<PAGE>
 
                                 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, 1996
                          ------------------------------------------------------
                                                 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, Malvern, PA                      19355-1307
---------------------------------------                    ------------
  (Address of principal executive                           (Zip Code) 
   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)

             Warrants for the purchase of shares of 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.   [X]

  The aggregate market value of the 69,053,050 shares of voting stock held by
non-affiliates of the registrant as of February 18, 1997 was $2,572,226,113.

  Common Stock outstanding at February 18, 1997: 69,589,250 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 14,
1997 -- Part III, Items 10, 11, 12 and 13.

*Includes Warrants issued in January 1992 which were registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934 as part of Units, each Unit
consisting of one share of Callable Common Stock of Tocor II, Inc., one Series T
Warrant and one callable Warrant.
<PAGE>
 
                                    Part I

ITEM 1. BUSINESS
----------------

GENERAL

  Any statements contained in this Annual Report on Form 10-K by Centocor, Inc.
("Centocor" or the "Company") that are forward looking are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that forward looking statements involve risks and
uncertainties including economic, competitive, governmental, technological and
other factors  which may affect the Company's business and prospects.

  Centocor is a biotechnology company whose mission is to develop and
commercialize novel therapeutic and diagnostic products and services that solve
critical needs in human health care. The Company concentrates on research and
development, manufacturing and market development, with a primary technological
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 is marketed by Eli Lilly and
Company ("Lilly") and sold in a number of markets including, but not limited to,
the United States and Europe for the reduction of acute ischemic cardiac
complications in patients undergoing angioplasty procedures who are at high risk
for abrupt artery closure. Panorex is marketed by Glaxo Wellcome plc ("Glaxo
Wellcome") and sold in Germany as an adjuvant therapy in the treatment of post-
operative colorectal cancer. The Company also markets several diagnostic
products for cancer and infectious disease in the United States, certain
European countries and Japan.

  At December 31, 1996, Centocor had approximately 545 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 Guildford, the United Kingdom, and an office in
Tokyo, Japan.

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, regulatory processes, manufacturing and market development. The
Company seeks to license technology and product candidates from research
institutions and other biotechnology companies, in addition to conducting
selected basic research.
 
     In an effort to reach the market in an expeditious manner, create
competitive barriers and establish itself as the market leader, the Company's
clinical development and regulatory strategy for its therapeutic products is to
pursue initial approval for a narrowly defined indication. The Company then
seeks to expand the indications for which the products may be marketed by
conducting additional clinical trials. The Company maintains and seeks strategic
alliances with major pharmaceutical companies for the commercialization and
marketing of each of its therapeutic products, pursuant to which the Company and
its respective partners jointly focus on the continued clinical and market
development for the products, while the Company's partners primarily conduct the
marketing, promotion and distribution of such products. With regard to the
Company's CenTNF product (see "Therapeutic Products - CenTNF"), however, the
Company is evaluating the possibility of directly participating in the promotion
and marketing of such product in the United States.
 
     In the diagnostics area, the Company seeks to expand the markets for its
existing products while focusing on the development of unique assays that
complement the automated diagnostic instruments developed by its 

                                       1
<PAGE>
 
marketing partners. The Company believes that the experience it acquires in
developing therapeutic products may help it define diagnostic product
opportunities and vice versa. Based on this experience, the Company is seeking
to develop diagnostic products that can increase the effectiveness, and thereby
the utilization of, its therapeutic products. For instance, the Company has
developed assays to evaluate platelet function. Such assays are currently being
studied in conjunction with ReoPro clinical trials to target patients that can
benefit from ReoPro therapy. Also, the Rapid Rare Event Detection (RRED) System
allows the Company to perform tests on cells rather than circulating markers
like tumor markers. Initial clinical applications include the detection of
minimal residual disease in patients that may benefit from Panorex therapy. The
Company maintains and seeks distribution agreements for its diagnostic products
with companies having established positions and distribution networks in
applicable market segments.

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)         
-------------------------         ----------                           ---------         
<S>                           <C>                             <C>              
THERAPEUTIC:                                                                             
 ReoPro................       High-risk angioplasty           Marketed (U.S., Europe)    
                                                              Phase II (Japan)           
                              All angioplasty                 PLA supplement filed (U.S.)
                              Unstable angina                 PLA supplement filed (U.S.)
                              Acute myocardial infarction     Phase II                   
                              Adjuvant therapy with stents    Phase III                  
                              Stroke                          Phase II planned           
 Panorex...............       Adjuvant therapy for post-      Marketed (Germany)         
                              operative colorectal cancer     Phase III                  
                                                              Phase IA planned (Japan)   
 CenTNF................       Rheumatoid arthritis            Phase III                  
                                                              Phase II (Japan)           
                              Crohn's disease                 Phase III                  
                                                              Phase II (Japan)           
 Corsevin M............       Thrombosis                      Phase I                    
 Gene Vaccines.........       Colorectal cancer               Phase I                    
                              Prostate cancer                 Phase I planned             
</TABLE> 

(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.
 

                                       2
<PAGE>
 
<TABLE> 
<CAPTION> 
PRODUCT/PRODUCT CANDIDATE            INDICATION                                 STATUS
-------------------------            ----------                                 ------
<S>                            <C>                                     <C>                                           
DIAGNOSTIC:                                                                                                          
-----------                                                                                                          
 CA 125 II...............      Ovarian cancer monitoring               Marketed (U.S., Europe Japan)                
                               Ovarian cancer screening                Clinical development                          
 CA 19-9.................      Pancreatic cancer monitoring            Marketed (Europe, Japan)                     
 CA 15-3.................      Breast cancer monitoring                Marketed (Europe, Japan)                     
                                                                       510 K filed (U.S.)                            
 CA 72-4.................      Gastrointestinal cancer                 Marketed (Europe, Japan)                     
                                monitoring                                                                           
 P-glycoCHEK.............      Resistance to chemo-therapeutic         Sold for investigational use (Europe, Japan) 
                                drug detection                                                                       
 CYFRA 21-1..............      Non-small cell lung cancer              Marketed (Europe, Japan)                     
 CAPTIA Syphilis G.......      Syphilis antibody detection             Marketed (U.S., Europe, South America)       
 CAPTIA CMV..............      Cytomegalovirus antibody detection      Marketed (U.S., Europe)                      
 Myoscint................      Cardiac necrosis imaging                Marketed (U.S., Europe                       
                                                                       Approved (Japan)                              
 Platelet diagnostics....      Platelet function monitoring            Clinical development with ReoPro             
 RRED....................      Cellular detection of minimal residual  Clinical development with Panorex            
 (Rapid Rare Event Detection)  disease - cancer                                                                  
                               HIV viral load                          Feasibility testing                           
 </TABLE>

 THERAPEUTIC PRODUCTS

     Sales of the Company's therapeutic products were approximately $90.7
million and $22.1 million for the years ended December 31, 1996 and 1995,
respectively.

     ReoPro.   Antithrombotic agents such as ReoPro are used in the treatment of
cardiovascular disease to prevent blood clots. The three main markets for these
agents are angioplasty, unstable angina and myocardial infarction (heart
attack). Effective platelet inhibiting treatment is needed in angioplasty to
prevent abrupt reclosure and restenosis and in unstable angina to prevent
resulting heart attacks and death. Abrupt reclosure, which occurs in about 5-8%
of angioplasty cases and in 12-14% of more complicated high-risk cases, can
result in death, myocardial infarction, the need for emergency coronary bypass
surgery or repeat PTCA.  Powerful agents are also needed to enhance treatment of
myocardial infarction by effectively opening the clotted artery and preventing
reocclusion following drug therapy. ReoPro is effective in inhibiting blood
clotting by inhibiting the aggregation of platelets. 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. ReoPro is a chimeric monoclonal antibody fragment that binds to GP
IIb/IIIa receptors on the surface of platelets, thereby inhibiting platelet
aggregation.

     Following the successful completion of the EPIC Phase III clinical trial of
ReoPro and subsequent U.S. Food and Drug Administration ("FDA") approval, the
Company commenced commercial sales of ReoPro in January 1995 for patients who
are at high risk for abrupt artery closure following angioplasty. 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 

                                       3
<PAGE>
 
distributed by Fujisawa Pharmaceutical Co., Ltd. ("Fujisawa"). See "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 following summarizes the two most recently completed Phase III clinical
trials of ReoPro:

          EPILOG Trial for All Angioplasty.   The EPILOG trial was a randomized,
     double-blind, placebo-controlled trial, originally designed to enroll 4,800
     patients at 65 sites in the United States and Canada, to evaluate 30-day
     and 6-month clinical outcomes in all patients following angioplasty
     procedures. This trial excluded the heart attack and unstable angina
     patient groups that were evaluated in the EPIC trial because ReoPro had
     already demonstrated efficacy in these patients and was already approved
     for use in these groups. Because an interim analysis of the first 1,500
     patients enrolled in the trial revealed approximately a 70% reduction in
     death and heart attack rates within 30 days of the angioplasty procedure
     for patients receiving ReoPro, the EPILOG study was halted in December 1995
     on the recommendation of the EPILOG independent Safety and Efficacy
     Monitoring Committee. This result was highly statistically significant (p
     less than.0001). Additionally, the EPILOG independent Safety and Efficacy
     Monitoring Committee concluded that major bleeding events in patients
     receiving ReoPro were at essentially the same level as patients receiving
     placebo. In October 1996 the Company announced that the EPILOG trial
     demonstrated that ReoPro achieved a statistically significant improvement
     versus placebo at six months in the primary composite end-point of death,
     heart attack and revascularization. The EPILOG results show ReoPro
     continues to have a positive impact for patients undergoing angioplasty six
     months after the operation. The number of deaths and heart attacks were
     reduced by 46 percent six months after angioplasty. Death rates were
     reduced by 6 for every 1,000 patients, while 49 fewer heart attacks
     occurred for every 1,000 patients. The Company filed for regulatory
     approvals in the United States for the expanded indication in February 1997
     and expects to file for additional regulatory approvals in Europe in early
     1997.

          CAPTURE Trial for Unstable Angina.   Unstable angina is a condition
     that commonly precedes a heart attack. It is caused by inadequate blood
     supply to the heart due to the build-up of atherosclerotic plaque in the
     coronary artery. The CAPTURE trial was a randomized, double-blind, placebo-
     controlled trial originally designed to enroll 1,400 patients at 75 sites
     in Europe, to evaluate ReoPro in patients scheduled for urgent angioplasty
     procedures due to refractory unstable angina. Because of positive findings
     after an analysis of the first 1,050 patients enrolled in the trial, the
     CAPTURE study was halted in December 1995 on the recommendation of the
     CAPTURE independent Safety and Efficacy Monitoring Committee. The CAPTURE
     independent Safety and Efficacy Monitoring Committee determined that
     efficacy exceeded the predetermined stopping point, (p less than.0072), on
     the trial's primary end-point, which was defined as a reduction in a
     composite of death, heart attacks and the need for urgent intervention
     within 30 days. Additionally, in patients receiving ReoPro, the rate of
     major bleeding was markedly lower than in the EPIC trial. The Company filed
     for regulatory approvals in the United States for the expanded indication
     in February 1997 and expects to file for additional regulatory approvals in
     Europe in early 1997. The expanded indication is for stabilization of
     unstable angina patients not responding to conventional therapy who may be
     candidates for PTCA.

     The Company and Lilly are evaluating other potential indications for
ReoPro, including acute myocardial infarction and thrombotic strokes.  The
Company and Lilly are conducting the RAPPORT Phase IV trial to study the effect
of ReoPro in patients undergoing angioplasty procedures for acute myocardial
infarction. The Company is also conducting a Phase II trial 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 and ERASER Phase IV trial to evaluate the 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
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.
 

                                       4
<PAGE>
 
     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.

     CenTNF.   The Company is currently developing CenTNF, 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. CenTNF is primarily
targeted for the treatment of rheumatoid arthritis and inflammatory bowel
diseases such as Crohn's disease.
 
     The Company has completed a number of Phase II clinical trials of CenTNF in
both moderate-to-severe Crohn's disease and severe rheumatoid arthritis
patients. The Company is planning to initiate Phase III trials for these
indications in 1997.
 
     The Company has entered into an agreement with Tanabe Seiyaku Co., Ltd.
("Tanabe") under which Tanabe has commenced Phase II clinical testing and has
the right to distribute CenTNF in Japan. Additionally, the Company is seeking to
enter into an alliance arrangement with a partner regarding CenTNF for other
parts of the world.
 
     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 250,000 patients
with Crohn's disease in its moderate-to-severe form.
 
     Panorex.   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 has completed a Phase I clinical trial and is evaluating
protocols for additional clinical trials.

     DNA-Based Products.   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 

                                       5
<PAGE>
 
technology license by acquiring complementary technologies from other
institutions. The Company expects to initially focus its development efforts on
vaccines for prostate, breast 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 $41.4
million and $42.9 million for the years ended December 31, 1996 and 1995,
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 invitro diagnostic
products for infectious disease. In addition, 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 invitro 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.
 
     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 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.
 
     CAPTIA Syphilis G.   CAPTIA Syphilis G, an infectious disease serology test
for use as a primary screening method for the detection of Treponema pallidum
antibodies in human serum or plasma, as performed in blood bank or plasma center
testing laboratories, is offered for sale in the United States and certain
European and South American countries.
 
     CAPTIA CMV.   CAPTIA CMV, an infectious serology test for use as a primary
screening method for the detection of cytomegalovirus antibodies in human serum
or plasma, as performed in blood bank or plasma center testing laboratories, is
offered for sale in the United States and certain European countries.

     The Company has developed techniques for modifying monoclonal antibodies so
that they may be coupled with radioactive isotopes and used as contrast agents
in diagnostic imaging procedures. After injection, antibodies labeled with a
radioactive isotope travel to the disease site, allowing the site to be
visualized or "imaged" with nuclear medicine equipment in a procedure similar to
an X-ray. The Company's focus in this area is primarily on developing imaging
agents for cardiovascular disease.
 
     Myoscint.   Myoscint is an anti-myosin monoclonal antibody that, when
radio-labeled, may be useful in the detection of damage to heart tissue caused
by transplantation, myocardial infarction, chemotherapy and viral infection. The
Company has received marketing approvals for Myoscint in the United States,
several European 

                                       6
<PAGE>
 
countries and Japan. Revenues from the sale of Myoscint on a worldwide basis
have not been significant. There can be no assurance that future Myoscint sales
on a worldwide basis will be significant.


 PLATELET FUNCTION DIAGNOSTICS

     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 rapidly assess platelet function and to
better risk stratify 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.


 CELLULAR DIAGNOSTICS

     Based upon the Company's experience with Panorex, the Company believes that
the ability to rapidly detect rare cancer cells in blood, bone marrow and other
tissues could be useful to oncologists as a tool to enable them to select
appropriate treatments for cancer patients and then monitor the effectiveness of
those treatments. The Company is collaborating with a computer software company
to develop a computer-driven high-powered microscope known as the Rapid Rare
Event Detection ("RRED") System that utilizes reagents developed by the Company.
The Company and its partner have developed a working prototype of the RRED
System that has entered clinical trials for validation. In addition, the Company
has commenced discussions with other diagnostic companies that may be interested
in manufacturing and marketing the RRED System.

     Although the Company's initial focus with respect to the RRED System is the
oncology field, the Company believes that the RRED System technology may be
equally useful in the fields of infectious disease and prenatal testing. There
can be no assurances that the Company will be able to complete the development
of the RRED System or obtain the regulatory approvals necessary for the sale of
the RRED System.


MARKETING AND SALES

     In the therapeutic area, the Company maintains separate strategic alliances
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 such product. With regard to the Company's CenTNF product, the
Company is evaluating the possibility of directly participating in the promotion
and marketing of such product in the United States. In the diagnostics area, the
Company maintains distribution agreements with companies having established
positions and distribution networks in applicable market segments for the
Company's products. 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 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. 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.

     Pursuant to the Company's agreement with Fujisawa, consummated in August
1996, Fujisawa became the exclusive distributor of ReoPro in Japan. Following
approval, if any, of ReoPro for sale in Japan, the Company will 

                                       7
<PAGE>
 
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 to
jointly secure regulatory approvals.

     Pursuant to the Company's alliance 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 1996, approximately 67% 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.   During 1994, approximately 60% of
the Company's total product sales were to four customers, as follows: 10% to
Abbott Laboratories, 12% to Boehringer Mannheim GmbH, 13% to CIS bio
International and 25% 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 11 - 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.

     For the three years ended December 31, 1996, 1995 and 1994, the Company's
research and development expenses were $56,787,000, $66,235,000 and $70,003,000,
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 

                                       8
<PAGE>
 
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.

     The Company organized Centocor Partners III, L.P. ("CPIII") and other
entities to fund the research and development of certain products and/or
technology. Under agreements with each of these entities, Centocor licensed
certain technology to the entity and performed research and development in such
technology areas on behalf of the entity. The Company purchased the ownership
interests of all of these entities prior to 1995, with the exception of CPIII,
which Class A and Class C interests the Company purchased in January, 1997.


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 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 statistically evaluate
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 

                                       9
<PAGE>
 
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.

     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 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, produce
and market innovative products.  Centocor's management also believes that
significant competition will come from established pharmaceutical companies that
have greater capital 

                                       10
<PAGE>
 
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 and at a facility it leases in Guildford, England. Each of the
Company's diagnostic manufacturing facilities 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 8 years,
under which the Company is responsible for all operating expenses of the
facility.

     At the Company's current level of operations, portions of the Company's
facilities and equipment in Malvern are idle. The Company continually evaluates
the future needs for its facilities and equipment and is currently evaluating
potential needs for expansion in its Leiden facility to accommodate growth in
its therapeutic product production activities.


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 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, if it were to become the
judgement of the Court, would render the Company liable to pay plaintiff
approximately $4,000,000 plus interest fees and expenses pursuant to the license
agreement. The Company and its counsel believe the jury's findings are not
supported by the evidence and law and will file post-trial motions, and, if
necessary, an appeal. Accordingly, no provision has been made in the
accompanying financial statements for this matter. The Company believes that the
allegations of Velos are without merit and intends to continue vigorously to
defend this suit.

     On December 23, 1993, a purported class action captioned Peter Cordaro v.
Hubert J.P. Schoemaker, Stelios Papadopoulos, Marc Feldmann, David Golden,
Centocor and Tocor II Inc. ("Tocor II") was filed in the Court of Common Pleas
of Chester County, Pennsylvania.  The complaint alleges that the defendants
breached their fiduciary duties to Tocor II Unitholders by, among other things,
making an offer to exchange shares of the Company's Common Stock for Tocor II
Units, recommending acceptance of the exchange offer, and failing to maximize
shareholder value.  The complaint sought, among other relief, an injunction
against consummation of the exchange offer, the establishment of a "truly
independent" special committee and the retention of a financial advisor to
consider the exchange offer, and award of damages (including rescissionary
damages), costs and plaintiff's counsel fees. Plaintiff took no additional
action to obtain an injunction and the exchange offer was made and consummated.
Plaintiff's motion for class certification has been denied and plaintiff has
petitioned for rehearing.  No trial date has 

                                       11
<PAGE>
 
been fixed. The Company believes that the allegations set forth in the complaint
are without merit and intends to vigorously defend this suit.

     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 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 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 purports to be a class action
on behalf of all former limited partners of CPII. The complaint charges that
some portion of the $100 million 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 has been refiled in
the Delaware Superior Court. Discovery is beginning and plaintiff has moved for
certification of a class of all former limited partners of CPII, which the
Company has opposed.  Prior to the dismissal of 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.  That suit is in its earliest
stage. The Company believes that the allegations regarding Centocor in these
actions are without merit and intends to vigorously defend them.

     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 million 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 CPIII 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 (since 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, since 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 parties in these
suits are considering ways and means to resolve the issues without further
litigation.

     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.

                                       12
<PAGE>
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------

     Not applicable.



                                    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.


                                                  HIGH        LOW
                                                  ----        ---  

Year ended December 31, 1995
   First Quarter.........................      $21          $14 1/2
   Second Quarter........................       16  3/8      12 1/8
   Third Quarter.........................       14 35/64     10 7/8
   Fourth Quarter........................       33  1/8       9 5/8
 
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
 
 
     On February 18, 1997, there were approximately 3,534 holders of record of
the Common Stock.

     In June 1996, the Company and Lilly amended its 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.

                                       13
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31,
                                   1992           1993          1994         1995        1996
                                   ----           ----          ----         ----        ----    
<S>                                <C>           <C>          <C>          <C>         <C>      
CONSOLIDATED STATEMENT OF
 OPERATIONS DATA:
 
Revenues:
  Sales....................        $  58,394     $ 48,071     $  39,984    $ 65,001     $132,130
  Contracts:
     Related parties.......           16,071       10,109         1,652         ---          ---   
     Other                            51,767       17,750        25,590      13,915        3,355
                                   ---------     --------     ---------    --------     --------
  Total revenues...........          126,232       75,930        67,226      78,916      135,485
Costs and expenses(1)......          295,978      130,683       173,290     126,219      150,815
Other income (expenses)(2).          (24,400)     (19,626)      (20,594)     (9,829)       1,862
                                   ---------     --------     ---------    --------     --------
 
Loss before extraordinary          $(194,146)    $(74,379)    $(126,658)   $(57,132)    $(13,468)
 item......................
 
Net gain on extinguishment               ---          ---           ---         ---          705
 of debt...................        ---------     --------     ---------    --------     --------
Loss.......................        $(194,146)    $(74,379)    $(126,658)   $(57,132)    $(12,763)
                                   =========     ========     =========    ========     ========
 
Loss per share.............        $   (4.90)    $  (1.79)    $   (2.55)   $  (0.98)    $  (0.19)
                                   =========     ========     =========    ========     ========
 
Weighted average number of shares      
 outstanding(3)............           39,623       41,482        49,597      58,207       66,475  
 
 
                                        1992         1993          1994        1995         1996
                                        ----         ----          ----       -----     --------
CONSOLIDATED BALANCE SHEET DATA:
 
Cash and investments (4)           $ 163,083     $140,028     $ 184,507    $137,206     $185,817
Total assets                         349,268      281,039       305,915     260,284      341,121
Long-term debt                       238,166      238,100       231,640     231,640       54,765
Shareholders' equity                  30,721      (19,194)        5,278     (29,396)     235,910
 (deficit)
</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) charges of $64,877 and $3,500 in
    1992 and 1993, respectively, related to HA-1A inventory, (c) restructuring
    charges of $15,266, $9,387 and $1,642 in 1992, 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 charges of $11,245, $1,275 and $3,750 in
    1992, 1994 and 1995, respectively, related to the settlement of certain
    litigation.
(3) No shares of Common Stock issuable upon the exercise of stock options or
    warrants or the vesting of restricted stock awards have been included as
    their inclusion would have an antidilutive effect because the Company has
    incurred a net loss in each period presented.
(4) 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.

                                       14
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-------------------------------------------------------------------------
FINANCIAL CONDITION
-------------------

 
RESULTS OF OPERATIONS

 General

     Any statements contained in this Management's Discussion and Analysis of
Results of Operations and Financial Condition that are forward looking are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that forward looking statements
involve risks and uncertainties including economic, competitive, governmental,
technological and other factors  which may affect the Company's business and
prospects.

     Centocor is a biotechnology company whose mission is to develop and
commercialize novel therapeutic and diagnostic products and services that solve
critical needs in human health care. The Company concentrates on research and
development, manufacturing and market development, with a primary technological
focus on monoclonal antibodies and DNA-based products.

     The Company, since inception, has incurred significant operating expenses
developing therapeutic and diagnostic products. The Company has also incurred
significant special charges. To date, product sales have not produced sufficient
revenues to cover the Company's operating expenses. Consequently, the Company
has experienced substantial operating losses. The Company's financial results
have progressively improved throughout 1996 culminating with the Company
achieving profitability in the fourth quarter. The Company expects that its
sales of therapeutic and diagnostic products in 1997 will provide sufficient
revenues to cover operating expenses and provide net income for the year.

     The Company commenced commercial sales of two therapeutic products in 1995:
ReoPro in January 1995 and Panorex in February 1995. Because of positive
findings at interim analyses, in December 1995 the Company halted two clinical
trials of ReoPro designed to expand its authorized use. The Company filed for
regulatory approvals in the United States for the expanded indications in
February 1997 and expects to file for additional regulatory approvals in Europe
in early 1997.  The level of the Company's research and development expenses has
been primarily dependent upon the extent of clinical trial activity.  Further,
the impact on the level of future ReoPro sales based upon the early termination
of these two trials will depend upon the timing and extent of any future
regulatory approvals and the degree of market acceptance of ReoPro.

     In June 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of
("Statement 121"), which requires companies to review long-lived assets and
certain identifiable intangibles to be held, used or disposed of, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company adopted Statement 121 in 1996 which
did not have a significant effect on its financial statements.

     In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"),
which was effective for transactions entered into in fiscal years beginning
after December 15, 1995. The Company adopted Statement 123 in 1996 and elected
to continue to measure stock based compensation using the intrinsic value based
method of accounting prescribed by APB Opinion 25, Accounting for Stock Issued
to Employees and accordingly, the Company did not recognize compensation cost in
the consolidated financial statements for options granted. The Company discloses
pro forma financial information valuing stock based compensation using the fair
value based method of accounting. See Item 8. "Financial Statements and
Supplementary Data", Note 10 - Shareholders' Equity.

 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.

                                       15
<PAGE>
 
     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, 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. The Company expects ReoPro end sales to
increase in 1997 as market acceptance continues to grow and therefore the
Company expects its sales of ReoPro to Lilly to increase in 1997 over 1996
levels. Panorex end sales in 1997 are also expected to increase as compared to
1996 but Panorex sales to Glaxo Wellcome in 1997 are not expected to have a
significant impact on the Company's financial results.

     Diagnostic product sales for the year ended December 31, 1996 were
$41,388,000 as compared to $42,859,000 for the year ended December 31, 1995. The
decrease in sales for the year ended December 31, 1996 as compared to the year
ended December 31, 1995 is primarily related to a 1995 stocking order of reagent
products by a new customer within the oncology product line and the reduction in
the royalty rates of some of the Company's diagnostic products. Diagnostic
product sales in 1997 are expected to be at least at the same level or slightly
greater than sales levels achieved in 1996.

     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 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 reagent sales to marketing partners developing new automated
instruments, as well as the mix of completed diagnostic kit sales and sales of
antibody to collaborative partners who pay the Company for such antibody upon
sales of their respective diagnostic kits incorporating the Company's antibody.
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 kits may increase sales
of their respective diagnostic kits incorporating the Company's antibodies,
which the Company expects will result in reduced sales prices on certain
diagnostic products. The Company's revenues from sales of antibodies to partners
are lower than revenues from sales of its completed diagnostic kits.

     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.
The level of contract revenues in future periods will depend primarily upon the
extent to which the Company enters into other collaborative contractual
arrangements, if any, and its achievement of milestones under current
arrangements.

     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 expects an increase in cost of sales in 1997, 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, 1996 was approximately 54%
as compared to approximately 55% for the year ended December 31, 1995. Gross
margin percentage in 1997 is expected to improve over 1996 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.

                                       16
<PAGE>
 
     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. 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 1997
as compared to 1996 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, the use of ReoPro in conjunction with
stents and in stroke.  In addition, clinical trial activities for CenTNF,
primarily phase III trials for the Crohn's and severe rheumatoid arthritis
indications are expected to occur in 1997. The Company also expects to incur
additional clinical trial expenses in 1997 in support of continued Panorex
development primarily in the United States and Europe.

     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. The
levels of the Company's marketing, general and administrative expenses may
increase in future periods as compared to 1996 levels if the Company expands its
market development activities in connection with sales of therapeutic and
diagnostic products or 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 1997 as compared to 1996 due
primarily to the Company's increased investment in market development
opportunities for its therapeutic and diagnostic products.

     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 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, 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. Interest expense in
future periods will depend upon the level of debt outstanding.

     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. Centocor does
not expect the future equity in the income or losses of this investee company to
have a material impact on the Company.

     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.

     The Company expects its effective tax rate in 1997 to be approximately 3%.
The effective tax rate in 1997 is heavily influenced by the ability of the
Company to use net operating loss carryforwards from prior years to offset its
future tax liability.

 Year ended December 31, 1995 compared to year ended December 31, 1994

     The increase in sales for the year ended December 31, 1995 as compared to
the year ended December 31, 1994 is principally due to the commencement of sales
of ReoPro in January 1995 and Panorex in February 1995.

     For the year ended December 31, 1995, ReoPro sales to Lilly were
$15,545,000 and Lilly's announced sales to end-users were $22,800,000. During
the same period, the Company's sales of Panorex 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 

                                       17
<PAGE>
 
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, 1995 were
$42,859,000 as compared to $39,697,000 for the year ended December 31, 1994. The
increase in sales for the year ended December 31, 1995 as compared to the year
ended December 31, 1994 is primarily related to a 1995 reagent sale to a new
customer within the oncology product line.

     The decrease in contract revenues for the year ended December 31, 1995 as
compared to the year ended December 31, 1994 was primarily due to the
achievement of certain milestones and expansion of certain marketing and
distribution rights with Glaxo Wellcome in 1994, which in the aggregate amounted
to $14,000,000. Contract revenues for the year ended December 31, 1995 and 1994
included $10,000,000 and $9,500,000, respectively, recognized pursuant to the
Company's agreements with Lilly as a result of the Company's achievement of
milestones in the development of ReoPro. Contract revenues for the year ended
December 31, 1994 also included $1,652,000 recognized pursuant to the Company's
development agreement with Tocor II.  As a result of an exchange offer which was
completed in March 1994 and pursuant to which the Company acquired all of the
outstanding callable common stock of Tocor II (the "Exchange Offer"), the
revenues under the Tocor II research program terminated in 1994.

     Cost of sales increased for the year ended December 31, 1995 as compared to
the year ended December 31, 1994 due to the initiation of sales of ReoPro and
Panorex. 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, 1995
was approximately 55% as compared to approximately 60% for the year ended
December 31, 1994. There were no significant sales of therapeutic products in
1994.

     Research and development expenses for the year ended December 31, 1995
decreased as compared to the year ended December 31, 1994 due principally to the
capitalization as inventory in 1995 of certain costs associated with the
manufacture of ReoPro and Panorex. In 1994, such costs were not associated with
the production of inventory and therefore were expensed as research and
development expenses. Clinical trial expenses increased in 1995 as compared to
1994 because of the Company's efforts to obtain regulatory approvals for
additional indications of therapeutic products and further develop other
therapeutic and diagnostic product opportunities.

     Marketing, general and administrative expenses for the year ended December
31, 1995 increased as compared to the year ended December 31, 1994 due
principally to increases in facilities, insurance and market development
expenses.

     Interest income increased for the year ended December 31, 1995 as compared
to the year ended December 31, 1994 due principally to an increase in interest
rates on investments and an increase in the Company's average cash and
investment balances.

     Interest expense decreased for the year ended December 31, 1995 as compared
to the year ended December 31, 1994 due principally to a one-time adjustment of
$2,200,000 on a loan which was renegotiated with the Commonwealth of
Pennsylvania.

     Other income increased for the year ended December 31, 1995 as compared to
the year ended December 31, 1994 due to the Company's equity in earnings of a
company in which Centocor has an investment.

     Other income (expenses) also included 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.

                                       18
<PAGE>
 
QUARTERLY RESULTS

     The following table sets forth certain unaudited consolidated statement of
operations data for the three years ended December 31, 1996 (in thousands except
per share data):

<TABLE>
<CAPTION>
                                                               QUARTER ENDED
 
                                                March 31,   June 30,   Sept. 30,   Dec. 31,
                                                     1994       1994        1994       1994
                                                 --------   --------    --------   --------
     <S>                                         <C>        <C>         <C>        <C>  
     Total revenues                              $ 15,273   $ 16,384    $ 12,927   $ 22,642
 
     Cost and expenses:
       Cost of sales                                3,630      4,471       3,652      4,231
       Research and development                    14,389     16,666      15,701     23,247
       Marketing, general and administrative        6,818      6,809       7,159      4,583
       Special charges                             36,966          -           -     24,968
                                                 --------   --------    --------   --------
 
     Total costs and expenses                      61,803     27,946      26,512     57,029
 
     Other income (expenses)                       (4,107)    (3,856)     (3,994)    (8,637)
                                                 --------   --------    --------   --------
 
     NET LOSS                                    $(50,637)  $(15,418)   $(17,579)  $(43,024)
                                                 ========   ========    ========   ========
<CAPTION>  
                                                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)
                                                 ========   ========    ========   ========
 <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>

                                       19
<PAGE>
 
     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, and
foreign exchange fluctuations.

PER SHARE CALCULATIONS

     At December 31, 1996, approximately 4,386,000 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 per share data.  When dilutive,
options and warrants are included as share equivalents using the treasury stock
method. 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 primary per share data but are included in the
calculation of fully 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 as the Company
has recorded net losses for all years presented. 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 and 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. To date, the
Company's product sales have not produced sufficient revenues to cover the
Company's operating costs. Consequently, the Company has 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.

     The Company's future financial condition is dependent upon the reduction of
the Company's rate of net cash outflows and, ultimately, upon the achievement of
significant and sustained levels of therapeutic product sales. For the year
ended December 31, 1996, sales of the Company's products, including ReoPro and
Panorex, did not alone generate sufficient revenue to result in positive cash
flow for the year.  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 Panorex 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 and
Panorex or other product candidates will have a material adverse effect on the
Company.

     At December 31, 1996, the Company had cash, cash equivalents and
investments of $185,817,000, including equity investments of $9,502,000. For the
year ended December 31, 1996, the Company had negative cash flows from
operations of $12,838,000. The Company's total cash flows for the year ended
December 31, 1996 included the receipt of $20,791,000 from the exercise of
warrants and options to purchase shares of the Company's Common Stock. The
extent and timing of future warrant and option exercises, if any, are primarily
dependent upon the market 

                                       20
<PAGE>
 
price of the Company's Common Stock and general financial market conditions, as
well as the exercise prices and expiration dates of the warrants and 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. 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, the Company purchased $70,235,000 of the
6 3/4% Convertible Debentures. At December 31, 1996, $54,765,000 of the 6 3/4%
Convertible Debentures remain outstanding. 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 31,1996 the Company has a note payable of $6,897,000
which is secured by investments at the lending bank of $7,260,000. The Company's
total cash, cash equivalents and investments increased by $48,611,000 from
December 31, 1995, principally as a result of cash received from the stock
offering and the exercise of warrants and options as discussed above, partially
offset by the purchase of $70,235,000 of the Company's 6 3/4% Convertible
Debentures. The Company believes that its cash, cash equivalents and investments
will be sufficient to fund its operations through at least the end of 1997.

     Accounts Receivable at December 31, 1996 increased as compared to December
31, 1995 due to increased sales of ReoPro to Lilly.

     Inventory at December 31, 1996 increased as compared to December 31, 1995
due primarily to the increase in production of ReoPro.

     Gross property, plant and equipment at December 31, 1996 decreased as
compared to December 31, 1995, principally due to the impact of exchange rates
on property and equipment denominated in foreign currencies partially offset by
the investment of $4,674,000 for the purchase of property and equipment. The
Company expects to increase its investments in property, plant and equipment by
up to approximately $30,000,000 in 1997 to support its manufacturing capacity
expansion plans in Europe.  At the Company's present level of operations, the
Company currently maintains idle facilities and equipment in its Malvern
location. The Company continually evaluates the future needs for its facilities
and equipment. There can be no assurance that reserves to reduce the carrying
value of certain fixed assets will not be required in the future.

     Long-term investments at December 31, 1996 increased as compared to
December 31, 1995 principally due to additional equity investments in investee
companies classified as available for sale.

     Intangible and other assets at December 31, 1996 increased as compared to
December 31, 1995 resulting primarily from the amendment to the Company's Sales
and Distribution Agreement with Lilly and other activities in connection with
the commercialization and market development of ReoPro.

     Centocor had an exclusive option to purchase the limited partnership
interests in CPIII.  In January 1997, the Company exercised this option 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 the $13.6 million payment to
the partners of CPIII 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. See Item 8. "Financial Statements and Supplementary Data",
Note 3 - Commitments and Contingencies.

     The Company has entered into indemnity agreements with CPIII and the former
limited partners of Centocor Cardiovascular Imaging Partners, L.P. ("CCIP") and
CPII 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.

                                       21
<PAGE>
 
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.

     All royalties are reflected in cost of sales as incurred. Royalty costs
represent a significant percentage of sales.


PRODUCT LIABILITY

     The testing and marketing of medical products entails an inherent risk of
product liability. 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.


INFLATION

     The Company believes the effects of inflation generally do not have a
material adverse impact on its operations or financial condition.

                                       22
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------

<TABLE> 
<CAPTION> 
                        CENTOCOR, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                                (In thousands)


DECEMBER 31,                                           1996           1995 
-------------------------------------               ----------      ---------
<S>                                                 <C>             <C>
ASSETS

CURRENT ASSETS:
 
         Cash and cash equivalents  (Notes 5 and 9)    $ 55,953     $ 16,002 
         Short-term investments (Notes 5 and 9)         120,362      115,435 
         Accounts and contracts receivable               27,440       11,489 
         Interest receivable                              2,147        1,648 
         Inventory (Note 6)                              23,815       20,783 
         Prepaid expenses                                 4,279        2,959 
         Other current assets                               752          653 
                                                       --------     --------   
                                                        234,748      168,969  
 
 
PROPERTY, PLANT AND EQUIPMENT (NOTES 9 AND 19):
         Land and buildings                              71,607       72,980 
         Equipment, furniture, fixtures and                                   
            improvements                                 69,884       69,884  
                                                       --------     --------   
                                                        141,491      142,864  
         Less accumulated depreciation                  (79,954)     (74,727) 
                                                       --------     --------   
                                                         61,537       68,137  
                                                                              
LONG-TERM INVESTMENTS (NOTE 5)                            9,502        5,769  
                                                                              
INTANGIBLE AND OTHER ASSETS (NOTE 7)                     35,334       17,409  
                                                       --------     --------  

             TOTAL ASSETS                              $341,121     $260,284  
                                                       ========     ========
</TABLE>


See accompanying Notes to Consolidated Financial Statements.

                                      23
<PAGE>
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS (CONT'D.)

                                (In thousands)

<TABLE>
<CAPTION>
December 31,                                         1996       1995
---------------------------------                ----------  ---------
<S>                                              <C>         <C>
LIABILITIES  AND  SHAREHOLDERS' EQUITY
 
Current liabilities:
 
          Accounts payable                       $    9,543  $   4,126
          Accrued expenses  (Note 8)                 28,940     26,139
          Unearned revenues                             100         83
          Notes payable (Note 9)                      6,897      7,500
          Current portion of
            long-term debt (Note 9)                       -     18,289
                                                 ----------  ---------
                                                     45,480     56,137
 
Long-term debt (Note 9)                              54,765    231,640
 
 
Other liabilities                                     1,127      1,286
 
Minority interest                                     3,839        617
 
Shareholders' equity (Notes 2, 5, 10 and 13):
          Preferred Stock, $.01 par value,
            10,000 shares authorized, none issued         -          -
          Common Stock, $.01 par value,
            100,000 shares authorized and
            69,177 and 58,538 issued and
            outstanding at December 31, 1996
            and 1995, respectively                      692        585
          Additional paid-in capital              1,050,062    770,068
          Deficit                                  (821,602)  (808,839)
          Unrealized gain on marketable
            securities                                2,342      2,342
          Cumulative foreign currency
            translation adjustments                   4,416      6,448
                                                 ----------  --------- 
                                                    235,910    (29,396)
                                                 ----------  --------- 
              Total liabilities and
                shareholders' equity             $  341,121  $ 260,284
                                                 ==========  =========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

                                       24
<PAGE>
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                     (In thousands except per share data)


<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------
For the years ended December 31,                       1996         1995        1994 
---------------------------------------------------------------------------------------
<S>                                                  <C>          <C>        <C> 
Revenues:
  Sales                                              $ 132,130    $ 65,001   $  39,984
  Contracts (including related
   party revenues of: $1,652 in 1994)(Note 12)           3,355      13,915      27,242
                                                     ---------    --------   ---------
                                                       135,485      78,916      67,226
                                                     ---------    --------   ---------
Costs and expenses:
  Cost of sales                                         61,094      29,166      15,984
  Research and development (including contract
   revenue-related party expenses of $1,572 in 1994)    56,787      66,235      70,003
  Marketing, general and administrative
      (including contract revenue-related party
        expenses of $343 in 1994)                       32,934      29,176      25,369
  Charge for acquired research and
  development (Note 13)                                      -           -      36,966
  Other charges (Note 19)                                    -       1,642      24,968
                                                     ---------    --------   ---------
                                                       150,815     126,219     173,290

Other income (expenses):
  Interest income                                       10,276      10,126       5,999
  Interest expense                                      (8,351)    (17,001)    (19,821)
  Net loss on long-term investments (Note 14)                -           -      (3,649)
  Litigation settlement (Note 14)                            -      (3,750)     (1,275)
  Other income (expenses)                                  (63)        796      (1,848)
                                                     ---------    --------   ---------
                                                         1,862      (9,829)    (20,594)

Loss before extraordinary item                        ($13,468)   ($57,132)  ($126,658)
                                                     ---------    --------   ---------
Extraordinary item:
  Net gain on extinguishment of debt (Note 9)              705           -           -
                                                     ---------    --------   ---------
Net loss                                              ($12,763)   ($57,132)  ($126,658)
                                                     =========    ========   =========
Net loss per share:

  Before extraordinary item                             ($0.20)     ($0.98)     ($2.55)
  Extraordinary item                                     $0.01           -           -
                                                     ---------    --------   ---------
  Net loss per share                                    ($0.19)     ($0.98)     ($2.55)
                                                     =========    ========   =========
Weighted average number of shares
  outstanding                                           66,475      58,207      49,597
                                                     =========    ========   =========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

                                       25
<PAGE>
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                (IN THOUSANDS)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
   Year ended December 31,                                     1996       1995        1994
-------------------------------------------------------------------------------------------------
<S>                                                         <C>        <C>        <C> 
   Cash flows used for operating activities:
     Net loss                                                ($12,763)  ($57,132)  ($126,658)
     Adjustments to reconcile net loss to net cash
       used for operating activities:
        Charge for acquired research and development                -          -      36,966    
        Special charges                                             -          -       9,145    
        Net gain on extinguishment of debt                       (705)         -           -    
        Net loss on long-term investments                           -          -       3,649    
        Provisions for depreciation and amortization           14,004     16,394      18,164    
        Amortization of deferred income                           (83)    (1,616)     (3,067)   
        Other                                                     919        204       2,413    
        Changes in assets and liabilities:                                                      
               Accounts and contracts receivable              (16,044)       378       1,330    
               Interest receivable                               (512)      (542)       (466)   
               Inventory                                       (4,096)    (4,519)     (2,344)   
               Prepaid expenses                                (4,409)    (3,568)     (2,809)   
               Other current assets                              (110)       462          81    
               Intangible and other assets                       (127)    (1,456)     (1,423)   
               Accounts payable                                 5,537     (2,425)       (962)   
               Unearned revenue                                     -         46       1,675    
               Accrued expenses and other liabilities           5,706     (2,941)     (1,162)   
               Other long-term liabilities                       (155)       164         948    
                                                             ---------  ---------   ---------
       Net cash used for operating activities                 (12,838)   (56,551)    (64,520)   
                                                                                                
   Cash flows (used for) from investing activities:                                             
     Purchases of investments                                (115,577)  (147,381)    (98,808)   
     Sales of investments                                     110,650    136,490     127,250    
     Purchases of fixed assets                                 (4,674)    (4,845)     (4,555)   
     Acquisition of Tocor II, net of cash acquired                  -          -       3,991    
                                                             ---------  ---------   ---------
       Net cash (used for) from investing activities           (9,601)   (15,736)     27,878    
                                                                                                
   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         20,791     18,557      71,633    
     Reduction of long-term debt and notes payable            (84,537)    (9,615)     (2,788)   
                                                             ---------  ---------   ---------
       Net cash from financing activities                      62,170      8,942      68,845    
   Effect of foreign currency translation                         220        422         512    
                                                             ---------  ---------   ---------
   Net increase (decrease) in cash and cash equivalents        39,951    (62,923)     32,715     
   Beginning cash and cash equivalents                         16,002     78,925      46,210    
                                                             ---------  ---------   ---------
   Ending cash and cash equivalents                          $ 55,953   $ 16,002    $ 78,925     
                                                             =========  =========   =========
</TABLE>

   See accompanying Notes to Consolidated Financial Statements.

                                      26
<PAGE>
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                                           Net Unrealized         Cumulative
                                      Common Stock                                         gain (loss) on      foreign currency
                                -----------------------
                                  Number of                   Additional                     marketable          translation
                                   shares     Par value    paid in capital        Deficit    securities          adjustments
                                -----------------------------------------------------------------------------------------------
<S>                             <C>          <C>          <C>                   <C>        <C>               <C>
BALANCE AT DECEMBER 31, 1993         43,672      $437            $601,138       ($625,049)       ($635)               $4,915

Issued to Wellcome plc (Note 10)        140         1               3,500               -            -                     -
Issued pursuant to the Tocor II
 exchange offer (Note 13)             7,014        70              84,259               -            -                     -
Warrants retired pursuant to
 Tocor II exchange offer
 (Note 13)                                -         -              (8,492)              -            -                     -
Issued upon exercise of options
 and warrants or as stock grants      6,151        62              68,070               -            -                     -
Issued to employee benefit plan          17         -                 208               -            -                     -
Vested pursuant to restricted
 stock award plan                        87         1               1,492               -            -                     -
Translation adjustments                   -         -                   -               -            -                 1,324
Carrying value adjustments                -         -                   -               -          635                  .  -
Net loss                                  -         -                   -        (126,658)           -                     -
                                -----------------------------------------------------------------------------------------------
BALANCED AT DECEMBER 31, 1994        57,081       571             750,175        (751,707)           -                 6,239

Issued upon exercise of options
 and warrants or as stock grants      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)           -                     -
                                -----------------------------------------------------------------------------------------------
BALANCED AT DECEMBER 31, 1995        58,538       585             770,068        (808,839)       2,342                 6,448

Issued upon exercise of options and
 warrants or as stock grants          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 (Note 13)               135         2               1,631               -            -                     -
Translation adjustments                   -         -                   -               -            -                (2,032)
Net loss                                  -         -                   -         (12,763)           -                     -
                                -----------------------------------------------------------------------------------------------
BALANCED AT DECEMBER 31, 1996        69,177      $692          $1,050,062       ($821,602)      $2,342                $4,416
                                ===============================================================================================
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

                                      27
<PAGE>
 
                  Notes to Consolidated Financial Statements

Note 1
DESCRIPTION OF BUSINESS

     Centocor, Inc.("Centocor" or the "Company") is a biotechnology company
whose mission is to develop and commercialize novel therapeutic and diagnostic
products and services that solve critical needs in human health care. The
Company concentrates on research and development, manufacturing and market
development, 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 and a 75% interest in a joint venture. 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:

     Equipment, furniture and fixtures        3-5 years
     Land improvements                         10 years
     Leasehold improvements                    10 years
     Building and building improvements      31.5 years 

                                       28
<PAGE>
 
                  Notes to Consolidated Financial Statements

     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.  Licensing agreements, goodwill 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.

     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
     --------------

     Per share data are calculated using the weighted average number of
outstanding shares of Common Stock. Common Stock issuable upon the exercise of
stock options or warrants and upon the vesting of restricted stock awards are
included in the per share calculations only to the extent their inclusion would
have an aggregate dilutive effect. Common Stock issuable upon conversion of
convertible debt securities are included only in the fully diluted per share
calculations to the extent their inclusion would have a dilutive effect.

     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.

                                       29
<PAGE>
 
                  Notes to Consolidated Financial Statements

     Fair Value of Financial Instruments
     -----------------------------------

     The FASB issued Statement of Financial 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, 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.

     New Accounting Standards
     ------------------------

     In June 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed of ("Statement 121"), which requires companies to review
long-lived assets and certain identifiable intangibles to be held, used or
disposed of, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company adopted
Statement 121 in 1996 which did not have a significant effect on its financial
statements.

     In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"),
which was effective for transactions entered into in fiscal years beginning
after December 15, 1995. The Company adopted Statement 123 in 1996 and elected
to continue to measure stock based compensation using the intrinsic value based
method of accounting prescribed by APB Opinion 25, Accounting for Stock Issued
to Employees and accordingly, the Company did not recognize compensation cost in
the consolidated financial statements for options granted. The Company disclosed
pro forma financial information valuing stock based compensation using the fair
value based method of accounting. See Note 10 - Shareholders' Equity.

Note 3
COMMITMENTS AND CONTINGENCIES

     Liquidity and Capital Resources
     -------------------------------

     The Company has incurred significant operating expenses attempting to
develop therapeutic and diagnostic products. To date, the Company's product
sales have not produced sufficient revenues to cover the Company's operating
costs. Consequently, the Company has 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.

     The Company's future financial condition is dependent upon the reduction of
the Company's rate of net cash outflows and, ultimately, upon the achievement of
significant and sustained levels of therapeutic product sales. For the year
ended December 31, 1996, sales of the Company's products, including ReoPro and
Panorex, did not alone generate sufficient revenue to result in positive cash
flow for the year.  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 Panorex 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 and
Panorex or other product candidates will have a material adverse effect on the
Company.

                                       30
<PAGE>
 
                  Notes to Consolidated Financial Statements

     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 application 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 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, if it were to become the
judgement of the Court, would render the Company liable to pay plaintiff
approximately $4,000,000 plus interest fees and expenses pursuant to the license
agreement. The Company and its counsel believe the jury's findings are not
supported by the evidence and law and will file post-trial motions, and, if
necessary, an appeal. Accordingly, no provision has been made in the
accompanying financial statements for this matter. The Company believes that the
allegations of Velos are without merit and intends to continue vigorously to
defend this suit. 


     On December 23, 1993, a purported class action captioned Peter Cordaro v.
Hubert J.P. Schoemaker, Stelios Papadopoulos, Marc Feldmann, David Golden,
Centocor and Tocor II Inc. ("Tocor II") was filed in the Court of Common Pleas
of Chester County, Pennsylvania.  The complaint alleges that the defendants
breached their fiduciary duties to Tocor II Unitholders by, among other things,
making an offer to exchange shares of the Company's Common Stock for Tocor II
Units, recommending acceptance of the exchange offer, and failing to maximize
shareholder value.  The complaint sought, among other relief, an injunction
against consummation of the exchange offer, the establishment of a "truly
independent" special committee and the retention of a financial advisor to
consider the exchange offer, and award of damages (including rescissionary
damages), costs and plaintiff's counsel fees.  Plaintiff took no additional
action to obtain an injunction and the exchange offer was made and consummated.
Plaintiff's motion for class certification has been denied and plaintiff has
petitioned for rehearing.  No trial date has been fixed.  The Company believes
that the allegations set forth in the complaint are without merit and intends to
vigorously defend this suit.

     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 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 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 purports to be a class action
on behalf of all former limited partners of CPII. The complaint charges that
some portion of the $100 million 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 has been refiled in
the Delaware Superior Court. Discovery is beginning and plaintiff has moved for
certification of a class of all former limited partners of CPII, which the
Company has opposed. Prior to the dismissal of 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. That suit is in its earliest
stage. The Company believes that the allegations regarding Centocor in these
actions are without merit and intends to vigorously defend them.

     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 

                                       31
<PAGE>
 
                  Notes to Consolidated Financial Statements

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 million 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 CPIII 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 (since 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, since 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 parties in these suits are
considering ways and means to resolve the issues without further litigation.

     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
     ---------

     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. Subsequent 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 include payments based on future sales of ReoPro.

     Centocor had an exclusive option to purchase the limited partnership
interests in CPIII. In January 1997, the Company exercised this option 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 the $13.6 million payment to
the partners of CPIII 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. 

     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.

     All royalties are reflected in cost of sales as incurred.  Royalty costs
represent a significant percentage of sales.

     Product Liability
     -----------------

     The testing and marketing of medical products entails an inherent risk of
product liability. The Company maintains limited product liability insurance
coverage. Centocor's business may be materially adversely affected 

                                       32
<PAGE>
 
                  Notes to Consolidated Financial Statements

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 its 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.

     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
carried as a separate component of shareholders' equity. Unrealized gains and
losses on specific securities classified as trading are reported in earnings.

                                       33
<PAGE>
 
                  Notes to Consolidated Financial Statements

     At December 31, 1996, securities classified as trading, available for sale
and held to maturity are summarized below (in thousands).

<TABLE>
<CAPTION>
                                            Carrying        Unrealized          Fair
                                              Value      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>                                                                   
                                                              Estimated        
                                             Adjusted        Unrealized      Carrying
                                               Cost       Gains    (Losses)     Value
                                             --------      -----   --------  --------
<S>                                          <C>          <C>      <C>       <C>     
Investments available for sale:                                             
 Equity securities                           $  7,160     $2,342   $      -   $  9,502
                                             ========     ======   ========   ========

<CAPTION> 
                                                            Estimated
                                            Carrying        Unrealized          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):
 
  Cash equivalents                          $ 32,563
  Short-term investments                     120,362
  Long-term investments                        9,502
                                            --------
                                            $162,427
                                            ========

     The Company has agreed to maintain investments with fair values of
$7,260,000 as of December 31, 1996 at certain banks as collateral for loans from
those banks.  See Note 9 - Debt.

     At December 31, 1995, securities classified as available for sale and held
to maturity are summarized below (in thousands).

<TABLE>
<CAPTION>
                                                    Estimated
                                   Adjusted         Unrealized      Carrying
                                     Cost       Gains     (Losses)   Value
                                   ---------  ----------  --------  --------
<S>                                <C>        <C>         <C>       <C>
Investments available for sale:
  Equity securities                   $3,427      $2,342  $   -       $5,769
                                   =========  ==========  ========  ========
</TABLE>

                                       34
<PAGE>
 
                  Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                 Estimated
                                    Carrying    Unrealized       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       $ 70,622   $148      $(2)  $ 70,768
  Certificates of deposit             32,801      -        -     32,801
  Corporate bonds and
     commercial paper                 24,260     62       (1)    24,321
                                    --------  -----  -------   --------
                                    $127,683   $210      $(3)  $127,890
                                    ========  =====  =======   ========
</TABLE>

  At December 31, 1995, these securities were classified as follows (in
thousands):

  Cash equivalents                  $ 12,248
  Short-term investments             115,435
  Long-term investments                5,769
                                    --------
                                    $133,452
                                    ========
 
Note 6
INVENTORY
 
     Inventory consists of the following (in thousands):
 
     December 31,                       1996      1995
                                    --------   -------
                                    
     Raw materials                  $  5,824   $ 4,965
     Work in process                   7,948     9,382
     Finished goods                   10,043     6,436
                                    --------   -------
                                    $ 23,815   $20,783
                                    ========   =======

     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 reserves for inventories will not be required in the future.

                                       35
<PAGE>
 
                  Notes to Consolidated Financial Statements

Note 7
INTANGIBLE AND OTHER ASSETS

     Intangible and other assets consist of the following, net of accumulated
amortization of $10,804,000 and $7,282,000 at December 31, 1996 and 1995,
respectively, (in thousands):
 
     December 31,            1996     1995   
                            -------  ------- 
                                             
     Licenses               $ 5,378   $4,126 
     Goodwill                 5,158    5,502 
     Debt issuance costs        755    3,854 
     Deferred charges        23,026    1,697 
     Other                    1,017    2,230 
                            -------  ------- 
                            $35,334  $17,409 
                            =======  =======  

     Deferred charges at December 31, 1996 include a prepayment of future 
royalties amounting to $11.4 million, and a prepayment of $10.0 million 
associated with the commercialization and market development of ReoPro.

     Licensing agreements, goodwill 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 cashflows.

Note 8
ACCRUED EXPENSES

     Accrued expenses consist of the following (in thousands):
 
     December 31,     1996     1995   
                     -------  ------- 
                                      
     Compensation    $ 7,320  $ 3,191 
     Interest            823    5,473 
     Research          5,496    4,942 
     Royalties         7,973    1,836 
     Other             7,328   10,697 
                     -------  ------- 
                     $28,940  $26,139 
                     =======  =======  

Note 9
DEBT

     Notes Payable

     Notes payable at December 31, 1996 and 1995 consists of $6,897,000 and
$7,500,000, respectively, of borrowings under short-term notes at an interest
rate of 3.23 percent per annum at December 31, 1996, payable in Dutch guilders
no later than March 28, 1997. These borrowings are secured by investments at the
lending bank of $7,260,000 (see "Loan Covenants").

                                       36
<PAGE>
 
                  Notes to Consolidated Financial Statements

     Long-term debt

     Long-term debt consists of the following (in thousands):

December 31,                             1996      1995
                                       --------  ---------
 
     7 1/4% Convertible Notes          $      -  $106,640
     6 3/4% Convertible Debentures       54,765   125,000
     Mortgage Debt                            -     9,101
     Long-term Note                           -     9,188
                                        -------  --------
                                         54,765   249,929
     Current Portion                          -   (18,289)
                                        -------  --------
                                        $54,765  $231,640
                                        =======  ========

     7 1/4% Percent Notes

     In March 1996, the Company called for redemption of the 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 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.

     6 3/4% Convertible Debentures
 
     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,
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, 1996,
principally determined by quoted market prices, was $52,027,000 as compared to
its carrying value of $54,765,000.  The carrying amount of the Company's notes
payable at December 31, 1996 approximates their fair value.

     Mortgage Debt

     Mortgage loans have been used to finance a portion of the acquisition and
expansion of certain of the Company's facilities in the United States and The
Netherlands. These loans are generally secured by the related land and
buildings. These Netherlands loans, which at December 31, 1995 were payable in
Dutch guilders and classified as short-term debt, were repaid in full in October
1996.  The 6 3/4% Convertible Debentures were purchased at less than face value
resulting in an extraordinary gain of $3,475,000.  Partially offsetting the
extraordinary gain are charges of $2,770,000 relating to the write-off of debt
issuance costs.

                                       37
<PAGE>
 
                  Notes to Consolidated Financial Statements

     Long-term Notes

     At December 31, 1995 the Company's 9 1/2% percent long-term notes which
were payable in Dutch guilders were classified as short-term debt. In October
1996, the Company repaid these long-term notes.

     Loan Covenants

     The Company was required to maintain certain investments at the lending
bank, which at December 31, 1995 totaled $20,000,000. At December 31, 1995 the
Company classified the $18,289,000 of debt secured by such investments as short-
term.  In October 1996, the Company repaid the remaining balance of such debt to
the lending bank to eliminate all of the long-term notes and mortgage debt.
Additionally, $6,897,000 of the Company's notes payable are secured by
investments at the lending bank of $7,260,000.

Note 10
SHAREHOLDERS' EQUITY

     Capital Stock

     In 1996 the Company issued 1,596,000 shares of its Common Stock par value
$.01 per share in connection with the exercise of options and warrants.  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 conversion of the
Company's 7 1/4% Convertible Notes and in July 1996, the Company issued 920,716
shares in connection with its agreements with Lilly.   In 1995, the Company
issued 1,388,000 shares of its Common Stock in connection with the exercise of
options and warrants.  In 1994, the Company issued 7,014,000 shares of its
Common Stock pursuant to the terms of an exchange offer as described in Note 13,
6,151,000 shares of its Common Stock in connection with the exercise of options
and warrants and 140,000 shares pursuant to the terms of the extension of the
alliance agreement with Glaxo Wellcome.  At December 31, 1996, approximately
7,768,000 shares of Common Stock were reserved for issuance upon exercise of
warrants and stock options, pursuant to employee retirement savings and stock
award plans and agreements, and upon conversion of convertible debt securities.
Additionally, at December 31, 1996, 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.

     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.

                                       38
<PAGE>
 
                  Notes to Consolidated Financial Statements

     The following table summarizes the activity and value with respect to the
Company's stock options (in thousands except per share amounts):

                                  Options   Exercise Price
 
Outstanding, December 31, 1993      5,770   $ 6.500-53.500
Granted                               726   $ 9.130-17.940
Lapsed or canceled                   (685)  $ 6.880-16.000
Exercised                            (853)  $ 6.880-51.750
                                   ------   --------------
 
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
                                   ======   ==============

     At December 31, 1996, the weighted-average remaining contractual life of
outstanding options was 7.19 years. The weighted-average exercise price of the
options outstanding as of December 31, 1996 and 1995 was $17.50 and $12.98,
respectively.

     At December 31, 1996, options to purchase a total of approximately
2,181,000 shares of Common Stock were exercisable, and approximately 1,785,000
options become exercisable as follows (in thousands):

     Years ending December 31,  Shares
     ------------------------   ------

     1997                          808 
     1998                          450 
     1999                          317 
     2000                          210  

     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, 1996, awards of approximately 292,000 shares of the
Company's Common Stock were outstanding and are scheduled to vest in the
following periods (in thousands):


     Years ending December 31,  Shares
     -------------------------  ------
 
     1997                           96
     1998                           92
     1999                           66
     2000                           38 

                                       39
<PAGE>
 
                  Notes to Consolidated Financial Statements

     The terms of options unexercisable as of December 31, 1996 for an aggregate
of approximately 1,242,000 shares and restricted stock awards unvested as of
December 31, 1996 for an aggregate of approximately 257,000 shares provide for
the acceleration of the exercisability of such options and the vesting of such
restricted stock awards upon the occurrence of certain events constituting a
change in control of the Company.  Further, in such event, the holders of
approximately 2,991,000 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 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 APB Opinion 25 and related interpretations in
accounting for its stock option plans and accordingly, 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 loss and loss per share would
have been reduced to the pro forma amounts indicated in the table below (in
thousands except per share amounts):
 
                                  1996       1995
                                ---------  ---------
Net loss - as reported          $(12,763)  $(57,132)
Net loss - pro forma            $(17,791)  $(58,932)
 
Loss per share - as reported    $  (0.19)  $  (0.98)
Loss per share - pro forma      $  (0.27)  $  (1.01)
 
     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,
 
                                   1996   1995
                                   -----  -----
Risk free interest rate             5.6%   7.8%
Expected life of option (years)     9.2    9.2
Expected dividend of option (1)       -      -
Volatility of stock price          70.3%  70.3%

(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 year ended December 31, 1996 totaled $551,000. 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 

                                       40
<PAGE>
 
                  Notes to Consolidated Financial Statements

which, if consummated, would result in the ownership by that person or group of
at least 30 percent of the Common Stock.

     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 11
GEOGRAPHIC AND CUSTOMER INFORMATION

                                      Geographic Information (in thousands)
 
                                                   Income   Identifiable
          Years ended December 31,     Revenue     (Loss)         assets       
                                                                           
          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  
                                       ========  =========       ========  
                                                                           
          1994                                                             
          United States                $ 59,294  $(112,266)      $233,208  
          Europe                          7,932    (14,392)        72,707  
                                       --------  ---------       --------  
                                       $ 67,226  $(126,658)      $305,915  
                                       ========  =========       ========   
 
     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 1996, approximately 67% 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. During 1994, approximately 60% of
the Company's total product sales were to four customers, as follows: 10% to
Abbott Laboratories, 12% to Boehringer Mannheim GmbH, 13% to CIS bio
International and 25% to Toray-Fuji Bionics, Inc.

                                       41
<PAGE>
 
                  Notes to Consolidated Financial Statements

Note 12
CONTRACT REVENUES

     Lilly Related

     Pursuant to the Company's agreements with Lilly, the Company recognized
revenues of $10,000,000 and $9,500,000 for the years ended December 31, 1995 and
1994, respectively, related to the achievement of ReoPro milestones.

     Glaxo Wellcome Related

     Pursuant to the Company's agreements with Glaxo Wellcome, the Company
recognized revenues of $14,000,000 for the year ended December 31, 1994
principally related to the reimbursement of prior expenses and achievement of
milestones associated with Panorex. Glaxo Wellcome may make certain future
payments to the Company based on the achievement of certain milestones related
to Panorex.

     Related Party Research & Development

     During 1994, the Company conducted research and development under a
contract with Tocor II.  Under the contract, the Company received reimbursement
of its costs plus a management fee.  Such revenues were recorded net of
amortization of deferred costs resulting from the issuance of warrants to Tocor
II Unitholders.  See Note 13 for a discussion of an exchange offer which
resulted in the termination of the research and development contract and
services agreement.

     For the year ended December 31, 1994, revenues related to the Tocor II
research program were $1,652,000. Expenses incurred, including general and
administrative expenses for the year ended December 31, 1994 were $1,915,000.

     Additionally, the Company incurred expenses of approximately $29,121,000,
$29,900,000 and $22,850,000 for the years ended December 31, 1996, 1995 and
1994, 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.

     Other

     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 $3,355,000, $3,915,000 and $2,090,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.

Note 13
CHARGE FOR ACQUIRED RESEARCH AND DEVELOPMENT

     In February 1994, the Company initiated the exchange offer pursuant to
which the Company offered to exchange 3.2 shares of its Common Stock for each of
the 2,250,000 outstanding Tocor II Units tendered.  Each Unit consisted of one
share of callable common stock of Tocor II, one callable warrant to purchase one
share of Centocor Common Stock and one Series T warrant to purchase one share of
Centocor Common Stock (the "Warrants").  The 

                                       42
<PAGE>
 
                  Notes to Consolidated Financial Statements

exchange offer expired at the close of business on March 11, 1994, at which time
the Company accepted all of the 94 percent of the Tocor II Units tendered in
exchange for approximately 6,793,000 shares of its Common Stock, thereby
increasing shareholders equity by $81,607,000. The transaction was accounted for
as a purchase and the Company allocated the excess of the consideration paid
over the net assets of Tocor II to the value of the acquired research and
development. The Company recorded a charge to earnings in the first quarter of
1994 of $36,966,000 representing principally the cost allocated to the acquired
research and development. In connection with the transaction, the Company
acquired $50,124,000 of cash and short-term investments and warrants with a
value of $8,492,000 which were retired. The unaudited comparative statement of
operations data excluding the charge for acquired research and development,
assuming the exchange offer was consummated as of January 1, 1993, would have
been as follows (in thousands except per share amounts):

     Statements of       For the twelve months ended December 31, 
     Operations Data           1994                               
     ---------------           ----                               
                                                                  
     Revenues              $ 65,574                               
     Loss                  $(90,963)                              
     Loss per share          $(1.78)                               


     Effective March 30, 1994, each remaining share of Tocor II callable Common
Stock ("Tocor II Shares") was converted into 2.88 shares of the Company's Common
Stock through a merger of Tocor II into a wholly-owned subsidiary of the
Company.  Pursuant to the terms of the merger, holders of Tocor II Shares at the
time of the merger were required to surrender the certificates representing
Tocor II Shares to an exchange agent in exchange for certificates representing
Common Stock of the Company.  Through December 31, 1996, stock certificates
representing 357,000 shares of the Company's Common Stock had been delivered by
the exchange agent in connection with the merger.  If all of the remaining Tocor
II Shares are surrendered to the exchange agent, stock certificates representing
an additional 10,000 shares of the Company's Common Stock will be delivered.
Shares of the Company's Common Stock into which the Tocor II Shares were
converted by the merger are not classified as issued and outstanding until the
delivery by the exchange agent of the stock certificate representing such
shares. Warrants not tendered as part of Units in the exchange offer remain
outstanding.

Note 14
OTHER INCOME (EXPENSES)

     The Company recorded a charge to earnings of $3,750,000 and $1,275,000 for
the years ended December 31, 1995 and December 31, 1994, respectively, in
connection with the settlement of certain litigation.  During 1994 the Company
recorded a charge to earnings of $3,649,000 representing an unrealized loss due
to the other than temporary decline in the market value of marketable equity
investments below the Company's cost for such investments. Other income
(expenses) also includes the Company's equity share of the gain and/or losses of
an investee company.

                                       43
<PAGE>
 
                  Notes to Consolidated Financial Statements

Note 15
INCOME TAXES

     The components of the deferred tax assets are as follows as of December 31,
1996 and 1995 (in thousands):

                                    1996        1995
                                 ----------  ----------
 
     Tax credits                 $   7,216   $   5,424
     Loss carryforwards            237,401     229,855
     Acquired research              25,499      30,357
     Deferred R&D expense           16,385           -
     Facilities and equipment        2,207       2,326
     Depreciation                    1,050         977
     Investments                     1,553       1,553
                                 ---------   ---------
     Total                         291,311     270,492
     Valuation reserve            (291,311)   (270,492)
                                 ---------   ---------
     Net deferred tax assets     $       -   $       -
                                 =========   =========

     At December 31, 1996, the Company had research and development, orphan drug
and other tax credits of approximately $6,835,000 substantially all with
expiration dates ranging from 1999 to 2011, 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, 1996.

     Of the $291 million valuation allowance at December 31, 1996, $14.5 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, 1996 are
unused foreign tax subsidies that may be used to offset foreign taxable income
of approximately $23 million. The Company had net operating loss carryforwards
available in the United States for federal income tax purposes of approximately
$609 million which will begin to expire at various dates from the year 2005 to
2011. 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.

                                       44
<PAGE>
 
                  Notes to Consolidated Financial Statements

     The aggregate minimum rental commitments of leases are as follows:
 
     Years ending December 31,
 
          1997               $2,677,000
          1998                1,909,000
          1999                1,459,000
          2000                  750,000
          2001                  709,000
          Thereafter          3,446,000

     Rent expense was $3,162,000, $3,308,000 and $3,189,000, for the years ended
December 31, 1996, 1995, and 1994, respectively.

Note 17
SUPPLEMENTAL INFORMATION ON CASH FLOWS

     Interest paid was $12,615,000, $18,358,000 and $19,192,000, in 1996, 1995,
and 1994, respectively.

     Income tax payments of $13,000, $9,000 and $19,000 were made in 1996, 1995
and 1994, 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 1996 and 1995, the Company had unrealized gains on its equity
investments of $2,342,000.

     In 1994, the Company issued 7,014,000 shares of Common Stock, resulting in
a noncash increase to additional paid-in capital of $25,643,000 and acquired
cash and short-term investments of $50,124,000 in connection with an exchange
offer more fully described in Note 13.

Note 18
QUARTERLY FINANCIAL DATA (UNAUDITED)

(In thousands except per share data)
 
Three Months Ended           March 31    June 30   September 30   December 31
                             --------    -------   ------------   -----------

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
  Net income (loss)
   per share (2)              $  (.16)  $   (.06)      $   (.02)     $    .04
 

                                       45
<PAGE>
 
                  Notes to Consolidated Financial Statements
 
Three Months Ended           March 31    June 30   September 30   December 31
                             --------    -------   ------------   -----------
 
1995
  Total revenues              $23,995   $ 20,754       $ 19,155      $ 15,012
  Sales                        19,319     17,754         15,860        12,068
  Gross profit from sales      10,694      9,683          8,589         6,869
  Net loss (3) and (4)         (8,242)   (17,309)       (12,155)      (19,426)
  Net loss per share (2)      $  (.14)  $   (.30)      $   (.21)     $   (.33)
 

(1)  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. Fully diluted net income or loss per share is not materially
    different from primary net income or loss per share.
(3) During the second quarter of 1995, the Company recorded a reserve of
    $3,750,000 relating to the settlement of litigation.
(4) During the fourth quarter of 1995, the Company recorded charges of
    $1,642,000 relating to severance costs.

Note 19
OTHER CHARGES

     In 1995, the Company recorded a charge of $1,642,000 representing severance
costs in connection with the downsizing of its workforce. In 1994, the Company
elected to buyout a future royalty obligation and, as a result, recorded a
charge of $17,098,000 representing such buyout.  Additionally in 1994, the
Company recorded a charge of $7,870,000 in connection with the write-down of
certain facilities and equipment.  At the Company's present level of operations,
the Company currently maintains idle facilities and equipment at its Malvern
location. The Company continually evaluates the future needs for its facilities
and equipment.  There can be no assurance that reserves to further reduce the
carrying value of certain fixed assets, other royalty buyout arrangements, or
other charges will not be required in the future.

                                       46
<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.

                                       47
<PAGE>
 
                          INDEPENDENT AUDITORS' 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, 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 31, 1997 except for paragraph 3 of Note 3 which is as of March 4, 1997

                                       48
<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 14, 1997, which definitive Proxy Statement will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A.


                                    Part IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------

     a.   Documents filed as part of the Report:

          i.   Financial Statements of Centocor Partners III, L.P.:

               Balance Sheets, December 31, 1996 and 1995.

               Statements of Operations for the Years Ended December 31, 1996,
               1995 and 1994.

               Statements of Cash Flows for the Years Ended December 31, 1996,
               1995 and 1994.

               Statements of Partners' Capital for the Years Ended December 31,
               1996, 1995 and 1994.

               Notes to Financial Statements.

               Independent Auditors' Report.

          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.

                                       49
<PAGE>
 
          iii. Exhibits:

                    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).

                                       50
<PAGE>
 
                    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).

                    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).

                    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 (included in Exhibit 4.9) (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).

                                       51
<PAGE>
 
                    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).

                    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).

                                       52
<PAGE>
 
                    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).

                    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 

                                       53
<PAGE>
 
                           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).

                    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

                                       54
<PAGE>
 
                           this Agreement.) (incorporated by reference to
                           Exhibit 10(e) to the Registrant's Current Report on
                           Form 8-K dated December 16, 1993).

                    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).

                    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.

          *These exhibits constitute compensatory plans.


                                       55
<PAGE>
b.  The Registrant has filed the following reports on Form 8-K since the
    beginning of the quarter ended December 31, 1996:
    
                       None

               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.

               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.

                                       56
<PAGE>
 
 
Centocor Partners III, L.P.
Balance Sheets
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                             December 31,   December 31,
                                                 1996           1995
                                             -------------  -------------
<S>                                          <C>            <C>
Assets
 
 Cash                                         $    32,646    $     4,187
 Investment in joint venture                    3,677,478        618,011
                                              -----------    -----------
  Total Assets                                $ 3,710,124    $   622,198
                                              ===========    ===========
 
Liabilities
 
 Current liabilities:
  Accounts payable and accrued expenses       $    78,325    $    70,133
  Due to Centocor, Inc. (Note 7)                6,801,420      7,954,507
                                              -----------    -----------
                                                6,879,745      8,024,640
Partners' capital (Note 4)                     (3,169,621)    (7,402,442)
                                              -----------    -----------
 
  Total Liabilities and Partners' capital     $ 3,710,124    $   622,198
                                              ===========    ===========
</TABLE>


See accompanying Notes to Financial Statements.

-------------------------------------------------------------------------------

                                       57
<PAGE>
 
Centocor Partners III, L.P.
Statements of Operations
-------------------------------------------------------------------------------

<TABLE> 
<CAPTION>
For the Years ended December 31,          1996            1995            1994
                                      -------------  --------------  --------------
<S>                                   <C>            <C>             <C>             
Revenues:
 
 Equity in earnings of
 joint venture (Note 6)               $  7,850,936   $   1,269,919   $       4,490
                                      ------------   -------------   -------------
 
Costs and Expenses:
 
 Research and development (Note 7)      29,120,796      29,900,000      22,850,000
 General and administrative                131,794          23,548           4,500
                                      ------------    ------------    ------------
                                        29,252,590      29,923,548      22,854,500
                                      ------------    ------------    ------------
 
Loss for the period                   $(21,401,654)   $(28,653,629)   $(22,850,010)
                                      ============    ============    ============
</TABLE>


See accompanying Notes to Financial Statements.

--------------------------------------------------------------------------------

                                       58
<PAGE>
 
Centocor Partners III, L.P.
Statements of Cash Flows
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Years ended December 31,                      1996           1995           1994
                                                  ------------   ------------   ------------
<S>                                               <C>            <C>            <C>
Cash flows used for operating activities:
 
  Loss                                            $(21,401,654)  $(28,653,629)  $(22,850,010)
  Change in due to Centocor, Inc.                   (1,153,087)       957,381      2,863,000
  Change in accounts payable
     and accrued expenses                                8,192         27,726          4,500
  Change in investment in joint venture             (3,059,467)      (106,381)        (4,490)
                                                  ------------   ------------   ------------
  Net cash used for operating activities           (25,606,016)   (27,774,903)   (19,987,000)
 
Cash flows from financing activities:
 
  Distributions to partners                         (4,653,278)    (1,163,538)             -
  General partner capital contributions             30,287,753     28,942,628     19,987,000
                                                  ------------   ------------   ------------
  Net cash from financing activities                25,634,475     27,779,090     19,987,000
                                                  ------------   ------------   ------------
 
Increase in cash and cash equivalents                   28,459          4,187              -
 
Cash and cash equivalents at beginning of year           4,187              -              -
                                                  ------------   ------------   ------------
 
Cash and cash equivalents at end of year          $     32,646   $      4,187   $          -
                                                  ============   ============   ============
</TABLE>


See accompanying Notes to Financial Statements.

-------------------------------------------------------------------------------

                                       59
<PAGE>
 
Centocor Partners III, L.P.
Statements of Partners' Capital
-------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                      Limited           General
                                      Partners          Partner           Total
                                    ------------      ----------      -------------
<S>                                 <C>               <C>             <C>
Balance, December 31, 1993          $   470,452       $ (4,135,345)   $ (3,664,893)
 
Contributions                                 -         19,987,000      19,987,000
Loss                                        (10)       (22,850,000)    (22,850,010)
                                    ------------      -------------   -------------
 
Balance, December 31, 1994              470,442         (6,998,345)     (6,527,903)
 
Distributions                        (1,151,903)           (11,635)     (1,163,538)
Contributions                                 -         28,942,628      28,942,628
Income (Loss)                         1,233,530        (29,887,159)    (28,653,629)
                                    ------------      -------------   -------------
 
Balance, December 31, 1995              552,069         (7,954,511)     (7,402,442)
 
Distributions                        (4,606,745)           (46,533)     (4,653,278)
Contributions                                 -         30,287,753      30,287,753
Income (Loss)                         7,631,925        (29,033,579)    (21,401,654)
                                    ------------      -------------   -------------
 
Balance, December 31, 1996          $ 3,577,249       $ (6,746,870)   $ (3,169,621)
                                    ============      =============   =============
</TABLE>


See accompanying Notes to Financial Statements.

-------------------------------------------------------------------------------

                                       60
<PAGE>
 
Centocor Partners III, L.P.
Notes to Financial Statements
--------------------------------------------------------------------------------

1.   Basis of Presentation
     ---------------------

     Centocor Partners III, L.P. ("CPIII" or the "Partnership"), was formed in
December 1987, and is managed by its general partner, Centocor Development
Corporation III, a wholly owned subsidiary of Centocor, Inc. ("Centocor"), a
Pennsylvania corporation, which is subject to the reporting requirements of the
Securities Exchange Act of 1934. The Partnership was organized to develop and
derive income from the sale of one therapeutic product (ReoPro) and one imaging
product (Capiscint) which are expected to be used in the treatment and
diagnosis, respectively, of two different types of cardiovascular disease.

     In 1987 and 1988, the Partnership and Centocor sold (a) 542.25 units,
consisting of 111 Class C limited partnership interests and 431.25 Class A
limited partnership interests each together with warrants to purchase shares of
Centocor common stock, and (b) one Class B limited partnership interest,
together with warrants to purchase shares of Centocor common stock.  The
purchase prices were $90,000 for the Class C interests, $100,000 for the Class A
interests and $150,000 for the Class B interest.

     The net proceeds from the sale of limited partnership interests were used
primarily to pay expenses incurred under the Partnership's agreement with
Centocor (the "Development Agreement") to perform research and development for
the Partnership (see Note 7).

     The Partnership also entered into a Cross License Agreement pursuant to
which Centocor granted to the Partnership an exclusive license to use all patent
rights, know-how, technical information and biological materials owned or
controlled by Centocor within the Partnership's field of activity.  Under the
Cross License Agreement, the Partnership agreed to grant to Centocor an
exclusive royalty-free license to all patent rights, know-how, technical
information and biological materials arising from research and development
conducted under the Development Agreement for all purposes outside of the
Partnership's field of activity.

     Centocor entered into a Partnership Purchase Option Agreement with each of
the limited partners. On January 31, 1997, Centocor exercised its option to
acquire the Class A and Class C limited partnership interests. In connection
therewith, the general partner has terminated the research program and after the
acquisition of the Class B limited partnership interests, which is expected to
occur on or about May 1, 1997, the partnership is expected to dissolve. (See
Note 5)
 
2.   Summary of Significant Accounting Policies
     ------------------------------------------

     Investment in Joint Venture
     ---------------------------

     The Partnership accounts for its investment in the joint venture (see Note
6) under the equity method of accounting. The joint venture is expected to
terminate in 1997 upon the occurrence of certain events. (See Note 5)

                                       61
<PAGE>
 
Centocor Partners III, L.P.
Notes to Financial Statements
--------------------------------------------------------------------------------

     Income Taxes
     ------------

     The Partnership's distributable income or loss is reportable for income tax
purposes by the partners; therefore, no provision for income taxes has been made
in the accompanying financial statements.  The Partnership's tax returns are
subject to examination by federal and state taxing authorities.  Because many
types of transactions are susceptible to varying interpretations under federal
and state income tax laws and regulations, certain amounts may be subject to
change at a later date upon final determination by the respective taxing
authorities.

3.   Contingencies
     -------------

     In July 1995, PaineWebber Development Corporation ("PaineWebber"), a
wholly-owned subsidiary of PaineWebber Group, Inc., caused suit to be filed
against Centocor and Centocor Development Corporation III ("CDCIII", the general
partner of the Partnership and a wholly-owned subsidiary of Centocor) by a
development partnership formed in the mid 1980s by PaineWebber and managed by it
since then. The PaineWebber partnership, PaineWebber R&D Partners II,
L.P.("PWR&DII"), an investor in the Partnership, filed suit in the Court of
Chancery of the State of Delaware. In the complaint, the plaintiff seeks to sue
derivatively on behalf of CPIII. The Partnership is named as a nominal defendant
and Centocor and CDCIII are named as defendants against whom relief is sought.
The claim is that at least $25 million of the money paid by Eli Lilly and
Company ("Lilly") to Centocor in 1992 represented profits from the marketing of
ReoPro, obligating Centocor to pay a portion thereof to the Partnership, and
that Centocor is obligated to pay an increased percentage of the profits from
ReoPro to the Partnership going forward. Centocor 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 (since 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 a limited partner, John E. Abdo, against Centocor
and CDCIII and certain of their officers and directors.  The complaint, filed
derivatively on behalf of the Partnership, asserts claims, inter alia, for
breach of contract, breach of fiduciary duty, common law fraud, and conspiracy
and aiding and abetting. Centocor answered this complaint and also filed a
cross-claim against nominal defendant CPIII and a third-party complaint against
PaineWebber Group, Inc., and PaineWebber, since 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 parties in the PWR&DII suit have considered ways and means to resolve the
issues without further litigation.  The Partnership incurred approximately
$131,794 in legal expenses related to these suits in 1996 and cumulative legal
expenses to date of approximately $155,000 as a result of being named a nominal
defendant in the above suits.

     Under paragraph 7.8 of the Agreement of Limited Partnership, the
Partnership is obligated, under certain conditions, to indemnify CDCIII and its
officers and directors in respect of all fees,

                                       62
<PAGE>
 
Centocor Partners III, L.P.
Notes to Financial Statements
--------------------------------------------------------------------------------

costs and expenses incurred in connection with or resulting from any claim
against CDCIII and its officers and directors that arises out of or in any way
relates to the Partnership or its properties, business or affairs including any
losses or damages resulting from such claims and amounts paid in settlement or
compromise.  Therefore, the Partnership may incur legal expenses and other costs
pertaining to the suits described above.

     CPIII is expected to terminate in 1997 pursuant to the purchase by Centocor
of all limited partner interests. (See Note 5)

4.   Partners' Capital
     -----------------

     Profits and losses of the Partnership are generally allocated 1 percent to
the general partner and 99 percent to the limited partners.  Losses resulting
from research and development expenditures in excess of the limited partners'
capital contributions are allocated to the general partner (see Note 7).

5.   Partnership Purchase Option
     ---------------------------

     On January 31, 1997, Centocor exercised its purchase option and made an
advance payment to the Class A and Class C limited  partners of $13,598,000 in
the aggregate. Centocor plans to exercise its option to purchase the Class B
limited Partnership interest by making a payment of $41,500 in the aggregate on
or about May 1, 1997 at which time the joint venture will terminate.

     CPIII is expected to terminate on or around July 30, 1997 pursuant to the
transfer of all limited partner interests to Centocor.  Pursuant to the terms of
the Partnership Purchase Agreement, Centocor will make future quarterly royalty
payments to the former limited partners. For each quarter beginning with the
first quarter of the year 2000, Centocor's payments to the former limited
partners will be reduced by 25 percent of the amount otherwise payable to the
former limited partners until Centocor has recouped the amount of the advance
payment.

6.   Joint Venture
     -------------

     The Partnership and Centocor formed a joint venture for the purpose of
commercializing any products developed within the Partnership's field of
activity.  The Joint Venture Agreement provided that Centocor  manufacture the
products on behalf of the joint venture for its actual costs of manufacturing.
Under the Joint Venture Agreement, Centocor also provided marketing services for
the joint venture for a commission of 17 percent of joint venture sales and
received 10 percent of joint venture sales as reimbursement for its management
and administrative services.  The profits and losses of the joint venture are to
be allocated approximately 75 percent to Centocor and 25 percent to the
Partnership.

     The joint venture will terminate upon Centocor's exercise of the option to
purchase the Class B limited Partnership interest.

     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

                                       63
<PAGE>
 
Centocor Partners III, L.P.
Notes to Financial Statements
--------------------------------------------------------------------------------

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, Centocor and Lilly amended the Sales and Distribution
Agreement. Under this 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 August 1996, Centocor entered into an agreement with Fujisawa
Pharmaceutical Co., Ltd., appointing Fujisawa as the exclusive distributor of
ReoPro in Japan. Centocor 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.

     Through the joint venture, Centocor commenced sales of ReoPro to Lilly in
January 1995. ReoPro sales to Lilly for the twelve months ended December 31,
1996 were $88,669,000.  The level of sales of ReoPro will depend upon a number
of factors, including the timing and extent of additional regulatory approvals
for ReoPro, approval and commercialization of competitive products, the degree
of acceptance of ReoPro in the marketplace, and the strength of Centocor's
patent position and that of others.

7.   Research Funding
     ----------------

     The initial funding by the limited partners for the Partnership's research
program pursuant to the Development Agreement with Centocor was exhausted in
1990.  In order to continue the research program, the Partnership extended the
terms of the Development Agreement with Centocor. Approximately $143,383,000 of
the Partnership's research costs through December 31, 1996 were funded by the
general partner.  At December 31, 1996 and 1995, approximately $6,801,000 and
$7,955,000, respectively, were due to Centocor for expenditures under the
Development Agreement. Pursuant to Centocor's purchase of the Class A and Class
C limited partner interests as per Note 5, the General Partner has terminated
the research program in accordance with the Development Agreement.

                                       64
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT


The Partners of Centocor Partners III, L.P.:

We have audited the accompanying balance sheets of Centocor Partners III, L.P.
("the Partnership") as of December 31, 1996 and 1995, and the related statements
of operations, cash flows and partners' capital for each of the years in the
three-year period ended December 31, 1996.  These financial statements are the
responsibility of the Partnership's management.  Our responsibility is to
express an opinion on these financial statements 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.

As disclosed in Notes 1 and 5 to the financial statements, on January 31, 1997,
Centocor exercised its option to acquire the Class A and Class C limited
Partnership interests. In connection therewith, the general partner has
terminated the research program and after the acquisition of the Class B limited
Partnership interests, which is expected to occur on or about May 1, 1997, the
Partnership is expected to dissolve.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Centocor Partners III, L.P. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP



Philadelphia, Pennsylvania
January 31, 1997

                                       65
<PAGE>

                                                                     Schedule II
                        CENTOCOR, INC. AND SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
                  FOR THE THREE YEARS ENDED DECEMBER 31, 1996
                                (IN THOUSANDS)

<TABLE> 
<CAPTION> 
                    Balance    Charged to               Balance   Charged to             Balance   Charged to              Balance
                      at       Costs and                   at     Costs and                at      Costs and                 at
Classification      12/31/93   Expenses    Deductions   12/31/94  Expenses   Deductions  12/31/95  Expenses    Deductions  12/31/96
--------------      --------   ---------   ----------   --------  ---------- ----------  --------  ----------  ----------  --------
<S>                 <C>        <C>         <C>          <C>       <C>        <C>         <C>       <C>         <C>         <C> 

Inventory Reserves   $64,743    $3,609      ($53,472)    $14,880   $2,094     ($15,938)   $1,036    $662        ($357)     $1,341
                   ================================================================================================================
</TABLE> 
<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 28, 1997             By:   /s/   David P. Holveck
                                  --------------------------------
                                 David P. Holveck,
                                 President and 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.

<TABLE> 
<CAPTION> 
        SIGNATURES                            TITLE                       DATE
------------------------         -------------------------------    ------------------
<S>                              <C>                                <C> 
/s/ Hubert J. P. Schoemaker      Director, Chairman of the Board    February 28, 1997
-----------------------------
HUBERT J. P. SCHOEMAKER


/s/ David P. Holveck             President, Chief Executive          February 28, 1997
-----------------------------
DAVID P. HOLVECK                 Officer, and Director

 
/s/ Dominic J. Caruso            Vice President-Finance and          February 28, 1997
-----------------------------    Chief Financial Officer and
DOMINIC J. CARUSO                Acting General Manager Diagnostics
                                 Division (principal financial and
                                 accounting officer)

/s/ Anthony B. Evnin             Director                            February 28, 1997
-----------------------------
ANTHONY B. EVNIN
 
/s/ William F. Hamilton          Director                            February 28, 1997
-----------------------------
WILLIAM F. HAMILTON
 
/s/ Antonie T. Knoppers          Director                            February 28, 1997
-----------------------------
ANTONIE T. KNOPPERS
 
/s/ Ronald A. Matricaria         Director                            February 28, 1997
-----------------------------
RONALD A. MATRICARIA
 
/s/ Richard D. Spizzirri         Director                            February 28, 1997
-----------------------------
RICHARD D. SPIZZIRRI
 
/s/ Lawrence Steinman            Director                            February 28, 1997
-----------------------------
LAWRENCE STEINMAN
 
/s/ Jean C. Tempel               Director                            February 28, 1997
-----------------------------
JEAN C. TEMPEL
</TABLE> 
<PAGE>
 
                                 EXHIBIT INDEX


Exhibit
Number
------

 10.24              AMENDMENT TO SALES AND DISTRIBUTION AGREEMENT

 10.33              DISTRIBUTION 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