<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 March 31, 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 May 1, 1998 were 70,363,045.
<PAGE>
 
PART I:  FINANCIAL INFORMATION
------------------------------
ITEM 1:  FINANCIAL STATEMENTS
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
 
                                (IN THOUSANDS)
<TABLE> 
<CAPTION>  
                                                           (UNAUDITED)                
                                                            MARCH 31,     DECEMBER 31,
                                                              1998           1997     
---------------------------------------                    ----------     ----------- 
<S>                                                        <C>            <C>         
ASSETS                                                                               
                                                                                     
CURRENT ASSETS:                                                                      
                                                                                     
          Cash and cash equivalents (Notes 4 and 8)         $157,295       $ 85,565  
          Short-term investments (Note 4)                    120,526        109,108                                
          Accounts and contracts receivable                   38,958         26,459                                
          Interest receivable                                  1,286          1,394                                
          Inventory (Note 5)                                  30,612         27,777                                
          Prepaid expenses                                     2,285          3,053                                
          Other current assets                                 1,613          1,489                                
                                                            --------       --------  
                                                             352,575        254,845   
 
 
 
PROPERTY, PLANT AND EQUIPMENT:
          Land and buildings                                  68,552         68,957
          Equipment, furniture, fixtures, improvements                                                              
          and construction in progress                       101,358         87,483                                 
                                                            --------       --------                                 
                                                             169,910        156,440                                 
          Less accumulated depreciation                      (79,952)       (79,426)                                
                                                            --------       --------  
                                                              89,958         77,014                                 
                                                                                                                    
LONG-TERM INVESTMENTS (NOTE 4)                                23,334         11,957                                 

INTANGIBLE AND OTHER ASSETS (NOTE 6)                         259,583         61,288                                 
                                                            --------       -------- 
                                                                                                                    
          TOTAL ASSETS                                      $725,450       $405,104                                 
                                                            ========       ======== 
</TABLE> 
 
See accompanying Notes to Consolidated Financial Statements.

                                       2
<PAGE>
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS (CONT'D.)
 
                                (IN THOUSANDS)
<TABLE> 
<CAPTION> 
                                                           (UNAUDITED)                         
                                                            MARCH 31,     DECEMBER 31, 
                                                              1998            1997          
---------------------------------------                    -----------    ------------ 
<S>                                                        <C>            <C>           
LIABILITIES AND SHAREHOLDERS' EQUITY
 
CURRENT LIABILITIES:
 
          Accounts payable                                  $   11,843     $   15,651             
          Accrued expenses                                      66,612         54,203                              
          Notes payable (Note 8)                                 5,769          5,940                              
          Current portion of long-term debt (Note 8)            54,765             --
          Other current liabilities (Note 7)                    15,800         15,800                              
                                                            ----------     ---------- 
                                                               154,789         91,594                              
                                                                                                                   
LONG-TERM DEBT (NOTE 8)                                        460,000         54,765                              
                                                                                                                   
                                                                                                                   
OTHER LIABILITIES                                                1,060            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                                                                          
            70,193 and 70,146 issued and                                                                           
            outstanding at March 31, 1998 and                                                                      
            December 31, 1997, respectively                        702            701                              
         Additional paid-in capital                          1,061,337      1,060,158                              
         Accumulated deficit                                  (950,779)      (810,472)                             
         Unrealized gain on marketable                                                                             
            securities (Note 12)                                    --          7,894                              
         Cumulative foreign currency                                                                               
            translation adjustments (Note 12)                   (1,659)          (446)                             
                                                            ----------     ----------
                                                               109,601        257,835 
                                                            ----------     ---------- 
                                                                                      
              TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $  725,450     $  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 March 31,                     1998                1997
-----------------------------------------------------------------------------------
<S>                                                   <C>            <C> 
 
REVENUES:                                         
  Sales                                                   $56,505          $44,936 
  Contracts                                                   360              100                           
                                                       ----------          -------                           
                                                           56,865           45,036                           
                                                                                                             
COSTS AND EXPENSES:                                                                                          
  Cost of sales                                            20,760           17,806                           
  Research and development                                 19,913           14,337                           
  Marketing, general and administrative                    15,867            9,796                           
  Special charges (Note 11)                               145,405               --                           
                                                       ----------          -------                           
                                                          201,945           41,939                           
                                                                                                             
OTHER INCOME (EXPENSES):                                                                                     
  Interest income                                           4,164            2,154                           
  Interest expense                                         (2,687)            (997)                          
  Litigation settlement (Note 2)                           (3,430)              --                           
  Gain on sale of investment (Note 4)                       6,931               --                           
  Other                                                       (55)            (913)                          
                                                       ----------          -------                           
                                                            4,923              244                           
                                                       ----------          -------                           
                                                                                                             
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES          (140,157)           3,341                           
                                                                                                             
                                                                                                             
Provision for income taxes (Note 9)                           150               70                           
                                                       ----------          -------                           
                                                                                                             
NET INCOME (LOSS)                                       ($140,307)         $ 3,271                           
                                                       ==========          =======        
                                                                                                             
                                                                                                             
BASIC EARNINGS (LOSS) PER SHARE                            ($2.00)         $  0.05
                                                       ==========          =======
                                                                                                             
DILUTED EARNINGS (LOSS) PER SHARE                          ($2.00)         $  0.05
                                                       ==========          =======
                                                  
WEIGHTED AVERAGE NUMBER OF SHARES                                  
  OUTSTANDING                                              70,185           69,517
                                                       ==========          =======       
                                                  
WEIGHTED AVERAGE COMMON AND DILUTIVE              
 EQUIVALENT SHARES OUTSTANDING                             70,185           71,659
                                                       ==========          =======    
</TABLE> 
                                                  
See accompanying Notes to Consolidated Financial Statements.

                                       4
<PAGE>
 
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                (IN THOUSANDS)
                                  (UNAUDITED)
<TABLE> 
<CAPTION>  
------------------------------------------------------------------------------------------------------------ 
For the three months ended March 31,                                 1998          1997
----------------------------------------------------------------------------------------------------------- 
<S>                                                             <C>            <C> 
Cash flows used for operating activities:
  Net income (loss)                                              ($140,307)     $   3,271         
  Adjustments to reconcile net income (loss) to net cash                                                      
    used for operating activities:                                                                            
     Provisions for depreciation and amortization                    5,158          3,894                     
     Special charges (Note 11)                                     145,405             --
     Gain on sale of investment                                     (6,931)            --                     
     Other                                                              --         (1,126)                     
     Changes in assets and liabilities:                                                                       
              Accounts and contracts receivable                    (12,259)        (6,733)                     
              Interest receivable                                      105            181                     
              Inventory                                             (3,546)        (1,793)                     
              Prepaid expenses                                        (259)           325                     
              Other current assets                                    (170)          (261)                     
              Intangible and other assets                           (7,412)       (13,909)                     
              Accounts payable                                      (2,114)        (1,570)                     
              Accrued expenses and other                             7,174          3,164                     
              liabilities                                                                                     
              Other long-term liabilities                              150            (57)                     
                                                                 ---------      ---------             
    Net cash used for operating activities                         (15,006)       (14,614)                     
                                                                                                              
Cash flows used for investing activities:                                                                     
  Purchases of investments                                         (58,209)      (116,695)                     
  Sales of investments                                              51,373        102,869                     
  Retavase acquisition and related costs                          (337,039)            --                     
  Purchases of fixed assets                                        (17,881)        (1,856)                     
                                                                 ---------      ---------
    Net cash used for investing activities                        (361,756)       (15,682)
                                                                                                              
Cash flows from financing activities:                                                                         
  Net proceeds from issuances of Common Stock                          306          3,958                     
  Net proceeds from issuance of long-term debt                     448,500             --                     
                                                                 ---------      --------- 
    Net cash from financing activities                             448,806          3,958                     
                                                                                                              
Effect of foreign currency translation                                (314)           237                     
                                                                 ---------      --------- 
                                                                                                              
Net increase (decrease) in cash and cash equivalents                71,730        (26,101)                     
                                                                                                              
Beginning cash and cash equivalents                                 85,565         55,953                     
                                                                 ---------      --------- 
                                                                                                              
Ending cash and cash equivalents                                 $ 157,295      $  29,852  
                                                                 =========      ========= 
</TABLE> 
 
See accompanying Notes to Consolidated Financial Statements.

                                       5
<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 March 31, 1998 and December 31, 1997 and the
consolidated results of operations and cash flows for the three months ended
March 31, 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.

  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").

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

                                       6
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

  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.

  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 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.

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

 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.

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

  In July 1995, PaineWebber Development Corporation, a wholly-owned subsidiary
of Paine Webber Group Inc., caused suits to be filed against the Company by two
research and development partnerships formed in the mid-1980s by PaineWebber and
managed by it since then.  The two PaineWebber partnerships (PaineWebber R&D
Partners, L.P. and PaineWebber R&D Partners II, L.P.) were, respectively,
investors in Centocor Partners II, L.P. ("CPII") and Centocor Partners III, L.P.
("CPIII"), research partnerships for which PaineWebber acted as the sales agent
and in other capacities.  The Company purchased the limited partners' interests
in CPII in February 1992 and that partnership was then dissolved.  The Company
purchased the Class A and Class C limited partners' interests in CPIII in
January 1997 and purchased the Class B limited partnership interest in CPIII in
May 1997.

  The suit by PaineWebber R&D Partners, L.P., was filed in the Supreme Court of
the State of New York, County of New York, and was brought as a class action on
behalf of all former limited partners of CPII.  The complaint charges that some
portion of the $100,000,000 paid by Lilly to the Company in July 1992
constituted revenues to the Company for the licensing, sublicensing or sale of
HA-1A (Centoxin) and that the Company is obligated to pay a percentage thereof
to the former limited partners of CPII, in addition to amounts already paid.
The Company moved to dismiss the New York suit on the ground that it was brought
in an inconvenient forum and that motion was granted.  The suit was then refiled
in the Delaware Superior Court.  Prior to the New York action, a similar suit
was filed by another former CPII partner, Jerome J. Petrisko, in the Court of
Common Pleas of Chester County, Pennsylvania.  Petrisko was subsequently allowed
to intervene in the Delaware action and the Chester County action was dismissed.
The PaineWebber and Petrisko actions were consolidated and the action was
certified as a class action.  The Company filed an affirmative defense and
counterclaim based on unjust enrichment which seeks 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.
A trial in this action is scheduled to commence on June 8, 1998.  The Company
believes that this action is without merit and intends to defend it vigorously.

  The suit by PaineWebber R&D II, L.P. ("PWR&DII") was filed in the Court of
Chancery of the State of Delaware.  In the complaint in this action, the
plaintiff seeks to sue derivatively on behalf of CPIII.  CPIII is named as a
nominal defendant and the Company and Centocor Development Corporation III
("CDCIII"), a wholly owned subsidiary of the Company which acted as the general

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

partner of CPIII, are named as defendants against whom relief is sought.  The
claim in this case is that at least $25,000,000 of the money paid by Lilly to
the Company in 1992 represented profits from the marketing of ReoPro, obligating
the Company to pay a portion thereof to CPIII, and that the Company is obligated
to pay an increased percentage of the profits from ReoPro to the former CPIII
limited partners going forward.  The Company answered the complaint in the
Delaware action and filed a cross-claim against nominal defendant CPIII and a
third-party complaint against PaineWebber Group Inc. and PaineWebber Development
Corporation.  The cross-claim seeks an offset against any damages awarded the
partners based on theories of unjust enrichment and quasi contract.  The third-
party claims (later amended to add additional theories of liability and to make
PaineWebber, Inc. an additional third-party defendant) seek to hold the
PaineWebber entities liable for some or all of any alleged injury to the
partnership.  On November 1, 1995, an additional suit was commenced in the
Delaware Court of Chancery by John E. Abdo, a limited partner of CPIII, against
the Company, CDCIII and certain of their officers and directors.  The complaint,
filed derivatively on behalf of CPIII, asserts claims, inter alia, for breach of
contract, breach of fiduciary duty, common law fraud, and conspiracy and aiding
and abetting.  The Company answered this complaint and also filed a cross-claim
against nominal defendant CPIII and a third party complaint against PaineWebber
Group Inc. and PaineWebber Development Corporation, later amended to add
additional theories of liability and to name PaineWebber, Inc. as a further
third-party defendant.  Abdo moved to amend his complaint to assert claims
against the persons appointed by PaineWebber to the CDCIII Board of Directors.
That motion was granted.  Motions to disqualify PWR&DII from serving as the
derivative plaintiff were filed in July 1996 by CPIII and in August 1996 by
Centocor and CDCIII.  Abdo joined those motions.  No decision has been issued on
those motions.  The case brought by PWR&DII has been settled, subject to final
approval of the settlement by the Court.  Abdo and Pharmaceutical Partners II,
L.P., a limited partnership which has purchased CPIII limited partnership
interests, objected to the settlement.  They were permitted to take discovery
regarding the settlement and have sought to take additional discovery.  A
hearing on the adequacy and fairness of the settlement was held on September 4,
1997.  No decision has been rendered.

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


                                       10
<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

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

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, 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 without prejudice to Genentech's
opposition to the transfer of an action recently filed by Genentech against
Centocor in the United States District Court for the Northern District of
California, which is described below. 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.  A hearing that was to have taken
place in that nullity action in February, 1998 has been postponed until July,
1998.  The Court in the infringement action based on patents EP 0 217 379 and EP
0 228 862 has directed certain questions to an expert yet to be appointed.  No
report is expected from the expert until at least the end of 1998.  A July, 1998
hearing date has been fixed on Boehringer Mannheim's nullity suit against the
patent EP 0 217 379.  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

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

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, 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. Because of the close relationship between
the '565 and '566 Patents and certain of the patents in suit in the District of
Massachusetts, on April 2, 1998, the Company filed a motion to transfer the case
from the Northern District of California to the District of Massachusetts. No
decision on the motion has been rendered. In addition to filing the motion to
transfer, the Company has answered the complaint, denying infringement of the
'565 and '566 Patents and raising various affirmative defenses concerning
invalidity of those patents. There can be no assurance that the Company will
prevail in its motion to transfer. If it does not, the Company will have to
defend infringement claims concerning the '565 and '566 Patents in California,
as well as defending the pending litigation in Massachusetts. Moreover, 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.  In
addition, the Company is required to make future royalty payments to the former
limited partners of CPIII based upon future sales of ReoPro.

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

                                       13
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

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., 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 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,

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

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 will jointly promote ReoPro through Lilly's existing ReoPro
sales force and the Company's Retavase sales force.

  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 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. 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

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

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, for a period of up to six months after
closing of the transaction, completed in March 1998, Boehringer Mannheim 
Corporation has and will provide certain transition services to Centocor,
including accepting orders and invoices on behalf of Centocor, collection
services and customer complaints and inquiries, to facilitate the transfer of
responsibility for the sale and distribution of the product.

  Relationship with The DuPont Merck Pharmaceutical Company

  Boehringer Mannheim Corporation and The DuPont Merck Pharmaceutical Company
("DuPont Merck") entered into an agreement in December 1996 pursuant to which
Boehringer Mannheim Corporation granted DuPont Merck 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 Merck is
continuing to co-promote Retavase in the United States.

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

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 March 31, 1998, securities classified as trading, available for sale and
held to maturity are summarized below (in thousands).

<TABLE>
<CAPTION>
 
                                                                         Unrealized                      
                                                 Carrying       ---------------------------------         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                     $ 31,925          $    119          $      (16)          $ 32,028
  Other short-term obligations                    97,330                 -                   -             97,330
  Corporate bonds and
   commercial paper                               25,146                 5                 (70)            25,081
                                                 -------           -------           ---------            -------
                                                $154,401          $    124          $      (86)          $154,439
                                                 =======           =======           =========            =======
 
                                                                          Unrealized                        
                                                Adjusted         --------------------------------        Carrying
                                                  Cost              Gains             (Losses)             Value
                                               ----------        -------------       ------------       ---------
Investments available for sale:
  Equity securities                             $  3,334          $        -        $         -          $ 3,334
                                                 =======           ===========       ============         =======
</TABLE> 
 

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

                                                                       Unrealized                             
                                            Carrying          ------------------------------            Fair
                                             Value               Gains            (Losses)             Value
                                           -----------        ------------     -------------         -------
<S>                                         <C>                 <C>              <C>                   <C> 
Investments held to maturity:
  Securities and obligations of
   the U.S. Treasury and other
   U.S. government agencies                 $ 91,058          $       15        $       (20)         $ 91,053
Certificates of deposit                        6,126                   4                  -             6,130
                                             -------           ---------         ----------           -------
                                            $ 97,184          $       19        $       (20)         $ 97,183
                                             =======           =========         ==========           =======

At March 31, 1998, these securities were classified as follows (in thousands):
 
Cash equivalents                            $131,097
 
Short-term investments                       120,526
 
Long-term investments                          3,334
                                             -------
                                            $254,957
                                             =======
</TABLE>

     The Company has agreed to maintain investments with fair values of
$5,836,000 as of March 31, 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 Escrow
Amount has been placed in escrow and 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.

                                       18
<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>
 
                           March 31,             December 31,
                             1998                   1997
                          -----------             -----------
<S>                        <C>                    <C>          
Raw materials            $     5,905             $      4,646
 
Work in process               18,253                   12,850
 
Finished goods                 6,454                   10,281
                          ----------              -----------
                         $    30,612             $     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>
 
                                        March 31,      December 31,
                                          1998            1997
                                       -----------    -------------   
<S>                                     <C>            <C>         
Acquired regulatory licenses            $  86,598      $         -
Goodwill                                   38,665                -
Prepaid royalties related to CPIII         29,398           29,398
Deferred charges                           20,381           23,084
Debt issuance costs                        13,190              598
Other licenses                             12,189            5,339
All other                                  59,162            2,869
                                         --------       ----------
                                        $ 259,583      $    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.

                                       19
<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 million 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 March 31, 1998 and December 31, 1997 consists of
$5,769,000 and $5,940,000, respectively, of borrowings under short-term notes at
an interest rate of 3.9 % per annum at March 31, 1998, payable in Dutch guilders
no later than September 30, 1998. These borrowings are secured by investments at
the lending bank of $5,836,000.

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

     Long-term debt

     Long-term debt consists of the following:
 
               4 3/4% Convertible Subordinated Debentures    $  460,000
               6 3/4% Convertible Subordinated Debentures        54,765
                                                              ---------
                                                                514,765
               Less: current portion of long-term debt          (54,765)
                                                              --------- 
                                                             $  460,000
                                                              =========

     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 March 31, 1998, the aggregate amount
of senior obligations outstanding amounted to $5,769,000 and the aggregate
amount of indebtedness of the Company that would rank pari passu with the 4 3/4%
Debentures was approximately $54,765,000.

     The 4 3/4% Debentures have not been registered under the Securities Act of
1933, as amended (the "Securities Act"). Accordingly, the 4 3/4% Debentures may
not be offered or sold in the United States, absent registration or an
applicable exemption from the Securities Act registration requirements.

     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

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

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 March 31, 1998 and
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 6 3/4% Debentures were redeemed at par and were
subsequently retired.

NOTE 9
INCOME TAXES

     A provision for income taxes of $150,000 and $70,000 was recorded for the
three months ended March 31, 1998 and March 31, 1997, respectively, representing
current federal and state income taxes.

     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 $348,500,000 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

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

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

     There was no interest paid for the three months ended March 31, 1998 and
1997.

     Income tax payments for the three months ended March 31, 1998 and 1997 were
approximately $12,000 and $81,000, respectively.

     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.

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.

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

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

<TABLE> 
             <S>                                               <C> 
               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
                                                                 =========
</TABLE> 

     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:

<TABLE>
<CAPTION>
 
       
       Statement of                    For the three months
      Operations Data                     ended March 31,
---------------------------------   ------------------------
                                       1998           1997
                                    --------       ---------
<S>                                 <C>             <C>  
Revenues                            $ 67,061        $ 53,036
 
Net loss                            $ (2,767)       $(11,046)
 
Diluted loss per share              $   (.04)       $   (.16)
 
</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 Avakine, 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):
<TABLE> 
                         <S>                       <C>  
                            Severance               $    3,142
 
                            Asset impairments            2,825
                                                     ---------
                                                    $    5,967
                                                     =========
</TABLE> 

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

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).

     Total comprehensive income (loss) was approximately ($149,414,000) and
$705,000 for the three months ended March 31, 1998 and 1997, respectively.

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

<TABLE>
<CAPTION>
 
                                           For the three months ended
                                         -----------------------------
                                          March 31,         March 31,
                                           1998               1997
                                         -------------   -------------
<S>                                      <C>              <C> 
Net income (loss)                        $   (140,307)   $      3,271
 
Foreign currency translation adjustments       (1,213)         (2,483)
 
Unrealized loss on marketable securities         (963)            (83)
 
Reclassification adjustment - realized
   gain on available for sale security         (6,931)              -
                                          -----------      ----------
Subtotal other comprehensive loss              (9,107)         (2,566)
                                          -----------      ----------

Total comprehensive income (loss)        $   (149,414)   $        705
                                          ===========      ========== 
 
</TABLE> 

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

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

<TABLE>
<CAPTION>
 
                                                     March 31,      December 31,
                                                       1998            1997
                                                   ------------    ------------
      <S>                                           <C>             <C> 
      Cumulative foreign currency translation
       adjustments                                $  (1,659)      $     (446)
      Unrealized gain on marketable securities            -            7,894
                                                   --------        ---------
      Other comprehensive income (loss)           $  (1,659)      $    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 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.

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

    For the quarter ended March 31, 1998 no exercise of options and warrants or
other common stock equivalents is assumed since their effect is antidilutive,
resulting from the Company reporting a loss for this period.

<TABLE>
<CAPTION>
                                     For the Three Months Ended March 31, 1997
                                     -----------------------------------------
                                        Income           Shares      
                                     (in thousands)  (in thousands)  Per Share
                                       (Numerator)   (Denominator)     Amount
                                     --------------  -------------------------
<S>                                   <C>             <C>             <C> 
Basic EPS                           $        3,271         69,517     $  0.05
Incremental shares from assumed
exercise of dilutive options and                         
warrants                                        --          2,142
                                     --------------  ------------ 
Diluted EPS                         $        3,271         71,659     $  0.05
                                     ==============  ============
</TABLE>

NOTE 14
SUBSEQUENT EVENT

  International Distribution Agreement for Avakine(TM) (infliximab)

  On April 6, 1998, Schering-Plough Corporation and the Company announced an
agreement giving Schering-Plough Ltd. exclusive worldwide distribution rights,
excluding the United States, Japan and portions of the Far East, to Avakine(TM)
(infliximab), a novel monoclonal antibody in development for the treatment of
Crohn's disease and rheumatoid arthritis.

  Under terms of the agreement, the Company received a $20,000,000 non-
refundable payment in April 1998 and could receive additional payments of up to
$30,000,000 upon the achievement of certain milestones.  In addition, Schering-
Plough and Centocor will divide profits related to Avakine and have agreed to
share certain internal and external development expenses related to the product.
The Company retains U.S. distribution rights for Avakine for all indications,
but reserves the right to co-promote with Schering-Plough.  The Company
previously granted distribution rights to Avakine in Japan and portions of the
Far East to Tanabe Seiyaku Co, Ltd.

                                       27
<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 and (ix) the potential for product liability claims.
Therefore, actual results may differ materially from those expressed or
forecasted in any such forward-looking statements. Unless required by law, the
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.

     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 months ended March 31, 1998 have been affected
by various significant one-time events.  Significant one-time events for the
three months

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

ended March 31, 1998 include the special charges, the litigation settlement and
the gain on sale of investment. Excluding such significant one-time events, the
Company's reported earnings per share would have been $.02 for the three months
ended March 31, 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 through Lilly's
existing ReoPro sales force and the Company's Retavase sales force. The Company
is co-promoting Retavase in the United States with DuPont Merck pursuant to an
assignment of DuPont Merck'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.

     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 Avakine(TM) (infliximab) for the

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

treatment of moderate to severe Crohn's disease, including fistulizing Crohn's
disease.  The Company has been notified by the FDA that its BLA for Avakine has
been accepted and will receive a priority review.  The FDA's Gastrointestinal
Drugs Advisory Committee will discuss Avakine at its meeting on May 28, 1998.
The Company also is conducting studies for Avakine in the treatment of
rheumatoid arthritis.  Panorex, Retavase  and Avakine 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
Standard 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 $348,500,000 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.

     Three months ended March 31, 1998 compared to the three months ended March
     31, 1997

     The increase in sales for the three months ended March 31, 1998 as compared
to the three months ended March 31, 1997 is principally due to the increase in
sales of ReoPro.

     For the three months ended March 31, 1998, ReoPro sales to Lilly were
$45,688,000 and

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

Lilly's announced sales to end-users were $70,000,000. For the three months
ended March 31, 1997 sales to Lilly were $35,263,000 and Lilly's announced sales
to end-users were $51,700,000. For the three months ended March 31, 1998, the
Company's sales of Panorex to Glaxo Wellcome were $1,390,000 as compared to
$929,000 for the three months ended March 31, 1997. The Company's sales of
Retavase for the period beginning March 16, 1998 through March 31, 1998 were
$2,300,000.

     The level of the Company's sales of ReoPro to Lilly and of Panorex to Glaxo
Wellcome is dependent upon the orders placed and the levels of inventory
maintained by each of these marketing partners.  The Company expects ReoPro end-
sales to increase in 1998 as market acceptance continues to grow.  Therefore,
the Company expects its sales of ReoPro to Lilly to increase in 1998 over 1997
levels.  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 March 31, 1998 were
$7,507,000 as compared to $8,744,000 for the three months ended March 31, 1997.
Diagnostic product sales in 1998 are expected to be at about the same level or
slightly lower than sales levels achieved in 1997.

     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.

     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 Avakine, the Company is currently evaluating
strategic options for Centocor Diagnostics, including possible divestiture.

     Cost of sales increased for the three months ended March 31, 1998 as
compared to the three months ended March 31, 1997 due primarily to the increased
sales of ReoPro. 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 March 31, 1998
increased as compared to the three months ended March 31, 1997 due principally
to increased clinical trial

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

activities to expand the indications for ReoPro and the continued development of
Avakine. The level of the Company's total research and development expenses in
future periods will be dependent upon the extent of clinical trial-related
activities. Research and development expenses are expected to increase in 1998
as compared to 1997 due to clinical trial activities in connection with the
continued expansion of ReoPro use for additional indications including, but not
limited to, acute myocardial infarction and in stroke. In addition, clinical
trial activities for Avakine, primarily Phase III trials for the Crohn's disease
and severe rheumatoid arthritis indications are expected to continue throughout
1998.

     Marketing, general and administrative expenses for the three months ended
March 31, 1998 increased as compared to the three months ended March 31, 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 Avakine 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 Avakine.

     For the three months ended March 31, 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 three months ended March 31, 1998 as
compared to the three months ended March 31, 1997 due principally to the
increase in the level of the Company's investments as a result of the proceeds
from the offering of the 4 3/4% Debentures 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 March 31, 1998 as
compared to the three months ended March 31, 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 April 16,
1998.  Interest expense in future periods will depend upon the level of debt
outstanding.

     In February 1998, the Company recorded a one-time charge of $3,430,000
representing the settlement of litigation more fully described in Note 2 to the
Centocor, Inc. and Subsidiaries Condensed Notes to Consolidated Financial
Statements (Unaudited).

     In February 1998, Centocor Diagnostics sold an equity investment in
ChromaVision Medical

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

Systems, Inc. consisting of 962,740 shares classified as available for sale
resulting in a realized gain of $6,931,000.

     Other income (expenses) decreased for the three months ended March 31, 1998
as compared to the three months ended March 31, 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.

PER SHARE CALCULATIONS

     At March  31, 1998, approximately 4,603,000 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
and the 898,000 shares that were issuable upon conversion of the 6 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 Common Stock equivalents or shares issuable upon conversion of the 4
3/4% Debentures and the 6 3/4% Debentures were included in the per share
calculations for any period presented since to do so would have been
antidilutive. Depending upon the market value of the Company's Common Stock and
its results of operations for such periods, the Company may be required to
include its then outstanding Common Stock equivalents as well as shares issuable
upon the conversion of the 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

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

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 March 31, 1998, the Company had cash, cash equivalents and investments
of $301,155,000, including equity investments of $3,334,000.  For the three
months ended March 31, 1998, the Company had negative cash flows from operations
of $15,006,000.  The Company's total cash flows for the three months ended March
31, 1998 included the receipt of $448,500,000 representing the net proceeds from
the 4 3/4% Debentures, $7,701,000 representing the proceeds from the sale of an
equity investment in ChromaVision Medical Systems, Inc. and $306,000 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 March 31, 1998 the Company had a note payable of $5,769,000 which is secured
by investments at the lending bank of $5,836,000, 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 $94,525,000 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. 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 March 31, 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 March 31, 1998 increased as compared to December 31, 1997 due
primarily to increased ReoPro and Avakine production activities.

     Gross property, plant and equipment at March 31, 1998 increased as compared
to December 31, 1997, principally due to the investment of $17,881,000 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

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

expansion plans in Europe and the establishment of a U.S. biopharmaceutical
manufacturing facility to support ReoPro and Avakine 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 March 31, 1998 increased as compared to December
31, 1997 principally due to the $20,000,000 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 March 31, 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
primarily represent goodwill and acquired regulatory licenses 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.

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.

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

                                       36
<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 6:   Exhibits and Reports on Form 8-K

          (a)  Exhibits
               --------

               4.1    Indenture by and between the Company and the United States
                      Trust Company of New York, as Trustee, dated February 20,
                      1998.

               4.2    Form of 4 3/4% Convertible Subordinated Debentures due
                      2005 (included in Exhibit 4.1 hereto).

              10.1    Registration Rights Agreement, dated as of February 13,
                      1998.

              10.2    Distribution Agreement between Centocor, Inc. and Schering
                      Plough Ltd. dated April 3, 1998. (The Registrant has
                      requested confidential treatment from the Securities and
                      Exchange Commission for portions of this Agreement.)

              27.0    Centocor, Inc. and subsidiaries Financial Data Schedule 
                      for the three months ended March 31, 1998.

              27.1    Centocor, Inc. and subsidiaries Restated Financial Data 
                      Schedule for the three months ended March 31, 1997.

              27.2    Centocor, Inc. and subsidiaries Restated Financial Data
                      Schedules for the years ended December 31, 1996 and 1995.

          (b)  Reports on Form 8-K
               -------------------

               The Registrant has filed the following reports on Form 8-K since
               the beginning of the quarter ended March 31, 1998:

               Date of Report                      Item Covered
               --------------                      ------------

               January 21, 1998                          5

               February 12, 1998                         5

               February 20, 1998                         5

                                       37
<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:     May 11, 1998                        /s/ David P. Holveck
                                              ------------------------------
                                              David P. Holveck
                                              Chief Executive Officer
                                              (principal executive officer)


Date:     May 11, 1998                        /s/ Dominic J. Caruso
                                              ------------------------------
                                              Dominic J. Caruso
                                              Senior Vice President and
                                              Chief Financial Officer
                                              (principal financial and
                                              accounting officer)