<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 September 30, 1998
                                     ------------------

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

      For the transition period from __________ to __________

                        Commission file number  0-11103
                                               ---------

                                CENTOCOR, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

         Pennsylvania                                   23-2117202
-----------------------------------         ------------------------------------
   (State or other jurisdiction of                    (IRS Employer)
   incorporation or organization)                   Identification No.)

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes    X     No 
                                          -------     -------       

Shares of Common Stock outstanding at November 2, 1998 were 70,582,424.
<PAGE>
Part I:  Financial Information
------------------------------
Item 1:  Financial Statements

                        CENTOCOR, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                     (In thousands except per share data)
<TABLE> 
<CAPTION> 

                                                                (Unaudited)
                                                               September 30,     December 31,
                                                                   1998              1997
-----------------------------------------------------------    -------------     ------------
<S>                                                            <C>               <C> 
ASSETS

Current assets:

            Cash and cash equivalents (Notes 4 and 8)               $82,183          $85,565
            Short-term investments (Note 4)                         116,974          109,108
            Accounts and contracts receivable                        81,539           26,459
            Interest receivable                                         761            1,394
            Inventory (Note 5)                                       41,442           27,777
            Prepaid expenses                                            840            3,053
            Other current assets                                      2,031            1,489
                                                               -------------     ------------
                                                                    325,770          254,845



Property, plant and equipment:
            Land and buildings                                       71,061           68,957
            Equipment, furniture, fixtures, improvements   
              and construction in progress                          150,154           87,483
                                                               -------------     ------------
                                                                    221,215          156,440
            Less accumulated depreciation                           (88,610)         (79,426)
                                                               -------------     ------------
                                                                    132,605           77,014

Long-term investments (Note 4)                                       21,649           11,957

Intangible and other assets (Note 6)                                252,796           61,288
                                                               -------------     ------------
               Total assets                                        $732,820         $405,104
                                                               =============     ============
</TABLE> 



See accompanying Notes to Consolidated Financial Statements.




                                       2
<PAGE>
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS (CONT'D.)

                     (In thousands except per share data)

<TABLE> 
<CAPTION> 

                                                      (Unaudited)
                                                     September 30,    December 31,
                                                         1998             1997
--------------------------------------------------   -------------    ------------
<S>                                                  <C>              <C> 
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

   Accounts payable                                       $17,323         $15,651
   Accrued expenses                                        82,795          54,203
   Notes payable (Note 8)                                   6,316           5,940
   Unearned revenues                                        4,646               0
   Other current liabilities (Note 7)                      15,800          15,800
                                                     -------------    ------------
                                                          126,880          91,594

Long-term debt (Note 8)                                   460,000          54,765


Other liabilities                                           2,754             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 70,540 
      and 70,146 issued and outstanding at 
      September 30, 1998 and December 31, 
      1997, respectively                                      705             701
   Additional paid-in capital                           1,065,194       1,060,158
   Accumulated deficit                                   (928,012)       (810,472)
   Unrealized gain (loss) on                      
      marketable securities (Note 12)                        (455)          7,894
   Cumulative foreign currency                    
      translation adjustments (Note 12)                     5,754            (446)
                                                     -------------    ------------
                                                          143,186         257,835
                                                     -------------    ------------

        Total liabilities and shareholders' equity       $732,820        $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)


--------------------------------------------------------------------------
For the three months ended September 30,          1998            1997
--------------------------------------------------------------------------


Revenues:
  Sales                                           $87,602         $50,171
  Contracts                                            67           1,230
                                               -----------     -----------
                                                   87,669          51,401

Costs and expenses:
  Cost of sales                                    32,220          18,307
  Research and development                         12,728          18,821
  Marketing, general and administrative            36,123          10,310
                                               -----------     -----------
                                                   81,071          47,438

Other income (expenses):
  Interest income                                   3,357           2,493
  Interest expense                                 (5,815)           (978)
  Other                                              (388)           (837)
                                               -----------     -----------
                                                   (2,846)            678
                                               -----------     -----------

Income before provision for income taxes            3,752           4,641

Provision for income taxes (Note 9)                   265             200
                                               -----------     -----------

Net income                                         $3,487          $4,441
                                               ===========     ===========

Basic earnings per share                            $0.05           $0.06
                                               ===========     ===========

Diluted earnings per share                          $0.05           $0.06
                                               ===========     ===========

Weighted average common
  shares outstanding                               70,502          69,915
                                               ===========     ===========

Weighted average common and dilutive
  equivalent shares outstanding                    71,974          71,965
                                               ===========     ===========


See accompanying Notes to Consolidated Financial Statements.


                                       4
<PAGE>
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                     (In thousands except per share data)
                                  (Unaudited)
<TABLE> 
<CAPTION> 

 -----------------------------------------------------------------------------------------
 For the nine months ended September 30,                           1998           1997
 -----------------------------------------------------------------------------------------

 <S>                                                              <C>            <C> 
 Revenues:
   Sales                                                          $213,987       $146,114
   Contracts                                                        21,429          3,966
                                                              -------------    -----------
                                                                   235,416        150,080

 Costs and expenses:
   Cost of sales                                                    77,403         58,296
   Research and development                                         48,689         50,450
   Marketing, general and administrative                            78,098         29,694
   Special charges (Note 11)                                       145,405              -
                                                              -------------    -----------
                                                                   349,595        138,440

 Other income (expenses):
   Interest income                                                  11,157          7,095
   Interest expense                                                (14,136)        (2,940)
   Gain on sale of investment (Note 4)                               6,931              -
   Litigation charges (Note 2)                                      (4,730)             -
   Loss on sale of facility and related business (Note 14)               -         (4,565)
   Other                                                              (718)        (2,508)
                                                              -------------    -----------
                                                                    (1,496)        (2,918)
                                                              -------------    -----------

 Income (loss) before provision for income taxes                  (115,675)         8,722

 Provision for income taxes (Note 9)                                 1,865            290
                                                              -------------    -----------

 Net income (loss)                                               ($117,540)        $8,432
                                                              =============    ===========

 Basic earnings (loss) per share                                    ($1.67)         $0.12
                                                              =============    ===========

 Diluted earnings (loss) per share                                  ($1.67)         $0.12
                                                              =============    ===========

 Weighted average common
   shares outstanding                                               70,357         69,707
                                                              =============    ===========

 Weighted average common and dilutive
   equivalent shares outstanding                                    70,357         71,704
                                                              =============    ===========
</TABLE> 

See accompanying Notes to Consolidated Financial Statements.


                                       5
<PAGE>
                        CENTOCOR, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                (In thousands)
                                  (Unaudited)
<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------
For the nine months ended September 30,                           1998           1997
----------------------------------------------------------------------------------------
<S>                                                             <C>             <C> 
Cash flows used for operating activities:
  Net income (loss)                                             ($117,540)      $ 8,432
  Adjustments to reconcile net income (loss) to net cash
    used for operating activities:
     Special charges (Note 11)                                    145,405            --
     Loss on sale of facility and related business (Note 14)           --         4,565
     Gain on sale of investment                                    (6,931)           --
     Provisions for depreciation and amortization                  27,426        10,818
     Amortization of unearned revenue                              (4,354)           --
     Other                                                              0         3,345
     Changes in assets and liabilities:
             Accounts and contracts receivable                    (50,679)      (27,410)
             Interest receivable                                      635           406
             Inventory                                            (11,614)       (1,966)
             Prepaid expenses                                        (451)          212
             Other current assets                                    (442)          185
             Intangible and other assets                          (14,114)      (18,395)
             Accounts payable                                       2,518         1,020
             Unearned revenue                                       9,000            --
             Accrued expenses and other liabilities                18,391        14,802
             Other long-term liabilities                            1,844           (53)
                                                               -----------   -----------
    Net cash used for operating activities                           (906)       (4,039)

Cash flows from (used for) investing activities:
  Purchases of investments                                       (187,296)      (55,250)
  Sales of investments                                            184,720        78,400
  Retavase acquisition and related costs                         (337,039)           --
  Sale of facility and related business                                --         2,835
  Purchases of fixed assets                                       (59,919)      (14,726)
                                                               -----------   -----------
    Net cash from (used for) investing activities                (399,534)       11,259

Cash flows from financing activities:
  Net proceeds from other issuances of Common Stock                 3,131         8,884
  Net proceeds from issuance of long-term debt (Note 8)           448,500            --
  Reduction of long-term debt (Note 8)                            (54,765)           --
                                                               -----------   -----------
    Net cash from financing activities                            396,866         8,884
Effect of foreign currency translation                                192         1,549
                                                               -----------   -----------

Net increase (decrease) in cash and cash equivalents               (3,382)       17,653
Beginning cash and cash equivalents                                85,565        55,953
                                                               -----------   -----------

Ending cash and cash equivalents                                  $82,183       $73,606
                                                               ===========   ===========
</TABLE> 
     See accompanying Notes to Consolidated Financial Statements.

                                       6

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

NOTE 1
BASIS OF PRESENTATION

   Centocor, Inc. ("Centocor" or the "Company") is a leading biopharmaceutical
company that creates, acquires and markets cost-effective therapies that yield
long-term benefits for patients and the healthcare community.  Its products,
most of which are developed through monoclonal antibody technology, help
physicians deliver innovative treatments to improve human health and restore
patients' quality of life.

   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 September 30, 1998 and December 31, 1997 and
the consolidated results of operations for the three and nine months ended
September 30, 1998 and 1997 and consolidated cash flows for the nine months
ended September 30, 1998 and 1997.  The results of operations and the cash flows
are not necessarily indicative of the results to be expected for the entire
year.

NOTE 2
COMMITMENTS AND CONTINGENCIES

  Liquidity and Capital Resources

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

  On March 13, 1998, the Company completed the acquisition of the U.S. and
Canadian product rights for Retavase(R)  (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

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

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

  The Company financed the acquisition through the issuance of $460,000,000
principal amount of 43/4% Convertible Subordinated Debentures due February 15,
2005 ("the 43/4% Debentures") in February 1998.

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

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

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

  The Company's future financial condition is dependent upon the Company's rate
of net cash 

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

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, REMICADE or other
products or will approve any other of the Company's product candidates under
development for commercial sale. Failure to obtain additional timely FDA or
other regulatory approval for the Company's products and product candidates may
have a material adverse effect on the Company.

  Legal Proceedings

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

  In July 1995, PaineWebber Development Corporation, a wholly-owned subsidiary
of Paine Webber Group Inc., caused suits to be filed against the Company by two
research and development partnerships formed in the mid-1980s by PaineWebber and
managed by it since then.  The two 

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

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 charged that some
portion of the $100,000,000 paid by Eli Lilly and Company ("Lilly") to the
Company in July 1992 constituted revenues to the Company for the licensing,
sublicensing or sale of HA-1A (Centoxin) and that the Company is obligated to
pay a percentage thereof to the former limited partners of CPII, in addition to
amounts already paid. The Company moved to dismiss the New York suit on the
ground that it was brought in an inconvenient forum and that motion was granted.
The suit was then refiled in the Delaware Superior Court. A similar suit was
filed by another former CPII partner, Jerome J. Petrisko, in the Court of Common
Pleas of Chester County, Pennsylvania. Petrisko was subsequently allowed to
intervene in the Delaware action and the Chester County action was dismissed.
The PaineWebber and Petrisko actions were consolidated and the action was
certified as a class action.  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 certain
claims by the plaintiffs but denied the Company's motion as to plaintiffs' claim
for an 8% royalty on approximately $71,000,000. Thereafter, the parties entered
into a settlement agreement, subject to approval by the court under which
Centocor would make a payment to the class members of $1,300,000.  As a result,
the Company recorded a one-time charge to earnings in the second quarter of 1998
for $1,300,000. On September 11, 1998, the court entered an Order approving the
settlement of the case as fair, adequate and reasonable, and settlement checks
were issued to the class out of the settlement fund on or about November 9, 1998
in accordance with the Order.

  The suit by PaineWebber R&D II, L.P. ("PWR&DII") was filed in the Court of
Chancery of the State of Delaware.  CPIII is named as a nominal defendant and
the Company and Centocor Development Corporation III ("CDCIII"), a wholly owned
subsidiary of the Company which acted as the general partner of CPIII, are named
as defendants against whom relief is sought.  The claim in this case is that at
least $25,000,000 of the money paid by Lilly to the Company in 1992 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 

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

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

  On January 19, 1998, a purported class action captioned Surgener v. Centocor,
Inc. and David P. Holveck was filed in the United States District Court for the
Eastern District of Pennsylvania.  Other similar suits were filed thereafter.
The complaints in these actions charge the Company and its chief executive
officer with having violated the federal securities laws.  Plaintiffs seek to
represent a class of those who purchased Centocor stock between December 2,
1997, and December 16, 1997, inclusive, and allege that defendants made false
and misleading statements in connection with earnings forecasts.  Damages in an
unspecified amount are sought.  The court consolidated the actions and
plaintiffs subsequently filed a consolidated class action complaint.  On June
25, 1998, the defendants filed a motion to dismiss the complaint.  No decision
has been rendered on that motion.  The Company believes these actions are
without merit and intends to defend them vigorously.

  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 

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

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

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

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

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

  The patent litigation in Germany consists of a number of different
proceedings: 1) an infringement suit by Genentech and its licensee against
Boehringer Mannheim GmbH based on the European patent EP 0 093 619 and an
extension based on patents EP 0 217 379 and EP 0 228 862; 2) a nullity suit by
Boehringer Mannheim against the patent EP 0 093 619; 3) a nullity suit by
Boehringer Mannheim against the patent EP 0 217 379; 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 was stayed pending the
outcome of the corresponding nullity action.  Following a hearing in the nullity
action against the patent EP 0 093 619 on July 14, 1998, the court revoked the
claims as originally stated, but allowed alternative claims, the definition of
which and the reasons for which were subsequently set forth by the court.
Boehringer Mannheim, Genentech and Genentech's European licensee have all filed
notices of appeals.  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 early 1999.  At
a hearing on July 28, 1998 in Boehringer Mannheim's nullity suit against the
patent EP 0 217 379, the court directed that further evidence be submitted,
following which a further hearing will be scheduled.  It is expected that that
hearing will not occur until February or March of 1999.  No date has been set
for a hearing on the appeal in the opposition proceedings with regard to patent
EP 0 228 862.  The infringement suit based on patent EP 0 093 619 is now
proceeding, following the decision in the related nullity action.  If any of the
German patent proceedings remain pending at the date when the Company is no
longer dependent on Boehringer Mannheim for the supply of Retavase, the defense
and risk of the remaining proceedings will revert to Boehringer Mannheim.  An
adverse determination in these proceedings could have a material adverse effect
on the Company's ability to market Retavase.

  On March 17, 1998, two additional patents were issued to Genentech, United
States Patent Nos. 5,728,565 (the "565 Patent") and 5,728,566 (the "566
Patent").  The '565 and '566 Patents issued from the same original application
as United States Patent No. 5,185,259, one of the patents at issue in the suit
that Genentech brought in the District of Massachusetts. That same day, March
17, 1998, 

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

Genentech brought suit against the Company (but not Boehringer Mannheim GmbH or
Boehringer Mannheim Corporation) for infringement of the '565 and '566 Patents
in the United States District Court for the Northern District of California. In
that suit, as in Massachusetts, Genentech seeks judgment of infringement, an
injunction, damages, and costs including attorney's fees. The Company answered
the complaint, denying infringement of the '565 and '566 Patents and raising
various affirmative defenses concerning invalidity of those patents. On July 17,
1998, the Company filed an amended answer and counterclaims against Genentech
expanding the affirmative defenses and further alleging that the '565 and '566
Patents are invalid and unenforceable. The amended answer also asserts
counterclaims against Genentech for declaratory judgments of noninfrigement,
invalidity and unenforceability of the '565 and '566 Patents and for
monopolization and attempted monopolization under the federal antitrust laws and
unfair competition under California law. The court has set a trial date in the
case of October 12, 1999. Genentech has filed motions to dismiss the antitrust
and unfair competition claims and has moved to strike certain of Centocor's
affirmative defenses of equitable estoppel and/or implied license, patent
misuse, abandonment and laches. The court held a hearing on those motions on
October 17, 1998. No decision has been rendered. The parties have agreed that,
should the antitrust and unfair competition claims remain in the case, they will
be separated for discovery and trial along with issues relating to damages.
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 

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

January 1997. The Company thereafter acquired the Class B limited partnership
interest. The Company is required to make future royalty payments to the former
limited partners of CPIII based upon future sales of ReoPro.

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

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

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

  Product Liability and Product Recall

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

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

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

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

  Relationship with Fujisawa Pharmaceutical Co., Ltd.

  In August 1996, Centocor entered into an agreement with Fujisawa
Pharmaceutical Co., Ltd., appointing Fujisawa as the exclusive distributor of
ReoPro in Japan.  The Company and Fujisawa will co-develop ReoPro in Japan and
jointly file for Japanese product approval.  Fujisawa shall bear all external
costs associated with the clinical development of ReoPro in Japan and may make
future milestone payments to the Company.

  Relationship with Glaxo Wellcome plc

  In November 1993, Centocor and Glaxo Wellcome plc ("Glaxo Wellcome") entered
into an agreement for the development and marketing of certain of Centocor's
monoclonal antibody-based cancer therapeutic products, including Panorex(R)
(edrecolomab).  In November 1994, Centocor and Glaxo Wellcome amended their
agreement and Glaxo Wellcome became the exclusive worldwide distributor for
Panorex. Under the agreement, Glaxo Wellcome is responsible principally for the
continuing clinical development of Panorex, and Centocor is responsible
principally for 

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

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 them to another
party.

  Relationship with Boehringer Mannheim GmbH and Boehringer Mannheim Corporation

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

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

  Relationship with The DuPont Pharmaceutical Company

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

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

  Relationship with Schering-Plough Corporation

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

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

  Relationship with Biovail Corporation International

  On September 15, 1998, Centocor entered into an agreement with Biovail
Corporation International, making Biovail the exclusive distributor of Retavase
in Canada in exchange for an up-front payment of $4,000,000 and additional
payments on future sales, which will be recognized as income over the life of
the agreement.

                                       18
<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 September 30, 1998, securities classified as trading, available for
sale and held to maturity are summarized below (in thousands).
<TABLE> 
<CAPTION> 

                                                                    Unrealized                   
                                             Adjusted       ----------------------------   Fair
                                               Cost           Gains        (Losses)       Value
                                            -----------     -----------  -----------   -----------
 <S>                                       <C>             <C>          <C>            <C>  
 Trading securities:
   Securities and obligations of
     the U.S. Treasury and other
     U.S. government agencies              $    34,248     $       594  $     (197)    $   34,645
   Other short-term obligations                  4,585              19         (11)         4,593
   Corporate bonds and                                                                             
     commercial paper                           99,075               -            -        99,075
                                            -----------     -----------  -----------    ----------
                                           $   137,908     $       613  $     (208)    $  138,313
                                            ===========     ===========  ===========    ==========
                                                                                                
                                                                    Unrealized               
                                             Adjusted       ------------------------        Fair  
                                               Cost           Gains        (Losses)        Value
                                            -----------     -----------  -----------    ----------
 Investments available for sale:                                                                   
   Equity securities                       $     7,104     $         -  $     (455)    $    6,649
                                            ===========     ===========  ===========    ==========
</TABLE> 

                                      19
<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              $    37,738   $      16  $         -   $   37,754
  Certificates of deposit                        6,130           -            -        6,130
                                            -----------   ---------  -----------   ----------
                                           $    43,868   $      16  $         -   $   43,884
                                            ===========   =========  ===========   ==========

  At September 30, 1998, these securities were classified as follows (in 
  thousands):
  Cash equivalents                         $  65,207
  Short-term investments                     116,974
  Long-term investments                        6,649
                                            ---------
                                           $ 188,830
                                            =========
</TABLE> 
         The Company has agreed to maintain investments with fair values of
$5,840,000 as of September 30, 1998 at a lending bank as collateral for loans
from that bank. See Note 8 -- Debt.

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

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


                                      20
<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):

                                           September 30,   December 31, 
                                                1998           1997     
                                           -------------   ------------ 
               Raw materials             $        6,868  $       4,646  
               Work in process                   23,624         12,850  
               Finished goods                    10,950         10,281  
                                           -------------   ------------ 
                                         $       41,442  $      27,777  
                                           =============   ============ 

         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):

                                                 September 30,   December 31,
                                                     1998           1997
                                                 -------------   ------------
       Acquired regulatory licenses            $       83,376  $           -
       Goodwill                                        37,134              -
       Prepaid royalties related to CPIII              27,098         29,398
       Deferred charges                                16,241         23,084
       Debt issuance costs                             11,805            598
       Other licenses                                  17,652          5,339
       All other                                       59,490          2,869
                                                 -------------   ------------
                                               $      252,796  $      61,288
                                                 =============   ============

         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.


                                      21
<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.


  In June 1997, the Company sold its diagnostic manufacturing facility in
Guildford, England and its related infectious disease product line.  In
connection with the transaction, the Company recorded a one-time charge to
earnings of $4,565,000 in the second quarter of 1997, a component of which was
the write-off of goodwill on the facility and related business.


  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, when cumulative world-wide sales of ReoPro exceed
$600,000,000 and a revision to the royalties payable to the former limited
partners of CPIII. The Company has recorded a current liability for the
$15,800,000 for these probable payments to the former limited partners of CPIII.


NOTE 8
DEBT


  Notes Payable


  Notes payable at September 30, 1998 and December 31, 1997 consists of
$6,316,000 and $5,940,000, respectively, of borrowings under short-term notes at
an interest rate of 3.9% per annum 


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

at September 30, 1998, payable in Dutch guilders no later than March 31, 1999.
These borrowings are secured by investments at the lending bank of $5,840,000.


  Long-term debt


  43/4% Convertible Subordinated Debentures


  On February 20, 1998, the Company issued $460,000,000 aggregate principal
amount of the 43/4% Convertible Subordinated Debentures (the "43/4% Debentures")
due February 15, 2005.  The 43/4% 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 43/4% Debentures are not redeemable by the Company prior to
February 21, 2001. After February 21, 2001, the 43/4% Debentures will be
redeemable by the Company at a redemption price of 102.714% of the principal
amount of the 43/4% Debentures and declining annually.  The holders of the 43/4%
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 43/4% Debentures, subject to prior redemption, to convert any of the
43/4% Debentures or portions thereof into Common Stock of the Company, subject
to the terms of the Indenture.  At September 30, 1998, the aggregate amount of
senior obligations outstanding amounted to $6,316,000.


  63/4% Convertible Subordinated Debentures


  On October 16, 1991, the Company issued $125,000,000 principal amount of 63/4%
Convertible Subordinated Debentures (the "63/4% Debentures") due October 16,
2001. The 63/4% Debentures were initially convertible by the holders into
approximately 2,049,000 shares of the Company's Common Stock at a conversion
price of $61.00 per share at any time prior to redemption or maturity. The 63/4%
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 63/4% Debentures.


  In the second quarter of 1996, the Company purchased $70,235,000 of the 63/4%
Debentures which were subsequently retired. At December 31, 1997, $54,765,000 of
the 63/4% Debentures remained outstanding and were convertible into
approximately 898,000 shares of the Company's Common Stock.


  On April 16, 1998, the remaining $54,765,000 of the 63/4% Debentures were
redeemed at par and were subsequently retired.


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


NOTE 9
INCOME TAXES


  A provision for income taxes of $265,000 and $1,865,000 was recorded for the
three and nine months ended September 30, 1998 as compared to $200,000 for the
three months and $290,000 for the nine months ended September 30, 1997,
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 $345,000,000 of deferred tax assets consisting
primarily of the future tax benefit from net operating loss carryforwards.  The
Company presently has not concluded that it is more likely than not that it will
realize all, or a portion of the benefit of such tax assets. Accordingly, the
Company has recorded a 100% valuation allowance against the asset.  If the
Company determines that all or a part of these deferred tax assets are more
likely than not to be realized through sufficient future profitability based on
the outcome of certain future events, then the Company will reverse all or part
of such valuation allowance and recognize a tax benefit.  Until such tax benefit
is recognized, the Company's effective tax rate is reflective of the utilization
of its net operating loss carryforwards on an annual basis and therefore such
rate is expected to be substantially lower than the statutory rate.  Should all
such deferred tax assets be recognized, the Company expects that its effective
tax rate in future periods will approximate the applicable statutory rates.


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


NOTE 10
SUPPLEMENTAL INFORMATION ON CASH FLOWS


  Interest paid for the three and nine months ended September 30, 1998 was
$10,622,000 and $12,307,000, respectively, as compared to $1,852,000 for the
three and nine months ended 


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

September 30, 1997.


  Income tax payments made for the three and nine months ended September 30,
1998 were $0 and $12,000, respectively, as compared to $14,000 paid for the
three months and $115,000 paid for the nine months ended September 30, 1997.


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


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 in the United
States.


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


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

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

  The value assigned to the acquired research and development related to the
acquisition of 


                                      25
<PAGE>

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


Retavase was determined by identifying the value of a Retavase/ReoPro
combination therapy, which is currently in the research and development phase.
The value was determined by estimating the costs to develop a Retavase/ReoPro
combination therapy into a commercially viable product; estimating the resulting
net cash flows from such a product; and discounting the net cash flows back to
their present value.


         The resulting cash flows from a Retavase/RePro Combination therapy are
based on management's estimates of revenues, cost of sales, research and
devlopment costs, selling, general and administrative costs and income taxes
from such products.

         The nature of the efforts to develop the acquired research and
development into a commercially viable product primarily relate to the
successful completion of Phase II and Phase III clinical trial activities,
demonstrating the ability to successfully manufacture a Retavase/ReoPro
combination therapy as well as obtaining necessary regulatory approvals. There
can be no assurance, however, that a Retavase/ReoPro combination therapy will
prove to be safe and effective, will receive FDA approval or, even if approved,
ultimately will achieve market acceptance.

         The pro forma unaudited comparative Statement of Operations data
excluding the special charges related to the Retavase acquisition and the
Centocor Diagnostics restructuring (described below) 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         For the nine months
       Operations Data                 ended September 30,         ended September 30, 
-----------------------------------  ------------------------     -----------------------
                                       1998           1997          1998          1997
                                     ---------     ----------     ---------     ---------
<S>                                 <C>           <C>            <C>           <C> 
Revenues                            $  87,669     $   63,501     $ 245,612     $ 180,080
Net income (loss)                   $   3,487     $   (6,159)    $  19,850     $ (29,191)
Diluted income (loss) per share     $    0.05     $    (0.09)    $    0.28     $   (0.42)
</TABLE> 


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


  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 market launch
of Remicade, the Company has been evaluating strategic options for Centocor
Diagnostics.


  Charges related to the Centocor Diagnostics, Inc. restructuring consist of (in
thousands):

 
           Severance            $    3,142   
                          
           Asset impairments         2,825
                                  ---------
                                $    5,967
                                  =========     

  Severance payments for the three and nine months ended September 30, 1998 were
$274,000 and $1,050,000, respectively.  The employee group in the restructuring
plan totaled approximately 50.  

  In October 1998, the Company announced that it has signed a definitive
agreement to sell its oncology diagnostics business to Fujirebio, Inc., of
Japan.  Under the agreement, Fujirebio will purchase Centocor Diagnostics' in
vitro diagnostic oncology business, which includes immunoassays using monoclonal
antibody technology that aids in the detection and monitoring of solid tumor
cancers.


                                      27
<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).

         The components of comprehensive income (loss) are (in thousands):
<TABLE> 
<CAPTION> 
                                                     For the three                    For the nine
                                                     months ended                     months ended
                                              ---------------------------   ------------------------------
                                                Sept 30,       Sept 30,        Sept 30,         Sept 30,
                                                  1998           1997            1998             1997
                                              ------------   ------------    ------------     ------------
<S>                                         <C>            <C>             <C>              <C> 
Net income (loss)                           $       3,487  $       4,441   $    (117,540)   $       8,432

Foreign currency translation adjustments            5,597         (1,236)          6,200           (4,483)
Unrealized gain (loss) on marketable
   securities                                        (455)         8,298          (1,418)           8,884
Reclassification adjustment - realized
   gain on available for sale security                  -              -          (6,931)               -
                                              ------------   ------------    ------------     ------------
Subtotal other comprehensive income (loss)          5,142          7,062          (2,149)           4,401
                                              ------------   ------------    ------------     ------------

Total comprehensive income (loss)           $       8,629  $      11,503   $    (119,689)   $      12,833
                                              ============   ============    ============     ============
</TABLE> 


                                      28
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------


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

<TABLE> 
<CAPTION> 
                                                      September 30,   December 31,
                                                           1998           1997
                                                      -------------   ------------
          <S>                                       <C>             <C> 
          Cumulative foreign currency translation                                
             adjustments                            $        5,754  $        (446)
          Unrealized gain (loss) on marketable                                   
             securities                                       (455)         7,894
                                                      -------------   ------------
          Other comprehensive income                $        5,299  $       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.

<TABLE> 
<CAPTION> 
                                           For the three months ended September 30, 1998
                                           ---------------------------------------------
                                                 Income           Shares
                                             (in thousands)   (in thousands)  Per Share
                                               (Numerator)    (Denominator)     Amount
                                             --------------   -------------   ---------
<S>                                        <C>       <C>            <C>      <C>    
Basic EPS                                  $         3,487          70,502   $    0.05    
Incremental shares from assumed exercise                                                  
   of dilutive options and warrants                      -           1,472                 
                                             --------------   -------------               
Diluted EPS                                $         3,487          71,974   $    0.05
                                             ==============   =============               
</TABLE> 

                                      29
<PAGE>
 
                        Centocor, Inc. And Subsidiaries
             Condensed Notes to Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------


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

<TABLE> 
<CAPTION> 

                                           For the three months ended September 30, 1997
                                           ---------------------------------------------
                                                 Income           Shares
                                             (in thousands)   (in thousands)   Per Share
                                               (Numerator)    (Denominator)      Amount
                                             --------------   -------------    ---------
<S>                                        <C>       <C>            <C>      <C>   
Basic EPS                                  $         4,441          69,915   $    0.06
Incremental shares from assumed exercise                                      
   of dilutive options and warrants                      -           2,050                
                                             --------------   -------------               
Diluted EPS                                $         4,441          71,965   $    0.06
                                             ==============   =============               

                                             For the nine months ended September 1997
                                           ---------------------------------------------
                                                 Income           Shares
                                             (in thousands)   (in thousands)   Per Share
                                               (Numerator)    (Denominator)      Amount
                                             --------------   -------------    ---------

Basic EPS                                  $         8,432          69,707    $   0.12
Incremental shares from assumed exercise                                       
   of dilutive options and warrants                      -           1,997                
                                             --------------   -------------               
Diluted EPS                                $         8,432          71,704    $   0.12
                                             ==============   =============   
</TABLE> 
Note 14
Sale of facility and related business

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

Note 15
Subsequent event

         In October 1998, the Company announced that it has signed a definitive
agreement to sell its oncology diagnostics business to Fujirebio, Inc., of
Japan, for approximately $37,500,000. As a result of this transaction, which is
expected to close in the fourth quarter of 1998, Centocor expects to record a
one-time, after-tax gain of approximately $15,000,000, or about $0.20 per share.
Under the agreement, Fujirebio will purchase Centocor Diagnostics' in vitro
diagnostic oncology business, which includes immunoassays using monoclonal
antibody technology that aids in the detection and monitoring of solid tumor
cancers.


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

RESULTS OF OPERATIONS


General


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


  Centocor, Inc. ("Centocor" or the "Company") is a leading biopharmaceutical
company that creates, acquires and markets cost-effective therapies that yield
long-term benefits for patients and the healthcare community.  Its products,
most of which have been developed through monoclonal antibody technology, help
physicians deliver innovative treatments to improve human health and restore
patients' quality of life.


  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 


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

one-time events. The Company's results for the nine months ended September 30,
1998 have been affected by various significant one-time events. Significant one-
time events for the nine months ended September 30, 1998 include certain non-
recurring contract revenue, special charges, litigation charges and the gain on
sale of an investment. Excluding such significant one-time events, the Company's
diluted earnings per share would have been $0.10 for the nine months ended
September 30, 1998.


  On March 13, 1998, the Company completed the acquisition of the U.S. and
Canadian product rights for Retavase(R) (reteplase), a leading acute-care
cardiovascular drug, from Roche Healthcare for $335,000,000 in cash.  The
Company financed the acquisition through the issuance of $460,000,000 principal
amount of its 43/4% Convertible Subordinated Debentures due February 15, 2005
(the "43/4% Debentures") in February 1998.


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


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


  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.


  On September 15, 1998, Centocor entered into an agreement with Biovail
Corporation International, making Biovail the exclusive distributor of Retavase
in Canada in exchange for an up-front payment of $4,000,000 and additional
payments on future sales, which will be recognized as income over the life of
the agreement.


  In April, 1998, Centocor entered into an agreement with Schering-Plough
Corporation ("Schering-Plough"), giving Schering-Plough exclusive worldwide
marketing rights, excluding the United States, Japan and portions of the Far
East, to REMICADE(TM), formerly known as Avakine(TM)


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

(infliximab).  REMICADE is a novel monoclonal antibody approved in the United
States for the treatment of certain Crohn's disease patients and in development
for the treatment of rheumatoid arthritis.


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


  In August 1998, the FDA approved REMICADE for treatment of moderately to
severe active Crohn's disease for the reduction of the signs and symptoms, in
patients who have an inadequate response to conventional therapy.  It is also
indicated as a treatment for patients with fistulizing Crohn's disease for
reduction in the number of enterocutaneous fistula(s).  Shipments to wholesalers
began in September 1998.


  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.


  Panorex, Retavase and REMICADE are trademarks of Centocor.  ReoPro is a
trademark of Lilly.


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


  Centocor has approximately $345,000,000 of deferred tax assets consisting
primarily of the future tax benefit from net operating loss carryforwards.  The
Company presently has not concluded that it is more likely than not that it will
realize all, or a portion of the benefit of such tax assets. 


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

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


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


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


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


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


  For the three months ended September 30, 1998, ReoPro sales to Lilly were
$56,908,000 and Lilly's announced sales to end-users were $86,700,000.  For the
three months ended September 30, 1997 sales to Lilly were $40,686,000 and
Lilly's announced sales to end-users were $63,300,000.  The Company's sales of
Retavase for the three months ended September 30, 1998 were $18,522,000 and
initial sales of REMICADE for the three months ended September 30, 1998 were
$4,023,000.  For the three months ended September 30, 1998, the Company's sales
of Panorex to Glaxo Wellcome were $1,646,000 as compared to $1,835,000 for the
three months ended September 30, 1997.


  The level of the Company's sales of ReoPro to Lilly and of Panorex to Glaxo
Wellcome is dependent upon the orders placed and the levels of inventory
maintained by each of these marketing partners.  The Company expects ReoPro end-
user sales to increase in 1998 as market acceptance 


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

continues to grow. Therefore, the Company expects its sales of ReoPro to Lilly
to increase in 1998 over 1997 levels. Retavase and REMICADE 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 September 30, 1998 were
$6,443,000 as compared to $7,650,000 for the three months ended September 30,
1997.  Diagnostic product sales in 1998 are expected to be lower than sales
levels achieved in 1997.


  In October 1998, the Company announced that it has signed a definitive
agreement to sell its oncology diagnostics business to Fujirebio, Inc., of
Japan, for approximately $37,500,000.  This transaction is expected to close in
the fourth quarter of 1998.


  Under the agreement, Fujirebio will purchase Centocor Diagnostics' in vitro
diagnostic oncology business, which includes immunoassays using monoclonal
antibody technology that aids in the detection and monitoring of solid tumor
cancers.


  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.


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


  Research and development expenses for the three months ended September 30,
1998 decreased as compared to the three months ended September 30, 1997 due
principally to REMICADE, ReoPro and Retavase clinical activities which are
partially being shared with Schering-Plough, Lilly and Biovail, respectively.
The level of the Company's total research and development expenses in future
periods will be dependent upon the extent of clinical trial-related activities.
Research and development expenses are expected to be at about the same level
or increase slightly 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, unstable angina and in stroke. In addition, clinical trial
activities for REMICADE, primarily Phase III trials for the Crohn's disease and
severe

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

rheumatoid arthritis indications, are expected to continue throughout 1998.


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

  Interest income increased for the three months ended September 30, 1998 as
compared to the three months ended September 30, 1997 due to the increase in the
level of the Company's investments as a result of the proceeds from the 43/4%
Debenture offering completed in February 1998.  Interest income in future
periods will depend primarily on the level of the Company's investments and the
rates of return obtained on such investments.

  Interest expense increased for the three months ended September 30, 1998 as
compared to the three months ended September 30, 1997 due to the issuance of the
43/4% Debentures.  Interest expense in 1998 is expected to increase as a result
of the interest on the 43/4% Debentures.  Interest expense in future periods
will depend upon the level of debt outstanding.

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

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

Nine months ended September 30, 1998 compared to the nine months ended September
30, 1997

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

  For the nine months ended September 30, 1998, ReoPro sales to Lilly were
$150,119,000 and Lilly's announced sales to end-users were $257,600,000.  For
the nine months ended September 30, 1997 sales to Lilly were $116,552,000 and
Lilly's announced sales to end-users were $174,900,000.  For the nine months
ended September 30, 1998, the Company's sales of Panorex to Glaxo Wellcome were
$3,174,000 as compared to $4,193,000 for the nine months ended September 30,
1997.  The Company's sales of Retavase for the period beginning March 16, 1998
through September 30, 1998 

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

were $36,023,000. Initial REMICADE sales, which commenced in September 1998,
were $4,023,000.

  Diagnostic product sales for the nine months ended September 30, 1998 were
$20,950,000 as compared to $25,369,000 for the nine months ended September 30,
1997.  Diagnostic product sales in 1998 are expected to be lower than sales
levels achieved in 1997.

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

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

  Research and development expenses for the nine months ended September 30, 1998
decreased as compared to the nine months ended September 30, 1997 due
principally to REMICADE, ReoPro and Retavase clinical activities which are
partially being shared by Schering-Plough, Lilly and Biovail, respectively.
The level of the Company's total research and development expenses in future
periods will be dependent upon the extent of clinical trial-related activities.

  Marketing, general and administrative expenses for the nine months ended
September 30, 1998 increased as compared to the nine months ended September 30,
1997 due principally to the integration of the Company's Retavase and REMICADE
sales force and related infrastructure into the organization, amortization of
the cost of acquired intangibles and continued ReoPro and REMICADE market
development efforts.

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

  Interest income increased for the nine months ended September 30, 1998 as
compared to the nine months ended September 30, 1997 due principally to the
increase in the level of the Company's investments as a result of the proceeds
from the 43/4% Debenture offering completed in February 1998.

  Interest expense increased for the nine months ended September 30, 1998 as
compared to the nine months ended September 30, 1997 due principally to the
issuance of the 43/4% Debentures.  Interest expense in 1998 is expected to
increase as a result of the interest on the 43/4% Debentures 

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

but will be partially offset by the redemption of the Company's remaining 63/4%
Convertible Subordinated Debentures due 2001 (the "63/4% Debentures") completed
in April 1998.

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

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

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

PER SHARE CALCULATIONS

  At September 30, 1998, approximately 4,434,000 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 43/4% Debentures
are not considered Common Stock equivalents and are not included in the
calculation of basic or diluted per share data but would be included in the
calculation of diluted per share data if their effect is dilutive.

  No shares issuable upon conversion of the 43/4% 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 43/4% Debentures in its calculations
of per share data for such periods if the effect would be dilutive.

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

LIQUIDITY AND CAPITAL RESOURCES

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

  The Company's future financial condition is dependent upon the Company's rate
of net cash inflows and, ultimately, upon the achievement of significant and
sustained levels of therapeutic product sales. Under the Company's collaborative
alliances with established pharmaceutical companies, the Company generally
shares sales revenues from products covered by such arrangements with its
partners.  The level of future sales of the Company's products will be dependent
upon several factors, including, but not limited to, the timing and extent of
future regulatory approvals of those products, approval and commercialization of
competitive products and the degree of acceptance of the Company's products in
the marketplace.  There can be no assurance that FDA or other regulatory
authorities will approve expanded labeling for ReoPro and other products or will
approve any other of the Company's product candidates under development for
commercial sale.  Failure to obtain, on a timely basis, initial or expanded
regulatory approvals for the Company's products and product candidates will have
a material adverse effect on the Company.

  At September 30, 1998, the Company had cash, cash equivalents and investments
of $220,806,000, including equity investments of $6,649,000.  For the nine
months ended September 30, 1998, the Company had negative cash flows from
operations of $906,000.  The Company's total cash flows for the nine months
ended September 30, 1998 included the receipt of $448,500,000 representing the
net proceeds from the 43/4% Debentures, $25,000,000 related to the Company's
agreement with Schering-Plough, $7,701,000 representing the proceeds from the
sale of an equity investment in ChromaVision Medical Systems, Inc., $4,000,000
from the Company's agreement with Biovail and $3,131,000 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 September
30,1998 the Company had a note payable of $6,316,000 which is secured by
investments at the lending bank of $5,840,000, and $20,000,000 of its cash is
held in escrow and is restricted based upon the successful completion of certain
milestones in the transfer of the manufacturing of Retavase from Boehringer
Mannheim to Centocor.  The Company's total cash, cash equivalents and
investments increased by $14,176,000 from December 31, 1997, principally as a
result of the issuance of the  43/4% Debentures partially offset by an outflow
of $337,039,000 from the acquisition of Retavase and related costs as well as
capital expenditures relating to the establishment of a U.S. biopharmaceutical
manufacturing facility to support ReoPro and REMICADE production requirements
and the costs related to the integration of the Centocor Retavase and REMICADE
sales force and related infrastructure into the organization.  The Company
believes that its cash, cash equivalents and investments will be 

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

sufficient to fund its operations through at least the end of 1999.

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

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

  Gross property, plant and equipment at September 30, 1998 increased as
compared to December 31, 1997, principally due to the investment of $59,919,000
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 $90,000,000 for its
manufacturing capacity expansion plans in Europe and the establishment of a U.S.
biopharmaceutical manufacturing facility to support ReoPro and REMICADE
production requirements.  The Company continually evaluates the future needs for
its facilities and equipment. There can be no assurance that there will be
losses resulting from sales, or that reserves to reduce the carrying value, of
certain fixed assets will not be required in the future.

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

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

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

                                       40
<PAGE>
 
Item 2:Management's Discussion and Analysis of Financial Condition and Results 
--------------------------------------------------------------------------------
of Operations
-------------

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 those
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.

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" or
"Y2K" 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 the 
Company and various entities with which the company interacts, including the 
Company's marketing partners, suppliers, and various vendors.

  To address the Y2K problem, the Company has established a Year 2000 project
and a Y2K Steering Committee comprised of representatives from key functional
areas. In addition, an Information Technology Association of America certified
Y2K consulting firm has been engaged to assist with the validation and
management of the Year 2000 project. The project encompasses global corporate
initiatives, including the Company's manufacturing facility in the Netherlands
and the United States manufacturing facility which is currently under
construction.

  In a separate project to replace some of the Company's legacy systems, the 
Company is in the process of implementing a new Enterprise Resource Planning 
("ERP") system, which is Y2K compliant, with a goal to complete the initial 
phase of the project by the second quarter of 1999.  The completion of the 
initial phase of this project will result in replacing many of the Company's 
primary financial and manufacturing business applications and will 
simultaneously replace some of 


                                       41
<PAGE>
 
Item 2:Management's Discussion and Analysis of Financial Condition and Results 
--------------------------------------------------------------------------------
of Operations
-------------

the Company's critical systems (i.e., systems which pose risks to revenues, 
manufacturing processes or individuals, property and the environment). 
Centocor's goal is to achieve full Y2K readiness by the end of the third quarter
of 1999.

    The Centocor Year 2000 Project is designed to address three major areas: (1)
Information Technology systems, including business application software; (2)
hardware, equipment and instrumentation, including embedded systems; (3) and 
third party relationships. The Company's approach within each of these areas is 
to inventory, assess and prioritize those systems which present potential Y2K 
problems; remediate (repair, replace or upgrade) non-compliant items; test each 
major area of exposure to ensure compliance; and develop contingency plans to 
minimize potential business interruption.

    As of September 30, 1998, high level risk assessments were completed for all
functional areas. Inventory and assessments for Information Technology
department-supported business systems and infrastructure are complete and
remediation planning is in progress. Inventory and assessments of hardware,
equipment and instrumentation are in process and is scheduled for completion by
the end of 1998. Test plans and scripts are also under development, with testing
to occur as new equipment is acquired or old equipment is replaced. All testing
is scheduled for completion by the end of the second quarterof 1999. Contingency
plans with respect to business systems, hardware, equipment and instrumentation
are being developed and are scheduled for completion by year end 1998.

    The Company has contacted all of its critical suppliers and strategic
business partners with regard to their Year 2000 readiness and remediation
plans, and detailed evaluations of those plans, and their potential impact on
the Company, are being developed. Most of those parties state that they intend
to be Y2K compliant by 2000. 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
affect on the Company. Contingency plans with respect to critical suppliers and
strategic business partners are being developed and are scheduled for completion
by mid-1999.

    The total costs associated with the Year 2000 compliance are not expected to
be material to Centocor's financial position and are estimated at approximately
$3,000,000 to $4,000,000, approximately $500,000 of which has been incurred to
date.

    The foregoing estimated completion times and costs are management's best
estimates and utilize 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 these estimates will be 
achieved and actual results could differ materially from those estimates. 
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, the readiness of 
strategic partners and similar uncertainties. Further, given the complexity of 
the Year 2000 issues, the Company is currently unable at this time to determine 
whether Year 2000

                                      42
<PAGE>
 
Item 2: Management's Discussion and Analysis of Financial Condition and Results 
-------------------------------------------------------------------------------
of Operations
-------------

failures will have a material impact on results of operation, liquidity or
financial condition. The Project is intended to significantly reduce, but not
eliminate, levels of uncertainty about Year 2000 compliance.





                                       43
<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     Rights Agreement, dated as of September 26, 1998, between
                Centocor, Inc. and BankBoston, N.A., as Rights Agent, including
                Resolution of the Board of Directors Establishing and
                Designating the Series A Preferred Stock as Exhibit A, the Form
                of Right Certificate as Exhibit B, and the Summary of Rights as
                Exhibit C (incorporated by reference to Exhibit 4 to the
                Company's Current Report on Form 8-K dated September 28, 1998).

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

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

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

                The Registrant has filed the following reports on Form 8-K since
                the beginning of the quarter ended September 30, 1998:

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

                August 26, 1998                      5

                September 28, 1998                   5

                                       44
<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:     November 16, 1998                   /s/David P. Holveck
                                              ------------------------------
                                              David P. Holveck
                                              Chief Executive Officer
                                              (principal executive officer)
                                            


Date:     November 16, 1998                   /s/Dominic J. Caruso
                                              ------------------------------
                                              Dominic J. Caruso
                                              Senior Vice President and
                                              Chief Financial Officer
                                              (principal financial and
                                              accounting officer)

                                       45