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



                                   FORM 10-Q


(Mark One)


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



      For the quarterly period ended June 30, 1998
                                     -------------



[ ]   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                    (IRS Employer)
   incorporation or organization)                  Identification No.)


 200 Great Valley Parkway     Malvern, Pennsylvania     19355-1307
--------------------------------------------------------------------------------
(Address of principal executive offices)                (Zip Code)


                                 610-651-6000
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)


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
                                          ______      ______

Shares of Common Stock outstanding at August 3, 1998 were 70,470,841.
<PAGE>
Part I:  Financial Information
Item 1:  Financial Statements

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

                     (IN THOUSANDS EXCEPT PER SHARE DATA)

                                                       (UNAUDITED)
                                                JUNE 30,        DECEMBER 31,
                                                  1998              1997
------------------------------------          -------------    -------------
<S>                                           <C>              <C> 
ASSETS

CURRENT ASSETS:

     Cash and cash equivalents (Notes 4 and 8)     $128,713          $85,565
     Short-term investments (Note 4)                103,078          109,108
     Accounts and contracts receivable               71,643           26,459
     Interest receivable                              1,126            1,394
     Inventory (Note 5)                              36,899           27,777
     Prepaid expenses                                 1,857            3,053
     Other current assets                             1,369            1,489
                                                  ---------        ---------
                                                    344,685          254,845

PROPERTY, PLANT AND EQUIPMENT:
     Land and buildings                              69,171           68,957
     Equipment, furniture, fixtures, improvements
       and construction in progress                 120,418           87,483
                                                 ----------        --------- 
                                                    189,589          156,440
     Less accumulated depreciation                  (82,773)         (79,426)
                                                  ---------        ---------
                                                    106,816           77,014

LONG-TERM INVESTMENTS (NOTE 4)                       18,193           11,957

INTANGIBLE AND OTHER ASSETS (NOTE 6)                255,225           61,288
                                                 ----------       ----------

          TOTAL ASSETS                             $724,919         $405,104
                                                 ==========       ==========

</TABLE>


See accompanying Notes to Consolidated Financial Statements.


                                       2


<PAGE>

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

                                               (IN THOUSANDS EXCEPT PER SHARE DATA)

                                                                       (UNAUDITED)                   
                                                                         JUNE 30,       DECEMBER 31, 
                                                                           1998            1997      
----------------------------------------                              -------------    --------------
<S>                                                                   <C>              <C>           
LIABILITIES AND SHAREHOLDERS' EQUITY                                                                 
                                                                                                     
CURRENT LIABILITIES:                                                                                 
                                                                                                     
    Accounts payable                                                       $22,845          $15,651  
    Accrued expenses                                                        81,560           54,203  
    Notes payable (Note 8)                                                   5,882            5,940  
    Unearned revenues                                                        3,479                -  
    Other current liabilities (Note 7)                                      15,800           15,800  
                                                                      -------------    ------------- 
                                                                           129,566           91,594  
                                                                                                     
LONG-TERM DEBT (NOTE 8)                                                    460,000           54,765  
                                                                                                     
                                                                                                     
OTHER LIABILITIES                                                            2,489              910   

SHAREHOLDERS' EQUITY (NOTES 2, 4 AND 8):
      Preferred Stock, $.01 par value,                                
       10,000 shares authorized, none issued                                     _                _  
      Common Stock, $.01 par value,                                                                  
       100,000 shares authorized and                                                                 
       70,415 and 70,146 issued and                                                                  
       outstanding at June 30, 1998 and                                                              
       December 31, 1997, respectively                                         704              701  
      Additional paid-in capital                                         1,063,502        1,060,158  
      Accumulated deficit                                                 (931,499)        (810,472) 
      Unrealized gain on marketable                                                                  
       securities (Note 12)                                                      -            7,894  
      Cumulative foreign currency                                                                    
       translation adjustments (Note 12)                                       157             (446)
                                                                      -------------    ------------- 
                                                                           132,864          257,835  
                                                                      -------------    ------------- 
                                                                                                     
       TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                          $724,919         $405,104 
                                                                      =============    ============= 
</TABLE> 

See accompanying Notes to Consolidated Financial Statements.

                                       3
<PAGE>


                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                     (IN THOUSANDS EXCEPT PER SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
------------------------------------------------------------------------
For the three months ended June 30,                 1998         1997
------------------------------------------------------------------------
<S>                                              <C>          <C> 
REVENUES:                                          
  Sales                                            $69,880      $51,007 
  Contracts                                         21,002        2,636
                                                 ----------   ----------   
                                                    90,882       53,643
                                                                       
COSTS AND EXPENSES:                                 
  Cost of sales                                     24,422       22,183
  Research and development                          16,048       17,292
  Marketing, general and administrative             26,108        9,588
                                                 ----------   ----------   
                                                    66,578       49,063
                                                                       
OTHER INCOME (EXPENSES):                             
  Interest income                                    3,636        2,448
  Interest expense                                  (5,634)        (965)
  Litigation charge (Note 2)                        (1,300)           0 
  Loss on sale of facility and related business          
   (Note 14)                                             0       (4,565)   
  Other                                               (276)        (758)
                                                 ----------   ----------
                                                    (3,574)      (3,840)
                                                 ----------   ----------
                                                                             
INCOME BEFORE PROVISION FOR INCOME TAXES            20,730          740         
                                                                               
Provision for income taxes (Note 9)                  1,450           20        
                                                 ----------   ----------    
                                                                               
NET INCOME                                         $19,280         $720     
                                                 ==========   ==========    
                                                                               
BASIC EARNINGS PER SHARE                             $0.27        $0.01     
                                                 ==========   ==========    
                                                                               
DILUTED EARNINGS PER SHARE                           $0.27        $0.01     
                                                 ==========   ==========    
                                                                               
WEIGHTED AVERAGE NUMBER OF                                                     
  SHARES OUTSTANDING                                70,384       69,689     
                                                 ==========   ==========    
                                                                               
WEIGHTED AVERAGE COMMON AND DILUTIVE                                           
  EQUIVALENT SHARES OUTSTANDING                     72,144       71,597     
                                                 ==========   ==========     
</TABLE> 

See accompanying Notes to Consolidated Financial Statements.


                                       4






<PAGE>

<TABLE>
<CAPTION>
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                     (IN THOUSANDS EXCEPT PER SHARE DATA)
                                  (UNAUDITED)

  ----------------------------------------------------------------
  For the six months ended June 30,         1998          1997
  ----------------------------------------------------------------
  <S>                                       <C>           <C>   
  REVENUES:
    Sales                                   $126,385      $95,943
    Contracts                                 21,362        2,736
                                           ----------   ----------
                                             147,747       98,679

  COSTS AND EXPENSES:
    Cost of sales                             45,182       39,989
    Research and development                  35,961       31,629
    Marketing, general and administrative     41,975       19,384
    Special charges (Note 11)                145,405            0
                                           ----------   ----------
                                             268,523       91,002

  OTHER INCOME (EXPENSES):
    Interest income                            7,800        4,602
    Interest expense                          (8,321)      (1,962)
    Gain on sale of investment (Note 4)        6,931            0
    Litigation charges (Note 2)               (4,730)           0
    Loss on sale of facility and related         
     business (Note 14)                            0       (4,565)
    Other                                       (331)      (1,671)
                                           ----------   ----------
                                               1,349       (3,596)
                                           ----------   ----------

  INCOME (LOSS) BEFORE PROVISION 
    FOR INCOME TAXES                        (119,427)       4,081

  Provision for income taxes (Note 9)          1,600           90
                                           ----------   ----------

  NET INCOME (LOSS)                        ($121,027)      $3,991
                                           ==========   ==========

  BASIC EARNINGS (LOSS) PER SHARE             ($1.72)       $0.06
                                           ==========   ==========

  DILUTED EARNINGS (LOSS) PER SHARE           ($1.72)       $0.06
                                           ==========   ==========

  WEIGHTED AVERAGE NUMBER OF
    SHARES OUTSTANDING                        70,284       69,603
                                           ==========   ==========

  WEIGHTED AVERAGE COMMON AND DILUTIVE
    EQUIVALENT SHARES OUTSTANDING             70,284       71,629
                                           ==========   ==========
</TABLE>

         See accompanying Notes to Consolidated Financial Statements.

                                       5





<PAGE>

<TABLE>
<CAPTION>
                                                  CENTOCOR, INC. AND SUBSIDIARIES
                                               CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                          (IN THOUSANDS)
                                                            (UNAUDITED)
--------------------------------------------------------------------------------------------------
  For the six months ended June 30,                                     1998              1997
--------------------------------------------------------------------------------------------------
<S>                                                                     <C>               <C> 
  Cash flows from (used for) operating activities:
    Net income (loss)                                                    ($121,027)        $3,991
    Adjustments to reconcile net income (loss) to net cash
      from (used for) operating activities:
       Special charges (Note 11)                                           145,405              0
       Loss on sale of facility and related business (Note 14)                   0          4,565
       Gain on sale of investment                                           (6,931)             0
       Provisions for depreciation and amortization                         15,133          8,283
       Amortization of unearned revenue                                     (1,521)             0
       Other                                                                     0          2,369
       Changes in assets and liabilities:
              Accounts and contracts receivable                            (44,540)       (24,369)
              Interest receivable                                              267            388
              Inventory                                                     (9,359)        (2,565)
              Prepaid expenses                                                (657)           272
              Other current assets                                             106           (663)
              Intangible and other assets                                   (7,838)       (18,244)
              Accounts payable                                               8,708         (1,153)
              Unearned revenue                                               5,000              0
              Accrued expenses and other liabilities                        19,318         14,711
              Other long-term liabilities                                    1,579           (225)
                                                                       ------------   ------------
      Net cash from (used for) operating activities                          3,643        (12,640)

  Cash flows from (used for) investing activities:
    Purchases of investments                                               (89,619)       (40,500)
    Sales of investments                                                   105,512         53,400
    Retavase acquisition and related costs                                (337,039)             0
    Sale of facility and related business                                        0          2,400
    Purchases of fixed assets                                              (35,457)        (7,623)
                                                                       ------------   ------------
      Net cash from (used for) investing activities                       (356,603)         7,677

  Cash flows from financing activities:
    Net proceeds from other issuances of Common Stock                        2,473          4,423
    Net proceeds from issuance of long-term debt (Note 8)                  448,500              0
    Reduction of long-term debt (Note 8)                                   (54,765)             0
                                                                       ------------   ------------
      Net cash from financing activities                                   396,208          4,423
  Effect of foreign currency translation                                      (100)           951
                                                                       ------------   ------------

  Net increase in cash and cash equivalents                                 43,148            411
  Beginning cash and cash equivalents                                       85,565         55,953
                                                                       ------------   ------------

  Ending cash and cash equivalents                                        $128,713        $56,364
                                                                       ============   ============
</TABLE>

  See accompanying Notes to Consolidated Financial Statements.

                                       6






<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

NOTE 1
BASIS OF PRESENTATION

   Centocor, Inc. ("Centocor" or the "Company") is a biopharmaceutical company
the mission of which is to develop or otherwise acquire and commercialize novel
therapeutic products that solve critical needs in human health care, with a
primary technological focus on monoclonal antibodies and DNA-based products.

   The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to interim
periods.  These financial statements do not include all disclosures required for
annual financial statements and should be read in conjunction with the more
complete disclosures contained in Centocor, Inc.'s audited financial statements
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.

   The statements reflect, in the opinion of management, all adjustments of a
normal and recurring nature necessary to present fairly the Company's
consolidated financial position at June 30, 1998 and December 31, 1997 and the
consolidated results of operations for the three and six months ended June 30,
1998 and 1997 and consolidated cash flows for the six months ended June 30, 1998
and 1997. The results of operations and the cash flows are not necessarily
indicative of the results to be expected for the entire year.


NOTE 2
COMMITMENTS AND CONTINGENCIES

   Liquidity and Capital Resources

   The Company, since inception, has incurred significant operating expenses
attempting to develop therapeutic and diagnostic products.  The Company has also
incurred significant special charges.  Consequently, the Company had experienced
substantial net cash outflows, which have been only partially offset by
significant contract revenues received through collaborative alliances with
pharmaceutical companies and the Company's financing activities and, more
recently, by therapeutic product sales.

   On March 13, 1998, the Company completed the acquisition of the U.S. and
Canadian product rights for Retavase(TM) (reteplase), a leading acute-care
cardiovascular drug, from Roche Healthcare Limited ("Roche Healthcare"), a
subsidiary of Roche Holding Ltd. ("Roche"), for $335,000,000 in cash.  Centocor
was able to acquire Retavase because Roche was required to divest Retavase as a
condition of Roche's acquisition of Corange Limited, the parent company of
Boehringer Mannheim GmbH ("Boehringer Mannheim").

                                       7
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

  As part of the Company's agreements with Roche Healthcare, $20,000,000 of the
Retavase purchase price (the "Escrow Amount") has been placed in escrow,
$15,000,000 of which is classified as a long-term investment.  Centocor is
entitled to recover all or a portion of the Escrow Amount upon the successful
completion of certain milestones in the transfer of the manufacturing of
Retavase from Boehringer Mannheim to Centocor.

  The Company financed the acquisition through the issuance of $460,000,000
principal amount of 4 3/4% Convertible Subordinated Debentures due February 15,
2005 ("the 4 3/4% Debentures") in February 1998.

  The Company believes a potential advantage of the acquisition of Retavase lies
in the possibility that ReoPro(R) (abciximab) and Retavase, administered in
combination, may prove to have a therapeutic advantage over monotherapy for
acute myocardial infarction patients. Two Phase II clinical trials currently are
underway to evaluate the approach of using ReoPro in conjunction with a
fibrinolytic product in the management of heart attack patients. There can be no
assurance, however, that a ReoPro/Retavase combination therapy will prove to be
safe and effective, will receive U.S. Food and Drug Administration ("FDA")
approval or, even if approved, ultimately will achieve market acceptance.

  In April, 1998, Centocor entered into an agreement with Schering-Plough
Corporation ("Schering-Plough"), giving Schering-Plough exclusive worldwide
marketing rights, excluding the United States, Japan and portions of the Far
East, to Remicade(TM), formerly known as Avakine(TM) (infliximab).  Remicade is
a novel monoclonal antibody in development for the treatment of Crohn's disease
and rheumatoid arthritis.

  Under terms of the agreement, Centocor received a $20,000,000 non-refundable
payment and could receive additional payments of up to $30,000,000 upon the
achievement of certain milestones.  In addition, Schering-Plough and the Company
will divide profits related to Remicade and have agreed to share certain
internal and external development expenses related to the product.  Centocor
retains U.S. marketing rights for Remicade for all indications, but reserves the
right to co-promote with Schering-Plough.  Centocor previously granted
distribution rights to Remicade in Japan and portions of the Far East to Tanabe
Seiyaku Co., Ltd.

  The Company's future financial condition is dependent upon the Company's rate
of net cash inflows and, ultimately, upon the achievement of significant and
sustained levels of therapeutic product sales. Under the Company's 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 the Company's products will be 

                                       8
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

dependent upon several factors, including, but not limited to, the timing and
extent of future regulatory approvals of those 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 the FDA or
other regulatory authorities will approve expanded labeling for ReoPro and other
products or will approve any other of the Company's product candidates under
development for commercial sale. Failure to obtain additional timely FDA or
other regulatory approval for the Company's products and product candidates may
have a material adverse effect on the Company.

  Legal Proceedings

  In October 1992, the Company was served with a complaint filed by the Velos
Group, a Maryland partnership ("Velos") in the U.S. District Court for the
District of Maryland.  The complaint primarily alleged that the Company breached
certain provisions of a license agreement between Velos and the Company pursuant
to which the Company has exclusive rights to U.S. Patent No. 5,057,598, as well
as various patent applications and foreign patents.  The complaint sought
declaratory relief and monetary relief in excess of $100,000,000, and requested
that the Company place in escrow one-half of the amounts received by the Company
in 1992 pursuant to its agreements with Eli Lilly and Company ("Lilly").  On
February 20, 1998, the Company and Velos entered into a comprehensive settlement
agreement resolving all claims between them.  Upon the execution and delivery of
the settlement agreement, the Company paid to Velos $4,750,000 in full and final
satisfaction of any and all obligations that the Company may have owed as the
result of any claims that had been brought by Velos, or that it may have owed in
the future under the provisions of the license agreement, including the future
minimum annual royalty payments that would become due.  The Company and Velos
exchanged general releases and both parties filed stipulations dismissing all
litigation between them (including appeals).  The Company granted to Velos a
fully-paid exclusive license to United States Patent No. 5,057,598 (which had
been assigned to the Company on November 7, 1990 and has no applicability to any
of the Company's products or product candidates); and the parties terminated the
license agreement.  As a result of the completion of the comprehensive
settlement agreement in February 1998, the Company recorded a one-time charge to
earnings of $3,430,000 primarily representing the portion of the payment due to
Velos which had not been previously expensed.

  In July 1995, PaineWebber Development Corporation, a wholly-owned subsidiary
of Paine Webber Group Inc., caused suits to be filed against the Company by two
research and development partnerships formed in the mid-1980s by PaineWebber and
managed by it since then.  The two PaineWebber partnerships (PaineWebber R&D
Partners, L.P. and PaineWebber R&D Partners II, L.P.) were, respectively,
investors in Centocor Partners II, L.P. ("CPII") and Centocor Partners III, L.P.
("CPIII"), research partnerships for which PaineWebber acted as the sales agent
and in other 

                                       9
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

capacities. The Company purchased the limited partners' interests in CPII in
February 1992 and that partnership was then dissolved. The Company purchased the
Class A and Class C limited partners' interests in CPIII in January 1997 and
purchased the Class B limited partnership interest in CPIII in May 1997.

  The suit by PaineWebber R&D Partners, L.P., was filed in the Supreme Court of
the State of New York, County of New York, and was brought as a class action on
behalf of all former limited partners of CPII.  The complaint charged that some
portion of the $100,000,000 paid by Lilly to the Company in July 1992
constituted revenues to the Company for the licensing, sublicensing or sale of
HA-1A (Centoxin) and that the Company is obligated to pay a percentage thereof
to the former limited partners of CPII, in addition to amounts already paid. The
Company moved to dismiss the New York suit on the ground that it was brought in
an inconvenient forum and that motion was granted. The suit was then refiled in
the Delaware Superior Court. A similar suit was filed by another former CPII
partner, Jerome J. Petrisko, in the Court of Common Pleas of Chester County,
Pennsylvania. Petrisko was subsequently allowed to intervene in the Delaware
action and the Chester County action was dismissed. The PaineWebber and Petrisko
actions were consolidated and the action was certified as a class action. The
Company filed an answer denying that any additional monies were owed to the
former partners and raising an affirmative defense and counterclaim based on
unjust enrichment which sought an offset on any recovery by the class. Discovery
has been completed. In November 1997, Centocor filed a motion for summary
judgment as to certain claims asserted in plaintiffs' complaint. In February
1998, the Court granted the Company's motion with respect to the claim seeking
fifty percent of approximately $71,000,000 of the $100,000,000 paid to Centocor
by Lilly; and, it granted the motion insofar as it sought dismissal of the claim
based on an alleged breach of a covenant of good faith and fair dealing.
Finally, the Court denied the Company's motion as to plaintiffs' claim for an 8%
royalty on approximately $71,000,000, but expressly reserved the Company's right
to renew its motion for judgment as to this claim. Thereafter, the parties
entered into a settlement agreement, subject to approval by the court under
which Centocor would make a payment to the class members of $1,300,000. The
Company recorded a one-time charge to earnings in the second quarter of 1998 for
$1,300,000 resulting from this matter. A hearing on the fairness, reasonableness
and adequacy of the settlement has been scheduled for September 8, 1998.

  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 originally sought 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 acted
as the general partner of CPIII, are named as defendants against whom relief is
sought.  The claim in this case is that at least $25,000,000 of the money paid
by Lilly to the Company in 1992 

                                       10
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

represented profits from the marketing of ReoPro, obligating the Company to pay
a portion thereof to CPIII, and that the Company is obligated to pay an
increased percentage of the profits from ReoPro to the former CPIII limited
partners going forward. The Company answered the complaint in the Delaware
action and filed a cross-claim against nominal defendant CPIII and a third-party
complaint against PaineWebber Group Inc. and PaineWebber Development
Corporation. The cross-claim seeks an offset against any damages awarded the
partners based on theories of unjust enrichment and quasi contract. The third-
party claims (later amended to add additional theories of liability and to make
PaineWebber, Inc. an additional third-party defendant) seek to hold the
PaineWebber entities liable for some or all of any alleged injury to the
partnership. On November 1, 1995, an additional suit was commenced in the
Delaware Court of Chancery by John E. Abdo, a limited partner of CPIII, against
the Company, CDCIII and certain of their officers and directors. The complaint,
filed derivatively on behalf of CPIII, asserts claims, inter alia, for breach of
contract, breach of fiduciary duty, common law fraud, and conspiracy and aiding
and abetting. The Company answered this complaint and also filed a cross-claim
against nominal defendant CPIII and a third party complaint against PaineWebber
Group Inc. and PaineWebber Development Corporation, later amended to add
additional theories of liability and to name PaineWebber, Inc. as a further
third-party defendant. Abdo moved to amend his complaint to assert claims
against the persons appointed by PaineWebber to the CDCIII Board of Directors.
That motion was granted. Motions to disqualify PWR&DII from serving as the
derivative plaintiff were filed in July 1996 by CPIII and in August 1996 by
Centocor and CDCIII. Abdo joined those motions. No decision has been issued on
those motions. The case brought by PWR&DII has been settled, subject to final
approval of the settlement by the Court. As part of the settlement, the
complaint has been amended to restate the claims as class claims. Abdo and
Pharmaceutical Partners II, L.P., a limited partnership which has purchased
CPIII limited partnership interests, objected to the settlement and were
permitted to take discovery regarding the settlement. A hearing on the adequacy
and fairness of the settlement was held on September 4, 1997. No decision has
been rendered pending the completion of certain additional discovery by the
objectors.


  On January 19, 1998, a purported class action captioned Surgener v. Centocor,
Inc. and David P. Holveck was filed in the United States District Court for the
Eastern District of Pennsylvania.  Other similar suits were filed thereafter.
The complaints in these actions charge the Company and its chief executive
officer with having violated the federal securities laws.  Plaintiffs seek to
represent a class of those who purchased Centocor stock between December 2,
1997, and December 16, 1997, inclusive, and allege that defendants made false
and misleading statements in connection with earnings forecasts.  Damages in an
unspecified amount are sought.  The court consolidated the actions and
plaintiffs subsequently filed a consolidated class action complaint.  On June
25, 1998, the defendants filed a motion to dismiss the complaint.  The Company
believes these actions are without merit and intends to defend them vigorously.

                                       11
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

  Pursuant to the Asset Purchase Agreement between the Company and Roche
Healthcare Limited, entered into in connection with the Company's acquisition of
the U.S. and Canadian product rights for Retavase (the "Purchase Agreement"),
the Company has assumed responsibility for certain Retavase patent litigation
instituted by Genentech, Inc. against Boehringer Mannheim GmbH and Boehringer
Mannheim Corporation in the United States and Germany.  The Purchase Agreement
also provides that the cost of the Retavase patent litigation (in the United
States and Germany) is to be shared equally by Roche and the Company and Roche
is committed to assist the Company in the litigation by making available, at
Roche's expense, witnesses and documents.  If, as a result of (i) a binding
determination (including a permanent, temporary or preliminary injunction for so
long as such injunction is not stayed or vacated) in connection with the
Retavase patent litigation (a "Binding Determination") or (ii) a settlement of
the Retavase patent litigation (a "Settlement"), the Company is unable during
the life of the relevant Genentech patents to engage in the manufacture or sale
of Retavase in the United States and Canada, Roche Healthcare would be required
to reimburse to the Company up to 100% of the purchase price under the Purchase
Agreement (excluding the $20,000,000 placed in escrow at the closing of the
Purchase Agreement) depending upon the length of the period for which the
Company's manufacturing and sale activities are prohibited.  Furthermore, Roche
Healthcare would be required under the Purchase Agreement to indemnify the
Company for (i) any damages (including lost profits) and (ii) any reasonable
royalty payments, for which the Company may become liable to Genentech as a
result of a Binding Determination or a Settlement.  Roche Healthcare's total
purchase price reimbursement and indemnification obligations relating to the
Retavase patent litigation are limited to an aggregate of 125% of the total
purchase price under the Purchase Agreement, excluding any portion of the Escrow
Amount previously returned to the Company.  In the event the governance
agreement between Roche and Genentech allows Roche to control Genentech or in
the event Roche obtains 100% of the stock of Genentech, Roche will cause the
patent litigation to be dismissed with prejudice and will cause Genentech not to
institute any additional infringement litigation relating to Retavase.

  In a suit filed in the United States District Court for the District of
Massachusetts, Genentech charges Boehringer Mannheim GmbH and Boehringer
Mannheim Corporation with infringement of five patents.  Genentech seeks
judgment of infringement, an injunction, treble damages, and costs including
attorney's fees.  The defendants have denied infringement and raised various
affirmative defenses and counterclaims.  Defendants seek a declaration of
invalidity, unenforceability and non-infringement, damages under the antitrust
laws and a state statute and costs, including attorney's fees.  The Court
directed the parties to address initially three of the patents (United States
Patents Nos. 4,342,832, 5,034,225 and 4,511,502), reserving two for later
disposition (United States Patents Nos. 5,221,619 and 5,185,259).  The Court has
conducted a Markman hearing as to the first three patents to be considered in
order to construe the claims of the patents.  It subsequently issued an opinion
which has limited the construction of the claims asserted by Genentech in
certain instances, 

                                       12
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

while not accepting all of defendants' arguments as to construction. Thereafter,
the Court entertained argument on the motions by the defendants for summary
judgment of noninfringement as to the same three patents, but has not yet issued
an opinion. On March 27, 1998, the Company moved to intervene as a named
defendant in the litigation pending in the District of Massachusetts. The Court
thereafter joined the Company as a party. There can be no assurance that the
defendants will prevail in obtaining a judgment of noninfringement as a result
of the summary judgment proceedings. Moreover, there can be no assurance that
the defendants will prevail in obtaining a judgment of non-infringement,
invalidity, or unenforceability of the patents in any subsequent trial or
appeal. An adverse determination in these proceedings could have a material
adverse effect on the Company's ability to market Retavase.

  The patent litigation in Germany consists of a number of different
proceedings: 1) an infringement suit by Genentech and its licensee against
Boehringer Mannheim GmbH based on the European patent EP 0 093 619 and an
extension based on patents EP 0 217 379 and EP 0 228 862; 2) a nullity suit by
Boehringer Mannheim against the patent EP 0 093 619; 3) a nullity suit by
Boehringer Mannheim against the patent EP 0 217 379; and 4) an appeal by
Boehringer Mannheim from the decision of the European Patent Office arising from
Boehringer Mannheim's opposition to the patent EP 0 228 862.  The nullity suits
and the opposition appeal challenge the validity of the patents in issue or seek
construction of the claims in a manner which would exclude Retavase.  The
infringement suit based on the patent EP 0 093 619 has been stayed pending the
outcome of the corresponding nullity action.  Following a hearing in the nullity
action against the patent EP 0 093 619 on July 14, 1998, the court revoked the
claims as originally stated, but allowed alternative claims, the definition of
which will not be clear until the court sets forth the reasons for its decision.
The Court in the infringement action based on patents EP 0 217 379 and EP 0 228
862 has directed certain questions to an expert yet to be appointed.  No report
is expected from the expert until at least the end of 1998.  At a hearing on
July 28, 1998 in Boehringer Mannheim's nullity suit against the patent EP 0 217
379, the court directed that further evidence be submitted, following which a
further hearing will be scheduled.  It is expected that that hearing will not
occur until February or March of 1999.  No date has been set for a hearing on
the appeal in the opposition proceedings with regard to patent EP 0 228 862.  If
any of the German patent proceedings remain pending at the date when the Company
is no longer dependent on Boehringer Mannheim for the supply of Retavase, the
defense and risk of the remaining proceedings will revert to Boehringer
Mannheim.  An adverse determination in these proceedings could have a material
adverse effect on the Company's ability to market Retavase.

  On March 17, 1998, two additional patents were issued to Genentech, United
States Patent Nos. 5,728,565 (the "565 Patent") and 5,728,566 (the "566
Patent").  The '565 and '566 Patents issued from the same original application
as United States Patent No. 5,185,259, one of the patents at issue in the suit
that Genentech brought in the District of Massachusetts. That same day, March
17, 1998,
                                       13
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

Genentech brought suit against the Company (but not Boehringer Mannheim GmbH or
Boehringer Mannheim Corporation) for infringement of the '565 and '566 Patents
in the United States District Court for the Northern District of California. In
that suit, as in Massachusetts, Genentech seeks judgment of infringement, an
injunction, damages, and costs including attorney's fees. On April 2, 1998, the
Company filed a motion to transfer the case from the Northern District of
California to the District of Massachusetts, but that motion was denied on May
11, 1998. The Company also answered the complaint, denying infringement of the
'565 and '566 Patents and raising various affirmative defenses concerning
invalidity of those patents. On July 17, 1998, the Company filed an amended
answer and counterclaims against Genentech expanding the affirmative defenses
and further alleging that the '565 and '566 Patents are invalid and
unenforceable. The amended answer also asserts counterclaims against Genentech
for declaratory judgements of noninfrigement, invalidity and unenforceability of
the '565 and '566 Patents and for monopolization and attempted monopolization
under the federal antitrust laws and unfair competition under California law.
The court has set a trial date in the case of October 12, 1999. There can be no
assurance that the Company will prevail in its defense of the suit concerning
the '565 and '566 Patents. An adverse determination in these proceedings could
have a material adverse effect on the Company's ability to market Retavase.

  In addition to the indemnification and purchase price reimbursement
arrangements under the Purchase Agreement relating to the Genentech litigation
that was pending at the time of the Purchase Agreement, Roche Healthcare agreed
to indemnify the Company against certain other future infringement actions,
subject to certain limitations; and Roche Healthcare further agreed that it will
not institute Retavase-related claims based on any Roche patents or patent
applications existing as of the closing date of the Purchase Agreement.  Roche
has confirmed its understanding that the suit that Genentech brought against the
Company in the Northern District of California is covered by the indemnification
and reimbursement provisions of the Purchase Agreement.

  While it is not possible to predict with certainty the eventual outcome of
these matters, the Company believes that the foregoing proceedings will not have
a material adverse effect on the Company.

  Royalties

  In January 1997, the Company exercised its option to acquire the limited
partnership interests in CPIII and made an advance payment of approximately
$13,598,000 in cash to the Class A and Class C limited partners of CPIII.  The
Company recorded this payment as a prepaid royalty in January 1997.  The Company
thereafter acquired the Class B limited partnership interest.  The Company is
required to make future royalty payments to the former limited partners of CPIII
based upon future sales of ReoPro.

                                       14
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

  The Company has entered into agreements to support research at certain
research institutions.  These agreements, which grant the Company licenses
and/or options to license certain technology resulting from the research,
generally require the Company to pay royalties to such institutions on the sales
of any products that utilize the licensed technology.  Further, the Company has
licenses under certain patents, patent applications and technology and pays the
licensors or their licensees royalties under such agreements.

  The Company has entered into indemnity agreements with the former limited
partners of Centocor Cardiovascular Imaging Partners, L.P. ("CCIP"), CPII and
CPIII pursuant to which the Company would be obligated, under certain
circumstances, to compensate these parties for the fair market value of their
respective interests under any license agreements with the Company relating to
their respective products which are lost through the exercise by the U.S.
government of any of its rights relating to the licensed technology.  The amount
of any such loss would be determined annually by independent appraisal.

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

  Product Liability and Product Recall

  The testing and marketing of medical products entails an inherent risk of
product liability.  There is also a risk that circumstances might develop
requiring a product recall.  The Company maintains limited product liability and
does not maintain product recall or product tampering insurance coverage.
Centocor's business may be materially adversely affected by a successful product
liability claim in excess of any insurance coverage.  There can be no assurance
that product liability insurance coverage will continue to be available to
Centocor in the future on reasonable terms or at all.

NOTE 3
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,
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 

                                       15
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

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 further amended its Sales and
Distribution Agreement, pursuant to which Lilly no longer has the right to buy
ReoPro for resale in Japan, but Lilly retains its exclusive right to buy and
resell ReoPro in the rest of the world.

     Because of the complementary nature of Retavase and ReoPro in the
cardiovascular field, the Company believes the joint promotion of Retavase and
ReoPro could result in increased market penetration for ReoPro.  Accordingly,
the Company and Lilly are jointly promoting ReoPro in the United States.

     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.  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 and may make
future milestone payments to the Company.

     Relationship with Glaxo Wellcome plc

     In November 1993, Centocor and Glaxo Wellcome plc ("Glaxo Wellcome")
entered into an agreement for the development and marketing of certain of
Centocor's monoclonal antibody-based cancer therapeutic products, including
Panorex(R) (edrecolomab). In November 1994, Centocor and Glaxo Wellcome amended
their 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.

     Relationship with Roche Healthcare Limited

     The Retavase Asset Purchase Agreement requires that Centocor establish and
qualify, either directly or through contract manufacturers, arrangements for the
manufacture of Retavase for sale in the United States within four years of the
consummation of the acquisition (subject to extension by the United States
Federal Trade Commission (the "FTC") for up to two additional one year periods
if it appears that the required FDA approvals are likely to be obtained within
such extended time period) (the "Transfer Period"). Under the Purchase
Agreement, Centocor is entitled to recover all or a portion of the Escrow Amount
upon the achievement of certain manufacturing milestones. 

                                       16
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

Roche will cooperate in Centocor's establishment of manufacturing arrangements
by providing training and other assistance and has agreed to maintain assets
sufficient to supply Retavase for the Transfer Period. Centocor must be
successful in establishing such manufacturing arrangements by the end of the
Transfer Period or the Retavase assets will revert to Roche, which must then
divest them to another party.

     Relationship with Boehringer Mannheim GmbH and Boehringer Mannheim
     Corporation

     During the Transfer Period Boehringer Mannheim GmbH will continue to supply
Retavase to Centocor from its facilities in Germany at an agreed price per unit
pursuant to a Supply Agreement.  Boehringer Mannheim GmbH has represented and
warranted that the products supplied to Centocor will meet FDA approved
specifications and has provided the Company with customary indemnities,
including for damages that result from the failure of the product to meet FDA
approved specifications.

     Under a Transition Services Agreement, Boehringer Mannheim Corporation has
provided certain transition services to Centocor, including accepting orders and
invoices on behalf of Centocor, collection services and customer complaints and
inquiries, to facilitate the transfer of responsibility for the sale and
distribution of the product.  Such transition services were terminated as of
June 15, 1998.

     Relationship with The DuPont Pharmaceutical Company

     In December 1996, Boehringer Mannheim Corporation and The DuPont
Pharmaceutical Company ("DuPont"), formerly DuPont Merck Pharmaceutical Company,
entered into an agreement, pursuant to which Boehringer Mannheim granted DuPont
the right to co-promote Retavase in the United States.  That agreement was
assigned to Centocor in connection with its acquisition of the Retavase assets
and DuPont is continuing to co-promote Retavase in the United States.

     Relationship with Schering-Plough Corporation

     In April, 1998, Centocor entered into an agreement with Schering-Plough
Corporation ("Schering-Plough"), giving Schering-Plough exclusive worldwide
marketing rights, excluding the United States, Japan and portions of the Far
East to Remicade(TM), formerly known as Avakine(TM) (infliximab).  Remicade is a
novel monoclonal antibody in development for the treatment of Crohn's disease
and rheumatoid arthritis.

     Under terms of the agreement, Centocor received a $20,000,000 non-
refundable payment and could receive additional payments of up to $30,000,000
upon the achievement of certain milestones.

                                       17
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

     In addition, Schering-Plough and the Company will divide profits related to
Remicade and have agreed to share certain internal and external development
expenses related to the product. Centocor retains U.S. marketing rights for
Remicade for all indications, but reserves the right to co-promote with 
Schering-Plough. Centocor previously granted distribution rights to Remicade in
Japan and portions of the Far East to Tanabe Seiyaku Co., Ltd.


NOTE 4
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 as a component
of other income (expenses).

     At June 30, 1998, 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             $   39,942      $      148     $        (24)     $     40,066  
                                        
       Other short-term obligations              31,277               3              (27)           31,253  
                                                 
       Corporate bonds and                                                                         
        commercial paper                         64,629               -                -            64,629  
                                             ----------      ----------     ------------      ------------
                                             $  135,848      $      151     $        (51)     $    135,948
                                             ==========      ==========     ============      ============
</TABLE> 
 

                                       18
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                             Adjusted                Unrealized                Carrying       
                                                            ----------------------------
                                               Cost            Gains          (Losses)           Value        
                                           -----------      ----------      ------------      ---------- 
     <S>                                   <C>              <C>             <C>               <C> 
     Investments available for sale:                                                                              
       Equity securities                   $     3,193      $        -      $          -      $    3,193
                                           ===========      ==========      ============      ==========

<CAPTION> 
                                             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           $    73,221      $       13      $         (7)     $   73,227
     Certificates of deposit                     6,130               -                 -           6,130       
                                           -----------      ----------      ------------      ----------
                                           $    79,351      $       13      $         (7)     $   79,357     
                                           ===========      ==========      ============      ==========   
</TABLE> 

     At June 30, 1998, these securities were classified as follows (in
     thousands):

     Cash equivalents                      $   112,221            
     Short-term investments                    103,078         
     Long-term investments                       3,193       
                                           -----------
                                           $   218,492 
                                           ===========

     The Company has agreed to maintain investments with fair values of
$5,840,000 as of June 30, 1998 at the lending bank as collateral for loans from
that bank. See Note 8 -- Debt.

     As part of the Company's agreements with Roche Healthcare, the Company has
placed $20,000,000 in escrow, $15,000,000 of which is classified as a long-term
investment.  Centocor is entitled to recover all or a portion of the Escrow
Amount upon the successful completion of certain milestones in the transfer of
the manufacturing of Retavase from Boehringer Mannheim to Centocor.

     In February, 1998, Centocor Diagnostics, Inc., a wholly owned subsidiary of
Centocor, Inc. ("Centocor Diagnostics"), sold an equity investment in
ChromaVision Medical Systems, Inc. consisting of 962,740 shares classified as
available for sale resulting in a realized gain of $6,931,000.

                                       19
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

NOTE 5
INVENTORY


     Inventory, net of reserves, consists of the following (in thousands):


<TABLE> 
<CAPTION> 
                                     June 30,      December 31,   
                                       1998            1997      
                                    ----------     ------------ 
          <S>                       <C>            <C> 
          Raw materials             $    5,292     $      4,646   
          Work in process               20,722           12,850 
          Finished goods                10,885           10,281 
                                    ----------     ------------
                                    $   36,899     $     27,777  
                                    ==========     ============ 
</TABLE> 

     Inventories have various expiration dates. The Company continually
evaluates the extent of inventory reserves considered necessary based upon the
future regulatory and commercial status of such products. There can be no
assurance that additional reserves for inventories will not be required in the
future.


NOTE 6
INTANGIBLE AND OTHER ASSETS


     Intangible and other assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                     June 30,           December 31,   
                                                       1998                 1997       
                                                    ----------          ------------   
     <S>                                            <C>                 <C>            
     Acquired regulatory licenses                   $   85,002          $          -   
     Goodwill                                           37,907                     -   
     Prepaid royalties related to CPIII                 28,698                29,398   
     Deferred charges                                   18,219                23,084   
     Debt issuance costs                                12,264                   598   
     Other licenses                                     11,660                 5,339   
     All other                                          61,475                 2,869   
                                                    ----------          ------------   
                                                    $  255,225          $     61,288   
                                                    ==========          ============    
</TABLE>

     Intangible and other assets related to the acquisition of Retavase,
consisting primarily of goodwill and acquired regulatory licenses, are being
amortized over periods ranging from six to fifteen years.

                                       20
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

     Prepaid royalties related to CPIII represent an advance payment of
approximately $13,600,000 in cash paid to the former limited partners of CPIII
in connection with the purchase of the limited partnership interests in CPIII
and an additional $15,800,000 payable to the former limited partners of CPIII in
connection with the revision of future royalties. See Note 2 -- Commitments and
Contingencies and Note 7 -- Other Current Liabilities.

     Deferred charges include a prepayment of certain future royalties and a
prepayment associated with the commercialization and market development of
ReoPro.

     Intangible and other assets are reviewed for impairment whenever events or
circumstances provide evidence that suggests that the carrying amount of the
asset may not be recoverable. Impairment is evaluated by using identified or
expected cash flows.


NOTE 7
OTHER CURRENT LIABILITIES


  In June 1997, the Company announced that it has reached an agreement to settle
the litigation brought by PaineWebber R&D Partners II, L.P. on behalf of CPIII,
against Centocor arising out of Centocor's Sales and Distribution Agreement with
Lilly with respect to ReoPro. See Note 2 -- Commitments and Contingencies. The
settlement is conditional on Delaware Chancery Court approval. The agreement
provides, among other things, for Centocor to pay the former limited partners of
CPIII $10,800,000 from which attorney's fees and expenses will be deducted, an
additional $5,000,000, if and when cumulative world-wide sales of ReoPro exceed
$600,000,000 and a revision to the royalties payable to the former limited
partners of CPIII. The Company has recorded a current liability for the
$15,800,000 for these probable payments to the former limited partners of CPIII.


NOTE 8
DEBT


     Notes Payable

     Notes payable at June 30, 1998 and December 31, 1997 consists of $5,882,000
and $5,940,000, respectively, of borrowings under short-term notes at an
interest rate of 3.9% per annum at June 30, 1998, payable in Dutch guilders no
later than September 30, 1998. These borrowings are secured by investments at
the lending bank of $5,840,000.

                                       21
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

     Long-term debt

     4 3/4% Convertible Subordinated Debentures

     On February 20, 1998, the Company issued $460,000,000 aggregate principal
amount of the 4 3/4% Convertible Subordinated Debentures (the "4 3/4%
Debentures") due February 15, 2005. The 4 3/4% Debentures are convertible by the
holders into approximately 9,338,000 shares of the Company's Common Stock at an
initial conversion price of $49.261 per share, subject to adjustment in certain
circumstances. The 4 3/4% Debentures are not redeemable by the Company prior to
February 21, 2001. After February 21, 2001, the 4 3/4% Debentures will be
redeemable by the Company at a redemption price of 102.714% of the principal
amount of the 4 3/4% Debentures and declining annually. The holders of the 4
3/4% Debentures will be entitled at any time after 90 days following the date of
original issuance thereof through the close of business on the final maturity
date of the 4 3/4% Debentures, subject to prior redemption, to convert any of
the 4 3/4% Debentures or portions thereof into Common Stock of the Company,
subject to the terms of the Indenture. At June 30, 1998, the aggregate amount of
senior obligations outstanding amounted to $5,882,000.

     6 3/4% Convertible Subordinated Debentures

     On October 16, 1991, the Company issued $125,000,000 principal amount of
6 3/4% Convertible Subordinated Debentures (the "6 3/4% Debentures") due October
16, 2001. The 6 3/4% 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% Debentures were 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% Debentures.

     In the second quarter of 1996, the Company purchased $70,235,000 of the
6 3/4% Debentures which were subsequently retired. At December 31, 1997,
$54,765,000 of the 6 3/4% Debentures remained outstanding and were convertible
into approximately 898,000 shares of the Company's Common Stock.

     On April 16, 1998, the remaining $54,765,000 of the 6 3/4% Debentures were
redeemed at par and were subsequently retired.


NOTE 9
INCOME TAXES


     A provision for income taxes of $1,450,000 and $1,600,000 was recorded for
the three and six months ended June 30, 1998 as compared to $20,000 for the
three months and $90,000 for the six months ended June 30, 1997, representing
current federal and state income taxes.

                                       22
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

     The Company has accumulated certain tax attributes such as net operating
loss carryforwards and tax credit carryforwards which are assets in the sense
that they may provide the Company with future cash flows from the reduction in
future tax payments. However, the realization of such assets is not assured as
it depends upon future taxable income. Under Statement of Financial Accounting
Standard No. 109 ("SFAS 109"), the Company is required to recognize all or a
portion of its net deferred tax assets with corresponding increases to net
income, when the Company believes, given the weight of all available evidence,
that it is more likely than not that all or a portion of the benefits of net
operating loss carryforwards and other credits will be realized.

     Centocor has approximately $345,000,000 of deferred tax assets consisting
primarily of the future tax benefit from net operating loss carryforwards.  The
Company presently has not concluded that it is more likely than not that it will
realize all, or a portion of the benefit of such tax assets. Accordingly, the
Company has recorded a 100% valuation allowance against the asset.  If the
Company determines that all or a part of these deferred tax assets are more
likely than not to be realized through sufficient future profitability based on
the outcome of certain future events, then the Company will reverse all or part
of such valuation allowance and recognize a tax benefit.  Until such tax benefit
is recognized, the Company's effective tax rate is reflective of the utilization
of its net operating loss carryforwards on an annual basis and therefore such
rate is expected to be substantially lower than the statutory rate.  Should all
such deferred tax assets be recognized, the Company expects that its effective
tax rate in future periods will approximate the applicable statutory rates.

     The recognition of these deferred tax assets under SFAS 109 has no impact
on the Company's cash flows for income taxes despite the change in the Company's
effective tax rate. The recognition of these deferred tax assets will impact
reported earnings per share due to the benefit recorded to the statement of
operations from the reduction in the Company's valuation allowance.


NOTE 10
SUPPLEMENTAL INFORMATION ON CASH FLOWS


     Interest paid for the three and six months ended June 30, 1998 was
$1,685,000 as compared to $1,852,000 for the three and six months ended June 30,
1997.

     Income tax payments made for the three and six months ended June 30, 1998
were $12,000 as compared to $20,000 paid for the three months and $101,000 paid
for the six months ended June 30, 1997.

     In February, 1998, Centocor Diagnostics sold an equity investment in
ChromaVision Medical Systems, Inc. consisting of 962,740 shares classified as
available for sale resulting in a gain of $6,931,000.

                                       23
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

NOTE 11
SPECIAL CHARGES


     In the first quarter of 1998, the Company recorded special charges of
$145,405,000 consisting of the following:

     ACQUISITION OF RETAVASE

     On March 13, 1998, the Company completed the acquisition of the U.S. and
Canadian product rights for Retavase, an acute-care cardiovascular drug, from
Roche Healthcare for $335,000,000 in cash.  In addition, the Company has
employed many of the U.S. based sales and marketing personnel, formerly employed
by Boehringer Mannheim Corporation, to commercialize the product.

     Retavase is a recombinant biologic cardiology care product administered for
the treatment of acute myocardial infarction (heart attack) to improve blood
flow to the heart.  It is among the class of fibrinolytic drugs known as "clot
busters."  Retavase received marketing authorization from the FDA in October
1996 and was launched in January 1997.

     Charges relating to the acquisition of Retavase consist of (in thousands):

          Charge for acquired research and development                    
           related to the acquisition of Retavase              $  134,495  
                                                           
          One-time transitional expenses related to the                   
           integration of Retavase into Centocor                    4,943
                                                               ----------
                                                               $  139,438
                                                               ==========

     The pro forma unaudited comparative Statement of Operations data excluding
the special charges related to the Retavase acquisition and the Centocor
Diagnostics restructuring and assuming that the acquisition was consummated as
of January 1, 1997, would have been as follows:

                                       24
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                            For the three months           For the six months 
              Statement of                     ended June 30,                 ended June 30,                          
            Operations Data                 1998            1997            1998           1997
     -------------------------------      --------        --------       ---------      ---------- 
     <S>                                  <C>             <C>            <C>            <C> 
     Revenues                             $ 90,882        $  63,543      $  157,943     $  116,579   
     Net income (loss)                    $ 19,280        $ (11,985)     $   16,363     $  (23,032)          
     Diluted income (loss) per share      $    .27        $    (.17)     $      .23     $     (.33)           
</TABLE> 
                                          
     CENTOCOR DIAGNOSTICS, INC. RESTRUCTURING

     Given the Company's strong emphasis on the pharmaceutical business
following the Retavase acquisition, the continuing success of ReoPro and the
anticipated market launch of Remicade, the Company is currently evaluating
strategic options for Centocor Diagnostics, including possible divestiture.

     Charges related to the Centocor Diagnostics, Inc. restructuring consist of
(in thousands):
 
                    Severance                  $   3,142                  
                    Asset impairments              2,825 
                                               ---------                
                                               $   5,967  
                                               =========

     Severance payments for the six months ended June 30, 1998 were $775,000.
The employee group in the restructuring plan totaled approximately 50. Of this
employee group, approximately 15 have been terminated as of June 30, 1998.


NOTE 12
COMPREHENSIVE INCOME


     In January, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of Statement 130 had no impact on the
Company's net loss or shareholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive income
(loss).

                                       25
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

  The components of comprehensive income (loss) are (in thousands):

<TABLE>
<CAPTION>
                                                 For the three                       For the six
                                                 months ended                        months ended
                                            ------------------------         -------------------------
                                            June 30,        June 30,         June 30,         June 30,
                                             1998            1997             1998             1997
                                            --------        --------         --------         -------- 
<S>                                         <C>             <C>               <C>              <C> 
 Net income (loss)                          $ 19,280        $    720         $ (121,027)       $   3,991  
 
Foreign currency translation
 adjustments                                   1,816            (764)               603           (3,247)
Unrealized gain (loss) on marketable               -             669               (963)             586
   securities
Reclassification adjustment - realized
   gain on available for sale security             -               -             (6,931)               -
                                            --------        --------           --------         -------- 
Subtotal other comprehensive income (loss)     1,816             (95)            (7,291)          (2,661)
                                            --------        --------           --------         -------- 
  
Total comprehensive income (loss)           $ 21,096        $    625         $ (128,318)       $   1,330 
                                            ========        ========           ========         ======== 
</TABLE> 

  The components of accumulated other comprehensive income are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                    June 30,            December 31,
                                                      1998                  1997
                                                  -------------       ----------------
<S>                                               <C>                 <C>
Cumulative foreign currency translation
   adjustments                                    $         157       $           (446)
Unrealized gain on marketable securities                      -                  7,894
                                                  -------------       ----------------
Other comprehensive income                        $         157       $          7,448
                                                  =============       ================ 
</TABLE>

NOTE 13 
EARNINGS PER SHARE

  In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("Statement 128"),
which was effective for financial statements issued for periods ending after
December 15, 1997, including interim periods.  Statement 128 establishes
standards for computing and presenting earnings per share ("EPS") and applies to
entities with publicly held common stock or potential common stock. Statement
128 

                                       26
<PAGE>
 
                        Centocor, Inc. And Susidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

simplifies the standards for computing earnings per share previously found
in Accounting Principles Board Opinion No. 15, Earnings Per Share, and makes
them comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator for the basic EPS computation to the numerator and denominator
of the diluted EPS computation. This Statement requires restatement of all prior
period EPS data presented. The Company adopted Statement 128 in December 1997.
The adoption of Statement 128 did not have a significant effect on its financial
statements.

<TABLE>
<CAPTION>
                                                     For the three months ended June 30, 1998
                                              -----------------------------------------------------
                                                 Income               Shares
                                              (in thousands)        (in thousands)       Per Share
                                               (Numerator)          (Denominator)          Amount
                                              --------------       ---------------     ------------
<S>                                           <C>                  <C>                 <C>
Basic EPS                                     $       19,280                70,384     $       0.27
Incremental shares from assumed exercise
   of dilutive options and warrants                        -                 1,760
                                              --------------       ---------------
Diluted EPS                                   $       19,280                72,144     $       0.27
                                              ==============       ===============
</TABLE>

<TABLE>
<CAPTION>
                                                       For the three months ended June 30, 1997
                                              -----------------------------------------------------
                                                 Income               Shares
                                              (in thousands)        (in thousands)       Per Share
                                               (Numerator)          (Denominator)          Amount
                                              --------------        --------------     ------------
<S>                                           <C>                  <C>                 <C>
Basic EPS                                     $          720                69,689     $       0.01
Incremental shares from assumed exercise
   of dilutive options and warrants                        -                 1,908
                                              --------------        --------------
Diluted EPS                                   $          720                71,597     $       0.01
                                              ==============        ==============
</TABLE>

<TABLE>
<CAPTION>
                                                          For the six months ended June 1997
                                              -----------------------------------------------------
                                                 Income               Shares
                                              (in thousands)        (in thousands)       Per Share
                                               (Numerator)          (Denominator)          Amount
                                              --------------        --------------     -------------
<S>                                            <C>                 <C>                 <C>
Basic EPS                                      $       3,991                 69,603    $       0.06
Incremental shares from assumed exercise
   of dilutive options and warrants                         -                 2,026
                                               --------------        --------------
Diluted EPS                                    $       3,991                 71,629    $       0.06
                                               =============         ==============
</TABLE>

                                       27
<PAGE>
 
                       Centocor Inc. And Subsidiaries  
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

  For the six months ended June 30, 1998, no exercise of options or other common
stock equivalents is assumed since their effect is antidilutive.


NOTE 14
SALE OF FACILITY AND RELATED BUSINESS


  In June 1997, the Company sold its diagnostic manufacturing facility in
Guilford, England and its related infectious disease product line.  In
connection with the transaction, the Company recorded a one-time charge to
earnings of $4,565,000 in the second quarter of 1997.

                                       28
<PAGE>
 
Item 2: Management's Discussion And Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------

RESULTS OF OPERATIONS


 General



  This quarterly report on Form 10-Q contains forward-looking statements that
have been made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995.  Such forward-looking statements are based on current
expectations, estimates and projections about the Company's business and
industry, management's beliefs and certain assumptions made by the Company's
management.  Investors are cautioned that matters subject to forward-looking
statements involve risks and uncertainties including economic, competitive,
governmental, technological and other factors which may affect the Company's
business and prospects.  Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements.  These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict.  Such risks
and uncertainties include, but are not limited to, those associated with (i) the
timing, completion and outcome of clinical trials for, regulatory approval of,
and market acceptance of the Company's products; (ii) the strength of the
Company's patent position and the patent position of others; (iii) the Company's
forward integration into direct commercialization of certain products; (iv) the
Company's ability to construct and maintain manufacturing facilities that meet
regulatory requirements and satisfy the Company's inventory needs; (v) the
Company's dependence on its collaborative partners; (vi) uncertainties regarding
health care reform and reimbursement from third party payors; (vii) changes in
the competitive environment in which the Company operates; (viii) the outcome of
pending litigation; (ix) the potential for product liability claims and (x) the
availability of raw materials and other necessary inputs into the production
process.  Therefore, actual results may differ materially from those expressed
or forecasted in any such forward-looking statements.  Unless required by law,
the Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.

  Centocor is a biopharmaceutical company the mission of which is to develop or
otherwise acquire and commercialize novel therapeutic products that solve
critical needs in human health care, 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. Consequently, the Company had experienced
substantial operating losses.  The Company's financial results progressively
improved throughout 1996 culminating with the Company achieving profitability in
the fourth quarter of 1996 and profitability in each quarter of 1997.  The
Company expects that its sales of therapeutic and diagnostic products in 1998
will provide sufficient revenues to cover operating expenses and provide net
income for the year, excluding the impact of certain one-time events.  The
Company's results for the three and six months ended June 30, 1998 have been
affected by various significant one-time events.  Significant one-time events
for the three and six

                                       29
<PAGE>
 
Item 2: Management's Discussion And Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------

months ended June 30, 1998 include certain non-recurring contract revenue,
special charges, litigation charges and the gain on sale of an investment.
Excluding such significant one-time events, the Company's reported earnings per
share would have been $0.03 and $0.05 for the three and six months ended June
30, 1998.

  On March 13, 1998, the Company completed the acquisition of the U.S. and
Canadian product rights for Retavase(TM) (reteplase), a leading acute-care
cardiovascular drug, from Roche Healthcare for $335,000,000 in cash.

  Retavase is a recombinant biologic cardiology care product administered for
the treatment of acute myocardial infarction (heart attack) to improve blood
flow to the heart.  It is among the class of fibrinolytic drugs known as "clot
busters."  Retavase received marketing authorization from the U.S. Food and Drug
Administration ("FDA") in October 1996 and was launched in January 1997.

  Because of the complementary nature of Retavase and ReoPro(R) (abciximab) in
the cardiovascular field, the Company believes the joint promotion of Retavase
and ReoPro could result in increased market penetration for ReoPro. Accordingly,
the Company and Lilly are jointly promoting ReoPro in the United States. The
Company is co-promoting Retavase in the United States with The DuPont
Pharmaceutical Company pursuant to an assignment of DuPont's pre-divestiture
agreement with Boehringer Mannheim Corporation.

  The Company financed the acquisition through the issuance of $460,000,000
principal amount of its 4 3/4% Convertible Subordinated Debentures due February
15, 2005 (the "4 3/4% Debentures") in February 1998.

  The Company believes a further advantage of the acquisition of Retavase lies
in the possibility that ReoPro and Retavase, administered in combination, may
prove to have a therapeutic advantage over monotherapy for acute myocardial
infarction patients. Two Phase II clinical trials currently are underway to
evaluate the approach of using ReoPro in conjunction with a fibrinolytic product
in the management of heart attack patients. There can be no assurance, however,
that a ReoPro/Retavase combination therapy will prove to be safe and effective,
will receive FDA approval or, even if approved, ultimately will achieve market
acceptance.

  In April, 1998, Centocor entered into an agreement with Schering-Plough
Corporation ("Schering-Plough"), giving Schering-Plough exclusive worldwide
marketing rights, excluding the United States, Japan and portions of the Far
East, to Remicade(TM), formerly known as Avakine(TM) (infliximab). Remicade is a
novel monoclonal antibody in development for the treatment of Crohn's disease
and rheumatoid arthritis.

  Under terms of the agreement, Centocor received a $20,000,000 non-refundable
payment and could receive additional payments of up to $30,000,000 upon the
achievement of certain milestones.  In addition, Schering-Plough and the Company
will divide profits related to Remicade and have

                                       30
<PAGE>
 
Item 2: Management's Discussion And Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------

agreed to share certain internal and external development expenses related to
the product. Centocor retains U.S. marketing rights for Remicade for all
indications, but reserves the right to co-promote with Schering-Plough. Centocor
previously granted distribution rights to Remicade in Japan and portions of the
Far East to Tanabe Seiyaku Co., Ltd.

  The Company has two other therapeutic products approved for sale and several
product candidates in various stages of development.  ReoPro is marketed by
Lilly and sold in the United States and Europe for the reduction of acute
ischemic cardiac complications in patients undergoing percutaneous coronary
intervention ("PCI") such as angioplasty procedures, and for those patients with
unstable angina who are refactory to conventional therapy for whom PCI is
planned within twenty-four hours.  Panorex(R) (edrecolomab) is marketed by Glaxo
Wellcome plc ("Glaxo Wellcome") and sold in Germany as an adjuvant therapy in
the treatment of post-operative colorectal cancer.

  The Company has filed a Biologics License Application ("BLA") with the FDA and
an application with the European Medicines Evaluation Agency for Remicade, for
the treatment of moderate to severe Crohn's disease, including fistulizing
Crohn's disease.  On May 28, 1998, the FDA's Gastrointestinal Drugs Advisory
Committee voted unanimously to recommend approval of Remicade for those patients
for whom conventional therapy is inadequate and for the treatment of Crohn's
patients with draining fistulae.  On June 30, 1998, the FDA sent the Company a
complete review letter.  The Company has been working with the FDA to resolve
issues identified in the letter relating to labeling for Remicade, the design of
a Phase IV post-approval clinical trial and certain still unresolved
manufacturing deficiencies identified in connection with the FDA's inspection of
the Company's manufacturing facility in Leiden which took place between April
20, 1998 and May 1, 1998.  Since June 30, 1998, the Company believes that the
issues related to the labeling of Remicade and the design of a Phase IV trial
have largely been resolved.  Certain of the manufacturing issues are not yet
resolved and on July 15, 1998, the Company received a warning letter from the
FDA regarding the remaining unresolved issues.  The Company continues to address
these matters and expects that they will be satisfactorily resolved.  The
Company also is conducting studies for Remicade in the treatment of rheumatoid
arthritis.

   Panorex, Retavase and Remicade are trademarks of Centocor.  ReoPro is a
trademark of Lilly.  The Company also markets several diagnostic products for
cancer in the United States, Europe and Japan.

  The Company has accumulated certain tax attributes such as net operating loss
carryforwards and tax credit carryforwards which are assets in the sense that
they may provide the Company with future cash flows from the reduction in future
tax payments.  However, the realization of such assets is not assured as it
depends upon future taxable income.  Under Statement of Financial Accounting
Standards 109 ("SFAS 109"), the Company is required to recognize all or a
portion of its net deferred tax assets with corresponding increases to net
income, when the Company believes, given the weight of all available evidence,
that it is more likely than not that all or a portion of the benefits

                                       31
<PAGE>
 
Item 2: Management's Discussion And Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------

of net operating loss carryforwards and other credits will be realized.

  Centocor has approximately $345,000,000 of deferred tax assets consisting
primarily of the future tax benefit from net operating loss carryforwards.  The
Company presently has not concluded that it is more likely than not that it will
realize all, or a portion of the benefit of such tax assets. Accordingly, the
Company has recorded a 100% valuation allowance against the asset.  If the
Company determines that all or a part of these deferred tax assets are more
likely than not to be realized through sufficient future profitability based on
the outcome of certain future events, then the Company will reverse all or part
of such valuation allowance and recognize a tax benefit.  Until such tax benefit
is recognized, the Company's effective tax rate is reflective of the utilization
of its net operating loss carryforwards on an annual basis and therefore such
rate is expected to be substantially lower than the statutory rate.  Should all
such deferred tax assets be recognized, the Company expects that its effective
tax rate in future periods will approximate the applicable statutory rates.

  The recognition of these deferred tax assets under SFAS 109 has no impact on
the Company's cash flows for income taxes despite the change in the Company's
effective tax rate.  The recognition of these deferred tax assets will impact
reported earnings per share due to the benefit recorded to the statement of
operations from the reduction in the Company's valuation allowance.

  In June 1997, the FASB issued Statement of Financial Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("Statement
131"). Statement 131 supercedes Statement of Financial Standards No. 14,
Financial Reporting for Segments of a Business Enterprise, and establishes new
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports.  Statement 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Statement 131 is effective for periods beginning after December 15, 1997.  This
Statement affects reporting in financial statements only and will have no impact
on the Company's results of operations, financial condition or liquidity.

  Three months ended June 30, 1998 compared to the three months ended June 30,
1997

  The increase in sales for the three months ended June 30, 1998 as compared to
the three months ended June 30, 1997 is principally due to Retavase sales in
1998 which did not exist in 1997, as well as an increase in sales of ReoPro.

  For the three months ended June 30, 1998, ReoPro sales to Lilly were
$47,523,000 and Lilly's announced sales to end-users were $101,000,000.  For the
three months ended June 30, 1997 sales to Lilly were $40,603,000 and Lilly's
announced sales to end-users were $59,829,000.  The Company's sales of Retavase
for the three months ended June 30, 1998 were $15,197,000.  For the three months
ended June 30, 1998, the Company's sales of Panorex to Glaxo Wellcome were
$138,000 as compared to $1,429,000 for the three months ended June 30, 1997.

                                       32
<PAGE>
 
Item 2: Management's Discussion And Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------

  The level of the Company's sales of ReoPro to Lilly and of Panorex to Glaxo
Wellcome is dependent upon the orders placed and the levels of inventory
maintained by each of these marketing partners.  The Company expects ReoPro end-
user sales to increase in 1998 as market acceptance continues to grow.
Therefore, the Company expects its sales of ReoPro to Lilly to increase in 1998
over 1997 levels.  Retavase sales are also expected to grow in 1998 as the
development of the Company's salesforce and related infrastructure is completed.
Panorex sales to Glaxo Wellcome in 1998 are not expected to have a significant
impact on the Company's financial results.

  Diagnostic product sales for the three months ended June 30, 1998 were
$7,000,000 as compared to $8,975,000 for the three months ended June 30, 1997.
Diagnostic product sales in 1998 are expected to be at about the same level or
slightly lower than sales levels achieved in 1997.

  Given the Company's strong emphasis on the pharmaceutical business following
the Retavase acquisition, the continuing success of ReoPro and the anticipated
market launch of Remicade, the Company is currently evaluating strategic options
for Centocor Diagnostics, including possible divestiture.

  The level of future sales of the Company's products will be dependent upon
several factors, including, but not limited to, the timing and extent of future
regulatory approvals, the availability of production capacity, as well as the
continued availability of necessary raw materials and intermediate inputs into
the production process, approval and commercialization of competitive products
and ultimately, the degree of acceptance of the Company's products in the
marketplace.

  Contract revenue increased for the three months ended June 30, 1998 as
compared to the three months ended June 30, 1997 due to the Company's receipt of
a non-refundable payment of $20,000,000 from its agreement with Schering-Plough
Corporation in April 1998.

  Cost of sales increased for the three months ended June 30, 1998 as compared
to the three months ended June 30, 1997 due primarily to Retavase sales in 1998,
as well as increased sales of ReoPro to Lilly. The Company is required to make
certain royalty payments, based on sales of products.  These payments represent
a significant percentage of cost of sales. The Company expects an increase in
cost of sales in 1998, the extent of which will depend primarily on the amount
and mix of products sold. Other factors that can influence cost of sales
include, but are not limited to, exchange rate fluctuations, unplanned
production losses, cell line yields, increases in royalty obligations, costs of
raw materials and production interruptions due to plant upgrades.

  Research and development expenses for the three months ended June 30, 1998
decreased as compared to the three months ended June 30, 1997 due principally to
Remicade and ReoPro clinical activities which are partially being reimbursed by
Schering-Plough and Lilly, respectively.  The level of the Company's total
research and development expenses in future periods will be dependent upon the
extent of clinical trial-related activities.  Research and development expenses
are expected to increase in 1998 as compared to 1997 due to clinical trial
activities in connection with the continued

                                       33
<PAGE>
 
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------

expansion of ReoPro use for additional indications including, but not limited
to, acute myocardial infarction, unstable angina and in stroke. In addition,
clinical trial activities for Remicade, primarily Phase III trials for the
Crohn's disease and severe rheumatoid arthritis indications are expected to
continue throughout 1998.

  Marketing, general and administrative expenses for the three months ended June
30, 1998 increased as compared to the three months ended June 30, 1997 due
principally to the integration of the Centocor Retavase sales force and related
infrastructure into the organization, amortization of the cost of acquired
intangibles and continued ReoPro and Remicade market development efforts.
Marketing, general and administrative expenses are expected to increase in 1998
as compared to 1997 due primarily to the Company's increased investment in the
direct promotion and sale of Retavase and Remicade.

  Interest income increased for the three months ended June 30, 1998 as compared
to the three months ended June 30, 1997 due to the increase in the level of the
Company's investments as a result of the proceeds from the 4 3/4% Debenture
offering completed in February 1998.  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 increased for the three months ended June 30, 1998 as
compared to the three months ended June 30, 1997 due to the issuance of the
4 3/4% Debentures.  Interest expense in 1998 is expected to increase as a result
of the interest on the 4 3/4% Debentures but will be partially offset by the
redemption of the Company's remaining 6 3/4% Convertible Subordinated Debentures
due 2001 in April 1998.  Interest expense in future periods will depend upon the
level of debt outstanding.

  In June 1998, the Company recorded a one-time charge of $1,300,000
representing a reserve for litigation more fully described in Note 2 to the
Centocor, Inc. and Subsidiaries Condensed Notes to Consolidated Financial
Statements (Unaudited).

  Other income (expenses) decreased for the three months ended June 30, 1998 as
compared to the three months ended June 30, 1997 due to the Company's recording
its share of the 1997 losses of a company in which Centocor has invested.
Centocor does not expect the future share in the income or losses of this
investee company to have a material impact on the Company.

  The Company expects its effective tax rate in 1998 to be approximately 7%.
The effective tax rate in 1998 is heavily influenced by the ability of the
Company to use net operating loss carryforwards or other potential tax benefits
from prior years to offset its future tax liability.

                                       34
<PAGE>
 
Item 2: Management's Discussion And Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------

  Six months ended June 30, 1998 compared to the six months ended June 30, 1997

  The increase in sales for the six months ended June 30, 1998 as compared to
the six months ended June 30, 1997 is principally due to the increase in sales
of ReoPro as well as the initial sales of Retavase which commenced March 16,
1998.

  For the six months ended June 30, 1998, ReoPro sales to Lilly were $93,211,000
and Lilly's announced sales to end-users were $170,900,000.  For the six months
ended June 30, 1997 sales to Lilly were $75,866,000 and Lilly's announced sales
to end-users were $111,545,000.  For the six months ended June 30, 1998, the
Company's sales of Panorex to Glaxo Wellcome were $1,528,000 as compared to
$2,358,000 for the six months ended June 30, 1997.  The Company's sales of
Retavase for the period beginning March 16, 1998 through June 30, 1998 were
$17,501,000.

  Diagnostic product sales for the six months ended June 30, 1998 were
$14,507,000 as compared to $17,719,000 for the six months ended June 30, 1997.
Diagnostic product sales in 1998 are expected to be at about the same level or
slightly lower than sales levels achieved in 1997.

  Given the Company's strong emphasis on the pharmaceutical business following
the Retavase acquisition, the continuing success of ReoPro and the anticipated
market launch of Remicade, the Company is currently evaluating strategic options
for Centocor Diagnostics, including possible divestiture.

  Contract revenue increased for the six months ended June 30, 1998 as compared
to the six months ended June 30, 1997 due to the Company's receipt of a non-
refundable payment of $20,000,000 from its agreement with Schering-Plough
Corporation in April 1998.

  Cost of sales increased for the six months ended June 30, 1998 as compared to
the six months ended June 30, 1997 due primarily to the increased sales of
ReoPro as well as the initial sales of Retavase. The Company is required to make
certain royalty payments, based on sales of products.  These payments represent
a significant percentage of cost of sales.

  Research and development expenses for the six months ended June 30, 1998
increased as compared to the six months ended June 30, 1997 due principally to
increased clinical trial activities to expand the indications for ReoPro and the
continued development of Remicade. 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.

  Marketing, general and administrative expenses for the six months ended June
30, 1998 increased as compared to the six months ended June 30, 1997 due
principally to the integration of the Centocor Retavase sales force and related
infrastructure into the organization, amortization of the cost of acquired
intangibles and continued ReoPro and Remicade market development efforts.

                                       35
<PAGE>
 
Item 2: Management's Discussion and Analysis of Financial Condition and Results 
-------------------------------------------------------------------------------
of Operations
------------

     For the six months ended June 30, 1998, the Company recorded one-time
special charges of $145,405,000 consisting of a charge of $139,438,000 relating
to the acquisition of Retavase and a charge of $5,967,000 relating to the
restructuring of Centocor Diagnostics. These items are more fully described in
Note 11 to the Centocor, Inc. and Subsidiaries Condensed Notes to Consolidated
Financial Statements (Unaudited).

     Interest income increased for the six months ended June 30, 1998 as
compared to the six months ended June 30, 1997 due principally to the increase
in the level of the Company's investments as a result of the proceeds from the
4 3/4% Debenture offering completed in February 1998.

     Interest expense increased for the six months ended June 30, 1998 as
compared to the six months ended June 30, 1997 due principally to the issuance
of the 4 3/4% Debentures. Interest expense in 1998 is expected to increase as a
result of the interest on the 4 3/4% Debentures but will be partially offset by
the redemption of the Company's remaining 6 3/4% Convertible Subordinated
Debentures due 2001 (the "6 3/4% Debentures") completed in April 1998.

     For the six months ended June 30, 1998, the Company recorded one-time
charges of $4,730,000 relating to separate litigation issues more fully
described in Note 2 to the Centocor, Inc. and Subsidiaries Condensed Notes to
Consolidated Financial Statements (Unaudited).

     In February 1998, Centocor Diagnostics Inc. sold an equity investment in
ChromaVision Medical Systems, Inc. consisting of 962,740 shares classified as an
available for sale investment resulting in a realized gain of $6,931,000.

     Other income (expenses) decreased for the six months ended June 30, 1998 as
compared to the six months ended June 30, 1997 due principally to the Company's
recording its share of the 1997 losses of a company in which Centocor has
invested.  Centocor does not expect the future share in the income or losses of
this investee company to have a material impact on the Company.


PER SHARE CALCULATIONS


     At June 30, 1998, approximately 4,500,000 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 basic per share data. When dilutive,
options and warrants are included as share equivalents using the treasury stock
method and are included in the calculation of diluted per share data. The
approximately 9,338,000 shares issuable upon conversion of the 4 3/4% Debentures
are not considered Common Stock equivalents and are not included in the
calculation of basic or diluted per share data but would be included in the
calculation of diluted per share data if their effect is dilutive.

     No shares issuable upon conversion of the 4 3/4% Debentures were included
in the per share calculations for any period presented since to do so would have
been antidilutive. Depending upon 

                                       36
<PAGE>
 
Item 2: Management's Discussion and Analysis of Financial Condition and Results 
-------------------------------------------------------------------------------
of Operations
------------

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 4 3/4%
Debentures in its calculations of per share data for such periods if the effect
would be dilutive.


LIQUIDITY AND CAPITAL RESOURCES


     The Company, since inception, has incurred significant operating expenses
attempting to develop therapeutic and diagnostic products.  The Company has also
incurred significant special charges.  Consequently, the Company had experienced
substantial net cash outflows, which have been only partially offset by
significant contract revenues received through collaborative alliances with
pharmaceutical companies and the Company's financing activities.

     The Company's future financial condition is dependent upon the Company's
rate of net cash inflows and, ultimately, upon the achievement of significant
and sustained levels of therapeutic product sales. Under the Company's
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 the Company's products will be
dependent upon several factors, including, but not limited to, the timing and
extent of future regulatory approvals of those 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 authorities will approve expanded labeling for ReoPro and other
products or will approve any other of the Company's product candidates under
development for commercial sale. Failure to obtain, on a timely basis, initial
or expanded regulatory approvals for the Company's products and product
candidates will have a material adverse effect on the Company.

     At June 30, 1998, the Company had cash, cash equivalents and investments of
$249,984,000, including equity investments of $3,193,000.  For the six months
ended June 30, 1998, the Company had cash flows from operations of $3,643,000.
The Company's total cash flows for the six months ended June 30, 1998 included
the receipt of $448,500,000 representing the net proceeds from the 4 3/4%
Debentures, $25,000,000 related to the Company's agreement with Schering-Plough,
$7,701,000 representing the proceeds from the sale of an equity investment in
ChromaVision Medical Systems, Inc. and $2,473,000 from the exercise of options
to purchase shares of the Company's Common Stock.  The extent and timing of
future option exercises, if any, are primarily dependent upon the market price
of the Company's Common Stock and general financial market conditions, as well
as the exercise prices and expiration dates of the options.  At June 30,1998 the
Company had a note payable of $5,882,000 which is secured by investments at the
lending bank of $5,840,000, and $20,000,000 of its cash is held in escrow and is
restricted based upon the successful completion of certain milestones in the
transfer of the manufacturing of Retavase from Boehringer Mannheim to Centocor.
The Company's total cash, cash equivalents and investments increased by
$43,354,000 from December 31, 1997, principally as a result of the issuance of
the 4 3/4% Debentures partially offset by an outflow of $337,039,000 from the
acquisition of Retavase and related costs.  

                                       37
<PAGE>
 
Item 2: Management's Discussion and Analysis of Financial Condition and Results 
-------------------------------------------------------------------------------
of Operations
------------

The Company believes that its cash, cash equivalents and investments will be
sufficient to fund its operations through at least the end of 1999.

     Accounts receivable at June 30, 1998 increased as compared to December 31,
1997 due to increased sales of ReoPro to Lilly and sales of Retavase commencing
on March 16, 1998.

     Inventory at June 30, 1998 increased as compared to December 31, 1997 due
primarily to increased ReoPro and Remicade production activities as well as
the addition of Retavase inventory in 1998.

     Gross property, plant and equipment at June 30, 1998 increased as compared
to December 31, 1997, principally due to the investment of $35,457,000 for the
purchase of property and equipment, partially offset by the impact of exchange
rates on property and equipment denominated in foreign currencies. The Company
expects its total investments in property, plant and equipment to increase in
1998 by an amount up to approximately $100,000,000 for its manufacturing
capacity expansion plans in Europe and the establishment of a U.S.
biopharmaceutical manufacturing facility to support ReoPro and Remicade
production requirements. The Company continually evaluates the future needs for
its facilities and equipment. There can be no assurance that losses resulting
from sales, or reserves to reduce the carrying value, of certain fixed assets
will not be required in the future.

     Long-term investments at June 30, 1998 increased as compared to December
31, 1997 principally due to the amount placed in escrow as part of the Company's
agreement with Roche Healthcare, partially offset by the sale of an equity
investment in ChromaVision Medical Systems, Inc., classified as available for
sale, by Centocor Diagnostics, Inc.

     Intangible and other assets at June 30, 1998 increased as compared to
December 31, 1997 resulting primarily from the acquisition of the U.S. and
Canadian product rights for Retavase in March of 1998. The intangibles acquired
represent patents, goodwill, trade name, acquired regulatory licenses and
customer base related to Retavase.

     The Company has entered into indemnity agreements with the former limited
partners of CCIP, CPII and CPIII pursuant to which the Company would be
obligated, under certain circumstances, to compensate these parties for the fair
market value of their respective interests under any license agreements with the
Company relating to their respective products which are lost through the
exercise by the U.S. government of any of its rights relating to the licensed
technology. The amount of any such loss would be determined annually by
independent appraisal.


LEGAL PROCEEDINGS


     The Company is subject to certain litigation, as more fully described in
Note 2 to the Centocor, Inc. and Subsidiaries Condensed Notes to Consolidated
Financial Statements (Unaudited). 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.

                                       38
<PAGE>
 
Item 2: Management's Discussion and Analysis of Financial Condition and Results 
-------------------------------------------------------------------------------
of Operations
------------

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.


YEAR 2000 ISSUES


     The Company is aware of the issues associated with the programming code in
many existing computer systems as the millennium approaches. The "Year 2000"
problem is pervasive; virtually every computer operation may be affected in some
way by the rollover of the two digit year value to 00. The risk is that computer
systems will not properly recognize date sensitive information when the year
changes to 2000. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail, resulting in business
interruption.

     The Year 2000 issue is expected to affect the systems of various entities
with which the Company interacts, including the Company's marketing partners,
suppliers, and various vendors, and the Company is coordinating its efforts to
address the Year 2000 issue with those entities. However, there can be no
assurances that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.

     With respect to its own computer systems, the Company is upgrading,
generally, in order to meet the demands of its expanding business. In the
process the Company is taking steps to identify, correct or reprogram and test
its existing systems for Year 2000 compliance. It is anticipated that all new
system upgrades or reprogramming efforts will be completed by mid 1999, allowing
adequate time for testing. The Company presently believes that with modification
to existing software and conversions to new software, the Year 2000 issue can be
mitigated. However, given the complexity of the Year 2000 issue, there can be no
assurances that the Company will be able to address the problem without costs
and uncertainties that might affect future financial results or cause reported
financial information not to be necessarily indicative of future operating
results or future financial condition.

     Since the Company currently plans to upgrade or replace the majority of its
systems regardless of the Year 2000 problem, management has not separately
assessed any additional Year 2000 

                                       39
<PAGE>
 
Item 2: Management's Discussion and Analysis of Financial Condition and Results 
-------------------------------------------------------------------------------
of Operations
------------

compliance expense and related potential effect on the Company's earnings.

     The mid-1999 date by which the Company plans to complete its upgrades and
Year 2000 modifications is management's best estimate, which was derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no assurances that this estimate will be achieved
and actual results could differ materially from those plans. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.

                                       40
<PAGE>
 
Part II  OTHER INFORMATION

Item 1:  Legal Proceedings


          See Note 2 to the Centocor, Inc. and Subsidiaries Condensed Notes to
          Consolidated Financial Statements (Unaudited), which is attached
          hereto and incorporated herein by reference.

Item 4:   Submission of Matters to a Vote of Security Holders.

          (a)  The Annual Meeting of Shareholders was held on May 13, 1998 at
               the Company's principal office at 200 Great Valley Parkway,
               Malvern, Pennsylvania.

          (b)  With respect to the election of directors for a term of one year
               expiring on the date of the 1999 annual meeting of shareholders,
               each nominee was elected with the following vote:

<TABLE>
<CAPTION>
                                             Total Vote For    Total Vote Withheld
                                             Each Director     From Each Director
                                             -------------     ------------------  
               <S>                           <C>               <C>
               Anthony B. Evnin                58,512,227            166,356
               William F. Hamilton             58,514,751            166,356
               David P. Holveck                58,513,985            166,356
               Antonie T. Knoppers             58,479,939            166,356
               Ronald A. Matricaria            58,507,400            166,356
               Hubert J.P. Schoemaker          58,520,376            166,356
               Richard D. Spizzirri            58,498,583            166,356
               Lawrence Steinman               58,512,217            166,356
               Jean C. Tempel                  58,514,627            166,356
</TABLE> 
                                                          
          (c)  The proposed amendment of the 1987 Non-Qualified Stock Option
               Plan was approved with the following vote:

<TABLE> 
<CAPTION> 
                    For            Against          Abstain         Broker Non-Vote 
               ------------     -------------    -------------   ---------------------
               <S>              <C>              <C>             <C> 
                53,454,452        4,171,494         187,980             860,874 
</TABLE>

          (d)  The proposed amendment of the 1989 Non-Employee Directors' Non-
               Qualified Stock Option Plan was approved with the following vote:

<TABLE>
<CAPTION>
                     For            Against          Abstain         Broker Non-Vote
               -------------     -------------    -------------   ---------------------
               <S>               <C>              <C>             <C>  
               52,844,064         4,776,640         193,222             860,874 
</TABLE>

                                       41
<PAGE>
 
Part II   OTHER INFORMATION (continued)


Item 6:   Exhibits and Reports on Form 8-K

          (a)   Exhibits

          27.0  Centocor, Inc. and subsidiaries Financial Data Schedule for the
                six months ended June 30, 1998.

          27.1  Centocor, Inc. and subsidiaries Restated Financial Data Schedule
                for the six months ended June 30, 1997.

          (b)   Reports on Form 8-K
                -------------------
                The Registrant has filed the following reports on Form 8-K since
                the beginning of the quarter ended June 30, 1998:

                Date of Report               Item Covered
                --------------               ------------
                None
<PAGE>
 
                                  SIGNATURES


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


                                              Centocor, Inc.
                                              (Registrant)



Date:     August 13, 1998                     /s/ David P. Holveck
                                              ------------------------------
                                              David P. Holveck
                                              Chief Executive Officer
                                              (principal executive officer)



Date:     August 13, 1998                     /s/ Dominic J. Caruso
                                              ------------------------------
                                              Dominic J. Caruso         
                                              Senior Vice President and 
                                              Chief Financial Officer   
                                              (principal financial and  
                                              accounting officer)