December 16, 1997, inclusive, and allege that defendants
made false and misleading statements in connection with earnings forecasts.
Damages in an unspecified amount are sought. The Company believes these
actions are without merit and intends to defend them vigorously.
 
  While it is not possible to predict with certainty the eventual outcome of
these matters, the Company believes that the foregoing proceedings will not
have a material adverse effect on the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matters were submitted to a vote of security holders during the fiscal
year covered by this report.
 
                                      19
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
  The Company's Common Stock is traded publicly on the Nasdaq National Market
under the trading symbol CNTO. The table below sets forth the high and low
sale prices for the Company's Common Stock for the periods indicated as
reported by the Nasdaq National Market.
 
<TABLE>
<CAPTION>
                                                               HIGH    LOW
                                                               ----    ----
   <S>                                                         <C>     <C>
   Year ended December 31, 1996
     First Quarter.............................................$40     $27 5/8
     Second Quarter............................................ 40 7/8  28
     Third Quarter............................................. 37 7/8  23
     Fourth Quarter............................................ 37 3/8  25 1/2
   Year ended December 31, 1997
     First Quarter............................................. 41 1/4  27 1/2
     Second Quarter............................................ 38 1/4  23 3/8
     Third Quarter............................................. 51 1/4  29 3/4
     Fourth Quarter............................................ 53 3/4  27 1/4
</TABLE>
 
  On February 6, 1998, there were approximately 3,193 holders of record of the
Common Stock.
 
  In June 1996, the Company and Lilly amended their Sales and Distribution
Agreement. In July 1996, in consideration of the amendment and other
activities in connection with the commercialization and market development of
ReoPro, the Company issued 920,716 shares of its common stock in a private-
placement transaction under Section 4(2) of the Securities Act of 1933.
 
  The Company has never declared or paid any dividends on its Common Stock.
The Company does not anticipate paying any dividends in the foreseeable future
and intends to retain future earnings for the development and expansion of its
business.
 
                                      20
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
                      SUMMARY CONSOLIDATED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,
                           ---------------------------------------------------
                             1993       1994       1995      1996       1997
                           ---------  ---------  --------  ---------  --------
                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                        <C>        <C>        <C>       <C>        <C>
CONSOLIDATED STATEMENT OF
 OPERATIONS DATA:
Revenues:
  Sales..................  $  48,071  $  39,984  $ 65,001  $ 132,130  $196,354
  Contracts:
    Related parties......     10,109      1,652       --         --        --
    Other................     17,750     25,590    13,915      3,355     4,430
                           ---------  ---------  --------  ---------  --------
  Total revenues.........     75,930     67,226    78,916    135,485   200,784
Costs and expenses(1)....    130,683    173,290   126,219    150,815   187,498
Other income
 (expenses)(2)...........    (19,626)   (20,594)   (9,829)     1,862    (2,156)
                           ---------  ---------  --------  ---------  --------
Income (loss) before
 extraordinary item......  $ (74,379) $(126,658) $(57,132) $ (13,468) $ 11,130
Net gain on
 extinguishment of debt..        --         --        --         705       --
                           ---------  ---------  --------  ---------  --------
Income (loss)............  $ (74,379) $(126,658) $(57,132) $ (12,763) $ 11,130
                           =========  =========  ========  =========  ========
Basic earnings (loss) per
 share...................  $   (1.79) $   (2.55) $  (0.98) $   (0.19) $   0.16
                           =========  =========  ========  =========  ========
Diluted earnings (loss)
 per share...............  $   (1.79) $   (2.55) $  (0.98) $   (0.19) $   0.16
                           =========  =========  ========  =========  ========
Weighted average number
 of shares outstanding...     41,482     49,597    58,207     66,475    69,809
Weighted average common
 and dilutive equivalent
 shares outstanding......     41,482     49,597    58,207     66,475    71,770
</TABLE>
 
<TABLE>
<CAPTION>
                                  1993      1994     1995      1996     1997
                                --------  -------- --------  -------- --------
<S>                             <C>       <C>      <C>       <C>      <C>
CONSOLIDATED BALANCE SHEET DA-
 TA:
Cash and investments(3)........ $140,028  $184,507 $137,206  $185,817 $206,630
Total assets...................  281,039   305,915  260,284   341,121  405,104
Long-term debt.................  238,100   231,640  231,640    54,765   54,765
Shareholders' equity
 (deficit).....................  (19,194)    5,278  (29,396)  235,910  257,835
</TABLE>
 
  No dividends have been declared or paid during any of the periods presented.
--------
(1) Costs and expenses include the following: (a) charges for acquired
    research and development of $36,966 in 1994, (b) charge of $3,500 in 1993
    related to HA-1A inventory, (c) restructuring charges of $9,387 and $1,642
    in 1993 and 1995, respectively, (d) a royalty buyout of $17,098 in 1994
    and (e) a write-down of facilities and equipment of $7,870 in 1994.
(2) Other income (expenses) include: (a) a charge of $4,565 in 1997 relating
    to the loss on the sale of the Company's U.K. diagnostic manufacturing
    facility and related infectious disease product line and (b) charges of
    $1,275 and $3,750 in 1994 and 1995, respectively, related to the
    settlement of certain litigation.
(3) Cash and investments at December 31, 1997 include equity investments
    classified as available for sale of $11,957, and $7,260 of investments
    maintained at certain banks as collateral for certain debt outstanding at
    December 31, 1997. Cash and investments at December 31, 1996 include
    equity investments classified as available for sale of $9,502, and $7,260
    of investments maintained at certain banks as collateral for certain debt
    outstanding at December 31, 1996.
 
 
                                      21
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
RETAVASE TRANSACTION
 
  On February 12, 1998, the Company announced that it has entered into the
Purchase Agreement to acquire the Retavase Assets from Roche Healthcare
Limited, an affiliate of Roche Holding Ltd., for $335,000,000 in cash. In
connection with the Acquisition, Centocor expects to record a one-time, pretax
charge of approximately $138,500,000, in the first quarter of 1998,
representing the acquisition of in-process research and development. Also
during the first quarter, the Company expects to record a one-time tax benefit
of approximately $20,000,000 from the recognition of certain deferred tax
assets. See "Recent Developments--Pending Acquisition of Retavase", and "Pro
Forma Condensed Consolidated Financial Data."
 
RESULTS OF OPERATIONS
 
 General
 
  The Company, since inception, has incurred significant operating expenses
developing therapeutic and diagnostic products. The Company has also incurred
significant special charges. Consequently, the Company had experienced
substantial operating losses. The Company's financial results progressively
improved throughout 1996 culminating with the Company achieving profitability
in the fourth quarter of 1996 and profitability in full year 1997. The Company
expects that its sales of therapeutic and diagnostic products in 1998 will
provide sufficient revenues to cover operating expenses and provide net income
for the year. The Company's results have been affected by various non-
operating events. Excluding such non-operating events, the Company reported
operating earnings per share of $.22 in 1997 versus an operating loss of $.20
per share in 1996.
 
  The Company commenced commercial sales of two therapeutic products in 1995:
ReoPro in January 1995 and Panorex in February 1995. In November 1997, the
Company obtained regulatory approvals in the United States and Europe for the
expanded use of ReoPro.
 
  In February 1997, the FASB issued Statement of Financial Standards No. 128,
Earnings Per Share ("Statement 128"), which was effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods. This Statement establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly
held common stock or potential common stock. This Statement simplifies the
standards for computing earnings per share previously found in Accounting
Principles Board Opinion No. 15, Earnings Per Share, and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator for the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This Statement requires restatement of all prior
period EPS data presented. The Company adopted Statement 128 in December of
1997. The adoption of Statement 128 did not have a significant effect on its
financial statements.
 
  In June 1997, the FASB issued Statement of Financial Standards No. 130,
Reporting Comprehensive Income ("Statement 130"). This Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. This
Statement is effective for fiscal years beginning after December 15, 1997. The
Company plans to adopt this accounting standard as required. The adoption of
this standard will have no impact on the Company's earnings, financial
condition or liquidity, but will require the Company to classify items of
other comprehensive income in a financial statement and display the
accumulated balance of other comprehensive income separately in the equity
section of the balance sheet.
 
  In June 1997, the FASB also issued Statement of Financial Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information
("Statement 131"). Statement 131 supercedes Statement of Financial
 
                                      22
<PAGE>
 
Standards No. 14, Financial Reporting for Segments of a Business Enterprise,
and establishes new standards for reporting information about operation
segments in annual financial statements and requires selected information
about operating segments in interim financial reports. Statement 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Statement 131 is effective for periods
beginning after December 15, 1997. This Statement affects reporting in
financial statements only and will have no impact on the Company's results of
operations, financial condition or liquidity.
 
  The Company has accumulated certain tax attributes such as net operating
loss carryforwards and tax credit carryforwards which are assets in the sense
that they may provide the Company with future cash flows from the reduction in
future tax payments. However, the realization of such assets is not assured as
it depends upon future taxable income. Under Statement of Financial Accounting
Standard No. 109, the Company is required to recognize all or a portion of net
deferred tax assets with corresponding increases to net income, when the
Company believes, given the weight of all available evidence, that it is more
likely than not that all or a portion of the benefits of net operating loss
carryforwards and other credits will be realized.
 
  Centocor has approximately $301 million of deferred tax assets consisting
primarily of the future tax benefit from net operating loss carryforwards. The
Company presently has not concluded that it is more likely than not that it
will realize all, or a portion of the benefit of such tax assets. Accordingly,
the Company has recorded a 100% valuation allowance against the asset. If the
Company determines that all or a part of these deferred tax assets are more
likely than not to be realized through sufficient future profitability based
on the outcome of certain future events, then the Company will reverse all or
part of such valuation allowance and recognize a tax benefit. Until such tax
benefit is recognized, the Company's effective tax rate is reflective of the
utilization of its net operating loss carryforwards on an annual basis and
therefore such rate is expected to be substantially lower than the statutory
rate. Should all such deferred tax assets be recognized, the Company expects
that its effective tax rate in future periods will approximate the applicable
statutory rates.
 
  The recognition of these deferred tax assets under SFAS 109 has no impact on
the Company's cash flows for income taxes despite the change in the Company's
effective tax rate. The recognition of these deferred tax assets will impact
reported EPS due to the benefit recorded to the statement of operations from
the reduction in the Company's valuation allowance.
 
 Year ended December 31, 1997 compared to year ended December 31, 1996
 
  The increase in sales for the year ended December 31, 1997 as compared to
the year ended December 31, 1996 is principally due to the increase in sales
of ReoPro.
 
  The Company is highly dependent upon the ability of its marketing partners
to develop and expand the markets for both ReoPro and Panorex. For the year
ended December 31, 1997, ReoPro sales to Lilly were $158,373,000 and Lilly's
announced sales to end-users were $254,400,000. For the year ended December
31, 1996, ReoPro sales to Lilly were $88,669,000 and Lilly's announced sales
to end-users were $149,300,000. For the year ended December 31, 1997, the
Company's sales of Panorex to Glaxo Wellcome were $5,264,000 and Glaxo
Wellcome reported to the Company that sales to end-users were approximately
$5,653,000. For the year ended December 31, 1996, the Company's sales of
Panorex to Glaxo Wellcome were $2,073,000 and Glaxo Wellcome reported to the
Company that sales to end-users were approximately $5,375,000. The level of
the Company's sales of ReoPro to Lilly and of Panorex to Glaxo Wellcome is
dependent upon the orders placed and the levels of inventory maintained by
each of these marketing partners. The Company expects ReoPro end sales to
increase in 1998 as market acceptance continues to grow. Therefore, the
Company expects its sales of ReoPro to Lilly to increase in 1998 over 1997
levels. Panorex sales to Glaxo Wellcome in 1998 are not expected to have a
significant impact on the Company's financial results.
 
  Diagnostic product sales for the year ended December 31, 1997 were
$31,777,000 as compared to $41,388,000 for the year ended December 31, 1996.
In June of 1997, the Company completed the sale of its U.K. diagnostic
manufacturing facility and its related infectious disease product line.
Oncology diagnostic
 
                                      23
<PAGE>
 
product sales for the year ended December 31, 1997 were $30,097,000 as
compared to $37,689,000 for the year ended December 31, 1996. This decrease
was due primarily to a reduction in the selling prices of some of the
Company's diagnostic bulk products, a reduction in component sales, lower
completed kit volumes and, to a lesser extent, the unfavorable impact of
foreign currency fluctuations. Diagnostic product sales in 1998 are expected
to be at about the same level achieved in 1997 primarily due to lower sales
prices and a shift of mix of products sold to more bulk and component products
for which the Company receives lower sales revenues.
 
  The level of future sales of both diagnostic and therapeutic products will
be dependent upon several factors, including, but not limited to, the timing
and extent of future regulatory approvals of the Company's products, the
availability of production capacity, as well as the continued availability of
necessary raw materials and intermediate inputs into the production process,
approval and commercialization of competitive products and ultimately, the
degree of acceptance of the Company's products in the marketplace. For the
Company's diagnostic products, the level of sales is also dependent upon the
extent of and timing of bulk and component sales to marketing partners
developing new automated instruments, as well as the mix of completed
diagnostic kit sales. The Company is currently attempting to expand its
diagnostic distribution channels to include additional distributors on a non-
exclusive basis and the Company further expects that current distributors of
its completed kits may increase sales of their respective diagnostic kits
incorporating the Company's bulk antibodies or components, which the Company
expects will result in reduced revenues on certain diagnostic products. The
Company's revenues from sales of bulk antibodies and components to partners
are lower than revenues from sales of its completed diagnostic kits.
 
  The Company is also evaluating a number of business strategies to expand and
support both its therapeutic and diagnostic products and product candidates
including, but not limited to, access to instruments primarily in the
diagnostics area, directly participating in the promotion and marketing of
certain of the Company's products and product candidates and expanding the
Company's production capabilities. In order to implement such strategies, the
Company may need to secure financing from the equity or other capital markets
or through bank relationships. There can be no assurance that such financing
will be available or that these business strategies, or any others, if
implemented will be successful in achieving increased product sales for the
Company's therapeutic and diagnostic products and product candidates.
 
  Cost of sales increased for the year ended December 31, 1997 as compared to
the year ended December 31, 1996 due primarily to the increased sales of
ReoPro. The Company is required to make certain royalty payments, based on
sales of products, which payments represent a significant percentage of cost
of sales. The Company expects an increase in cost of sales in 1998, the extent
of which will depend primarily on the amount and mix of products sold. The
Company's gross margin on sales for the year ended December 31, 1997 was
approximately 60% as compared to approximately 54% for the year ended December
31, 1996. Gross margin percentage in 1998 is expected to improve over 1997 as
production activities increase and further process efficiencies are realized.
Factors that can influence gross margin include, but are not limited to,
exchange rate fluctuations, unplanned production losses, cell line yields,
increases in royalty obligations, costs of raw materials and production
interruptions due to plant upgrades.
 
  Research and development expenses for the year ended December 31, 1997
increased as compared to the year ended December 31, 1996 due principally to
increased clinical trial activities to expand the indications for ReoPro and
the continued development of Avakine. The level of the Company's total
research and development expenses in future periods will be dependent upon the
extent of clinical trial-related activities. Research and development expenses
are expected to increase in 1998 as compared to 1997 due to clinical trial
activities in connection with the continued expansion of ReoPro use for
additional indications including, but not limited to, acute myocardial
infarction and in stroke. In addition, clinical trial activities for Avakine,
primarily phase III trials for the Crohn's and severe rheumatoid arthritis
indications are expected to continue into 1998.
 
  Marketing, general and administrative expenses for the year ended December
31, 1997 increased as compared to the year ended December 31, 1996 due
principally to ReoPro and Avakine market development efforts. The levels of
the Company's marketing, general and administrative expenses are expected to
increase in
 
                                      24
<PAGE>
 
future periods as compared to 1997 levels as the Company expands its market
development activities in connection with sales of therapeutic and diagnostic
products and directly undertakes the promotion, marketing and sale of any of
its therapeutic or diagnostic products. Marketing, general and administrative
expenses are expected to increase in 1998 as compared to 1997 due primarily to
the Company's increased investment in the direct promotion and sale of
Avakine.
 
  Interest income decreased for the year ended December 31, 1997 as compared
to the year ended December 31, 1996 due principally to a decrease in the
interest rates obtained on the Company's cash and investment balances.
Interest income in future periods will depend primarily on the level of the
Company's investments and the rates of return obtained on such investments.
 
  Interest expense decreased for the year ended December 31, 1997 as compared
to the year ended December 31, 1996 due principally to the conversion of the
Company's 7 1/4% Convertible Notes due February 1, 2001 into the Company's
Common Stock, the purchase of $70,235,000 of the Company's 6 3/4% Convertible
Debentures and the repayment of mortgage loans in Europe. Interest expense in
future periods will depend upon the level of debt outstanding.
 
  Other expenses increased for the year ended December 31, 1997 as compared to
the year ended December 31, 1996 due to an increase in Centocor's equity in
the losses of a company in which Centocor has invested. Centocor does not
expect the future equity in the income or losses of this investee company to
have a material impact on the Company.
 
  The Company did not record a provision for income tax for the year ended
December 31, 1997 or December 31, 1996. Although the Company reported net
income in 1997 for book purposes, after accounting for temporary and permanent
differences between reported net income and taxable income, Centocor did not
achieve taxable income in 1997. Therefore, no tax provision was recorded in
the financial statements.
 
 Year ended December 31, 1996 compared to year ended December 31, 1995
 
  The increase in sales for the year ended December 31, 1996 as compared to
the year ended December 31, 1995 is principally due to the increase in sales
of ReoPro. ReoPro sales commenced in January 1995.
 
  For the year ended December 31, 1996, ReoPro sales to Lilly were $88,669,000
and Lilly's announced sales to end-users were $149,300,000. For the year ended
December 31, 1995 sales to Lilly were $15,545,000 and Lilly's announced sales
to end-users were $22,800,000. For the year ended December 31, 1996, the
Company's sales of Panorex to Glaxo Wellcome were $2,073,000 and Glaxo
Wellcome reported to the Company that sales to end-users were approximately
$5,375,000. For the year ended December 31, 1995 sales to Glaxo Wellcome were
$6,531,000 and Glaxo Wellcome reported to the Company that sales to end-users
were approximately $3,400,000. The level of the Company's sales of ReoPro to
Lilly and of Panorex to Glaxo Wellcome is dependent upon the orders placed and
the levels of inventory maintained by each of these marketing partners, which
in 1995 included initial launch period quantities.
 
  Diagnostic product sales for the year ended December 31, 1996 were
$41,388,000 as compared to $42,859,000 for the same period in 1995. This
decrease was due primarily to a one-time $2,176,000 1995 stocking order of
reagents to a new customer and the reduction in the percentage of end-user
sales that the Company received from the sale of reagents in 1996 due to a
change in certain exclusive arrangements to non-exclusive in an effort to
allow the Company to increase its market penetration.
 
  The decrease in contract revenues for the year ended December 31, 1996 as
compared to the year ended December 31, 1995 was primarily due to the
achievement of certain milestones in 1995 pursuant to the Company's agreements
with Lilly. Contract revenues for the year ended December 31, 1995 included
$10,000,000 recognized pursuant to the Company's agreements with Lilly as a
result of the Company's achievement of milestones in the development of
ReoPro.
 
 
                                      25
<PAGE>
 
  Cost of sales increased for the year ended December 31, 1996 as compared to
the year ended December 31, 1995 due primarily to the increased sales of
ReoPro. The Company is required to make certain royalty payments, based on
sales of products, which payments represent a significant percentage of cost
of sales. The Company's gross margin on sales for the year ended December 31,
1996 was approximately 54% as compared to approximately 55% for the year ended
December 31, 1995. Factors that can influence gross margin include, but are
not limited to, exchange rate fluctuations, unplanned production losses, cell
line yields, increases in royalty obligations, costs of raw materials and
production interruptions due to plant upgrades.
 
  Research and development expenses for the year ended December 31, 1996
decreased as compared to the year ended December 31, 1995 due principally to
the capitalization as inventory in 1996 of certain costs associated with the
manufacture of ReoPro. In 1995, such costs were not associated with the
production of inventory and therefore were expensed as research and
development expenses.
 
  Marketing, general and administrative expenses for the year ended December
31, 1996 increased as compared to the year ended December 31, 1995 due
principally to ReoPro market development efforts and ongoing litigation.
 
  Interest income increased for the year ended December 31, 1996 as compared
to the year ended December 31, 1995 due principally to an increase in the
Company's average cash and investment balances.
 
  Interest expense decreased for the year ended December 31, 1996 as compared
to the year ended December 31, 1995 due principally to the conversion of the
Company's 7 1/4% Convertible Notes due February 1, 2001 into the Company's
Common Stock, the purchase of $70,235,000 of the Company's 6 3/4% Convertible
Debentures and the repayment of mortgage loans in Europe.
 
  Other income (expenses) increased for the year ended December 31, 1996 as
compared to the year ended December 31, 1995 due to an increase in Centocor's
equity in the losses of a company in which Centocor has invested.
 
  Other income (expenses) also includes a charge to operations of $3,750,000
for the year ended December 31, 1995 relating to the settlement of certain
class action securities litigation. The results of operations for the year
ended December 31, 1995 also included a charge to costs and expenses of
$1,642,000 for severance costs related to a reduction in the level of the
Company's personnel in 1995.
 
                                      26
<PAGE>
 
QUARTERLY RESULTS
 
  The following table sets forth certain unaudited consolidated statement of
operations data for the three years ended December 31, 1997 (in thousands
except per share data):
 
<TABLE>
<CAPTION>
                                                    QUARTER ENDED
                                        ---------------------------------------
                                        MARCH 31, JUNE 30,  SEPT. 30,  DEC. 31,
                                          1995      1995      1995       1995
                                        --------- --------  ---------  --------
<S>                                     <C>       <C>       <C>        <C>
Total revenues.........................  $23,995  $ 20,754  $ 19,155   $ 15,012
Cost and expenses:
  Cost of sales........................    8,625     8,071     7,271      5,199
  Research and development.............   13,501    17,008    18,376     17,350
  Marketing, general and
   administrative......................    7,494     7,120     7,643      6,919
  Special charges......................      --        --        --       1,642
                                         -------  --------  --------   --------
Total costs and expenses...............   29,620    32,199    33,290     31,110
Other income (expenses)................   (2,617)   (5,864)    1,980     (3,328)
                                         -------  --------  --------   --------
Net loss...............................  $(8,242) $(17,309) $(12,155)  $(19,426)
                                         =======  ========  ========   ========
</TABLE>
 
<TABLE>
<CAPTION>
                                         MARCH 31,  JUNE 30  SEPT. 30,  DEC. 31,
                                           1996       1996     1996       1996
                                         ---------  -------- ---------  --------
<S>                                      <C>        <C>       <C>        <C>
Total revenues.......................... $ 21,882 $ 30,586  $ 39,179   $ 43,838
Cost and expenses:                                
  Cost of sales.........................   10,554   14,554    17,652     18,334
  Research and development..............   12,548   13,296    15,174     15,769
  Marketing, general and                          
   administrative.......................    7,403    7,882     8,537      9,112
                                         -------- --------  --------   --------
Total costs and expenses................   30,505   35,732    41,363     43,215
Net gain on extinguishment of debt......      --       705       --         --
Other income (expenses).................   (1,075)     118       549      2,270
                                         -------- --------  --------   --------
Net income (loss)....................... $ (9,698)$ (4,323) $ (1,635)  $  2,893
                                         ======== ========  ========   ========
</TABLE>
 
<TABLE>
<CAPTION>
                                          MARCH 31, JUNE 30,  SEPT. 30, DEC. 31,
                                            1997      1997      1997      1997
                                          --------- --------  --------- --------
<S>                                       <C>       <C>       <C>       <C>
Total revenues...........................  $45,036  $53,643    $51,401  $50,704
Cost and expenses:
  Cost of sales..........................   17,806   22,183     18,307   19,662
  Research and development...............   14,337   17,292     18,821   18,173
  Marketing, general and administrative..    9,796    9,588     10,310   11,223
                                           -------  -------    -------  -------
Total costs and expenses.................   41,939   49,063     47,438   49,058
Other income (expenses)..................      244   (3,840)       678      762
Provision for income taxes...............       70       20        200     (290)
                                           -------  -------    -------  -------
Net income...............................  $ 3,271  $   720    $ 4,441  $ 2,698
                                           =======  =======    =======  =======
</TABLE>
 
  The Company's results, as a percentage of total revenues, have fluctuated on
a quarterly basis and can be expected to continue to be subject to quarterly
fluctuations. Quarterly results can fluctuate as a result of a number of
factors, including the timing of research and development expenses, the level
of product sales, the completion or commencement of significant contracts, a
reduction in the valuation allowance relating to the Company's deferred tax
assets and foreign exchange fluctuations.
 
                                      27
<PAGE>
 
PER SHARE CALCULATIONS
 
  At December 31, 1997, approximately 3,971,115 shares of the Company's Common
Stock were issuable upon exercise of outstanding options and warrants and upon
vesting of restricted stock awards. The Company uses the weighted average
number of shares outstanding in calculating basic per share data. When
dilutive, options and warrants are included as share equivalents using the
treasury stock method and are included in the calculation of diluted per share
data. The approximately 898,000 shares issuable upon conversion of the 6 3/4%
Convertible Debentures are not considered Common Stock equivalents and are not
included in the calculation of basic or diluted per share data but would be
included in the calculation of diluted per share data if their effect is
dilutive.
 
  No Common Stock equivalents or shares issuable upon conversion of the 6 3/4%
Convertible Debentures were included in the per share calculations for any
year presented since to do so would have been antidilutive. In March 1996, the
Company completed a public offering of 4,025,000 shares. In April 1996, the
Company issued 3,450,000 shares as a result of the conversion of the Company's
7 1/4% Convertible Notes. In July 1996, the Company issued 920,716 shares in
connection with its agreements with Lilly. These shares have been included in
the per share calculations and, depending upon the market value of the
Company's Common Stock and its results of operations for such periods, the
Company may be required to include its then outstanding Common Stock
equivalents as well as shares issuable upon the conversion of the 6 3/4%
Convertible Debentures in its calculations of per share data for such periods
if the effect would be dilutive.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company, since inception, has incurred significant operating expenses
attempting to develop therapeutic and diagnostic products. The Company has
also incurred significant special charges. Consequently, the Company had
experienced substantial net cash outflows, which have been only partially
offset by significant contract revenues received through collaborative
alliances with pharmaceutical companies and the Company's financing
activities. The Company's financial results have progressively improved
throughout 1996 culminating with the Company achieving profitability in the
fourth quarter of 1996 and for the full year 1997.
 
  The Company's total cash, cash equivalents and investments increased by
$20,813,000 from December 31, 1996, principally as a result of cash received
from operations and the exercise of options as discussed below, partially
offset by investments in fixed assets. The Company's future financial
condition is dependent upon the Company's rate of net cash inflows and,
ultimately, upon the achievement of significant and sustained levels of
therapeutic product sales. Under the Company's strategy of entering into
collaborative alliances with established pharmaceutical companies, the Company
generally shares sales revenues from products covered by such arrangements
with its partners. The level of future sales of both diagnostic and
therapeutic products will be dependent upon several factors, including, but
not limited to, the timing and extent of future regulatory approvals of the
Company's products, approval and commercialization of competitive products and
the degree of acceptance of the Company's products in the marketplace. There
can be no assurance that FDA or other regulatory approvals expanding the
authorized use of ReoPro and other products or permitting the commercial sale
of any of the Company's product candidates under development will be obtained.
Failure to obtain additional timely FDA or other regulatory approvals for the
use of ReoPro or other product candidates, including Avakine, will have a
material adverse effect on the Company.
 
  At December 31, 1997, the Company had cash, cash equivalents and investments
of $206,630,000, including equity investments of $11,957,000. For the year
ended December 31, 1997, the Company had cash flows from operations of
$33,715,000. The Company's total cash flows for the year ended December 31,
1997 included the receipt of $8,996,000 from the exercise of options to
purchase shares of the Company's Common Stock. The extent and timing of future
option exercises, if any, are primarily dependent upon the market price of the
Company's Common Stock and general financial market conditions, as well as the
exercise prices and expiration dates of the options. In the first quarter of
1996, the Company completed a public equity offering of 4,025,000 shares of
common stock. The net proceeds to the Company from the offering were
$125,916,000.
 
                                      28
<PAGE>
 
Upon completion of the offering, the Company initiated redemption of the
remaining 7 1/4% Convertible Notes due February 2001 most of which were
converted into common stock in the second quarter of 1996. Also in the second
quarter of 1996, the Company purchased $70,235,000 of the 6 3/4% Convertible
Debentures. In the third quarter of 1996, the Company received $15,000,000 in
connection with its agreements with Fujisawa. Additionally, in the fourth
quarter 1996, the Company repaid both its mortgage debt and long-term note
related to its Leiden facility in the amount of $15,141,000. At December 31,
1997, $54,765,000 of the 6 3/4% Convertible Debentures remain outstanding. At
December 31, 1997, the Company has a note payable of $5,940,000 which is
secured by investments at the lending bank of $7,260,000. The Company believes
that its cash, cash equivalents and investments will be sufficient to fund its
operations through at least the end of 1998.
 
  Inventory at December 31, 1997 increased as compared to December 31, 1996
due primarily to increased production of ReoPro.
 
  Gross property, plant and equipment at December 31, 1997 increased compared
to December 31, 1996, principally due to the investment of $23,570,000 for the
purchase of property and equipment partially offset by the impact of exchange
rates on property and equipment denominated in foreign currencies and the sale
of the Company's U.K. manufacturing facility and related infectious disease
product line in the second quarter of 1997. The Company expects its total
investments in property, plant and equipment to increase in 1998 by an amount
up to approximately $100,000,000 for its manufacturing capacity expansion
plans in Europe and the establishment of a U.S. biopharmaceutical
manufacturing facility in Malvern to support ReoPro and Avakine production
requirements.
 
  Long-term investments at December 31, 1997 increased as compared to December
31, 1996 principally due to an increase in the carrying value of an investment
classified as available for sale. In 1996 the Company acquired an investment,
ChromaVision Medical Systems Inc., as compensation for its prior research and
commercialization efforts and the exchange of a commercialization license. The
Company's historical basis in this investment was $770,000 and was valued at
$8,665,000 at December 31,1997. Unrealized gains and losses on securities
classified as available for sale are carried as a separate component of
shareholders' equity.
 
  Intangible and other assets at December 31, 1997 increased as compared to
December 31, 1996 resulting primarily from the advance payment of
approximately $13,600,000 to the former limited partners of CPIII in January
1997 in connection with the exercise of the Company's option to purchase the
limited partnership interest in CPIII. In June 1997, the Company announced
that it reached an agreement to settle the litigation brought by PaineWebber
R&D Partners II, L.P. on behalf of CPIII, against Centocor arising out of
Centocor's sales and distribution agreement with Lilly with respect to ReoPro.
The settlement is conditional on Delaware Chancery Court approval. The
agreement provides, among other things, for Centocor to pay the former CPIII
limited partners $10,800,000 from which attorney's fees and expenses will be
deducted, an additional $5,000,000, if and when cumulative world-wide sales of
ReoPro exceed $600 million and a revision to the royalties payable to the
former CPIII limited partners. The Company expects to pay $15,800,000 in 1998.
The Company has recorded these probable payments to the former CPIII limited
partners as a prepaid royalty, a component of Intangible and other assets in
the second quarter of 1997.
 
  The Company has entered into indemnity agreements with the former limited
partners of CCIP, CPII and CPIII pursuant to which the Company would be
obligated, under certain circumstances, to compensate these parties for the
fair market value of their respective interests under any license agreements
with the Company relating to their respective products which are lost through
the exercise by the U.S. government of any of its rights relating to the
licensed technology. The amount of any such loss would be determined annually
by independent appraisal.
 
  In October 1997, the Company announced that its subsidiary, Centocor
Diagnostics, had filed a registration statement with the Securities and
Exchange Commission relating to a proposed initial public offering by Centocor
Diagnostics of shares of its Class A Common Stock. The Company will not sell
any shares of Centocor Diagnostics stock in the offering. The proceeds of the
offering were to be used for capital expenditures related
 
                                      29
<PAGE>
 
principally to Centocor Diagnostics' cardiovascular diagnostic program,
working capital, product research and development, and other general corporate
purposes. In December 1997, the Company announced that the initial public
offering of Centocor Diagnostics, Inc. has been postponed due to market
conditions.
 
LEGAL PROCEEDINGS
 
  The Company is subject to certain litigation, as more fully described under
Part I, Item 3 "Legal Proceedings." While it is not possible to predict with
certainty the eventual outcome of these matters, the Company believes that
such legal proceedings will not have a material adverse effect on the Company.
 
ROYALTIES
 
  The Company is required to make certain future payments to the former
limited partners of CCIP and CPII based on sales of products developed by each
of the respective partnerships. Pursuant to the exercise by the Company of its
option to acquire the limited partnership interests in CPIII in January 1997,
the Company is required to make future payments to the former limited partners
of CPIII which will include payments based on future sales of ReoPro.
 
  The Company has entered into agreements to support research at certain
research institutions. These agreements, which grant the Company licenses
and/or options to license certain technology resulting from the research,
generally require the Company to pay royalties to such institutions on the
sales of any products that utilize the licensed technology. Further, the
Company has licenses under certain patents, patent applications and technology
and pays the licensors or their licensees royalties under such agreements.
 
  The Company has entered into indemnity agreements with the former limited
partners of CCIP, CPII and CPIII pursuant to which the Company would be
obligated, under certain circumstances, to compensate these parties for the
fair market value of their respective interests under any license agreements
with the Company relating to their respective products which are lost through
the exercise by the U.S. government of any of its rights relating to the
licensed technology. The amount of any such loss would be determined annually
by independent appraisal.
 
  All royalties are reflected in cost of sales as incurred. Royalty costs
represent a significant percentage of sales.
 
PRODUCT LIABILITY AND PRODUCT RECALL
 
  The testing and marketing of medical products entails an inherent risk of
product liability. There is also a risk that circumstances might develop
requiring a product recall. The Company maintains limited product liability
insurance coverage. Centocor's business may be materially adversely affected
by a successful product liability claim in excess of any insurance coverage.
There can be no assurance that product liability insurance coverage will
continue to be available to Centocor in the future on reasonable terms or at
all.
 
FOREIGN CURRENCY
 
  Certain of the Company's sales are denominated in currencies other than the
U.S. dollar. Additionally, the Company conducts operations in countries other
than the United States, primarily its manufacturing facility in Leiden, The
Netherlands. The Company's consolidated financial statements are denominated
in U.S. dollars, and, accordingly, changes in the exchange rate between
foreign currencies and the U.S. dollar will affect the translation of
financial results of foreign subsidiaries into U.S. dollars for purposes of
reporting the Company's consolidated financial results. To date, exchange rate
fluctuations have not had a material net effect on the Company's financial
results. The Company does not currently engage in any derivatives transactions
as a hedge against foreign currency fluctuations.
 
 
                                      30
<PAGE>
 
YEAR 2000 ISSUES
 
  The Company is aware of the issues associated with the programming code in
many existing computer systems as the millennium approaches. The "Year 2000"
problem is pervasive; virtually every computer operation may be affected in
some way by the rollover of the two digit year value to 00. The risk is that
computer systems will not properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous date or cause a system to fail, resulting
in business interruption.
 
  The Year 2000 issue is expected to affect the systems of various entities
with which the Company interacts, including the Company's marketing partners,
suppliers, and various vendors, and the Company is coordinating its efforts to
address the Year 2000 issue with those entities. However, there can be no
assurances that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another
company, or a conversation that is incompatible with the Company's systems,
would not have material adverse effect on the Company.
 
  With respect to its own computer systems, the Company is upgrading,
generally, in order to meet the demands of its expanding business. In the
process the Company is taking steps to identify, correct or reprogram and test
its existing systems for Year 2000 compliance. It is anticipated that all new
system upgrades or reprogramming efforts will be completed by mid 1999,
allowing adequate time for testing. The Company presently believes that with
modification to existing software and conversations to new software, the Year
2000 issue can be mitigated. However, given the complexity of the Year 2000
issue, there can be no assurances that the Company will be able to address the
problem without costs and uncertainties that might affect future financial
results or cause reported financial information not to be necessarily
indicative of future operating results or future financial condition.
 
  Since the Company currently plans to upgrade the majority of its systems
regardless of the Year 2000 problem, management has not separately assessed
the Year 2000 compliance expense and related potential effect on the Company's
earnings.
 
  The mid-1999 date by which the Company plans to complete its upgrades and
Year 2000 modifications is management's best estimate, which was derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no assurances that this estimate will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
 
INFLATION
 
  The Company believes the effects of inflation generally do not have a
material adverse impact on its operations or financial condition.
 
                                      31
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             ------------------
                                                               1997      1996
                                                             --------  --------
                                                              (IN THOUSANDS)
<S>                                                          <C>       <C>
                           ASSETS
CURRENT ASSETS:
  Cash and cash equivalents (Notes 5 and 9)................. $ 85,565  $ 55,953
  Short-term investments (Notes 5 and 9)....................  109,108   120,362
  Accounts and contracts receivable.........................   26,459    27,440
  Interest receivable.......................................    1,394     2,147
  Inventory (Note 6)........................................   27,777    23,815
  Prepaid expenses..........................................    3,053     4,279
  Other current assets......................................    1,489       752
                                                             --------  --------
                                                              254,845   234,748
PROPERTY, PLANT AND EQUIPMENT (NOTE 9):
  Land......................................................    6,044     6,176
  Buildings.................................................   62,913    65,431
  Equipment, furniture, fixtures and improvements...........   62,869    68,403
  Construction in progress..................................   24,614     1,481
                                                             --------  --------
                                                              156,440   141,491
  Less accumulated depreciation.............................  (79,426)  (79,954)
                                                             --------  --------
                                                               77,014    61,537
LONG-TERM INVESTMENTS (NOTE 5)..............................   11,957     9,502
INTANGIBLE AND OTHER ASSETS (NOTE 7)........................   61,288    35,334
                                                             --------  --------
    Total assets............................................ $405,104  $341,121
                                                             ========  ========
</TABLE>
 
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       32
<PAGE>
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS (CONT'D.)
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                                ----------------------
                                                   1997        1996
                                                ----------  ----------
                                                   (IN THOUSANDS)
<S>                                             <C>         <C>
LIABILITIES AND SHAREHOLDERS' 
            EQUITY            
CURRENT LIABILITIES:          
  Accounts payable...........................   $   15,651  $    9,543
  Accrued expenses (Note 8)..................       54,203      28,940
  Unearned revenues..........................          --          100
  Notes payable (Note 9).....................        5,940       6,897
  Other current liabilities   
   (Note 10).................................       15,800         --
                                                ----------  ----------
                                                    91,594      45,480
LONG-TERM DEBT (NOTE 9)......................       54,765      54,765
OTHER LIABILITIES............................          910       1,127
MINORITY INTEREST............................          --        3,839
SHAREHOLDERS' EQUITY (NOTES 2, 5 AND 11):                
  Preferred Stock, $.01 par value, 
   10,000 shares authorized, none issued.....          --          --
  Common Stock, $.01 par value, 100,000 
   shares authorized and 70,146 and  
   69,177 issued and outstanding at 
    December 31, 1997 and 1996,         
   respectively...............................         701         692
  Additional paid-in          
   capital....................................   1,060,158   1,050,062
  Deficit.....................................    (810,472)   (821,602)
  Unrealized gain on          
   marketable securities......................       7,894       2,342
  Cumulative foreign currency 
   translation adjustments....................        (446)      4,416
                                                ----------  ----------
                                                   257,835     235,910
                                                ----------  ----------
    Total liabilities and     
     shareholders' equity.....................  $  405,104  $  341,121
                                                ==========  ==========
</TABLE>
 
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       33
<PAGE>
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                           FOR THE YEARS ENDED DECEMBER 31,
                                           ----------------------------------
                                              1997        1996        1995
                                           ----------  ----------  ----------
                                            (IN THOUSANDS EXCEPT PER SHARE
                                                        DATA)
<S>                                        <C>         <C>         <C>
REVENUES:
  Sales................................... $  196,354  $  132,130  $   65,001
  Contracts...............................      4,430       3,355      13,915
                                           ----------  ----------  ----------
                                              200,784     135,485      78,916
COSTS AND EXPENSES:
  Cost of sales...........................     77,958      61,094      29,166
  Research and development................     68,623      56,787      66,235
  Marketing, general and administrative...     40,917      32,934      29,176
  Other charges (Note 14).................        --          --        1,642
                                           ----------  ----------  ----------
                                              187,498     150,815     126,219
OTHER INCOME (EXPENSES):
  Interest income.........................      9,607      10,276      10,126
  Interest expense........................     (3,938)     (8,351)    (17,001)
  Loss on sale of facility and related
   business (Note 14).....................     (4,565)        --          --
  Litigation settlement (Note 14).........        --          --       (3,750)
  Other...................................     (3,260)        (63)        796
                                           ----------  ----------  ----------
                                               (2,156)      1,862      (9,829)
                                           ----------  ----------  ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM... $   11,130  $  (13,468) $  (57,132)
                                           ----------  ----------  ----------
EXTRAORDINARY ITEM:
  Net gain on extinguishment of debt (Note
   9).....................................        --          705         --
                                           ----------  ----------  ----------
NET INCOME (LOSS)......................... $   11,130  $  (12,763) $  (57,132)
                                           ==========  ==========  ==========
BASIC EARNINGS (LOSS) PER SHARE:
  Before extraordinary item............... $     0.16  $    (0.20) $    (0.98)
  Extraordinary item...................... $      --   $     0.01  $      --
                                           ----------  ----------  ----------
  Net income (loss) per share............. $     0.16  $    (0.19) $    (0.98)
                                           ==========  ==========  ==========
DILUTED EARNINGS (LOSS) PER SHARE:
  Before extraordinary item............... $     0.16  $    (0.20) $    (0.98)
  Extraordinary item...................... $      --   $     0.01  $      --
                                           ----------  ----------  ----------
  Net income (loss) per share............. $     0.16  $    (0.19) $    (0.98)
                                           ==========  ==========  ==========
WEIGHTED AVERAGE NUMBER OF SHARES
 OUTSTANDING..............................     69,809      66,475      58,207
                                           ==========  ==========  ==========
WEIGHTED AVERAGE COMMON AND DILUTIVE
 EQUIVALENT SHARES OUTSTANDING............     71,770      66,475      58,207
                                           ==========  ==========  ==========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       34
<PAGE>
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                 ------------------------------
                                                   1997      1996       1995
                                                 --------  ---------  ---------
                                                        (IN THOUSANDS)
<S>                                              <C>       <C>        <C>
Cash flows from (used for) operating activi-
 ties:
 Net income (loss).............................  $ 11,130  $ (12,763) $ (57,132)
 Adjustments to reconcile net income (loss) to
  net cash from (used for) operating
  activities:
  Loss on sale of facility and related
   business....................................     4,565        --         --
  Net gain on extinguishment of debt...........       --        (705)       --
  Provisions for depreciation and
   amortization................................    14,617     14,004     16,394
  Amortization of deferred income..............      (100)       (83)    (1,616)
  Share of loss in equity investee.............     3,664        919        204
  Changes in assets and liabilities:
    Accounts and contracts receivable..........    (1,136)   (16,044)       378
    Interest receivable........................       745       (512)      (542)
    Inventory..................................    (4,561)    (4,096)    (4,519)
    Prepaid expenses...........................    (2,621)    (4,409)    (3,568)
    Other current assets.......................      (825)      (110)       462
    Intangible and other assets................   (19,345)      (127)    (1,456)
    Accounts payable...........................       450      5,537     (2,425)
    Unearned revenue...........................       --         --          46
    Accrued expenses and other liabilities.....    27,349      5,706     (2,941)
    Other long-term liabilities................      (217)      (155)       164
                                                 --------  ---------  ---------
  Net cash from (used for) operating
   activities..................................    33,715    (12,838)   (56,551)
Cash flows used for investing activities:
 Purchases of investments......................   (97,649)  (115,577)  (147,381)
 Sales of investments..........................   106,065    110,650    136,490
 Sale of facility and related business.........     2,835        --         --
 Purchases of fixed assets.....................   (23,570)    (4,674)    (4,845)
                                                 --------  ---------  ---------
  Net cash used for investing activities.......   (12,319)    (9,601)   (15,736)
Cash flows from financing activities:
 Net proceeds from issuance of Common Stock
  relating to public offering..................       --     125,916        --
 Net proceeds from other issuances of Common
  Stock........................................     8,996     20,791     18,557
 Reduction of long-term debt and notes pay-
  able.........................................       --     (84,537)    (9,615)
                                                 --------  ---------  ---------
  Net cash from financing activities...........     8,996     62,170      8,942
Effect of foreign currency translation.........      (780)       220        422
                                                 --------  ---------  ---------
Net increase (decrease) in cash and cash equiv-
 alents........................................    29,612     39,951    (62,923)
Beginning cash and cash equivalents............    55,953     16,002     78,925
                                                 --------  ---------  ---------
Ending cash and cash equivalents...............  $ 85,565  $  55,953  $  16,002
                                                 ========  =========  =========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       35
<PAGE>
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                            COMMON STOCK
                         -------------------
                                                                        NET UNREALIZED    CUMULATIVE
                                                                           GAIN ON     FOREIGN CURRENCY
                         NUMBER OF             ADDITIONAL                 MARKETABLE     TRANSLATION
                          SHARES   PAR VALUE PAID IN CAPITAL  DEFICIT     SECURITIES     ADJUSTMENTS
                         --------- --------- --------------- ---------  -------------- ----------------
                                                        (IN THOUSANDS)
<S>                      <C>       <C>       <C>             <C>        <C>            <C>
BALANCE AT DECEMBER 31,
 1994...................  57,081     $571      $  750,175    $(751,707)     $  --           $6,239
Issued upon exercise of
 options and warrants...   1,388       14          18,323          --          --              --
Issued to employee
 benefit plan...........      31      --              511          --          --              --
Vested pursuant to
 restricted stock award
 plan...................      38      --            1,059          --          --              --
Translation
 adjustments............     --       --              --           --          --              209
Carrying value
 adjustments............     --       --              --           --        2,342             --
Net loss................     --       --              --       (57,132)        --              --
                          ------     ----      ----------    ---------      ------          ------
BALANCE AT DECEMBER 31,
 1995...................  58,538      585         770,068     (808,839)      2,342           6,448
Issued upon exercise of
 options and warrants...   1,596       16          18,015          --          --              --
Issued to employee
 benefit plan...........      71        1             379          --          --              --
Issued upon stock
 offering...............   4,025       40         125,916          --          --              --
Issued upon conversion
 of debt................   3,831       38         106,302          --          --              --
Amendment to Sales and
 Distribution Agreement
 with Lilly.............     921        9          26,991          --          --              --
Vested pursuant to
 restricted stock award
 plan...................      60        1             760          --          --              --
Warrants retired
 pursuant to Tocor II
 exchange offer.........     135        2           1,631          --          --              --
Translation
 adjustments............     --       --              --           --          --           (2,032)
Net loss................     --       --              --       (12,763)        --              --
                          ------     ----      ----------    ---------      ------          ------
BALANCE AT DECEMBER 31,
 1996...................  69,177      692       1,050,062     (821,602)      2,342           4,416
Issued upon exercise of
 options and warrants...     876        9           8,989          --          --              --
Issued to employee
 benefit plan...........       9      --              320          --          --              --
Vested pursuant to
 restricted stock award
 plan...................      84      --              787          --          --              --
Translation
 adjustments............     --       --              --           --          --           (4,862)
Carrying value
 adjustments............     --       --              --           --        5,552             --
Net income..............     --       --              --        11,130         --              --
                          ------     ----      ----------    ---------      ------          ------
BALANCE AT DECEMBER 31,
 1997...................  70,146     $701      $1,060,158    $(810,472)     $7,894          $ (446)
                          ======     ====      ==========    =========      ======          ======
</TABLE>
 
 
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       36
<PAGE>
 
                                CENTOCOR, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1
 
DESCRIPTION OF BUSINESS
 
  Centocor, Inc. ("Centocor" or the "Company") is a biopharmaceutical company
the mission of which is to develop or otherwise acquire and commercialize
novel therapeutic and disgnostic products and services that solve critical
needs in human healthcare, with a primary technological focus on monoclonal
antibodies and DNA-based products.
 
NOTE 2
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of Presentation
 
  The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
 Investments
 
  The Company classifies investments with original maturities of three months
or less as cash equivalents. Investments with maturities of one year or less
are classified as short-term.
 
  Short-term marketable securities are carried at cost, which approximates
market value. Long-term debt securities which the Company has the ability and
intent to hold until maturity are carried at amortized cost. The equity
investments classified as available for sale are carried at estimated fair
value with unrealized gains and losses recorded as a component of
shareholders' equity. The Company also classifies certain investments as
trading securities which are carried at fair value with the unrealized gains
and losses reported in earnings.
 
 Inventory
 
  Inventory is stated at the lower of cost or market value using the first-in,
first-out method for diagnostic and pharmaceutical product inventories.
 
  Inventories have various expiration dates. Reserves are provided for
inventories which are likely to expire prior to sale or are likely to
otherwise not be available for sale.
 
 Property, plant and equipment and depreciation
 
  Property, plant and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets,
the depreciable lives are as follows:
 
<TABLE>
    <S>                                                               <C>
    Equipment, furniture and fixtures................................  3-5 years
    Land improvements................................................   10 years
    Leasehold improvements...........................................   10 years
    Building and building improvements............................... 31.5 years
</TABLE>
 
                                      37
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Leasehold improvements are amortized over the applicable lease period or
their estimated useful lives, whichever is shorter. Maintenance and repairs
are charged to expense, and major renewals and improvements are capitalized.
 
 Intangible and Other Assets
 
  Intangible and other assets are stated at cost, net of accumulated
amortization. Amortization is provided using either the straight-line method
or more applicable methods over the estimated useful lives of the assets,
generally 3 to 20 years. Intangable and other assets are reviewed for
impairment whenever events or circumstances provide evidence that suggest that
the carrying amount of the asset may not be recoverable. Impairment is
evaluated by using identified or expected cash flows.
 
 Revenue Recognition
 
  For contracts under which the Company is reimbursed for expenses, revenue is
recognized as the related expenses are incurred. Non-refundable fees or
milestone payments in connection with research and development or
commercialization agreements are recognized when they are earned in accordance
with the applicable performance requirements and contractual terms. Payments
received which are related to future performance are deferred and recognized
as revenue over the specified future performance periods.
 
  Sales revenues are recognized at the time the goods are shipped or when
title to the goods passes to the buyer. For certain bulk reagents, sales
revenues are recognized upon confirmation from the Company's customers that
product has been shipped to the final end user.
 
 Income Taxes
 
  The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." The
Company has net operating loss carryforwards for tax purposes that begin to
expire in 2005. Since realization of the tax benefit associated with these
carryforwards is not assured, a valuation allowance was recorded against this
tax benefit. In addition, pursuant to the Tax Reform Act of 1986, the annual
utilization of these losses may be limited. The Company believes that any such
limitation will not have a material impact on the utilization of these
carryforwards.
 
 Per Share Data
 
  The Company uses the weighted average number of shares outstanding in
calculating basic per share data. When dilutive, options and warrants are
included as share equivalents using the treasury stock method and are included
in the calculation of diluted per share data. Common Stock issuable upon
conversion of convertible debt securities are included in the calculation of
diluted per share data if their effect is dilutive.
 
 Foreign Currency Translation
 
  Assets and liabilities of subsidiaries denominated in foreign currencies are
translated at rates in effect at the appropriate year-end. Revenues and
expenses of such subsidiaries are translated at average rates of exchange for
the period of operation. The differences resulting from such translation as
compared to the equity of such subsidiaries translated at historical rates are
included in cumulative foreign currency translation adjustments, a separate
component of shareholders' equity. The Company believes that the aggregate
foreign currency transaction gains/losses do not have a significant effect on
its financial statements.
 
                                      38
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Fair Value of Financial Instruments
 
  The FASB issued Statement of Financial Accounting Standards No.107,
Disclosures About Fair Value of Financial Instruments, which defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. Cash and cash
equivalents, short term investments, accounts and contracts receivable,
prepaid expenses, interest receivable, other current assets, accounts payable
and accrued expenses reported in the consolidated balance sheets equal or
approximate fair value due to their short maturities. See Note 9 for
information regarding the fair value of the Company's long-term debt and notes
payable.
 
NOTE 3
 
COMMITMENTS AND CONTINGENCIES
 
 Liquidity and Capital Resources
 
  The Company, since inception, has incurred significant operating expenses
attempting to develop therapeutic and diagnostic products. The Company has
also incurred significant special charges. Consequently, the Company had
experienced substantial net cash outflows, which have been only partially
offset by significant contract revenues received through collaborative
alliances with pharmaceutical companies and the Company's financing
activities. The Company's financial results have progressively improved
throughout 1996 culminating with the Company achieving profitability in the
fourth quarter of 1996 and for the full year 1997.
 
  The Company's total cash, cash equivalents and investments increased by
$20,813,000 from December 31, 1996, principally as a result of cash received
from operations and the exercise of options as discussed below, partially
offset by investments in fixed assets. The Company's future financial
condition is dependent upon the Company's rate of net cash inflows and,
ultimately, upon the achievement of significant and sustained levels of
therapeutic product sales. Under the Company's strategy of entering into
collaborative alliances with established pharmaceutical companies, the Company
generally shares sales revenues from products covered by such arrangements
with its partners. The level of future sales of both diagnostic and
therapeutic products will be dependent upon several factors, including, but
not limited to, the timing and extent of future regulatory approvals of the
Company's products, approval and commercialization of competitive products and
the degree of acceptance of the Company's products in the marketplace. There
can be no assurance that FDA or other regulatory approvals expanding the
authorized use of ReoPro and other products or permitting the commercial sale
of any of the Company's product candidates under development will be obtained.
Failure to obtain additional timely FDA or other regulatory approvals for the
use of ReoPro or other product candidates, including Avakine, will have a
material adverse effect on the Company.
 
 Legal Proceedings
 
  In October 1992, the Company was served with a complaint filed by the Velos
Group, a Maryland partnership ("Velos") in the U.S. District Court for the
District of Maryland. The complaint primarily alleged that the Company
breached certain provisions of a license agreement between Velos and the
Company pursuant to which the Company has exclusive rights to U.S. Patent No.
5,057,598, as well as various patent applications and foreign patents. The
complaint sought declaratory relief and monetary relief in excess of
$100,000,000, and requested that the Company place in escrow one-half of the
amounts received by the Company in 1992 pursuant to its agreements with Lilly.
Over the course of the litigation, plaintiff asserted eleven different claims
for relief and the Company asserted affirmative defenses and a counterclaim
against Velos with respect to the license agreement. After rulings on motions
for summary judgment filed by both sides, the majority of plaintiff's claims
were dismissed. The case proceeded to trial on February 18, 1997 on
plaintiff's four remaining claims under the
 
                                      39
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
license agreement and on the Company's affirmative defenses and counterclaim.
The parties agreed that plaintiff's claim for attorneys fees under the license
agreement would be severed to await the outcome of the trial. On March 4,
1997, the jury returned a verdict which, had it become the final judgment of
the Court, would have rendered the Company liable to pay plaintiff
approximately $4,000,000 plus interest and fees and expenses pursuant to the
license agreement. The Company then filed post-trial motions. On September 12,
1997, the Court entered judgment as a matter of law in Centocor's favor,
notwithstanding the verdict, with respect to one of Velos' claims that would
have resulted in liability of $2,972,806, but the Court denied the motions
relating to Centocor's affirmative defenses. The amended judgment against
Centocor was in the amount of $1,352,689. In addition, Centocor would have
remained liable for future minimum annual royalty payments under the license
agreement. Both Centocor and Velos have appealed the judgment. Subsequent to
the filing of notices of appeal, and in the fourth quarter of 1997, the
parties engaged in mediation at the request of the Court of Appeals and
discussed certain terms of a possible settlement. Since December 31, 1997, the
parties have been negotiating further the terms of a possible settlement.
 
  In July 1995, PaineWebber Development Corporation, a wholly-owned subsidiary
of Paine Webber Group Inc., caused suits to be filed against the Company by
two research and development partnerships formed in the mid-1980s by
PaineWebber and managed by it since then. The two PaineWebber partnerships
(PaineWebber R&D Partners, L.P. and PaineWebber R&D Partners II, L.P.) were,
respectively, investors in Centocor Partners II, L.P. ("CPII") and Centocor
Partners III, L.P. ("CPIII"), research partnerships for which PaineWebber
acted as the sales agent and in other capacities. The Company purchased the
limited partners' interests in CPII in February 1992 and that partnership was
then dissolved. The Company purchased the Class A and Class C limited
partners' interests in CPIII in January 1997 and, purchased the Class B
limited partnership interest in CPIII in May 1997. See Note 7--Intangible and
other assets.
 
  The suit by PaineWebber R&D Partners, L.P., was filed in the Supreme Court
of the State of New York, County of New York, and was brought as a class
action on behalf of all former limited partners of CPII. The complaint charges
that some portion of the $100,000,000 paid by Lilly to the Company in July
1992 constituted revenues to the Company for the licensing, sublicensing or
sale of HA-1A (Centoxin) and that the Company is obligated to pay a percentage
thereof to the former limited partners of CPII, in addition to amounts already
paid. The Company moved to dismiss the New York suit on the ground that it was
brought in an inconvenient forum and that motion was granted. The suit was
then refiled in the Delaware Superior Court. Prior to the New York action, a
similar suit was filed by another former CPII partner, Jerome J. Petrisko, in
the Court of Common Pleas of Chester County, Pennsylvania. Petrisko was
subsequently allowed to intervene in the Delaware action and the Chester
County action was dismissed. The PaineWebber and Petrisko actions have been
consolidated and the action has been certified as a class action. The Company
has filed an affirmative defense and counterclaim based on unjust enrichment
which seek a setoff on any recovery by the class. Discovery has been
completed. In November 1997, Centocor filed a motion for summary judgment as
to certain claims asserted in plaintiffs' complaint. Argument on the motion
was held on December 29, 1997. The Court has not yet ruled on the motion. A
trial in this action is scheduled to commence on March 16, 1998. The Company
believes that the these actions are without merit and intends to defend them
vigorously.
 
  The suit by PaineWebber R&D II, L.P. ("PWR&DII") was filed in the Court of
Chancery of the State of Delaware. In the complaint in this action, the
plaintiff seeks to sue derivatively on behalf of CPIII. CPIII is named as a
nominal defendant and the Company and Centocor Development Corporation III
("CDCIII"), a wholly owned subsidiary of the Company which acts as the general
partner of CPIII, are named as defendants against whom relief is sought. The
claim in this case is that at least $25,000,000 of the money paid by Lilly to
the Company in 1992 represented profits from the marketing of ReoPro,
obligating the Company to pay a portion thereof to CPIII, and that the Company
is obligated to pay an increased percentage of the profits from ReoPro to the
former CPIII limited partners going forward. The Company answered the
complaint in the Delaware action
 
                                      40
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
and filed a cross-claim against nominal defendant CPIII and a third-party
complaint against PaineWebber Group Inc. and PaineWebber Development
Corporation. The cross-claim seeks an offset against any damages awarded the
partners based on theories of unjust enrichment and quasi contract. The third-
party claims (later amended to add additional theories of liability and to
make PaineWebber, Inc. an additional third-party defendant) seek to hold the
PaineWebber entities liable for some or all of any alleged injury to the
partnership. On November 1, 1995, an additional suit was commenced in the
Delaware Court of Chancery by John E. Abdo, a limited partner of CPIII,
against the Company, CDCIII and certain of their officers and directors. The
complaint, filed derivatively on behalf of CPIII, asserts claims, inter alia,
for breach of contract, breach of fiduciary duty, common law fraud, and
conspiracy and aiding and abetting. The Company answered this complaint and
also filed a cross-claim against nominal defendant CPIII and a third party
complaint against PaineWebber Group Inc. and PaineWebber Development
Corporation, later amended to add additional theories of liability and to name
PaineWebber, Inc. as a further third-party defendant. Abdo moved to amend his
complaint to assert claims against the persons appointed by PaineWebber to the
CDCIII Board of Directors. That motion was granted. Motions to disqualify
PWR&DII from serving as the derivative plaintiff were filed in July 1996 by
CPIII and in August 1996 by Centocor and CDCIII. Abdo joined those motions. No
decision has been issued on those motions. The case brought by PWR&DII has
been settled, subject to final approval of the settlement by the Court. Abdo
and Pharmaceutical Partners II, L.P., a limited partnership which has
purchased CPIII limited partnership interests, objected to the settlement.
They were permitted to take discovery regarding the settlement and have sought
to take additional discovery. A hearing on the adequacy and fairness of the
settlement was held on September 4, 1997. No decision has been rendered. See
Note 7--Intangible and Other Assets.
 
  On January 19, 1998, a purported class action captioned Surgener v.
Centocor, Inc. and David P. Holveck was filed in the United States District
Court for the Eastern District of Pennsylvania. Other similar suits were filed
thereafter. The complaints in these actions charge the Company and its chief
executive officer with having violated the federal securities laws. Plaintiffs
seek to represent a class of those who purchased Centocor stock between
December 2, 1997, and December 16, 1997, inclusive, and allege that defendants
made false and misleading statements in connection with earnings forecasts.
Damages in an unspecified amount are sought. The Company believes these
actions are without merit and intends to defend them vigorously.
 
  While it is not possible to predict with certainty the eventual outcome of
these matters, the Company believes that the foregoing proceedings will not
have a material adverse effect on the Company.
 
 Royalties
 
  In January 1997, the Company exercised its option to acquire the limited
partnership interests in CPIII and made an advance payment of approximately
$13,598,000 in cash to the Class A and Class C limited partners of CPIII. The
Company recorded this payment as a prepaid royalty in January 1997. In
addition, the Company is required to make future royalty payments to the
former limited partners of CPIII based upon future sales of ReoPro.
 
  The Company has entered into agreements to support research at certain
research institutions. These agreements, which grant the Company licenses
and/or options to license certain technology resulting from the research,
generally require the Company to pay royalties to such institutions on the
sales of any products that utilize the licensed technology. Further, the
Company has licenses under certain patents, patent applications and technology
and pays the licensors or their licensees royalties under such agreements.
 
  The Company has entered into agreements to support research at certain
research institutions. These agreements, which grant the Company licenses
and/or options to license certain technology resulting from the research,
generally require the Company to pay royalties to such institutions on the
sales of any products that utilize the licensed technology. Further, the
Company has licenses under certain patents, patent applications and technology
and pays the licensors or their licensees royalties under such agreements
 
                                      41
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company has entered into indemnity agreements with the former limited
partners of CCIP, CPII and CPIII pursuant to which the Company would be
obligated, under certain circumstances, to compensate these parties for the
fair market value of their respective interests under any license agreements
with the Company relating to their respective products which are lost through
the exercise by the U.S. government of any of its rights relating to the
licensed technology. The amount of any such loss would be determined annually
by independent appraisal.
 
  All royalties are reflected in cost of sales as incurred. Royalty costs
represent a significant percentage of sales.
 
 Product Liability and Product Recall
 
  The testing and marketing of medical products entails an inherent risk of
product liability. There is also a risk that circumstances might develop
requiring a product recall. The Company maintains limited product liability
insurance coverage. Centocor's business may be materially adversely affected
by a successful product liability claim in excess of any insurance coverage.
There can be no assurance that product liability insurance coverage will
continue to be available to Centocor in the future on reasonable terms or at
all.
 
NOTE 4
 
COLLABORATIVE ARRANGEMENTS
 
 Relationship with Eli Lilly and Company
 
  In July 1992, Centocor and Lilly entered into a Sales and Distribution
Agreement later amended in June 1993. Under that Agreement, as amended in June
1993, Centocor is principally responsible for developing and manufacturing
ReoPro, and Lilly will assist Centocor in the regulatory filings and continued
development of ReoPro for various clinical indications. Also, in the event
Centocor cannot manufacture ReoPro or under certain other circumstances, such
as material breach of the agreement by or the bankruptcy of Centocor, Lilly
has the option to assume the manufacture of ReoPro and assure the continued
supply of the product, even to the extent of acquiring Centocor's related
manufacturing assets at their independently appraised values.
 
  In June 1996, the Company and Lilly amended the Sales and Distribution
Agreement. Under the amendment, Lilly no longer has the right to buy ReoPro
for resale in Japan; however, Lilly will maintain its exclusive right to buy
and resell ReoPro in the rest of the world. In July 1996, in consideration of
the amendment and other activities in connection with the commercialization
and market development of ReoPro, the Company issued 920,716 shares of its
Common Stock to Lilly.
 
 Relationship with Fujisawa Pharmaceutical Co., Ltd.
 
  In August 1996, Centocor entered into an agreement with Fujisawa
Pharmaceutical Co., Ltd., appointing Fujisawa as the exclusive distributor of
ReoPro in Japan. As compensation for its appointment as exclusive distributor
in Japan, Fujisawa made a nonrefundable $15,000,000 payment to the Company,
and may make future milestone payments.
 
  The Company and Fujisawa will co-develop ReoPro in Japan and jointly file
for Japanese product approval. Fujisawa shall bear all external costs
associated with the clinical development of ReoPro in Japan.
 
                                      42
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Relationship with Glaxo Wellcome plc
 
  In November 1993, Centocor and Glaxo Wellcome entered into an alliance
agreement for the development and marketing of certain of Centocor's
monoclonal antibody-based cancer therapeutic products, including Panorex. In
November 1994, Centocor and Glaxo Wellcome amended their alliance agreement
and Glaxo Wellcome became the exclusive worldwide distributor for Panorex.
Under the agreement, Glaxo Wellcome is responsible principally for the
continuing clinical development of Panorex, and Centocor is responsible
principally for manufacturing Panorex and securing regulatory approvals.
 
NOTE 5
 
CASH EQUIVALENTS AND INVESTMENTS
 
  Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Securities that the Company has both
the intent and ability to hold to maturity are carried at amortized cost.
Securities that the Company does not intend to hold to maturity are classified
either as "available for sale" or as "trading" and are carried at fair value.
Unrealized gains and losses on securities classified as available for sale are
reported as a separate component of shareholders' equity. Unrealized gains and
losses on specific securities classified as trading are reported in earnings.
 
  At December 31, 1997, securities classified as trading, available for sale
and held to maturity are summarized below (in thousands).
 
<TABLE>
<CAPTION>
                                                           UNREALIZED
                                                         --------------
                                                ADJUSTED                 FAIR
                                                  COST   GAINS (LOSSES)  VALUE
                                                -------- ----- -------- -------
<S>                                             <C>      <C>   <C>      <C>
Trading securities:
  Securities and obligations of the U.S.
   Treasury and other U.S. government
   agencies.................................... $26,986  $ 98    $ (1)  $27,083
  Other short-term obligations.................   6,126   --      --      6,126
  Corporate bonds and commercial paper.........   4,035     3      (3)    4,035
                                                -------  ----    ----   -------
                                                $37,147  $101    $ (4)  $37,244
                                                =======  ====    ====   =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                         UNREALIZED
                                              ADJUSTED --------------- CARRYING
                                                COST   GAINS  (LOSSES)  VALUE
                                              -------- ------ -------- --------
<S>                                           <C>      <C>    <C>      <C>
Investments available for sale:
  Equity securities.......................... $  4,063 $7,894  $ --    $ 11,957
                                              ======== ======  =====   ========
<CAPTION>
                                                         UNREALIZED
                                              ADJUSTED ---------------   FAIR
                                                COST   GAINS  (LOSSES)  VALUE
                                              -------- ------ -------- --------
<S>                                           <C>      <C>    <C>      <C>
Investments held to maturity:
  Securities and obligations of the U.S.
   Treasury and other U.S. government
   agencies.................................. $108,048 $   13  $ (45)  $108,016
  Certificates of deposit....................    7,550    --     --       7,550
                                              -------- ------  -----   --------
                                              $115,598 $   13  $ (45)  $115,566
                                              ======== ======  =====   ========
</TABLE>
 
                                      43
<PAGE>
 
                                 CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  At December 31, 1997, these securities were classified as follows (in
thousands):
 
<TABLE>
    <S>                                                                <C>
    Cash equivalents.................................................. $ 43,734
    Short-term investments............................................  109,108
    Long-term investments.............................................   11,957
                                                                       --------
                                                                       $164,799
                                                                       ========
</TABLE>
 
  The Company has agreed to maintain investments with fair values of $7,260,000
as of December 31, 1997 at certain banks as collateral for loans from those
banks. See Note 9--Debt.
 
  At December 31, 1996, securities classified as trading, available for sale
and held to maturity are summarized below (in thousands).
 
<TABLE>
<CAPTION>
                                                         UNREALIZED
                                             ADJUSTED ----------------   FAIR
                                               COST    GAINS  (LOSSES)  VALUE
                                             -------- ------- -------- --------
<S>                                          <C>      <C>     <C>      <C>
Trading securities:
  Securities and obligations of the U.S.
   Treasury and other U.S. government
   agencies................................. $20,058  $    20   $(18)  $20,060
  Other short-term obligations..............   1,024      --     --      1,024
  Corporate bonds and commercial paper......   3,875        6     (3)    3,878
                                             -------  -------   ----   -------
                                             $24,957  $    26   $(21)  $24,962
                                             =======  =======   ====   =======
<CAPTION>
                                                         UNREALIZED
                                             ADJUSTED ---------------- CARRYING
                                               COST    GAINS  (LOSSES)  VALUE
                                             -------- ------- -------- --------
<S>                                          <C>      <C>     <C>      <C>
Investments available for sale:
  Equity securities......................... $ 7,160  $ 2,342   $--    $ 9,502
                                             =======  =======   ====   =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                          UNREALIZED
                                               CARRYING --------------   FAIR
                                                VALUE   GAINS (LOSSES)  VALUE
                                               -------- ----- -------- --------
<S>                                            <C>      <C>   <C>      <C>
Investments held to maturity:
  Securities and obligations of the U.S.
   Treasury and other U.S. government
   agencies................................... $111,488 $ 46   $(117)  $111,417
  Certificates of deposit.....................    8,603  --      --       8,603
  Corporate bonds and commercial paper........    7,872    8      (4)     7,876
                                               -------- ----   -----   --------
                                               $127,963 $ 54   $(121)  $127,896
                                               ======== ====   =====   ========
</TABLE>
 
  At December 31, 1996, these securities were classified as follows (in
thousands):
 
<TABLE>
    <S>                                                                <C>
    Cash equivalents.................................................. $ 32,563
    Short-term investments............................................  120,362
    Long-term investments.............................................    9,502
                                                                       --------
                                                                       $162,427
                                                                       ========
</TABLE>
 
                                       44
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 6
 
INVENTORY
 
  Inventory, net of reserves, consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                 ---------------
                                                                  1997    1996
                                                                 ------- -------
    <S>                                                          <C>     <C>
    Raw materials............................................... $ 4,646 $ 5,824
    Work in process.............................................  12,850   7,948
    Finished goods..............................................  10,281  10,043
                                                                 ------- -------
                                                                 $27,777 $23,815
                                                                 ======= =======
</TABLE>
 
  Inventories have various expiration dates. The Company continually evaluates
the extent of inventory reserves considered necessary based upon the future
regulatory and commercial status of such products. There can be no assurance
that additional reserves for inventories will not be required in the future.
 
NOTE 7
 
INTANGIBLE AND OTHER ASSETS
 
  Intangible and other assets consist of the following, net of accumulated
amortization of $16,311,000 and $10,804,000 at December 31, 1997 and 1996,
respectively, (in thousands):
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                ---------------
                                                                 1997    1996
                                                                ------- -------
    <S>                                                         <C>     <C>
    Licenses................................................... $ 5,339 $ 5,378
    Goodwill...................................................     --    5,158
    Prepaid royalties related to CPIII.........................  29,398     --
    Debt issuance costs........................................     598     755
    Deferred charges...........................................  23,084  23,026
    Other......................................................   2,869   1,017
                                                                ------- -------
                                                                $61,288 $35,334
                                                                ======= =======
</TABLE>
 
  Prepaid royalties related to CPIII at December 31, 1997 represent an advance
payment of approximately $13,600,000 in cash paid to the former limited
partners of CPIII in connection with the purchase of the limited partnership
interests in CPIII and an additional $15,800,000 payable to the former limited
partners of CPIII in connection with the revision of future royalties. See
Note 3--Commitments and Contingencies.
 
  Deferred charges at December 31, 1997 and 1996 include a prepayment of
certain future royalties and a prepayment associated with the
commercialization and market development of ReoPro.
 
  In June 1997, the Company sold its U.K. diagnostic manufacturing facility
and its related infectious disease product line. In connection with the
transaction the Company recorded a one-time charge to earnings of $4,565,000
in the second quarter of 1997, a component of which was the write-off of
goodwill on the facility and related business.
 
  Licensing agreements and other assets are reviewed for impairment whenever
events or circumstances provide evidence that suggest that the carrying amount
of the asset may not be recoverable. Impairment is evaluated by using
identified or expected cash flows.
 
                                      45
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 8
 
ACCRUED EXPENSES
 
  Accrued expenses consist of the following (in thousands):
 
<TABLE>
<CAPTION>
    DECEMBER 31,                                                  1997    1996
    ------------                                                 ------- -------
    <S>                                                          <C>     <C>
    Compensation................................................ $10,177 $ 7,320
    Interest....................................................     824     823
    Research....................................................  17,541   5,496
    Royalties...................................................  17,561   7,973
    Other.......................................................   8,100   7,328
                                                                 ------- -------
                                                                 $54,203 $28,940
                                                                 ======= =======
</TABLE>
 
NOTE 9
 
DEBT
 
 Notes Payable
 
  Notes payable at December 31, 1997 and 1996 consists of $5,940,000 and
$6,897,000, respectively, of borrowings under short-term notes at an interest
rate of 3.9 and 3.2 percent per annum at December 31, 1997 and 1996,
respectively, payable in Dutch guilders no later than March 28, 1998. These
borrowings are secured by investments at the lending bank of $7,260,000.
 
 Long-term debt
 
  On October 16, 1991, the Company issued $125,000,000 principal amount of 6
3/4% Convertible Debentures due October 16, 2001. The 6 3/4% Convertible
Debentures were initially convertible by the holders into approximately
2,049,000 shares of the Company's Common Stock at a conversion price of $61.00
per share at any time prior to redemption or maturity. The 6 3/4% Convertible
Debentures are redeemable by the Company for cash in whole or in part until
October 16, 2001 at amounts ranging up to 102 percent of the principal amount
of the 6 3/4% Convertible Debentures. The Company may be required to redeem
the 6 3/4% Convertible Debentures at their principal amount at the option of
the holders of the 6 3/4% Convertible Debentures in certain limited
circumstances, including a change in control of the Company.
 
  In the second quarter of 1996, the Company purchased $70,235,000 of its 6
3/4% Convertible Debentures which were subsequently retired. At December 31,
1997 and 1996, $54,765,000 of the 6 3/4% Convertible Debentures remain
outstanding and are convertible into approximately 898,000 shares of the
Company's Common Stock.
 
  The fair value of the Company's long-term debt at December 31, 1997
(consisting of the Company's 6 3/4% Convertible Debentures outstanding),
principally determined by quoted market prices, was $54,765,000 as compared to
its carrying value of $54,765,000. The carrying amount of the Company's notes
payable at December 31, 1997 approximates their fair value.
 
  7 1/4% Percent Notes
 
  In March 1996, the Company called for redemption of 7 1/4% Convertible Notes
at a redemption price of 103.222 percent of the outstanding principal amount.
The outstanding principal amount of the 7 1/4% Convertible
 
                                      46
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
Notes was $106,640,000 at December 31, 1995. The Company issued approximately
3,831,000 shares of Common Stock upon conversion of approximately $106,302,000
principal amount of the 7 1/4% Convertible Notes and paid $338,000 in cash to
redeem the remaining 7 1/4% Convertible Notes outstanding which were not
converted.
 
NOTE 10
 
OTHER CURRENT LIABILITIES
 
  In June 1997, the Company announced that it has reached an agreement to
settle the litigation brought by PaineWebber R&D Partners II, L.P. on behalf
of CPIII, against Centocor arising out of Centocor's sales and distribution
agreement with Lilly with respect to ReoPro (See Note 3). The settlement is
conditional on Delaware Chancery Court approval. The agreement provides, among
other things, for Centocor to pay the former limited partners of CPIII
$10,800,000 from which attorney's fees and expenses will be deducted, an
additional $5,000,000, if and when cumulative world-wide sales of ReoPro
exceed $600 million and a revision to the royalties payable to the former
limited partners of CPIII. At December 31, 1997 the Company has recorded a
current liability for the $15,800,000 for these probable payments to the
former limited partners of CPIII.
 
NOTE 11
 
SHAREHOLDERS' EQUITY
 
 Capital Stock
 
  In 1997, the Company issued 876,000 shares of its Common Stock par value
$.01 per share in connection with the exercise of options. In 1996 and 1995,
respectively, the Company issued 1,596,000 and 1,388,000 shares of its Common
Stock in connection with the exercise of options and warrants. In March 1996,
the Company completed a public offering of 4,025,000 shares, and in April 1996
the Company issued 3,450,000 shares as a result of conversion of the Company's
7 1/4% Convertible Notes. Additionally, in July 1996, the Company issued
920,716 shares in connection with its agreements with Lilly. At December 31,
1997, approximately 6,661,000 shares of Common Stock were reserved for
issuance upon exercise of stock options, pursuant to employee retirement
savings and stock award plans and agreements, and upon conversion of
convertible debt securities. Additionally, at December 31, 1997 and 1996,
respectively, approximately 385,000 shares of preferred stock were reserved
for issuance under a shareholder rights plan which is further described below.
 
 Warrants
 
  At December 31, 1996, warrants to purchase approximately 127,000 shares of
the Company's Common Stock were outstanding at an exercise price of $49.75,
exercisable to December 31, 1997. At December 31, 1997 the warrants lapsed
without exercise.
 
 Stock Option and Restricted Stock Award Plans
 
  The Company maintains stock option plans pursuant to which options to
purchase a total of approximately 9,050,000 shares of its Common Stock have
been authorized for grant to the Company's employees and to its non-employee
directors. Under the terms of these plans, the option exercise price may not
be less than the fair market value of the underlying stock at the time the
option is granted. The options granted under these plans generally expire upon
the earlier of the termination of the optionee's employment or service or ten
years from the date of the grant. Additionally, non-qualified stock options
have been granted to certain directors and employees of, and certain
consultants to, the Company pursuant to non-qualified stock option agreements
with terms similar to those set forth in the plans.
 
                                      47
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following table summarizes the activity with respect to the Company's
stock options (in thousands except per share amounts):
 
<TABLE>
<CAPTION>
                                                                 EXERCISE PRICE
                                                        OPTIONS    PER SHARE
                                                        -------  --------------
<S>                                                     <C>      <C>
Outstanding, December 31, 1994.........................  4,958   $ 6.500-53.500
Granted................................................    713   $ 9.875-24.000
Lapsed or canceled.....................................   (678)  $ 6.875-31.750
Exercised..............................................   (336)  $ 6.500-53.500
                                                        ------   --------------
Outstanding, December 31, 1995.........................  4,657   $ 6.875-51.750
Granted................................................    749   $14.125-39.375
Lapsed or canceled.....................................   (278)  $ 6.875-51.750
Exercised.............................................. (1,162)  $ 6.875-22.625
                                                        ------   --------------
Outstanding, December 31, 1996.........................  3,966   $ 6.875-51.750
Granted................................................    766   $23.750-52.500
Lapsed or canceled.....................................    (74)  $ 7.125-51.000
Exercised..............................................   (876)  $ 6.875-38.310
                                                        ------   --------------
Outstanding, December 31, 1997.........................  3,782   $ 6.875-52.500
                                                        ======   ==============
</TABLE>
 
  At December 31, 1997, the weighted-average remaining contractual life of
outstanding options was 6.73 years. The weighted-average exercise price of the
options outstanding as of December 31, 1997 and 1996 was $22.57 and $17.50,
respectively.
 
  At December 31, 1997, options to purchase a total of approximately 2,112,000
shares of Common Stock were exercisable, and approximately 1,670,000 options
become exercisable as follows (in thousands):
 
<TABLE>
<CAPTION>
    YEARS ENDING DECEMBER 31,                                              SHARES
    -------------------------                                              ------
    <S>                                                                    <C>
       1998...............................................................  617
       1999...............................................................  489
       2000...............................................................  390
       2001...............................................................  174
</TABLE>
 
  The Company maintains a Restricted Common Stock Award Plan, pursuant to
which a total of approximately 2,000,000 shares of the Company's Common Stock
have been authorized for award to eligible employees. The number of shares
awarded in each year and the terms under which such shares vest are determined
by the Board of Directors at the time of the award. Generally, a portion of
the shares awarded vests annually over a period of five years from the date of
the award. As of December 31, 1997, awards of approximately 188,000 shares of
the Company's Common Stock were outstanding and are scheduled to vest in the
following periods (in thousands):
 
<TABLE>
<CAPTION>
    YEARS ENDING DECEMBER 31,                                              SHARES
    -------------------------                                              ------
    <S>                                                                    <C>
       1998...............................................................   87
       1999...............................................................   64
       2000...............................................................   37
</TABLE>
 
  The terms of options unexercisable as of December 31, 1997 for an aggregate
of approximately 1,143,000 shares and restricted stock awards unvested as of
December 31, 1997 for an aggregate of approximately 172,000 shares provide for
the acceleration of the exercisability of such options and the vesting of such
restricted stock
 
                                      48
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
awards upon the occurrence of certain events constituting a change in control
of the Company. Further, in such event, the holders of approximately 2,342,000
options may then choose to receive cash through the exercise of a limited
stock appreciation right in lieu of exercising their options.
 
  The Company has adopted Statement of Financial Accounting Standards No. 123,
Accounting For Stock-Based Compensation ("Statement 123"), which was issued in
October 1995 and is effective for transactions entered into in fiscal years
beginning after December 15, 1995. In accordance with the provisions of
Statement 123, which allows the Company to apply Accounting Principles Board
Opinion No. 25 and related interpretations
in accounting for its stock option plans, the Company does not recognize
compensation cost for options granted. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by Statement 123, net income (loss) and earnings (loss) per
share would have been reduced to the pro forma amounts indicated in the table
below (in thousands except per share amounts):
 
<TABLE>
<CAPTION>
                                                               1997     1996
                                                              ------- --------
   <S>                                                        <C>     <C>
   Net income (loss)--as reported............................ $11,130 $(12,763)
   Net income (loss)--pro forma.............................. $ 5,980 $(17,791)
   Diluted earnings (loss) per share--as reported............ $  0.16 $  (0.19)
   Diluted earnings (loss) per share--pro forma.............. $  0.08 $  (0.27)
</TABLE>
 
  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following average assumptions
for the years ended December 31,
<TABLE>
<CAPTION>
                                                                     1997  1996
                                                                     ----  ----
   <S>                                                               <C>   <C>
   Risk free interest rate..........................................  6.1%  5.6%
   Expected life of option (years)..................................  9.1   9.2
   Expected dividend of option(1)...................................  --    --
   Volatility of stock price........................................ 67.3% 70.3%
</TABLE>
--------
(1) The Company has never declared or paid any dividends on its Common Stock.
    The Company does not anticipate paying any dividends in the foreseeable
    future and intends to retain future earnings for the development and
    expansion of its business.
 
 Qualified Savings and Retirement Plan
 
  The Company maintains a Qualified Savings and Retirement Plan for the
benefit of its employees. Employees' benefits are based solely on the
employees' discretionary contributions and the Company's discretionary
matching contributions which, for the years ended December 31, 1997 and 1996
totaled $875,000 and $551,000, respectively. The Company generally makes its
discretionary matching contributions in its Common Stock. Employee
contributions to the Plan may be invested in various instruments, including
the Company's Common Stock, at the discretion of the employee.
 
 Shareholder Rights Plan
 
  The Company maintains a Shareholder Rights Plan ("Rights Plan"). Under the
Rights Plan, each common shareholder receives one-half of one Right (a
"Right") for each share of Common Stock held. Each Right entitles the holder
to purchase from the Company one one-hundredth of a share of Series A
Preferred Stock at an exercise price of $170. The Rights will become
exercisable and will detach from the Common Stock in the event any individual
or group acquires 20 percent or more of the Common Stock, or announces a
tender or exchange offer which, if consummated, would result in the ownership
by that person or group of at least 30 percent of the Common Stock.
 
                                      49
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  If, following an acquisition of 20 percent or more of the Common Stock, the
Company is acquired by any person in a merger or other business combination
transaction or sells more than 50 percent of its assets or earning power to
any person, each Right will entitle the holder to purchase, for the exercise
price, common stock of the acquiring company with a value of twice the
exercise price. In addition, if any person acquires 30 percent or more of the
Common Stock, each Right will entitle the holder, other than an acquiring
person, to purchase Common Stock of the Company with a value of twice the
exercise price. The Rights also provide for protection against self-dealing
transactions by a 20 percent shareholder.
 
  The Company may redeem the Rights at $.02 per Right at any time until the
tenth day after the acquisition by a person or group beneficially owning 20
percent or more of its Common Stock. The Rights will expire on September 26,
1998 unless earlier redeemed.
 
NOTE 12
 
GEOGRAPHIC AND CUSTOMER INFORMATION
 
<TABLE>
<CAPTION>
                                        GEOGRAPHIC INFORMATION (IN THOUSANDS)
                                       -------------------------------------------
                                                      INCOME       IDENTIFIABLE
YEARS ENDED DECEMBER 31,                 REVENUE      (LOSS)          ASSETS
------------------------               ------------ ------------  ----------------
<S>                                    <C>          <C>           <C>
1997
  United States....................... $    138,223 $     14,166    $    306,980
  Europe..............................       52,693       (1,419)         97,715
  Other...............................        9,868       (1,617)            409
                                       ------------ ------------    ------------
                                       $    200,784 $     11,130    $    405,104
                                       ============ ============    ============
1996
  United States....................... $     86,743 $    (23,125)   $    243,182
  Europe..............................       36,194       10,333          97,450
  Other...............................       12,548           29             489
                                       ------------ ------------    ------------
                                       $    135,485 $    (12,763)   $    341,121
                                       ============ ============    ============
1995
  United States....................... $     35,272 $    (61,208)   $    160,094
  Europe..............................       43,466        4,076         100,190
  Other...............................          178          --              --
                                       ------------ ------------    ------------
                                       $     78,916 $    (57,132)   $    260,284
                                       ============ ============    ============
</TABLE>
 
  Revenues from unaffiliated customers is based on the location of the
customers. Income (loss) by geographic area consists of the related income
(loss) of the Company's subsidiaries based upon the location of their
respective operations. Identifiable assets by geographic area are those assets
used in the Company's operations in those areas.
 
 Customer Information
 
  During 1997, approximately 81% of the Company's total product sales were
sales of ReoPro to one customer, Lilly. During 1996, approximately 67% of the
Company's total product sales were sales of ReoPro to one customer, Lilly.
During 1995, approximately 50% of the Company's total product sales were to
three customers, as follows: 24% to Lilly, 11% to Glaxo Wellcome and 15% to
Toray-Fuji Bionics, Inc.
 
                                      50
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 13
 
CONTRACT REVENUES
 
  Pursuant to the Company's agreements with Lilly, the Company recognized
revenues of $10,000,000 for the year ended December 31, 1995 related to the
achievement of ReoPro milestones.
 
  The Company incurred expenses of approximately $1,486,000, $29,121,000 and
$29,900,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, representing aggregate CPIII research costs funded by the
Company in order to continue the progress of the research program and to
preserve the value of its purchase option which it exercised in January 1997.
 
  The Company has entered into various commercialization agreements under
which it has recognized revenues from non-refundable fees or milestone
payments in support of its research and development efforts. Revenues recorded
under these agreements amounted to $4,430,000, $3,355,000 and $13,915,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
 
NOTE 14
 
SPECIAL CHARGES
 
  In June 1997, the Company sold its U.K. diagnostic manufacturing facility
and its related infectious disease product line. In connection with the
transaction the Company recorded a one-time charge to earnings of $4,565,000
in the second quarter of 1997. The Company recorded a charge to earnings of
$3,750,000 for the years ended December 31, 1995 in connection with the
settlement of certain litigation. Other income (expenses) also includes the
Company's equity share of the gain and/or losses of an investee company.
 
  In 1995, the Company recorded a charge of $1,642,000 representing severance
costs in connection with the downsizing of its workforce.
 
NOTE 15
 
INCOME TAXES
 
  The components of the deferred tax assets are as follows as of December 31,
1997 and 1996 (in thousands):
 
<TABLE>
<CAPTION>
                                                             1997       1996
                                                           ---------  ---------
   <S>                                                     <C>        <C>
   Tax credits............................................ $  10,822  $   7,216
   Loss carryforwards.....................................   246,737    237,401
   Acquired research......................................    23,206     25,499
   Deferred R&D expense...................................     9,689     16,385
   Capital loss carryforwards.............................     5,536        --
   Facilities and equipment...............................     2,088      2,207
   Compensation and benefits..............................     1,359        --
   Litigation.............................................       479        --
   Depreciation...........................................     1,138      1,050
   Asset impairment.......................................       350      1,553
                                                           ---------  ---------
   Total..................................................   301,404    291,311
   Valuation reserve......................................  (301,404)  (291,311)
                                                           ---------  ---------
   Net deferred tax assets................................ $     --   $     --
                                                           =========  =========
</TABLE>
 
                                      51
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  At December 31, 1997, the Company had research and development, orphan drug
and other tax credits of approximately $10,440,000, substantially all with
expiration dates ranging from 1999 to 2012, and minimum tax credits of
approximately $381,000 which do not expire.
 
  Realization of net deferred tax assets related to these items is dependent
on future earnings, which are uncertain. Accordingly, a valuation reserve was
recorded by the Company and, therefore, the Company had no net deferred tax
assets at December 31, 1997.
 
  Of the $301 million valuation allowance at December 31, 1997, approximately
$25 million relating to deductions for non-qualified stock options will be
credited to paid-in-capital if realized. Included in loss carryforwards at
December 31, 1997 are unused foreign tax subsidies that may be used to offset
foreign taxable income of approximately $20 million. The Company had net
operating loss carryforwards available in the United States for federal income
tax purposes of approximately $634 million which will begin to expire at
various dates from the year 2005 to 2012. Net operating loss carryforwards may
also be subject to various annual and other limitations on the amounts to be
utilized.
 
NOTE 16
 
LEASES
 
  The Company is lessee under various non-cancelable operating leases,
covering certain of the Company's facilities and equipment. The facility
leases generally provide for the Company to pay all taxes and operating costs
associated with the facility.
 
  The aggregate minimum rental commitments of leases are as follows:
 
<TABLE>
<CAPTION>
   YEARS ENDING DECEMBER 31,
   -------------------------
   <S>                                                                 <C>
   1998............................................................... 2,000,000
   1999............................................................... 1,377,000
   2000...............................................................   320,000
   2001...............................................................   164,000
   2002...............................................................   149,000
   Thereafter.........................................................       --
</TABLE>
 
  Rent expense was $2,913,000, $3,162,000 and $3,308,000, for the years ended
December 31, 1997, 1996 and 1995, respectively.
 
NOTE 17
 
SUPPLEMENTAL INFORMATION ON CASH FLOWS
 
  Interest paid was $3,910,000, $12,615,000 and $18,358,000, in 1997, 1996,
and 1995, respectively.
 
  Income tax payments of $131,000, $13,000 and $9,000 were made in 1997, 1996
and 1995, respectively.
 
  In 1996, in consideration of the amendment to the Sales and Distribution
Agreement and other activities in connection with commercialization and market
development of ReoPro, Centocor issued 920,716 common shares to Lilly.
 
  In 1997, the Company had unrealized gains on its equity investments of
$7,894,000. In 1996 and 1995, the Company had unrealized gains on its equity
investments of $2,342,000.
 
                                      52
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 18
 
QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED
                                       -----------------------------------------
                                       MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
                                       -------- ------- ------------ -----------
                                         (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                    <C>      <C>     <C>          <C>
1997
  Total revenues...................... $45,036  $53,643   $51,401      $50,704
  Sales...............................  44,936   51,007    50,171       50,240
  Gross profit from sales.............  27,130   28,824    31,864       30,578
  Net income(1).......................   3,271      720     4,441        2,698
  Basic earnings per share(2)......... $   .05  $   .01   $   .06      $   .04
  Diluted earnings per share(2)....... $   .05  $   .01   $   .06      $   .04
  Operating earnings per share(3)..... $   .05  $   .07   $   .06      $   .04
</TABLE>
 
<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED
                                     -------------------------------------------
                                     MARCH 31  JUNE 30  SEPTEMBER 30 DECEMBER 31
                                     --------  -------  ------------ -----------
<S>                                  <C>       <C>      <C>          <C>
1996
  Total revenues.................... $21,882   $30,586    $39,179      $43,838
  Sales.............................  21,710    29,526     38,309       42,585
  Gross profit from sales...........  11,156    14,972     20,657       24,251
  Net income (loss)(1)..............  (9,698)   (4,323)    (1,635)       2,893
  Basic earnings (loss) per
   share(2)......................... $  (.16)  $  (.06)   $  (.02)     $   .04
  Diluted earnings (loss) per
   share(2)......................... $  (.16)  $  (.06)   $  (.02)     $   .04
  Operating earnings per share(3)... $  (.16)  $  (.07)   $  (.02)     $   .04
</TABLE>
--------
(1) During the second quarter of 1997, the Company sold its U.K. diagnostic
    manufacturing facility and its related infectious disease product line. In
    connection with the transaction the Company recorded a one-time charge to
    earnings of $4,565,000. During the second quarter of 1996, the Company
    recorded a net gain on the extinguishment of debt of $705,000.
(2) The computation of earnings or loss per share in each period is based on
    the weighted average number of common shares outstanding. When dilutive,
    stock options and warrants are included as share equivalents using the
    treasury stock method, for diluted earnings per share.
(3) Operating earnings (loss) per share represents diluted earnings (loss) per
    share without the effects of non-operating activities noted in footnote 1.
 
NOTE 19
 
EARNINGS PER SHARE
 
  In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("Statement 128"), which was effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. This Statement establishes standards for computing
and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. This Statement
simplifies the standards for computing earnings per share previously found in
Accounting Principles Board Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator for the basic EPS computation to the numerator
and denominator of the diluted EPS computation. This Statement requires
restatement of all prior period EPS data presented. The Company adopted
Statement 128 in December of 1997. The adoption of Statement 128 did not have
a significant effect on its financial statements.
 
                                      53
<PAGE>
 
                                CENTOCOR, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
<TABLE>
<CAPTION>
                                              FOR THE YEAR ENDED DECEMBER 31,
                                                           1997
                                            -----------------------------------
                                              INCOME       SHARES     PER SHARE
                                            (NUMERATOR) (DENOMINATOR)  AMOUNT
                                            ----------- ------------- ---------
<S>                                         <C>         <C>           <C>
  Basic EPS................................   $11,130      69,809       $0.16
  Incremental shares from assumed exercise
   of dilutive options and warrants........       --        1,961
                                              -------      ------
  Diluted EPS..............................   $11,130      71,770       $0.16
                                              =======      ======
</TABLE>
 
  For the years ended December 31, 1996 and 1995 no exercise of options and
warrants is assumed since their effect is antidilutive.
 
NOTE 20
 
SUBSEQUENT EVENT (UNAUDITED)
 
  On February 12, 1998, the Company entered into a definitive agreement with
Roche Healthcare Limited, a Bermuda corporation and a subsidiary of Roche
Holding Ltd., a Swiss corporation, to acquire the exclusive United States and
Canadian product rights for Retavase, a leading acute-care cardiovascular
drug, and other related assets for $335,000,000 in cash (the "Acquisition").
Retavase is a fibrinolytic ("clot-buster") product, which is administered
usually in the hospital emergency room, for the treatment of acute myocardial
infarction (heart attack). In connection with the Acquisition, Centocor
expects to record a one-time, pretax charge of approximately $138,500,000 in
the first quarter of 1998, representing the acquisition of in-process research
and development.
 
  Consummation of the Acquisition is not conditioned upon the receipt by the
Company of financing sufficient to fund the purchase price. The Company has,
however, received a commitment letter from a leading investment bank pursuant
to which such investment bank has committed to purchase from Centocor
securities in an amount sufficient to provide $335,000,000 of net proceeds to
the Company. The Company intends to finance the Acquisition through the
issuance of convertible subordinated debentures in an unregistered offering.
 
                                      54
<PAGE>
 
                             REPORT OF MANAGEMENT
 
  The consolidated financial statements presented in this report have been
prepared by the Company's management in conformity with generally accepted
accounting principles from the Company's financial records. The Company's
management is responsible for all information and representations made in
those financial statements and for their integrity and objectivity. In those
cases where judgment and best estimates are necessary, appropriate
consideration is given to materiality in the preparation of the financial
statements. The Company's management has also prepared the other information
in this report and is responsible for its accuracy and consistency with the
financial statements.
 
  The Company's management has designed systems of internal accounting
controls to provide reasonable, but not absolute, assurance that assets are
safeguarded from unauthorized use or disposition, and that transactions are
recorded according to management's policies and procedures. The concept of
reasonable assurance is based on the recognition that there are inherent
limitations in all systems of internal accounting control and that the costs
of such systems should not exceed the benefits to be derived. These systems
are continually reviewed and modified, where appropriate, to maintain such
assurance. Additionally, in connection with their annual audit, independent
auditors perform examinations in accordance with generally accepted auditing
standards, which include a review of the system of internal accounting
controls to the extent necessary in order to determine the nature, timing, and
extent of audit tests to be applied on the financial statements. The Company's
management believes that the Company's system of internal accounting controls
is adequate to accomplish the objectives discussed herein.
 
  The selection of the Company's independent auditors, KPMG Peat Marwick LLP,
has been approved by the Company's Board of Directors. An Audit Committee of
the Board of Directors, composed of three non-management directors, meets
with, and reviews the activities of, corporate financial management and the
independent auditors to ascertain that each is properly discharging its
responsibilities. The independent auditors also meet separately with the Audit
Committee without management present, to discuss the results of their work,
the adequacy of internal accounting controls, and the quality of financial
reporting.
 
                                      55
<PAGE>
 
                         INDEPENDENT AUDITOR'S REPORT
 
The Board of Directors and Shareholders
Centocor, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Centocor,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, cash flows and shareholders' equity for
each of the years in the three-year period ended December 31, 1997. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on
our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Centocor,
Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
 
KPMG Peat Marwick LLP
 
Philadelphia, Pennsylvania
January 28, 1998
 
                                      56
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  Not Applicable
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
ITEM 11. EXECUTIVE COMPENSATION
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  In accordance with General Instruction G(3), the information called for by
Items 10, 11, 12 and 13 of Part III are incorporated herein by reference from
the Company's definitive Proxy Statement for the Centocor Annual Meeting of
Shareholders to be held on May 13, 1998, which definitive Proxy Statement will
be filed with the Securities and Exchange Commission pursuant to Regulation
14A.
 
                                      57
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
 
  a. Documents filed as part of the Report:
 
    i. Not applicable
 
    ii. Financial Statement Schedules:
 
      Schedule II--Valuation and Qualifying Accounts
 
      Schedules, other than those listed above, have been omitted because
      of the absence of conditions under which they are required or
      because the required information is included in the financial
      statements or the notes thereto.
 
    iii. Exhibits:
 
<TABLE>
       <C>    <S>
        3.1   Restated Articles of Incorporation (incorporated by reference to
              Exhibit 3.1 to Form S-1 Registration Statement, File No. 2-
              80098).
        3.2   Statement of Reduction of Authorized Shares filed September 19,
              1983 (incorporated by reference to Exhibit 3.2 to Registrant's
              Annual Report on Form 10-K for the year ended December 31, 1986).
        3.3   Statement of Reduction of Authorized Shares filed January 19,
              1984 (incorporated by reference to Exhibit 3.3 to Registrant's
              Annual Report on Form 10-K for the year ended December 31, 1986).
        3.4   Articles of Amendment filed April 18, 1984 (incorporated by
              reference to Exhibit 3.4 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1986).
        3.5   Statement of Reduction of Authorized Shares filed February 25,
              1985 (incorporated by reference to Exhibit 3.5 to Registrant's
              Annual Report on Form 10-K for the year ended December 31, 1986).
        3.6   Statement of Reduction of Authorized Shares filed May 6, 1985
              (incorporated by reference to Exhibit 3.6 to Registrant's Annual
              Report on Form 10-K for the year ended December 31, 1986).
        3.7   Statement of Reduction of Authorized Shares filed October 23,
              1985 (incorporated by reference to Exhibit 3.7 to Registrant's
              Annual Report on Form 10-K for the year ended December 31, 1986).
        3.8   Articles of Amendment filed April 16, 1987 (incorporated by
              reference to Exhibit 3.8 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1987).
        3.9   Articles of Amendment filed April 21, 1988 (incorporated by
              reference to Exhibit 3.9 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1988).
        3.10  Articles of Amendment filed April 26, 1988 (incorporated by
              reference to Exhibit 3.10 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1988).
        3.11  Statement Re Series A Preferred Stock filed October 11, 1988
              (incorporated by reference to Exhibit 3.11 to Registrant's Annual
              Report on Form 10-K for the year ended December 31, 1988).
        3.12  Articles of Amendment filed April 13, 1990 (incorporated by
              reference to Exhibit 3.12 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1990).
        3.13  Articles of Amendment filed April 26, 1991 (incorporated by
              reference to Exhibit 3.13 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1991).
</TABLE>
 
                                      58
<PAGE>
 
<TABLE>
       <C>    <S>
        3.14  Statement of Correction filed October 16, 1991 to Articles of
              Amendment filed April 26, 1991 (incorporated by reference to
              Exhibit 3.14 to Registrant's Annual Report on Form 10-K for the
              year ended December 31, 1991).
        3.15  By-Laws of Centocor, Inc. as amended October 30, 1992
              (incorporated by reference to Exhibit 3.15 to Registrant's Annual
              Report on Form 10-K for the year ended December 31, 1992).
        3.16  By-laws of Centocor, Inc. as amended December 10, 1997.
        4.1   Specimen Certificate for Common Stock (incorporated by reference
              to Exhibit 4 to Amendment No. 1 to Form S-1 Registration
              Statement, File No. 2-80098).
        4.2   Rights Agreement between Centocor, Inc. and the First National
              Bank of Boston as Rights Agent dated September 26, 1988
              (incorporated by reference to Exhibit 4 to Registrant's Current
              Report on Form 8-K dated September 26, 1988).
        4.3   Form of Indenture between Centocor, Inc. and Chase Manhattan
              Trustees Limited as Trustee Dated as of October 16, 1991
              (incorporated by reference to Exhibit 4.3 to Form S-3
              Registration Statement, Reg. No. 33-44231).
        4.4   Form of Debenture Issued to Purchasers of 6 3/4% Convertible
              Subordinated Debentures Due October 16, 2001 (incorporated by
              reference to Exhibit 4.3 to Form S-3 Registration Statement, Reg.
              No. 33-44231).
        4.5   Form of Series T Warrant Issued to Purchasers of Units, each Unit
              consisting of one share of Tocor II Callable Common Stock, one
              Series T warrant to purchase one share of Centocor Common Stock,
              and one Callable warrant to purchase one share of Centocor Common
              Stock (incorporated by reference to Exhibit 4.2 to Amendment No.
              4 to Form S-1/S-3 Registration Statement of Tocor II and
              Centocor, Reg. No. 33-44072).
        4.6   Form of Callable Warrant Issued to Purchasers of Units, each Unit
              consisting of one share of Tocor II Callable Common Stock, one
              Series T warrant to purchase one share of Centocor Common Stock,
              and one Callable warrant to purchase one share of Centocor Common
              Stock (incorporated by reference to Exhibit 4.3 to Amendment No.
              4 to Form S-1/S-3 Registration Statement of Tocor II and
              Centocor, Reg. No. 33-44072).
       10.1*  Form of Non-Qualified Stock Option Agreement (incorporated by
              reference to Exhibit 10.01 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1987).
       10.2*  Incentive Stock Option Plan, as amended (incorporated by
              reference to Exhibit 10.03 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1986).
       10.3*  1983 Incentive Stock Option Plan, as amended (incorporated by
              reference to Exhibit 10.04 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1986).
       10.4*  1983 Restricted Common Stock Award Plan, as amended and restated
              (incorporated by reference to Exhibit 10.04 to Registrant's
              Annual Report on Form 10-K for the year ended December 31, 1993).
       10.5*  1987 Non-Qualified Stock Option Plan, as amended and restated
              (incorporated by reference to Exhibit 10.05 to Registrant's
              Annual Report on Form 10-K for the year ended December 31, 1990).
       10.6*  1989 Non-Employee Directors' Non-Qualified Stock Option Plan
              (incorporated by reference to Exhibit 10.06 to Registrant's
              Annual Report on Form 10-K for the year ended December 31, 1989).
</TABLE>
 
                                       59
<PAGE>
 
<TABLE>
       <C>    <S>
       10.7   Lease Agreement for property located at Great Valley Parkway,
              Malvern, PA 19355 (incorporated by reference to Exhibit 10.07 to
              Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1989).
       10.8   Partnership Purchase Option Agreement among Centocor, Inc., CCIP,
              Centocor Development Corporation I, each Class A limited partner
              and the Class B limited partner, dated September 12, 1985
              (incorporated by reference to Exhibit 10.53 to Registrant's Post
              Effective Amendment No. 1 to Form S-1 Registration Statement,
              File No. 2-95057).
       10.9   Indemnity Agreement between Centocor, Inc. and CCIP, dated
              September 12, 1985 (incorporated by reference to Exhibit 10.71 to
              Registrant's Post Effective Amendment No. 1 to Form S-1
              Registration Statement, File No. 2-95057).
       10.10* Qualified Savings and Retirement Plan, as amended and restated
              (incorporated by reference to Exhibit 10.14 to Registrant's
              Annual Report on Form 10-K for the year ended December 31, 1989).
       10.11  Partnership Purchase Option Agreement among Centocor, Inc., CPII,
              Centocor Development Corporation II, each Class A limited partner
              and the Class B limited partner, dated December 17, 1986
              (incorporated by reference to Exhibit 10.23 to Registrant's
              Annual Report on Form 10-K for the year ended December 31, 1986).
       10.12  Indemnity Agreement between Centocor, Inc. and CPII, dated
              December 17, 1986 (incorporated by reference to Exhibit 10.26 to
              Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1986).
       10.13  Indemnity Agreement between CPIII and Centocor, Inc., dated
              December 23, 1987 (incorporated by reference to Exhibit 10.41 to
              Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1987).
       10.14  Partnership Purchase Option Agreement among Centocor, Inc.,
              CPIII, Centocor Development Corporation III, and the Class C
              limited partner, dated December 23, 1987 (incorporated by
              reference to Exhibit 10.43 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1987).
       10.15  Amendment dated March 23, 1988 to Partnership Purchase Option
              Agreement among Centocor, Inc., CPIII, Centocor Development
              Corporation III and the Class C limited partner dated December
              23, 1987 (incorporated by reference to Exhibit 10.37 to
              Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1988).
       10.16  Series E, F and G Preferred Stock Purchase Agreement dated as of
              November 20, 1991 between Centocor Delaware, Inc. and Corvas
              International, Inc. (incorporated by reference to Exhibit 10.28
              to Form S-1 Registration Statement of Corvas International, Inc.
              Reg. No. 33-44555).
       10.17  Sales and Distribution Agreement between Centocor, Inc. and Eli
              Lilly and Company dated July 15, 1992. (The Registrant has
              requested confidential treatment from the Securities and Exchange
              Commission for portions of this Agreement.) (Incorporated by
              reference to Exhibit 10.32 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1992).
       10.18  Reimbursement Agreement between Centocor, Inc. and Eli Lilly and
              Company dated July 15, 1992. (The Registrant has requested
              confidential treatment from the Securities and Exchange
              Commission for portions of this Agreement.) (Incorporated by
              reference to Exhibit 10.33 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1992).
</TABLE>
 
                                       60
<PAGE>
 
<TABLE>
       <C>    <S>
       10.19  Investment Agreement between Centocor, Inc. and Eli Lilly and
              Company dated July 15, 1992. (The Registrant has requested
              confidential treatment from the Securities and Exchange
              Commission for portions of this Agreement.) (Incorporated by
              reference to Exhibit 10.34 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1992).
       10.20  Amendment to Sales and Distribution Agreement among Centocor,
              Inc., Centocor B.V. and Eli Lilly and Company dated June 27,
              1993. (The Registrant has requested confidential treatment from
              the Securities and Exchange Commission for portions of this
              Agreement.) (Incorporated by reference to Exhibit 10.35 to
              Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1993).
       10.21  Option Agreement between Centocor B.V. and Eli Lilly Nederland
              B.V. dated August 20, 1993. (The Registrant has requested
              confidential treatment from the Securities and Exchange
              Commission for portions of this Agreement.) (Incorporated by
              reference to Exhibit 10.36 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1993).
       10.22  Deed of Mortgage from Centocor B.V. to Eli Lilly Nederland B.V.
              dated August 26, 1993 (incorporated by reference to Exhibit 10.37
              to Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1993).
       10.23  Deed of Pledge from Centocor B.V. to Eli Lilly Nederland B.V.
              dated August 26, 1993 (incorporated by reference to Exhibit 10.38
              to Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1993).
       10.24  Amendment to Sales and Distribution Agreement among Centocor,
              Inc., Centocor B.V. and Eli Lilly and Company dated July 26,
              1996. (The Registrant has requested confidential treatment from
              the Securities and Exchange Commission for portions of this
              Agreement.) (Incorporated by reference to Exhibit 10.24 to
              Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1996).
       10.25  Stock Purchase Agreement made as of December 16, 1993 by and
              between Centocor, Inc. and The Wellcome Foundation Limited
              (incorporated by reference to Exhibit 10(a) to the Registrant's
              Current Report on Form 8-K dated December 16, 1993).
       10.26  Supply, Distribution and Sales Agreement dated December 16, 1993
              by and among Centocor, Inc., Centocor B.V., The Wellcome
              Foundation Limited and Burroughs Wellcome Co. (The Registrant has
              requested confidential treatment from the Securities and Exchange
              Commission for portions of this Agreement.) (Incorporated by
              reference to Exhibit 10(b) to the Registrant's Current Report on
              Form 8-K dated December 16, 1993).
       10.27  Clinical and Regulatory Development Agreement dated December 16,
              1993 among Centocor, Inc., Centocor B.V., The Wellcome Foundation
              Limited and Burroughs Wellcome Co. (The Registrant has requested
              confidential treatment from the Securities and Exchange
              Commission for portions of this Agreement.) (Incorporated by
              reference to Exhibit 10(c) to the Registrant's Current Report on
              Form 8-K dated December 16, 1993).
       10.28  Centocor Technology License Agreement dated as of December 16,
              1993 among Centocor, Inc., Centocor B.V., The Wellcome Foundation
              Limited and Burroughs Wellcome Co. (The Registrant has requested
              confidential treatment from the Securities and Exchange
              Commission for portions of this Agreement.) (Incorporated by
              reference to Exhibit 10(e) to the Registrant's Current Report on
              Form 8-K dated December 16, 1993).
</TABLE>
 
                                       61
<PAGE>
 
<TABLE>
       <C>    <S>
       10.29  Relicense Agreement dated as of December 16, 1993 among Centocor,
              Inc., Centocor B.V., The Wellcome Foundation Limited and
              Burroughs Wellcome Co. (incorporated by reference to Exhibit
              10(f) to the Registrant's Current Report on Form 8-K dated
              December 16, 1993).
       10.30  Appendix A--Glossary of Terms to each of the Agreements dated as
              of December 16, 1993 by and among Centocor, Inc., Centocor B.V.,
              The Wellcome Foundation Limited and Burroughs Wellcome Co. (The
              Registrant has requested confidential treatment from the
              Securities and Exchange Commission for portions of this
              Agreement.) (Incorporated by reference to Exhibit 10(g) to the
              Registrant's Current Report on Form 8-K dated December 16, 1993).
       10.31  First Supplemental Agreement dated as of November 15, 1994 among
              Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited
              and Burroughs Wellcome Co. (The Registrant has requested
              confidential treatment from the Securities and Exchange
              Commission for portions of this Agreement.) (Incorporated by
              reference to Exhibit 10(a) to the Registrant's Current Report on
              Form 8-K dated November 15, 1994).
       10.32  Wellcome Clinical Development Agreement dated as of November 15,
              1994 among Centocor, Inc., Centocor B.V., The Wellcome Foundation
              Limited and Burroughs Wellcome Co. (The Registrant has requested
              confidential treatment from the Securities and Exchange
              Commission for portions of this Agreement.) (Incorporated by
              reference to Exhibit 10(b) to the Registrant's Current Report on
              Form 8-K dated November 15, 1994).
       10.33  Distribution Agreement between Centocor, Inc. and Fujisawa
              Pharmaceutical Co. Ltd dated August 15, 1996. (Registrant has
              requested confidential treatment from the Securities and Exchange
              Commission for portions of this Agreement). (Incorporated by
              reference to exhibit 10.33 to Registrant's Annual Report on Form
              10-K for the year ended December 31, 1996).
       10.34  Asset Purchase Agreement dated February 11, 1998 between Roche
              Healthcare Limited and Centocor, Inc. (The Registrant has
              requested confidential treatment from the Securities and Exchange
              Commission for portions of this Agreement.)
       11     Computation of Earnings (Loss) per Common Share.
       12     Statement re: Computation of Ratios.
       21     Subsidiaries of the Registrant.
       23     Consent of Independent Auditors.
       27     Financial Data Schedule.
</TABLE>
    --------
    * These exhibits constitute compensatory plans.
 
  b. The Registrant has filed the following reports on Form 8-K since the
beginning of the quarter ended December 31, 1997:
 
<TABLE>
<CAPTION>
      DATE OF REPORT     ITEMS COVERED
      --------------     -------------
      <S>                <C>
      January 21, 1998       5, 7
      February 13, 1998      5, 7
</TABLE>
 
  For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into registrant's Registration Statements on Form
S-8, Nos. 2-86486, 33-16285, 33-00167, 33-35731, 33-23480, 33-16284, and 33-
35730.
 
                                      62
<PAGE>
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
 
                                      63
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
 
                                          Centocor, Inc.
 
February 13, 1998
 
                                                   
                                          By:    /s/ David P. Holveck
                                              -------------------------------  
                                                     DAVID P. HOLVECK,
                                                  CHIEF EXECUTIVE OFFICER
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
 
              SIGNATURE                        TITLE                 DATE
              ---------                        -----                 ----

     /s/ Hubert J. P. Schoemaker       Director, Chairman     February 13, 1998
-------------------------------------   of the Board                 
       HUBERT J. P. SCHOEMAKER
 
        /s/ David P. Holveck           Chief Executive        February 13, 1998
-------------------------------------   Officer, and                 
          DAVID P. HOLVECK              Director (principal
                                        executive officer)
 
        /s/ Dominic J. Caruso          Senior Vice            February 13, 1998
-------------------------------------   President and Chief          
          DOMINIC J. CARUSO             Financial Officer
                                        (principal
                                        financial and
                                        accounting officer)
 
        /s/ Anthony B. Evnin           Director               February 13, 1998
-------------------------------------                                
          ANTHONY B. EVNIN
 
       /s/ William F. Hamilton         Director               February 13, 1998
-------------------------------------                                
         WILLIAM F. HAMILTON
 
       /s/ Antonie T. Knoppers         Director               February 13, 1998
-------------------------------------                                
         ANTONIE T. KNOPPERS
<PAGE>
 
              SIGNATURE                         TITLE                DATE
              ---------                        ------                ----  

      /s/ Ronald A. Matricaria          Director              February 13, 1998 
-------------------------------------                                
        RONALD A. MATRICARIA
 
      /s/ Richard D. Spizzirri          Director              February 13, 1998
-------------------------------------                               
        RICHARD D. SPIZZIRRI
 
        /s/ Lawrence Steinman           Director              February 13, 1998
-------------------------------------                               
          LAWRENCE STEINMAN
 
         /s/ Jean C. Tempel             Director              February 13, 1998
-------------------------------------                             
           JEAN C. TEMPEL
<PAGE>
 
                                                                     SCHEDULE II
 
                        CENTOCOR, INC. AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
                  FOR THE THREE YEARS ENDED DECEMBER 31, 1997
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                    CHARGED                      CHARGED                      CHARGED
                           BALANCE  TO COSTS            BALANCE  TO COSTS            BALANCE  TO COSTS            BALANCE
                              AT      AND                  AT      AND                  AT      AND                  AT
 LASSIFICATIONC            12/31/94 EXPENSES DEDUCTIONS 12/31/95 EXPENSES DEDUCTIONS 12/31/96 EXPENSES DEDUCTIONS 12/31/97
--------------             -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- --------
 <S>                       <C>      <C>      <C>        <C>      <C>      <C>        <C>      <C>      <C>        <C>
 Inventory Reserves.......  $14,880   $2,094  ($15,938)   $1,036    $662     ($357)    $1,341   $8,484   ($5,317)   $4,508
</TABLE>
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
 -------
 <C>     <S>
   3.16  By-laws of Centocor, Inc., as amended December 10, 1997
  10.34  Asset Purchase Agreement dated February 11, 1998 between Roche
         Healthcare Limited and Centocor, Inc. (The Registrant has requested
         confidential treatment from the Securities and Exchange Commission for
         portions of this Agreement.)
  11     Computation of Earnings Per Common Share
  12     Statement re: Computation of Ratios
  21     Subsidiaries of the Registrant
  23     Consent of Independent Auditors
  27     Financial Data Schedule
</TABLE>