10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2006

Commission file number 1-6571

SCHERING-PLOUGH CORPORATION

(Exact name of registrant as specified in its charter)

New Jersey	22-1918501
State or other jurisdiction of incorporation or organization	(I.R.S. Employer identification No.)
2000 Galloping Hill Road, Kenilworth, NJ	07033
(Address of principal executive offices)	Zip Code

Registrant’s telephone number, including area code:

(908) 298-4000

      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 þ       No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ       Accelerated Filer o       Non-accelerated Filer o

      Indicate whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o       No þ

      Common Shares Outstanding as of March 31, 2006: 1,481,050,377

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS (Unaudited) (Amounts in millions, except per share figures)
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS (Unaudited) (Amounts in millions)
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 1A. Risk Factors
	Item 6. Exhibits
SIGNATURE(S)
EX-12: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-15: AWARENESS LETTER
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS

(Unaudited)

(Amounts in millions, except per share figures)

		Three Months Ended
		March 31,
		2006			2005
Net sales		$	2,551		$	2,369
Cost of sales			893			889
Selling, general and administrative			1,086			1,081
Research and development			481			384
Other (income) /expense, net			(34	)		17
Special charges			—			27
Equity income from cholesterol joint venture			(311	)		(220	)
Income before income taxes			436			191
Income tax expense			86			64
Net income before cumulative effect of a change in accounting principle		$	350		$	127
Cumulative effect of a change in accounting principle, net of tax			(22	)		—
Net income		$	372		$	127
Preferred stock dividends			22			22
Net income available to common shareholders		$	350		$	105
Diluted earnings per common share:
	Earnings available to common shareholders before cumulative effect of a change in accounting principle	$	0.22		$	0.07
	Cumulative effect of a change in accounting principle, net of tax		0.02			—
	Diluted earnings per common share	$	0.24		$	0.07
Basic earnings per common share:
	Earnings available to common shareholders before cumulative effect of a change in accounting principle	$	0.22		$	0.07
	Cumulative effect of a change in accounting principle, net of tax		0.02			—
	Basic earnings per common share	$	0.24		$	0.07
Dividends per common share		$	0.055		$	0.055

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

1

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS

(Unaudited)

(Amounts in millions)

			Three Months Ended
			March 31,
			2006			2005
Operating Activities:
Net income			$	372		$	127
	Cumulative effect of a change in accounting principle, net of tax			(22	)		—
Net income before cumulative effect of a change in accounting principle, net of tax				350			127
Adjustments to reconcile net income to net cash provided by operating activities:
	Special charges			—			27
	Depreciation and amortization			118			118
	Accrued share-based compensation			34			—
Changes in assets and liabilities:
		Accounts receivable		(251	)		(337	)
		Inventories		(17	)		82
		Prepaid expenses and other assets		(88	)		(56	)
		Accounts payable and other liabilities		22			239
Net cash provided by operating activities				168			200
Investing Activities:
	Capital expenditures			(64	)		(83	)
	Dispositions of property and equipment			2			33
	Purchases of investments			(2,246	)		(787	)
	Reduction of investments			523			846
	Other, net			—			(11	)
Net cash used for investing activities				(1,785	)		(2	)
Financing Activities:
	Cash dividends paid to common shareholders			(81	)		(81	)
	Cash dividends paid to preferred shareholders			(22	)		(22	)
	Net change in short-term borrowings			(489	)		(1,169	)
	Other, net			26			9
Net cash used for financing activities				(566	)		(1,263	)
Effect of exchange rates on cash and cash equivalents				(1	)		(7	)
Net decrease in cash and cash equivalents				(2,184	)		(1,072	)
Cash and cash equivalents, beginning of period				4,767			4,984
Cash and cash equivalents, end of period			$	2,583		$	3,912

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions, except per share figures)

		March 31,			December 31,
		2006			2005
ASSETS
Current Assets:
Cash and cash equivalents		$	2,583		$	4,767
Short-term investments			2,539			818
Accounts receivable, net			1,746			1,479
Inventories			1,630			1,605
Deferred income taxes			281			294
Prepaid expenses and other current assets			837			769
	Total current assets		9,616			9,732
Property, plant and equipment			7,228			7,197
Less accumulated depreciation			2,775			2,710
	Property, net		4,453			4,487
Goodwill			205			204
Other intangible assets, net			354			365
Other assets			712			681
	Total assets	$	15,340		$	15,469
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	1,158		$	1,078
Short-term borrowings and current portion of long-term debt			789			1,278
U.S., foreign and state income tax			216			213
Accrued compensation			396			632
Other accrued liabilities			1,596			1,458
	Total current liabilities		4,155			4,659
Long-term Liabilities:
Long-term debt			2,412			2,399
Deferred income tax			115			117
Other long-term liabilities			929			907
	Total long-term liabilities		3,456			3,423
Commitments and contingent liabilities (Note 15)
Shareholders’ Equity:
Mandatory convertible preferred shares — $1 par value; issued: 29; $50 per share face value			1,438			1,438
Common shares — authorized shares: 2,400, $.50 par value; issued: 2,030			1,015			1,015
Paid-in capital			1,472			1,416
Retained earnings			9,741			9,472
Accumulated other comprehensive income			(503	)		(516	)
	Total		13,163			12,825
Less treasury shares: 2006, 549; 2005, 550; at cost			5,434			5,438
	Total shareholders’ equity		7,729			7,387
	Total liabilities and shareholders’ equity	$	15,340		$	15,469

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

      These unaudited condensed consolidated financial statements of Schering-Plough Corporation and subsidiaries (the Company), included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles have been condensed or omitted pursuant to such SEC rules and regulations. Certain prior year amounts have been reclassified to conform to the current year presentation. These statements should be read in conjunction with the accounting policies and notes to consolidated financial statements included in the Company’s 2005 Annual Report on Form 10-K.

      In the opinion of the Company’s management, the financial statements reflect all adjustments necessary for a fair statement of the operations, cash flows and financial position for the interim periods presented.

2. Special Charges

      There were no special charges for the three months ended March 31, 2006. Special charges for the three months ended March 31, 2005 totaled $27 million, primarily related to employee termination costs at a manufacturing facility.

3. Equity Income from Cholesterol Joint Venture

      In May 2000, the Company and Merck & Co., Inc. (Merck) entered into two separate sets of agreements to jointly develop and market certain products in the U.S. including (1) two cholesterol-lowering drugs and (2) an allergy/asthma drug. In December 2001, the cholesterol agreements were expanded to include all countries of the world except Japan. In general, the companies agreed that the collaborative activities under these agreements would operate in a virtual joint venture to the maximum degree possible by relying on the respective infrastructures of the two companies. These agreements generally provide for equal sharing of development costs and for co-promotion of approved products by each company.

      The cholesterol agreements provide for the Company and Merck to jointly develop ezetimibe (marketed as ZETIA in the U.S. and Asia and EZETROL in Europe):

      i. as a once-daily monotherapy;

      ii. in co-administration with any statin drug; and

      iii. as a once-daily fixed-combination tablet of ezetimibe and simvastatin (Zocor), Merck’s cholesterol-modifying medicine. This combination medication (ezetimibe/simvastatin) is marketed as VYTORIN in the U.S. and as INEGY in many international countries.

      ZETIA/ EZETROL (ezetimibe) and VYTORIN/ INEGY (the combination of ezetimibe/simvastatin) are approved for use in the U.S. and have been launched in many international markets.

      The Company utilizes the equity method of accounting in recording its share of activity from the Merck/ Schering-Plough cholesterol joint venture. As such, the Company’s net sales do not include the sales of the joint venture. The cholesterol joint venture agreements provide for the sharing of operating income generated by the joint venture based upon percentages that vary by product, sales level and country. In the U.S. market, the Company receives a greater share of profits on the first $300 million of annual ZETIA sales. Above $300 million of annual ZETIA sales, Merck and Schering-Plough (the Partners) generally share profits equally. Schering-Plough’s allocation of the joint venture income is

4

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

increased by milestones recognized. Further, either Partner’s share of the joint venture’s income from operations is subject to a reduction if the Partner fails to perform a specified minimum number of physician details in a particular country. The Partners agree annually to the minimum number of physician details by country.

      The Partners bear the costs of their own general sales forces and commercial overhead in marketing joint venture products around the world. In the U.S., Canada, and Puerto Rico, the cholesterol agreements provide for a reimbursement to each Partner for physician details that are set on an annual basis. This reimbursed amount is equal to each Partner’s physician details multiplied by a contractual fixed fee. Schering-Plough reports this reimbursement as part of equity income from the cholesterol joint venture. This amount does not represent a reimbursement of specific, incremental and identifiable costs for the Company’s detailing of the cholesterol products in these markets. In addition, this reimbursement amount is not reflective of the Company’s sales effort related to the joint venture as the Company’s sales force and related costs associated with the joint venture are generally estimated to be higher.

      During the first quarter of 2005, the Company recognized $14 million of a $20 million milestone payment related to certain European approvals of VYTORIN.

      Under certain other conditions, as specified in the joint venture agreements with Merck, the Company could earn additional milestones totaling $105 million.

      Costs of the joint venture that the Partners contractually share are a portion of manufacturing costs, specifically identified promotion costs (including direct-to-consumer advertising and direct and identifiable out-of-pocket promotion) and other agreed upon costs for specific services such as market support, market research, market expansion, a specialty sales force and physician education programs.

      Certain specified research and development expenses are generally shared equally by the Partners.

      The unaudited financial information below presents summarized combined financial information for the Merck/ Schering-Plough Cholesterol Partnership for the three months ended March 31, 2006 and 2005:

	Three Months
	Ended
	March 31,
	2006		2005
	(Dollars in
	millions)
Net sales	$	793	$	516
Cost of sales		39		28
Income from operations		458		226

      Amounts related to physician details, among other expenses, that are invoiced by Schering-Plough and Merck in the U.S., Canada and Puerto Rico are deducted from income from operations of the Partnership.

      Schering-Plough’s share of the Partnership’s income from operations for the three months ended March 31, 2006 and 2005 was $266 million and $169 million, respectively. In the U.S. market, Schering-Plough receives a greater share of income from operations on the first $300 million of annual ZETIA sales. As a result, Schering-Plough’s share of the joint venture’s income from operations is generally higher in the first quarter than in subsequent quarters. In addition, during the first quarter of 2005, the Company’s share of equity income from operations includes a milestone of $14 million.

5

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

      The following information provides a summary of the components of the Company’s equity income from the cholesterol joint venture for the three months ended March 31, 2006 and 2005:

		Three Months
		Ended
		March 31,
		2006		2005
		(Dollars in
		millions)
Schering-Plough’s share of income from operations		$	266	$	169
Contractual reimbursement to Schering-Plough for physician details			41		45
Elimination of intercompany profit and other, net			4		6
	Total equity income from cholesterol joint venture	$	311	$	220

      Equity income from the joint venture excludes any profit arising from transactions between the Company and the joint venture until such time as there is an underlying profit realized by the joint venture in a transaction with a party other than the Company or Merck.

      Due to the virtual nature of the cholesterol joint venture, the Company incurs substantial costs, such as selling, general and administrative costs, that are not reflected in equity income and are borne by the overall cost structure of the Company. These costs are reported on their respective line items in the Statements of Condensed Consolidated Operations. The cholesterol agreements do not provide for any jointly owned facilities and, as such, products resulting from the joint venture are manufactured in facilities owned by either the Company or Merck.

      The allergy/asthma agreements provide for the joint development and marketing by the Partners of a once-daily, fixed-combination tablet containing CLARITIN and Singulair. Singulair is Merck’s once-daily leukotriene receptor antagonist for the treatment of asthma and seasonal allergic rhinitis. In January 2002, the Merck/ Schering-Plough respiratory joint venture reported on results of Phase III clinical trials of a fixed-combination tablet containing CLARITIN and Singulair. This Phase III study did not demonstrate sufficient added benefits in the treatment of seasonal allergic rhinitis. The CLARITIN and Singulair combination tablet does not have approval in any country and remains in clinical development with new Phase III clinical trials planned.

4. Share-Based Compensation

      Prior to January 1, 2006, the Company accounted for its stock compensation arrangements using the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and the related Interpretations. Prior to 2006, no stock-based employee compensation cost was reflected in net income, other than for the Company’s deferred stock units, as stock options granted under all other plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

      The Company has adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R), effective January 1, 2006. SFAS 123R requires companies to recognize compensation expense in an amount equal to the fair value of all share-based payments granted to employees. The Company has elected the modified prospective transition method and therefore adjustments to prior periods are not required as a result of adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted after the date of adoption and to any unrecognized expense of awards unvested at the date of adoption based on the grant date fair value. SFAS 123R also

6

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits that had been reflected as operating cash flows be reflected as financing cash flows.

      Under the terms of the Company’s 2002 Stock Incentive Plan, which was approved by the Company’s shareholders, 72 million of the Company’s authorized common shares may be granted as stock options or awarded as deferred stock units to officers and certain employees of the Company through December 2007. As of March 31, 2006, 12 million options and deferred stock units remain available for future year grants under the 2002 Stock Incentive Plan.

      The Company utilizes treasury stock to satisfy stock option exercises and for the issuance of deferred stock units.

      For grants issued to retirement eligible employees prior to the adoption of SFAS 123R, the Company recognized compensation costs over the stated vesting period of the stock option or deferred stock unit with acceleration of any unrecognized compensation costs upon the retirement of the employee. Upon adoption of SFAS 123R, the Company recognizes compensation costs on all share-based grants made on or after January 1, 2006 over the service period, which is the earlier of the employees retirement eligibility date or the service period of the award.

Implementation of SFAS 123R

      In the first quarter, the Company recognized a one-time benefit to income of $22 million for the cumulative effect of a change in accounting principle related to two long-term compensation plans required to be accounted for as liability plans under SFAS 123R.

      Tax benefits recognized related to stock-based compensation and related cash flow impacts were not material during the first quarter of 2006 as the Company is in a U.S. Net Operating Loss position.

Stock Options

      Stock options are granted to employees at exercise prices equal to the fair market value of the Company’s stock at the dates of grant. Stock options generally vest over three years and have a term of 10 years. Certain options granted prior to 2006 vest over longer periods ranging from three to nine years. Compensation costs for all stock options is recognized over the requisite service period for each separately vesting portion of the stock option award. Expense is recognized, net of estimated forfeitures, over the vesting period of the options using an accelerated method. Expense recognized for the three months ended March 31, 2006 was approximately $14 million.

      Fair values for the first quarter of 2006 and 2005 were estimated using the Black-Scholes option-pricing model, based on the following assumptions:

	March 31,			March 31,
	2006			2005
Dividend yield		1.1	%		1.7	%
Volatility		29	%		32	%
Risk-free interest rate		4.6	%		4.0	%
Expected term of options (in years)		6			7

      Dividend yields are based on historical dividend yields. Expected volatilities are based on historical volatilities of the Company’s common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options. The

7

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

expected term of options represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns.

      The amount of cash received from the exercise of stock options was $27 million and $9 million for the three months ended March 31, 2006 and 2005, respectively. The number of shares repurchased by the Company for payment of option exercises for the first quarter of 2006 was not material.

      Stock-based compensation for the three months ended March 31, 2005 was determined using the intrinsic value method. The following table provides supplemental information for the three months ended March 31, 2005 as if stock-based compensation had been computed under SFAS 123:

		Three Months
		Ended
		March 31,
		2005
		(Dollars in
		millions
		except per
		share figures)
Net income available to common shareholders, as reported		$	105
Add back: Expense included in reported net income for deferred stock units			15
Deduct: Pro forma expense as if both stock options and deferred stock units were charged against net income available to common shareholders in accordance with SFAS 123			(36	)
Pro forma net income available to common shareholders using the fair value method		$	84
Diluted earnings per common share:
	Diluted earnings per common share, as reported	$	0.07
	Pro forma diluted earnings per common share using the fair value method		0.06
Basic earnings per common share:
	Basic earnings per common share, as reported	$	0.07
	Pro forma basic earnings per common share using the fair value method		0.06

      Summarized information about stock options outstanding and exercisable at March 31, 2006 is as follows:

	Outstanding						Exercisable
			Weighted-		Weighted-				Weighted-
			Average		Average		Number		Average
	Number of		Remaining		Exercise		of		Exercise
Exercise Price Range	Options		Term in Years		Price		Options		Price
	(In thousands)
					(In thousands)
Under $20		39,352		7.0	$	17.97		28,694	$	18.04
$20 to $30		10,060		9.0		20.83		254		23.71
$30 to $40		15,521		3.9		36.57		15,456		36.59
Over $40		15,054		4.0		46.35		14,864		46.32
		79,987						59,268

      The weighted-average fair value of stock options granted for the three-month periods ended March 31, 2006 and 2005 was $6.35 and $6.39, respectively. The intrinsic value of stock options exercised was $9 million and $6 million for the three-month periods ended March 31, 2006 and 2005, respectively.

8

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The total fair value of shares vested during the three-month periods ended March 31, 2006 and 2005 was $42 million and $48 million, respectively.

      As of March 31, 2006, the total remaining unrecognized compensation cost related to non-vested stock options amounted to $42 million, which will be amortized over the weighted-average remaining requisite service period of 1.9 years.

      The following table summarizes stock option activity for the three-month periods ended March 31, 2006 under the current and prior plans:

					Weighted-
					Average
		Number of			Exercise
		Options			Price
		(In thousands)
Outstanding at January 1			82,484		$	27.00
	Granted		120			19.39
	Exercised		(1,845	)		14.42
	Canceled or expired		(772	)		26.94
Outstanding at March 31			79,987		$	27.28
Exercisable at March 31			59,268		$	30.00

      The aggregate intrinsic value of stock options outstanding at March 31, 2006 was $42 million. The aggregate intrinsic value of stock options currently exercisable at March 31, 2006 was $29 million. Intrinsic value for stock options is calculated based on the exercise price of the underlying awards as compared to the quoted price of the Company’s common stock as of the reporting date.

      The following table summarizes nonvested stock option activity for the three-month period ended March 31, 2006 under the current and prior plans:

					Weighted-
					Average
		Number of			Fair
		Options			Value
		(In thousands)
Nonvested at January 1			28,022		$	6.41
	Granted		120			6.35
	Vested		(7,018	)		6.00
	Forfeited		(405	)		6.12
Nonvested at March 31			20,719		$	6.52

Deferred Stock Units

      The fair value of deferred stock units is determined based on the number of shares granted and the quoted price of the Company’s common stock at the date of grant. Deferred stock units generally vest at the end of three years provided the employee remains in the service of the Company. Expense is recognized on a straight-line basis over the vesting period. Deferred stock units are payable in an equivalent number of common shares. Expense recognized for the three months ended March 31, 2006 and 2005 was $20 million and $15 million, respectively.

9

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

      Summarized information about stock deferred stock units outstanding at March 31, 2006 is as follows:

	Outstanding
			Weighted-
	Number of		Average		Weighted-
	Deferred Stock		Remaining		Average
Deferred Stock Unit Price Range	Units		Term in Years		Fair Value
	(In thousands)
Under $18		1,461		1.4	$	17.20
$18 to $20		2,855		1.1		18.33
$20 to $22		6,587		2.1		20.71
Over $22		367		0.9		34.46
		11,270

      The weighted-average fair value of deferred stock units granted for the three-month periods ended March 31, 2006 and 2005 was $19.45 and $19.58, respectively. The total fair value of deferred stock units vested during the quarter was $1 million and $3 million for the quarter ended March 31, 2006 and 2005, respectively.

      As of March 31, 2006, the total remaining unrecognized compensation cost related to deferred stock units amounted to $146 million, which will be amortized over the weighted-average remaining requisite service period of 1.8 years.

      The following table summarizes deferred stock unit activity for the three-month period ended March 31, 2006 under the current and prior plans:

		Number of
		Nonvested			Weighted-
		Deferred Stock			Average
		Units			Fair Value
		(In thousands)
Nonvested at January 1			11,416		$	20.12
	Granted		55			19.45
	Vested		(26	)		26.45
	Canceled or expired		(175	)		20.23
Nonvested at March 31			11,270		$	20.10

Incentive Plans

      The Company has two compensation plans that are classified as liability plans under SFAS 123R as the ultimate cash payout of these plans will be based on the Company’s stock performance as compared to the stock performance of a peer group. Upon adoption of SFAS 123R on January 1, 2006, the Company recognized a one-time cumulative income effect of a change in accounting principle of $22 million in order to recognize the liability plans at fair value. Income or expense amounts related to these liability plans are based on the change in fair value at each reporting date. Fair value for the plans were estimated using a lattice valuation model using expected volatility assumptions and other assumptions appropriate for determining fair value. The amount recognized in the Statements of Condensed Consolidated Operations for the three months ended March 31, 2006 related to these liability awards was not material.

      As of March 31, 2006, the total remaining unrecognized compensation cost related to the incentive plans amounted to $30 million, which will be amortized over the weighted-average remaining requisite service period of 2.4 years. This amount will vary each reporting period based on changes in fair value.

10

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

5. Other (Income)/ Expense, Net

      The components of other (income)/expense, net are as follows:

	Three Months
	Ended
	March 31,
	2006			2005
	(Dollars in
	millions)
Interest cost incurred	$	50		$	48
Less: amount capitalized on construction		4			3
Interest expense		46			45
Interest income		(68	)		(33	)
Foreign exchange losses		—			4
Other, net		(12	)		1
Total other (income)/expense, net	$	(34	)	$	17

6. Income Taxes

      At December 31, 2005, the Company had approximately $1.5 billion of U.S. Net Operating Losses (U.S. NOLs) for tax purposes available to offset future U.S. taxable income through 2024. The Company generated an additional U.S. NOL during the first quarter of 2006.

      The Company’s tax provisions for the periods ended March 31, 2006 and 2005 primarily relate to foreign taxes and do not include any benefit related to U.S. NOLs. The Company maintains a valuation allowance on its net U.S. deferred tax assets, including the benefit of U.S. NOLs, as management cannot conclude that it is more likely than not the benefit of U.S. net deferred tax assets can be realized.

7. Retirement Plans and Other Post-Retirement Benefits

      The Company has defined benefit pension plans covering eligible employees in the U.S. and certain foreign countries, and the Company provides post-retirement health care benefits to its eligible U.S. retirees and their dependents.

      The components of net pension and other post-retirement benefits expense were as follows:

							Other Post-
	Retirement						Retirement
	Plans						Benefits
	Three Months						Three Months
	Ended						Ended
	March 31,						March 31,
	2006			2005			2006			2005
	(Dollars in millions)
Service cost	$	29		$	27		$	4		$	3
Interest cost		28			35			6			6
Expected return on plan assets		(28	)		(36	)		(3	)		(4	)
Amortization, net		10			11			1			—
Termination benefits		—			2			—			—
Net pension and other post-retirement benefits expense	$	39		$	39		$	8		$	5

11

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

8. Earnings Per Common Share

      The following table reconciles the components of the basic and diluted earnings per common share computations:

	Three Months
	Ended
	March 31,
	2006		2005
	(Dollars and shares
	in millions)
EPS Numerator:
Net income before cumulative effect of a change in accounting principle and preferred stock dividends	$	350	$	127
Add: Cumulative effect of a change in accounting principle, net of tax		22		—
Less: Preferred stock dividends		22		22
Net income available to common shareholders	$	350	$	105
EPS Denominator:
Weighted average shares outstanding for basic EPS		1,480		1,474
Dilutive effect of options and deferred stock units		6		6
Weighted average shares outstanding for diluted EPS		1,486		1,480

      For the three months ended March 31, 2006 and 2005, 47 million and 37 million, respectively, of equivalent common shares issuable under the Company’s stock incentive plans were excluded from the computation of diluted EPS because their effect would have been antidilutive. Also, for the three months ended March 31, 2006 and 2005, 76 million and 79 million common shares, respectively, obtainable upon conversion of the Company’s 6 percent Mandatory Convertible Preferred Stock were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

9. Comprehensive Income

      Comprehensive income is comprised of the following:

		Three Months
		or Ended
		March 31,
		2006			2005
		(Dollars in
		millions)
Net income		$	372		$	127
	Foreign currency translation adjustment		14			(66	)
	Unrealized gain on investments available for sale, net of tax		(1	)		14
Total comprehensive income		$	385		$	75

12

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

10. Inventories

      Inventories consisted of the following:

		March 31,		December 31,
		2006		2005
		(Dollars in millions)
Finished products		$	597	$	665
Goods in process			757		614
Raw materials and supplies			276		326
	Total inventories	$	1,630	$	1,605

11. Other Intangible Assets

      The components of other intangible assets, net are as follows:

	March 31, 2006						December 31, 2005
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
	(Dollars in millions)
Patents and licenses	$	579	$	339	$	240	$	579	$	329	$	250
Trademarks and other		166		52		114		166		51		115
Total other intangible assets	$	745	$	391	$	354	$	745	$	380	$	365

      These intangible assets are amortized on the straight-line method over their respective useful lives. The residual value of intangible assets is estimated to be zero.

12. Short-Term Borrowings

      Short-term borrowings primarily consist of bank loans and commercial paper. Short-term borrowings at March 31, 2006 and December 31, 2005 totaled $789 million and $1.3 billion, respectively.

13. Segment Data

      The Company has three reportable segments: Prescription Pharmaceuticals, Consumer Health Care and Animal Health. The segment sales and profit data that follow are consistent with the Company’s current management reporting structure. The Prescription Pharmaceuticals segment discovers, develops, manufactures and markets human pharmaceutical products. The Consumer Health Care segment develops, manufactures and markets over-the-counter, foot care and sun care products, primarily in the U.S. The Animal Health segment discovers, develops, manufactures and markets animal health products.

13

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Net sales by segment:

	Three Months Ended
	March 31,
	2006		2005
	(Dollars in millions)
Prescription Pharmaceuticals	$	2,032	$	1,846
Consumer Health Care		311		330
Animal Health		208		193
Consolidated net sales	$	2,551	$	2,369

Profit by segment:

	Three Months
	Ended
	March 31,
	2006			2005
	(Dollars in
	millions)
Prescription Pharmaceuticals	$	349		$	160
Consumer Health Care		95			106
Animal Health		30			17
Corporate and other		(38	)		(92	)
Income before income taxes	$	436		$	191

      “Corporate and other” includes interest income and expense, foreign exchange gains and losses, headquarters expenses, special charges and other miscellaneous items. The accounting policies used for segment reporting are the same as those described in Note 1, “Summary of Significant Accounting Policies,” in the Company’s 2005 Form 10-K.

      There were no special charges for the three months ended March 31, 2006. For the three months ended March 31, 2005, “Corporate and other” included special charges of $27 million, including $21 million of employee termination costs and $6 million of asset impairment and other charges. It is estimated that the charges relate to the reportable segments as follows: Prescription Pharmaceuticals — $24 million, Consumer Health Care — $1 million, Animal Health — $1 million and Corporate and other — $1 million.

      Sales of products comprising 10 percent or more of the Company’s U.S. or international sales for the three months ended March 31, 2006, were as follows:

	Amount		Percentage
	(Dollars in millions)		(%)
U.S.
NASONEX	$	144		14
OTC CLARITIN		105		11
International
REMICADE	$	278		18
PEG-INTRON		153		10

14

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

      Schering-Plough’s net sales do not include sales of VYTORIN and ZETIA that are marketed in partnership with Merck, as the Company accounts for this joint venture under the equity method of accounting (see Note 3, “Equity Income From Cholesterol Joint Venture,” for additional information).

      The Company does not disaggregate assets on a segment basis for internal management reporting and, therefore, such information is not presented.

14. Consent Decree

      In May 2002, the Company agreed with the FDA to the entry of a Consent Decree to resolve issues related to compliance with current Good Manufacturing Practices (cGMP) at certain of the Company’s facilities in New Jersey and Puerto Rico (the “Consent Decree” or the “Decree”).

      In summary, the Decree required the Company to make payments totaling $500 million in two equal installments of $250 million, which were paid in 2002 and 2003. In addition, the Decree required the Company to complete revalidation programs for manufacturing processes used to produce bulk active pharmaceutical ingredients and finished drug products at the covered facilities, as well as to implement a comprehensive cGMP Work Plan for each such facility. The Decree required the foregoing to be completed in accordance with strict schedules, and provided for possible imposition of additional payments in the event the Company did not adhere to the approved schedules. Final completion of the work was made subject to certification by independent experts, whose certifications were in turn made subject to FDA acceptance.

      As of September 30, 2005, the Company had completed the revalidation and third party certification of the bulk active pharmaceutical ingredients. As of December 31, 2005, the Company had completed the revalidation and third party certification of the finished drug products. The Company also completed all 212 Significant Steps of the cGMP Work Plan by December 31, 2005. All of these requirements were completed in accordance with the schedules required by the Decree.

      Under the terms of the Decree, provided that the FDA has not notified the Company of a significant violation of FDA law, regulations, or the Decree in the five year period since the Decree’s entry, May 2002 through May 2007, the Company may petition the court to have the Decree dissolved and the FDA will not oppose the Company’s petition.

      Although the Company has reported to the FDA that it has completed both the revalidation programs and the cGMP Work Plan, third party certification of the Work Plan is still pending. It is possible that the third party expert may not certify the completion of a Work Plan Significant Step or that the FDA may disagree with the expert’s certification. In such an event, it is possible that FDA may assess additional payments as permitted under the Decree, and as described in more detail below.

      In general, the cGMP Work Plan contained 212 Significant Steps whose timely and satisfactory completion are subject to payments of $15 thousand per business day for each deadline missed. These payments may not exceed $25 million for 2002, and $50 million for each of the years 2003, 2004 and 2005. These payments are subject to an overall cap of $175 million. The Company would expense any such additional payments assessed under the Decree if and when incurred.

15

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

15.  Legal, Environmental and Regulatory Matters

Background

      The Company is involved in various claims, investigations and legal proceedings.

      The Company records a liability for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company adjusts its liabilities for contingencies to reflect the current best estimate of probable loss or minimum liability as the case may be. Where no best estimate is determinable, the company records the minimum amount within the most probable range of its liability. Expected insurance recoveries have not been considered in determining the amounts of recorded liabilities for environmental-related matters.

      If the Company believes that a loss contingency is reasonably possible, rather than probable, or the amount of loss cannot be estimated, no liability is recorded. However, where a liability is reasonably possible, disclosure of the loss contingency is made.

      The Company reviews the status of all claims, investigations and legal proceedings on an ongoing basis, including related insurance coverages. From time to time, the Company may settle or otherwise resolve these matters on terms and conditions management believes are in the best interests of the Company. Resolution of any or all claims, investigations and legal proceedings, individually or in the aggregate, could have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

      Resolution (including settlements) of matters of the types set forth in the remainder of this Note, and in particular under Investigations, frequently involve fines and penalties of an amount that would be material to its results of operations, cash flows or financial condition. Resolution of such matters may also involve injunctive or administrative remedies that would adversely impact the business such as exclusion from government reimbursement programs, which in turn would have a material adverse impact on the business, future financial condition, cash flows or the results of operations. There are no assurances that the Company will prevail in any of the matters discussed in the remainder of this Note, that settlements can be reached on acceptable terms (including the scope of the release provided and the absence of injunctive or administrative remedies that would adversely impact the business such as exclusion from government reimbursement programs) or in amounts that do not exceed the amounts reserved. Even if an acceptable settlement were to be reached, there can be no assurance that further investigations or litigations will not be commenced raising similar issues, potentially exposing the Company to additional material liabilities. The outcome of the matters discussed below under Investigations could include the commencement of civil and/or criminal proceedings involving the imposition of substantial fines, penalties and injunctive or administrative remedies, including exclusion from government reimbursement programs. Total liabilities reserved reflect an estimate (and in the case of the Investigations, a current estimate of the liability), and any final settlement or adjudication of any of these matters could possibly be less than, or could materially exceed the liabilities recorded in the financial statements and could have a material adverse impact on the Company’s financial condition, cash flows or operations. Further, the Company cannot predict the timing of the resolution of these matters or their outcomes.

      Except for the matters discussed in the remainder of this Note, the recorded liabilities for contingencies at March 31, 2006, and the related expenses incurred during the year ended March 31, 2006, were not material. In the opinion of management, based on the advice of legal counsel, the ultimate outcome of these matters, except matters discussed in the remainder of this Note, will not have a material impact on the Company’s results of operations, cash flows or financial condition.

16

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Patent Matters

      DR. SCHOLL’S FREEZE AWAY Patent. On July 26, 2004, OraSure Technologies filed an action in the U.S. District Court for the Eastern District of Pennsylvania alleging patent infringement by Schering-Plough HealthCare Products by its sale of DR. SCHOLL’S FREEZE AWAY wart removal product. The complaint seeks a permanent injunction and unspecified damages, including treble damages.

Investigations

      Massachusetts Investigation. The U.S. Attorney’s Office for the District of Massachusetts is investigating a broad range of the Company’s sales, marketing and clinical trial practices and programs along with those of Warrick Pharmaceuticals (Warrick), the Company’s generic subsidiary. The investigation is focused on the following alleged practices: providing remuneration to managed care organizations, physicians and others to induce the purchase of Schering pharmaceutical products; off-label marketing of drugs; and submitting false pharmaceutical pricing information to the government for purposes of calculating rebates required to be paid to the Medicaid program. The Company is cooperating with this investigation.

      The outcome of this investigation could include the commencement of civil and/or criminal proceedings involving the imposition of substantial fines, penalties and injunctive or administrative remedies, including exclusion from government reimbursement programs. The Company has recorded a liability of $500 million related to this investigation as well as the investigations described below under “AWP Investigations” and the state litigation described below under “AWP Litigation.” If the Company is not able to reach a settlement at the current estimate, the resolution of this matter could have a material adverse impact on the Company’s results of operations (beyond what has been reflected to date if the Company is not able to reach a settlement at the current estimate), cash flows, financial condition and/or its business.

      AWP Investigations. The Company continues to respond to existing and new investigations by the Department of Health and Human Services, the Department of Justice and several states into industry and Company practices regarding average wholesale price (AWP). These investigations relate to whether the AWP used by pharmaceutical companies for certain drugs improperly exceeds the average prices paid by providers and, as a consequence, results in unlawful inflation of certain government drug reimbursements that are based on AWP. The Company is cooperating with these investigations. The outcome of these investigations could include the imposition of substantial fines, penalties and injunctive or administrative remedies.

      NITRO-DUR Investigation. In August 2003, the Company received a civil investigative subpoena issued by the Office of Inspector General of the U.S. Department of Health and Human Services, seeking documents concerning the Company’s classification of NITRO-DUR for Medicaid rebate purposes, and the Company’s use of nominal pricing and bundling of product sales. The Company is cooperating with the investigation. It appears that the subpoena is one of a number addressed to pharmaceutical companies concerning an inquiry into issues relating to the payment of government rebates.

Pricing Matters

      AWP Litigation. The Company continues to respond to existing and new litigation by certain states and private payors into industry and Company practices regarding average wholesale price (AWP). These litigations relate to whether the AWP used by pharmaceutical companies for certain drugs improperly exceeds the average prices paid by providers and, as a consequence, results in unlawful inflation of certain reimbursements for drugs by state programs and private payors that are based on AWP. The complaints

17

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

allege violations of federal and state law, including fraud, Medicaid fraud and consumer protection violations, among other claims. In the majority of cases, the plaintiffs are seeking class certifications. In some cases, classes have been certified. The outcome of these litigations could include substantial damages, the imposition of substantial fines, penalties and injunctive or administrative remedies.

Securities and Class Action Litigation

      Federal Securities Litigation. Following the Company’s announcement that the FDA had been conducting inspections of the Company’s manufacturing facilities in New Jersey and Puerto Rico and had issued reports citing deficiencies concerning compliance with current Good Manufacturing Practices, several lawsuits were filed against the Company and certain named officers. These lawsuits allege that the defendants violated the federal securities law by allegedly failing to disclose material information and making material misstatements. Specifically, they allege that the Company failed to disclose an alleged serious risk that a new drug application for CLARINEX would be delayed as a result of these manufacturing issues, and they allege that the Company failed to disclose the alleged depth and severity of its manufacturing issues. These complaints were consolidated into one action in the U.S. District Court for the District of New Jersey, and a consolidated amended complaint was filed on October 11, 2001, purporting to represent a class of shareholders who purchased shares of Company stock from May 9, 2000 through February 15, 2001. The complaint seeks compensatory damages on behalf of the class. The Court certified the shareholder class on October 10, 2003. Discovery is ongoing.

      Shareholder Derivative Actions. Two lawsuits were filed in the U.S. District Court for the District of New Jersey, against the Company, certain officers, directors and a former director seeking damages on behalf of the Company, including disgorgement of trading profits made by defendants allegedly obtained on the basis of material non-public information. The complaints allege a failure to disclose material information and breach of fiduciary duty by the directors, relating to the FDA inspections and investigations into the Company’s pricing practices and sales, marketing and clinical trials practices. These lawsuits are shareholder derivative actions that purport to assert claims on behalf of the Company. The two shareholder derivative actions pending in the U.S. District Court for the District of New Jersey were consolidated into one action on August 20, 2001, which is in its very early stages.

      ERISA Litigation. On March 31, 2003, the Company was served with a putative class action complaint filed in the U.S. District Court in New Jersey alleging that the Company, retired Chairman, CEO and President Richard Jay Kogan, the Company’s Employee Savings Plan (Plan) administrator, several current and former directors, and certain corporate officers (Messrs. LaRosa and Moore) breached their fiduciary obligations to certain participants in the Plan. The complaint seeks damages in the amount of losses allegedly suffered by the Plan. The complaint was dismissed on June 29, 2004. The plaintiffs appealed. On August 19, 2005, the U.S. Court of Appeals for the Third Circuit reversed the dismissal by the District Court and the matter has been remanded back to the District Court for further proceedings.

      K-DUR Antitrust Litigation. K-DUR is Schering-Plough’s long-acting potassium chloride product supplement used by cardiac patients. Following the commencement of the FTC administrative proceeding described below, alleged class action suits were filed in federal and state courts on behalf of direct and indirect purchasers of K-DUR against Schering-Plough, Upsher-Smith, Inc. (Upsher-Smith) and ESI Lederle, Inc. (Lederle). These suits claim violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. These suits seek unspecified damages. Discovery is ongoing.

Antitrust Matters

      K-DUR. Schering-Plough had settled patent litigation with Upsher-Smith and Lederle which had related to generic versions of K-DUR for which Lederle and Upsher Smith had filed Abbreviated

18

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

New Drug Applications (ANDAs). On April 2, 2001, the FTC started an administrative proceeding against Schering-Plough, Upsher-Smith and Lederle alleging anti-competitive effects from those settlements. The administrative law judge issued a decision that the patent litigation settlements complied with the law in all respects and dismissed all claims against the Company. The FTC Staff appealed that decision to the full Commission. The full Commission reversed the decision of the administrative law judge ruling that the settlements did violate the antitrust laws. The full Commission issued a cease and desist order imposing various injunctive restraints. The federal court of appeals set aside the Commission ruling and vacated the cease and desist order. On August 29, 2005, the FTC filed a petition seeking a hearing by the U.S. Supreme Court.

Pending Administrative Obligations

      In connection with the settlement of an investigation with the U.S. Department of Justice and the U.S. Attorney’s Office for the Eastern District of Pennsylvania, the Company entered into a five-year corporate integrity agreement (CIA). As disclosed in Note 14 “Consent Decree,” the Company is subject to obligations under a Consent Decree with the FDA. Failure to comply with the obligations under the CIA or the Consent Decree can result in financial penalties.

Other Matters

      Biopharma Contract Dispute. Biopharma S.r.l. filed a claim in the Civil Court of Rome on July 21, 2004 (docket No. 57397/2004, 9^th Chamber) against certain Schering-Plough subsidiaries. The Complaint alleges that the Company did not fulfill its duties under distribution and supply agreements between Biopharma and a Schering-Plough subsidiary for distribution by Schering-Plough of generic products manufactured by Biopharma to hospitals and to pharmacists in France.

Tax Matters

      In October 2001, IRS auditors asserted that two interest rate swaps that the Company entered into with an unrelated party should be recharacterized as loans from affiliated companies, resulting in additional tax liability for the 1991 and 1992 tax years. In September 2004, the Company made payments to the IRS in the amount of $194 million for income tax and $279 million for interest. The Company filed refund claims for the tax and interest with the IRS in December 2004. Following the IRS’s denial of the Company’s claims for a refund, the Company filed suit in May 2005 in the U.S. District Court for the District of New Jersey for refund of the full amount of the tax and interest. This refund litigation is currently in the discovery phase. The Company’s tax reserves were adequate to cover the above mentioned payments.

Environmental

      The Company has responsibilities for environmental cleanup under various state, local and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. At several Superfund sites (or equivalent sites under state law), the Company is alleged to be a potentially responsible party (PRP). The Company believes that it is remote at this time that there is any material liability in relation to such sites. The Company estimates its obligations for cleanup costs for Superfund sites based on information obtained from the federal Environmental Protection Agency (EPA), an equivalent state agency and/or studies prepared by independent engineers, and on the probable costs to be paid by other PRPs. The Company records a liability for environmental assessments and/or cleanup when it is probable a loss has been incurred and the amount can be reasonably estimated.

19

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Schering-Plough Corporation:

      We have reviewed the accompanying condensed consolidated balance sheet of Schering-Plough Corporation and subsidiaries (the “Corporation”) as of March 31, 2006, and the related condensed consolidated statements of income and cash flow for the three-month periods ended March 31, 2006 and 2005. These interim financial statements are the responsibility of the Corporation’s management.

      We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

      Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

      We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Schering-Plough Corporation and subsidiaries as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

      As discussed in Note 4 to the condensed consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment”.

/s/  Deloitte & Touche LLP

Parsippany, New Jersey

April 27, 2006

20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE OVERVIEW

Overview of the Company

      Schering-Plough (the Company) discovers, develops, manufactures and markets medical therapies and treatments to enhance human health. The Company also markets leading consumer brands in the over-the-counter (OTC), foot care and sun care markets and operates a global animal health business.

      As a research-based pharmaceutical company, a core strategy of Schering-Plough is to invest substantial funds in scientific research with the goal of creating therapies and treatments with important medical and commercial value. Consistent with this core strategy, the Company has been increasing its investment in research and development, and this trend is expected to continue at historic levels or greater. Research and development activities focus on mechanisms to treat serious diseases. There is a high rate of failure inherent in such research and, as a result, there is a high risk that the funds invested in research programs will not generate financial returns. This risk profile is compounded by the fact that this research has a long investment cycle. To bring a pharmaceutical compound from the discovery phase to the commercial phase may take a decade or more.

      There are two sources of new products: products acquired through acquisition and licensing arrangements, and products in the Company’s late-stage research pipeline. With respect to acquisitions and licensing, there are limited opportunities for obtaining or licensing critical late-stage products, and these limited opportunities typically require substantial amounts of funding. The Company competes for these opportunities against companies often with greater financial resources. Accordingly, it may be challenging for the Company to acquire or license critical late-stage products that will have a positive material financial impact.

      The Company supports commercialized products with manufacturing, sales and marketing efforts. The Company is also moving forward with additional investments to enhance its infrastructure and business, including capital expenditures for the development process, where products are moved from the drug discovery pipeline to markets, information technology systems, and post-marketing studies and monitoring.

      Certain past events remain relevant to understand the Company’s current challenges. These events include but were not limited to, entering into a formal Consent Decree with the FDA in 2002 and the investigations related to certain of the Company’s sales and marketing practices by the U.S. Attorney’s Office for the District of Massachusetts.

      Beginning in April 2003, the Board of Directors named Fred Hassan as the new Chairman of the Board and Chief Executive Officer of Schering-Plough Corporation. Under his leadership, a new leadership team was recruited and a six- to eight-year, five-phase Action Agenda was formulated with the goal of stabilizing, repairing and turning around the Company. In October 2005, the Company announced that it entered the third phase of the Action Agenda, the Turnaround phase.

      The Company’s financial situation continues to improve, as discussed below. The Company’s cholesterol franchise products, VYTORIN and ZETIA, are the primary drivers of this improvement. ZETIA is the Company’s novel cholesterol absorption inhibitor. VYTORIN is the combination of ZETIA and Zocor, Merck & Co., Inc.’s (Merck) statin medication. These two products have been launched through a joint venture between the Company and Merck. ZETIA (ezetimibe), marketed in Europe as EZETROL, is marketed for use either by itself or together with statins for the treatment of elevated cholesterol levels. ZETIA/ EZETROL has been launched in more than 70 countries. VYTORIN (ezetimibe/simvastatin), marketed as INEGY internationally, has been launched in over 30 countries, including the United States.

      The Company currently expects its cholesterol franchise to continue to grow. The financial commitment to compete in the cholesterol reduction market is shared with Merck and profits from the sales of VYTORIN and ZETIA are also shared with Merck. The operating results of the joint venture with Merck are recorded using the equity method of accounting. Outside of the joint venture with Merck,

21

in the Japanese market, Bayer Healthcare will co-market the Company’s cholesterol-absorption inhibitor, ZETIA, upon approval. Due to a backlog of new drug applications in Japan, the Company cannot precisely predict the timing of this approval.

      The cholesterol-reduction market is the single largest pharmaceutical category in the world. VYTORIN and ZETIA are competing in this market, and on a combined basis, these products have continued to grow in terms of market share during 2006. As a franchise, the two products combined are poised to cross the 15 percent threshold of new prescriptions in the U.S. cholesterol management market (based on March 2006 IMS data). VYTORIN currently ranks as the third-leading prescription product for treating patients with high cholesterol (based on new prescriptions).

      During 2005, the Company’s results of operations and cash flows were driven significantly by the performance of VYTORIN and ZETIA. As a result, the Company’s ability to generate profits is predominantly dependent upon the performance of the VYTORIN and ZETIA cholesterol franchise, which dependence is expected to continue for some time. For the first three months of 2006, equity income from the cholesterol joint venture was $311 million and net income available to common shareholders was $350 million. Additional information regarding the joint venture with Merck is also included in Note 3, “Equity Income from Cholesterol Joint Venture,” in this 10-Q. Although it is expected that operating cash flow and existing cash and short-term investments will fund the Company’s operations for the intermediate term, as discussed in more detail below, future cash flows are also dependent upon the performance of VYTORIN and ZETIA. The Company must generate profits and cash flows to maintain and enhance its infrastructure and business as discussed above.

      Sales of the products may be impacted by the introduction of new innovative competing treatments and generic versions of existing products. In this regard, the Company expects that generic forms of Pravachol and Zocor, two existing well-established cholesterol-management products, will be introduced in the U.S. as they lose patent protection beginning in 2006 (generics had been introduced during 2005 in some international markets). The Company cannot reasonably predict what effect the introduction of generic forms of cholesterol management products may have on VYTORIN and ZETIA, although the decisions of government entities, managed care groups and other groups concerning formularies and reimbursement policies could potentially negatively impact the dollar size and/or growth of the cholesterol management market, including VYTORIN and ZETIA. A material change in the sales or market share of VYTORIN and ZETIA would have a significant impact on the Company’s operations and cash flow.

      REMICADE is prescribed for the treatment of immune-mediated inflammatory disorders such as rheumatoid arthritis, early rheumatoid arthritis, psoriatic arthritis, Crohn’s disease, ankylosing spondylitis, plaque psoriasis and ulcerative colitis. REMICADE is the Company’s second largest marketed pharmaceutical product line (after the cholesterol franchise). This product is licensed from and manufactured by Centocor, Inc., a Johnson & Johnson company. The Company has the exclusive marketing rights to this product outside of the U.S., Japan, China (including Hong Kong), Taiwan and Indonesia. During 2005, the Company exercised an option under its contract with Centocor for license rights to develop and commercialize golimumab, a fully human monoclonal antibody, in the same territories as REMICADE. Golimumab is currently under Phase III trials. Centocor believes these rights to golimumab expire in 2014, while the Company believes these rights extend beyond 2014. The parties are working together to move forward with their collaboration on golimumab, and steps are being taken to resolve the difference of opinion as to the expiration date.

      As is typical in the pharmaceutical industry, the Company licenses manufacturing, marketing and/or distribution rights to certain products to others, and also manufactures, markets and/or distributes products owned by others pursuant to licensing and joint venture arrangements. Any time that third parties are involved, there are additional factors relating to the third party and outside the control of the Company that may create positive or negative impacts on the Company. VYTORIN, ZETIA and REMICADE are subject to such arrangements and are key to the Company’s current business and financial performance.

      In addition, any potential strategic alternatives may be impacted by the change of control provisions in those arrangements, which could result in VYTORIN and ZETIA being acquired by Merck or

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REMICADE reverting back to Centocor. The change in control provision relating to VYTORIN and ZETIA is included in the contract with Merck, filed as Exhibit 10(q) to the Company’s 10-K, and the change of control provision relating to REMICADE is contained in the contract with Centocor, filed as Exhibit 10(u) to the Company’s 10-K.

Current State of the Business

      First quarter 2006 net sales of $2.6 billion were 8 percent higher than the 2005 period. As discussed below, the sales increase was driven primarily by the growth of REMICADE, NASONEX, TEMODAR and PEG-INTRON. The sales growth included a 5 percent unfavorable impact from foreign exchange.

      The Company had net income available to common shareholders of $350 million in the first quarter of 2006 as compared to $105 million in the first quarter of 2005. The net income available to common shareholders in the first quarter of 2006 included income of $22 million resulting from the cumulative effect of a change in accounting principle, net of tax, related to the implementation of SFAS 123R related to stock-based compensation.

      Many of the Company’s manufacturing sites operate below capacity. The Company’s manufacturing sites subject to the Consent Decree remained open while the Company was performing its revalidation and cGMP Work Plan obligations under decree. However, the Consent Decree work placed significant additional controls on production and release of products from these sites, which increased costs and slowed production and led to a reduction in the product mix at the sites. Further, the Company’s research and development operations were negatively impacted by the Consent Decree because these operations share common facilities with the manufacturing operations. Although certain costs, such as those associated with third party certifications, will decrease when the completion of the Work Plan is certified, other financial impacts will continue, such as the costs of the new processes that will continue to be used and the reduced product mix and volumes at the sites.

      The Company’s manufacturing cost base is relatively fixed. Actions on the part of management to significantly reduce the Company’s manufacturing infrastructure involve complex issues. In most cases, shifting products between manufacturing plants can take many years due to construction, revalidation and registration requirements. Management continues to review the carrying value of certain manufacturing assets for indications of impairment. Future events and decisions may lead to asset impairments and/or related costs.

      During 2005, the Company repatriated approximately $9.4 billion of previously unremitted foreign earnings at a reduced tax rate as provided by the American Jobs Creation Act of 2004 (AJCA). Repatriating funds under the AJCA benefited the Company by allowing the Company to fund U.S. cash needs while preserving U.S. NOLs.

DISCUSSION OF OPERATING RESULTS

Net Sales

      A significant portion of net sales is made to major pharmaceutical and health care products distributors and major retail chains in the U.S. Consequently, net sales and quarterly growth comparisons may be affected by fluctuations in the buying patterns of major distributors, retail chains and other trade buyers. These fluctuations may result from seasonality, pricing, wholesaler buying decisions or other factors.

      Consolidated net sales for the three months ended March 31, 2006 totaled $2.6 billion, an increase of $182 million or 8 percent compared with the same period in 2005, reflecting higher volumes tempered by a 5 percent unfavorable impact from foreign exchange.

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      Net sales for the three months ended March 31, 2006 and 2005 were as follows:

						Increase
		2006		2005		(Decrease)
						(%)
		(Dollars in millions)
PRESCRIPTION PHARMACEUTICALS		$	2,032	$	1,846		10
	REMICADE		278		220		26
	NASONEX		229		183		25
	PEG-INTRON		196		170		16
	TEMODAR		163		131		25
	CLARINEX/ AERIUS		160		144		11
	CLARITIN Rx		101		111		(9	)
	AVELOX		80		73		10
	INTEGRILIN		80		75		6
	REBETOL		78		64		22
	INTRON A		60		73		(18	)
	CAELYX		51		43		18
	SUBUTEX		48		51		(6	)
	ELOCON		34		41		(17	)
	CIPRO		25		37		(32	)
	Other Pharmaceutical		449		430		4
CONSUMER HEALTH CARE			311		330		(6	)
	OTC(a)		153		162		(6	)
	Foot Care		83		84		(2	)
	Sun Care		75		84		(10	)
ANIMAL HEALTH			208		193		8
CONSOLIDATED NET SALES		$	2,551	$	2,369		8

(a) Includes OTC CLARITIN of $111 million and $116 million in 2006 and 2005, respectively.

      International net sales of REMICADE, for the treatment of immune-mediated inflammatory disorders such as rheumatoid arthritis, early rheumatoid arthritis, psoriatic arthritis, Crohn’s disease, ankylosing spondylitis, plaque psoriasis and ulcerative colitis, were up $58 million or 26 percent in the first quarter of 2006 to $278 million primarily due to greater demand, expanded indications and continued market growth. In January 2006, REMICADE was approved for the additional indication of ulcerative colitis in Europe. In the near future, additional competitive products for the indications referred to above are likely to be introduced.

      Global net sales of NASONEX Nasal Spray, a once-daily corticosteroid nasal spray for allergies, rose 25 percent to $229 million in the first quarter of 2006, with U.S. sales climbing 33 percent to $144 million and international sales climbing 14 percent to $85 million, as the product captured greater U.S. and international market share versus the 2005 period. Generic Flonase (fluticasone propionate) was approved in 2006 and may unfavorably impact the corticosteroid nasal spray market.

      Global net sales of PEG-INTRON Powder for Injection, a pegylated interferon product for treating hepatitis C, increased 16 percent to $196 million in the first quarter of 2006, driven by growth in Japan due to a new indication for the treatment of hepatitis patients other than genotype 1. Sales growth was also driven by continuation of treatment in patients with genotype 1 hepatitis. Sales in Japan during 2005 benefited from the significant number of patients who were waiting for approval of PEG-INTRON before beginning treatment (“patient warehousing”). In the second half of 2006, the Company’s hepatitis

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franchise in Japan may be impacted by tougher comparisons as the bolus of initially treated patients complete therapy.

      Global net sales of TEMODAR Capsules, a treatment for certain types of brain tumors, increased $32 million or 25 percent to $163 million in the first quarter of 2006 due to increased utilization for treating newly diagnosed glioblastoma multiforme (GBM), which is the most prevalent form of brain cancer. This new indication was granted U.S. FDA approval in March 2005. In June 2005, TEMODAR received approval from the European Commission for use in combination with radiotherapy for GBM patients in twenty-five member states as well as in Iceland and Norway. The growth rates for TEMODAR may moderate going forward, as significant market penetration has already been achieved in the treatment of GBM, especially in the U.S. In Japan, TEMODAR was granted a priority review of the regulatory application to treat malignant glioma in the fourth quarter of 2005.

      Global net sales of CLARINEX (marketed as AERIUS in many countries outside the U.S.), for the treatment of seasonal outdoor allergies and year-round indoor allergies, increased 11 percent to $160 million in the first quarter of 2006. Sales outside the U.S. rose 17 percent to $90 million in the first quarter due to increased demand. In September 2005, generic Allegra (fexofenadine) was introduced to the U.S., which may continue to negatively affect the antihistamine market including CLARINEX.

      International net sales of prescription CLARITIN decreased 9 percent to $101 million in the first quarter of 2006 due to lower sales in Japan resulting from an unusually severe allergy season in 2005.

      Net sales of AVELOX, a fluoroquinolone antibiotic for the treatment of certain respiratory and skin infections, sold in the U.S. by Schering-Plough as a result of the Company’s license agreement with Bayer, increased $7 million or 10 percent to $80 million in 2006 due to market share growth and new indications.

      Global net sales of INTEGRILIN Injection, a glycoprotein platelet aggregation inhibitor for the treatment of patients with acute coronary syndrome, which is sold primarily in the U.S. by Schering-Plough, increased 6 percent to $80 million in the first quarter of 2006, due in part to favorable trade inventory comparisons.

      Global net sales of REBETOL Capsules, for use in combination with INTRON A or PEG-INTRON for treating hepatitis C, increased 22 percent to $78 million in the first quarter of 2006, driven by growth in Japan due to a new indication for the treatment of hepatitis patients other than genotype 1. Sales growth was also driven by continuation of treatment in patients with genotype 1 hepatitis. Sales in Japan during 2005 benefited from the significant number of patients who were waiting for approval of PEG-INTRON before beginning treatment (“patient warehousing”). In the second half of 2006, the Company’s hepatitis franchise in Japan may be impacted by tougher comparisons as the bolus of initially treated patients complete therapy. Sales of REBETOL going forward will also be impacted by larger than average government mandated price reductions in Japan.

      Global net sales of INTRON A Injection, for chronic hepatitis B and C and other antiviral and anticancer indications, decreased 18 percent to $60 million in the first quarter of 2006 due primarily to the conversion to PEG-INTRON in Japan.

      International sales of CAELYX, for the treatment of ovarian cancer, metastatic breast cancer and Kaposi’s sarcoma, increased 18 percent to $51 million in the first quarter of 2006 largely as a result of increased use in treating ovarian and breast cancer.

      International net sales of SUBUTEX Tablets, for the treatment of opiate addiction, decreased 6 percent to $48 million in the first quarter of 2006, due to an unfavorable impact from foreign exchange. It is expected that SUBUTEX will encounter generic competition in the near future.

      Global net sales of ELOCON cream, a medium-potency topical steroid, decreased 17 percent to $34 million in the first quarter of 2006, reflecting generic competition introduced in the U.S. during the first quarter of 2005. Generic competition is expected to continue to adversely affect sales of this product.

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      Net sales of CIPRO, a fluoroquinolone antibiotic for the treatment of certain respiratory, skin, urinary tract and other infections, sold in the U.S. by Schering-Plough as a result of the Company’s license agreement with Bayer, decreased 32 percent to $25 million in the first quarter of 2006 due to market share erosion from branded and generic competition.

      Other pharmaceutical net sales include a large number of lower sales volume prescription pharmaceutical products. Several of these products are sold in limited markets outside the U.S., and many are multiple source products no longer protected by patents. The products include treatments for respiratory, cardiovascular, dermatological, infectious, oncological and other diseases.

      Global net sales of Consumer Health Care products, which include OTC, foot care and sun care products, decreased $19 million or 6 percent to $311 million in the first quarter of 2006. Sales of OTC CLARITIN were $111 million in the first quarter of 2006, a decrease of $5 million from 2005, reflecting the continued adverse impact on sales of CLARITIN-D due to restrictions on the retail sale of OTC products containing pseudoephedrine (PSE). Sales of CLARITIN-D may continue to be adversely affected by both recent and future restrictions on the retail sale of such products. In addition, OTC CLARITIN continues to face competition from private label and branded loratadine.

      The Company sells numerous non-prescription upper respiratory products which contain PSE, an FDA-approved ingredient for the relief of nasal congestion. The Company’s annual North American sales of non-prescription upper respiratory products that contain PSE totaled approximately $277 million in 2005 and $66 million and $80 million for the three months ended March 31, 2006 and 2005, respectively. These products include all CLARITIN-D products as well as some DRIXORAL, CORICIDIN and CHLOR-TRIMETON products. The Company understands that PSE has been used in the illicit manufacture of methamphetamine, a dangerous and addictive drug. For some time, many states, Canada and Mexico have enacted regulations concerning the non-prescription sale of products containing PSE. In March 2006, the U.S. federal government enacted the Combat Meth Epidemic Act that requires the retailers to place non-prescription PSE containing products behind the counter or away from customers’ direct access and places other administrative restrictions on the purchase of these products. Depending on the manner in which the law is implemented by retailers, sales and the level of returns of these products may be impacted. The Company continues to monitor developments in this area and is working to mitigate further negative impact on operations or financial results. These regulations do not relate to the sale of prescription products, such as CLARINEX-D products, that contain PSE.

      Global net sales of Animal Health products increased 8 percent in the first quarter of 2006 to $208 million. The increased sales reflected growth of core brands across most geographic and species areas, led by higher sales of seasonal livestock and companion animal products. The sales growth was tempered by an unfavorable impact from foreign exchange of 6 percent.

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Costs, Expenses and Equity Income

      A summary of costs, expenses and equity income for the three months ended March 31, 2006 and 2005 is as follows:

							Increase
	2006			2005			(Decrease)
							(%)
	(Dollars in millions)
Cost of sales	$	893		$	889			—
Selling, general and administrative (SG&A)		1,086			1,081			—
Research and development (R&D)		481			384			25
Other (income)/expense, net		(34	)		17			N/M
Special charges		—			27			N/M
Equity income from cholesterol joint venture		(311	)		(220	)		42

N/ M — Not a meaningful percentage.

Substantially all the sales of cholesterol products are not included in the Company’s net sales. The results of these sales are reflected in equity income from cholesterol joint venture. In addition, due to the virtual nature of the joint venture, the Company incurs substantial selling, general and administrative expenses that are not captured in equity income but are included in the Company’s Statements of Condensed Consolidated Operations. As a result, the Company’s gross margin, and ratios of SG&A expenses and R&D expenses as a percentage of net sales do not reflect the impact of the joint venture’s operating results.

Gross margin

      Gross margin increased to 65.0 percent in the first quarter of 2006 as compared to 62.5 percent in 2005, primarily due to increased sales of higher margin products and supply chain efficiency improvements, partly offset by royalties for INTEGRILIN. The restructuring of the INTEGRILIN agreement has substantially offsetting effects, generally increasing cost of sales due to increased royalties offset by reduced selling, general and administrative expenses. The restructured agreement calls for minimum royalty payments of $85 million per year to Millennium for 2006 and 2007.

Selling, general and administrative

      Selling, general and administrative expenses (SG&A) were $1.1 billion in the first quarter of 2006, essentially flat versus the prior year period. SG&A in the first quarter of 2006 reflected the favorable impacts from foreign exchange and the restructured INTEGRILIN agreement tempered by increased selling expenses in Europe to support the continued launch of ZETIA and VYTORIN.

Research and development

      Research and development (R&D) spending increased 25 percent to $481 million in the first quarter of 2006. The increase was primarily due to increased R&D headcount, higher costs associated with clinical trials, and an upfront licensing payment to PTC Therapeutics, Inc. Generally, changes in R&D spending reflect the timing of the Company’s funding of both internal research efforts and research collaborations with various partners to discover and develop a steady flow of innovative products.

      The Company believes it has a strong Early Development pipeline across a wide-range of therapeutic areas with 17 compounds now approaching or in Phase I development. As the Company continues to develop the later phase growth-drivers of the pipeline (e.g., Thrombin Receptor Antagonist, vicriviroc and HCV protease inhibitor), the Company anticipates an approximate doubling of annual patient enrollment in clinical trials over the next 2-4 years versus 2005 levels.

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      The Company expects R&D spending to increase as compared to prior years reflecting the progression of the Company’s early-stage pipeline and increased clinical trial activity. To maximize the Company’s chances for the successful development of new products, the Company began a Development Excellence initiative in 2005 to build talent and critical mass, create a uniform level of excellence and deliver on high-priority programs within R&D. In 2006 the Company has begun a Global Clinical Harmonization Program to maximize and globalize the quality of clinical trial execution and pharmacovigilance processes.

Other (income)/expense, net

      The Company had $34 million of other income, net, in the first quarter of 2006 as compared to $17 million of other expense, net, in 2005, due primarily to higher interest rates on cash equivalents and short-term investments.

Special Charges

      There were no special charges for the three months ended March 31, 2006. Special charges for the three months ended March 31, 2005 totaled $27 million, primarily related to employee termination costs at a manufacturing facility.

Equity Income from Cholesterol Joint Venture

      Global cholesterol franchise sales, which include sales made by the Company and the cholesterol joint venture with Merck of VYTORIN and ZETIA, totaled $786 million and $509 million during the three months ended March 31, 2006 and 2005, respectively. As a franchise, the two products combined are poised to cross the 15 percent threshold of new prescriptions in the U.S. cholesterol management market (based on March 2006 IMS data). VYTORIN has been launched in more than 30 countries, including the U.S. in August 2004. ZETIA has been launched in more than 70 countries.

      The Company utilizes the equity method of accounting for the joint venture. Sharing of income from operations is based upon percentages that vary by product, sales level and country. The Company’s allocation of joint venture income is increased by milestones earned. Merck and Schering-Plough (the Partners) bear the costs of their own general sales forces and commercial overhead in marketing joint venture products around the world. In the U.S., Canada and Puerto Rico, the joint venture reimburses each Partner for a pre-defined amount of physician details that are set on an annual basis. The Company reports this reimbursement as part of equity income from the cholesterol joint venture. This reimbursement does not represent a reimbursement of specific, incremental and identifiable costs for the Company’s detailing of the cholesterol products in these markets. In addition, this reimbursement amount is not reflective of Schering-Plough’s sales effort related to the joint venture as Schering-Plough’s sales force and related costs associated with the joint venture are generally estimated to be higher.

      Costs of the joint venture that the Partners contractually share are a portion of manufacturing costs, specifically identified promotion costs (including direct-to-consumer advertising and direct and identifiable out-of-pocket promotion) and other agreed upon costs for specific services such as market support, market research, market expansion, a specialty sales force and physician education programs.

      Certain specified research and development expenses are generally shared equally by the Partners.

      Equity income from cholesterol joint venture totaled $311 million and $220 million in the first quarter of 2006 and 2005, respectively. The increase in equity income reflected the strong sales performance for VYTORIN and ZETIA in the first quarter of 2006.

      During the first quarter of 2005 the Company earned a milestone of $20 million of which $14 million was recognized for financial reporting purposes. This milestone related to certain European approvals of VYTORIN (ezetimibe/simvastatin) in the first quarter of 2005. This amount is included in equity income.

      Under certain other conditions, as specified in the joint venture agreements with Merck, the Company could earn additional milestones totaling $105 million.

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      In addition to the milestone recognized in the first quarter of 2005, the Company’s equity income in the first quarter of 2006 and 2005 was favorably impacted by the proportionally greater share of income allocated from the joint venture for the first $300 million of annual ZETIA sales.

      It should be noted that the Company incurs substantial selling, general and administrative and other costs, which are not reflected in equity income from the cholesterol joint venture and instead are included in the overall cost structure of the Company.

Provision for Income Taxes

      Tax expense was $86 million and $64 million for the three months ended March 31, 2006 and 2005, respectively. The income tax expense primarily related to foreign taxes and does not include any benefit related to U.S. Net Operating Losses (U.S. NOLs). The Company maintains a valuation allowance on its net U.S. deferred tax assets, including the benefit of U.S. NOLs, as management cannot conclude that it is more likely than not that the benefit of U.S. net deferred tax assets can be realized.

      At December 31, 2005, the Company had approximately $1.5 billion of U.S. NOLs. The Company generated an additional U.S. NOL during the three months ended March 31, 2006.

Net Income Available to Common Shareholders

      Net income available to common shareholders for the first quarter of 2006 and 2005 includes the deduction of preferred stock dividends of $22 million in each period, related to the issuance of the 6 percent Mandatory Convertible Preferred Stock in August 2004. In addition, the first quarter of 2006 included $22 million of income from the cumulative effect of a change in accounting principle related to the implementation of SFAS 123R.

LIQUIDITY AND FINANCIAL RESOURCES

Discussion of Cash Flow

	Three Months Ended
	March 31,
	2006			2005
	(Dollars in millions)
Cash flow from operating activities	$	168		$	200
Cash flow from investing activities		(1,785	)		(2	)
Cash flow from financing activities		(566	)		(1,263	)

      In the first three months of 2006, operating activities generated $168 million of cash, compared with $200 million in the first three months of 2005. The decrease was primarily related to the timing of payments offset by higher net income. Future payments regarding litigation and investigations will likely increase cash needs.

      Net cash used for investing activities during the first three months of 2006 was $1.8 billion primarily related to the net purchase of short-term investments of $1.7 billion and $64 million of capital expenditures. Net cash used for investing activities for the first three months of 2005 was $2 million including $83 million of capital expenditures offset by $33 million of cash receipts related primarily to the sale of an administrative office facility and a $59 million net reduction in short-term investments.

      Net cash used for financing activities was $566 million for the first three months of 2006, compared to $1.3 billion net cash used for the same period in 2005. Uses of cash for financing activities for the three months ended March 31, 2006 and 2005 included the payment of dividends on common and preferred shares of $103 million in each period, and the repayment of short-term borrowings of $489 million and $1.2 billion, respectively.

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      As the Company’s financial situation has begun to improve, the Company is moving forward with additional investments to enhance its infrastructure and business. This includes expected capital expenditures of approximately $300 million over the next several years for a pharmaceutical sciences center. The center will allow the Company to streamline and integrate the Company’s drug development process, where products are moved from the drug discovery pipeline to market. There will be additional related expenditures to upgrade equipment and staffing for the center.

      Total cash, cash equivalents and short-term investments less total debt was approximately $1.9 billion at March 31, 2006. Cash generated from operations and available cash and short-term investments are expected to provide the Company with the ability to fund cash needs for the intermediate term.

Borrowings and Credit Facilities

      The Company has outstanding $1.25 billion aggregate principal amount of 5.3 percent senior unsecured notes due 2013 and $1.15 billion aggregate principal amount of 6.5 percent senior unsecured notes due 2033. As previously disclosed, the interest rates payable on the notes are subject to adjustment and have been adjusted as discussed below.

      On July 14, 2004, Moody’s lowered its rating on the notes to Baa1. Accordingly, the interest payable on each note increased 25 basis points effective December 1, 2004. Therefore, on December 1, 2004, the interest rate payable on the notes due 2013 increased from 5.3 percent to 5.55 percent, and the interest rate payable on the notes due 2033 increased from 6.5 percent to 6.75 percent. This adjustment to the interest rate payable on the notes increased the Company’s interest expense by approximately $6 million annually. The interest rate payable on a particular series of notes will return to 5.3 percent and 6.5 percent, respectively, and the rate adjustment provisions will permanently cease to apply if, following a downgrade by either Moody’s or S&P below A3 or A-, respectively, the notes are subsequently rated above Baa1 by Moody’s and BBB+ by S&P.

      The Company has a revolving credit facility from a syndicate of major financial institutions. During March 2005, the Company negotiated an increase in the bank commitments from $1.25 billion to $1.5 billion with no changes in the basic terms of the pre-existing credit facility. Concurrently with the increase in commitments under this facility, the Company terminated early a separate $250 million line of credit which would have matured in May 2006. There was no outstanding balance under this facility at the time it was terminated.

      The existing $1.5 billion credit facility matures in May 2009 and requires the Company to maintain a total debt to total capital ratio of no more than 60 percent. This credit line is available for general corporate purposes and is considered as support to the Company’s commercial paper borrowings. Borrowings under this credit facility may be drawn by the U.S. parent company or by its wholly-owned international subsidiaries when accompanied by a parent guarantee. This facility does not require compensating balances, however, a nominal commitment fee is paid. As of March 31, 2006, no funds were drawn under this facility.

      In addition to the aforementioned credit facility, the Company entered into a $575 million credit facility during the fourth quarter of 2005, all of which was drawn in 2005 by a wholly-owned international subsidiary to fund repatriations under the American Jobs Creation Act of 2004 (AJCA). This credit facility requires the Company to maintain a total debt to total capital ratio of no more than 60 percent. These borrowings are payable no later than November 4, 2008. Any funds borrowed under this facility which are subsequently repaid may not be re-borrowed. As of March 31, 2006, the entire amount was outstanding.

      All credit facility borrowings have been classified as short-term borrowings as the Company intends to repay these amounts during 2006.

      At March 31, 2006 and December 31, 2005, short-term borrowings, including the amount borrowed under the credit facilities mentioned above, totaled $789 million and $1.3 billion, respectively, including the outstanding commercial paper of $149 million and $298 million, respectively. The short-term ratings

30

discussed below have not significantly affected the Company’s ability to issue or rollover its outstanding commercial paper borrowings at this time. However, the Company believes the ability of commercial paper issuers, such as the Company, with one or more short-term credit ratings of P-2 from Moody’s, A-2 from S&P and/or F2 from Fitch to issue or rollover outstanding commercial paper can, at times, be less than that of companies with higher short-term credit ratings. In addition, the total amount of commercial paper capacity available to these issuers is typically less than that of higher-rated companies. The Company’s sizable lines of credit with commercial banks as well as cash and short-term investments held by U.S. and international subsidiaries serve as alternative sources of liquidity and to support its commercial paper program.

      The Company’s current unsecured senior credit ratings and outlook are as follows:

Senior Unsecured Credit Ratings	Long-Term		Short-Term		Outlook
Moody’s Investors Service		Baa1		P-2		Negative
Standard and Poor’s		A-		A-2		Stable
Fitch Ratings		A-		F-2		Negative

      The Company’s credit ratings could decline below their current levels. The impact of such decline could reduce the availability of commercial paper borrowing and would increase the interest rate on the Company’s short and long-term debt. As discussed above, the Company believes that existing cash, short-term investments and cash generated from operations will allow the Company to fund its cash needs for the intermediate term.

6% Mandatory Convertible Preferred Stock

      In August 2004 the Company issued 28,750,000 shares of 6 percent mandatory convertible preferred stock with a face value of $1.44 billion. The preferred stock will automatically convert into between 2.2451 and 2.7840 common shares of the Company depending on the average closing price of the Company’s common shares over a period immediately preceding the mandatory conversion date of September 14, 2007, as defined in the prospectus. This preferred stock is described in more detail in Note 14, “Shareholders’ Equity” under Item 8, Financial Statements and Supplementary Data, in the Company’s 2005 10-K.

REGULATORY AND COMPETITIVE ENVIRONMENT IN WHICH THE COMPANY OPERATES

      The Company is subject to the jurisdiction of various national, state and local regulatory agencies. These regulations are described in more detail in Part I, Item I, “Business,” of the 2005 10-K.

      Regulatory compliance is complex, as regulatory standards (including Good Clinical Practices, Good Laboratory Practices and Good Manufacturing Practices) vary by jurisdiction and are constantly evolving.

      Regulatory compliance is costly. Regulatory compliance also impacts the timing needed to bring new drugs to market and to market drugs for new indications. Further, failure to comply with regulations can result in delays in the approval of drugs, seizure or recall of drugs, suspension or revocation of the authority necessary for the production and sale of drugs, fines and other civil or criminal sanctions.

      Regulatory compliance, and the cost of compliance failures, can have a material impact on the Company’s results of operations, its cash flows or financial condition.

      Since 2002, the Company has been working under a U.S. FDA Consent Decree to resolve issues involving the Company’s compliance with current Good Manufacturing Practices (cGMP) at certain of its manufacturing sites in New Jersey and Puerto Rico. See details in Note 14, “Consent Decree,” in this 10-Q.

      Under the terms of the Consent Decree, the Company made payments totaling $500 million during 2002 and 2003. As of the end of 2005, the Company has completed the revalidation programs for bulk active pharmaceutical ingredients and finished drug products, as well as all 212 Significant Steps of the cGMP Work Plan, in accordance with the schedules required by the Consent Decree. The Company’s

31

completion of the cGMP Work Plan is currently pending certification by a third party expert, whose certification is in turn subject to acceptance by the FDA. Under the terms of the Decree, provided that the FDA has not notified the Company of a significant violation of FDA law, regulations, or the Decree in the five year period since the Decree’s entry, May 2002 through May 2007, the Company may petition the court to have the Decree dissolved and FDA will not oppose the Company’s petition.

      The Company is subject to pharmacovigilance reporting requirements in many countries and other jurisdictions, including the U.S., the European Union (EU) and the EU member states. The requirements differ from jurisdiction to jurisdiction, but all include requirements for reporting adverse events that occur while a patient is using a particular drug, in order to alert the manufacturer of the drug and the governmental agency to potential problems.

      During 2003, pharmacovigilance inspections by officials of the British and French medicines agencies conducted at the request of the European Agency for the Evaluation of Medicinal Products (EMEA) cited serious deficiencies in reporting processes. The Company has continued to work on its long-term action plan to rectify the deficiencies and has provided regular updates to the EMEA.

      During the fourth quarter 2005, local UK and EMEA regulatory authorities conducted a follow up inspection to assess the Company’s implementation of its action plan. In the first quarter of 2006, these authorities also inspected the U.S.-based components of the Company’s pharmacovigilance system. The inspectors acknowledged that progress had been made since 2003, but also continued to note significant concerns with the quality systems supporting the Company’s pharmacovigilance processes. Similarly, in a follow up inspection of the Company’s clinical trial practices in the UK, inspectors identified issues with respect to the Company’s management of clinical trials and related pharmacovigilance practices.

      The Company intends to continue upgrading skills, processes and systems in clinical practices and pharmacovigilance. The Company remains committed to accomplish this work and to invest significant resources in this area. Further, in February 2006, the Company began the Global Clinical Harmonization Program for building clinical excellence (in trial design, execution and tracking), which will strengthen the Company’s scientific and compliance rigor on a global basis.

      The Company does not know what action, if any, the EMEA or national authorities will take in response to the inspections. Possible actions include further inspections, demands for improvements in reporting systems, criminal sanctions against the Company and/or responsible individuals and changes in the conditions of marketing authorizations for the Company’s products.

      Recently, clinical trials and post-marketing surveillance of certain marketed drugs of competitors’ within the industry have raised safety concerns that have led to recalls, withdrawals or adverse labeling of marketed products. In addition, these situations have raised concerns among some prescribers and patients relating to the safety and efficacy of pharmaceutical products in general. Company personnel have regular, open dialogue with the FDA and other regulators and review product labels and other materials on a regular basis and as new information becomes known.

      Following this wake of recent product withdrawals of other companies and other significant safety issues, health authorities such as the FDA, the EMEA and the PMDA have increased their focus on safety, when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications and are re-reviewing select products which are already marketed, adding further to the uncertainties in the regulatory processes. There is also greater regulatory scrutiny, especially in the United States, on advertising and promotion and in particular direct-to-consumer advertising.

      Similarly, major health authorities, including the FDA, EMEA and PMDA, have also increased collaboration amongst themselves, especially with regard to the evaluation of safety and benefit/risk information. Media attention has also increased. In the current environment, a health authority regulatory action in one market, such as a safety labeling change, may have regulatory, prescribing and marketing implications in other markets to an extent not previously seen.

32

      Some health authorities, such as the PMDA in Japan, have publicly acknowledged a significant backlog in workload due to resource constraints within their agency. This backlog has caused long regulatory review times for new indications and products, including the initial approval of ZETIA in Japan, and has added to the uncertainty in predicting approval timelines in these markets. While the PMDA has committed to correcting the backlog, it is expected to continue for the foreseeable future.

      In 2005, the FDA issued a Final Rule removing the essential use designation for albuterol CFC products. The removal of this designation requires that all CFC albuterol products, including the Company’s PROVENTIL CFC, be removed from the market no later than December 31, 2008. This will necessitate a transition in the marketplace from albuterol CFC (PROVENTIL) to albuterol HFA (PROVENTIL HFA) no later than the end of 2008. It is difficult to predict what impact this transition will have on the albuterol marketplace and the Company’s products.

      These and other uncertainties inherent in government regulatory approval processes, including, among other things, delays in approval of new products, formulations or indications, may also affect the Company’s operations. The effect of regulatory approval processes on operations cannot be predicted.

      The Company has nevertheless achieved a significant number of important regulatory approvals since 2004, including approvals for VYTORIN, CLARINEX D-24, CLARINEX REDITABS, CLARINEX D-12 and new indications for TEMODAR and NASONEX. Other significant approvals since 2004 include ASMANEX DPI (Dry Powder for Inhalation) in the United States, NOXAFIL in the EU, PEG-INTRON in Japan and new indications for REMICADE. The Company also has a number of significant regulatory submissions filed in major markets awaiting approval.

      As described more specifically in Note 15, “Legal, Environmental and Regulatory Matters,” in this 10-Q, the pricing, sales and marketing programs and arrangements, and related business practices of the Company and other participants in the health care industry are under increasing scrutiny from federal and state regulatory, investigative, prosecutorial and administrative entities. These entities include the Department of Justice and its U.S. Attorney’s Offices, the Office of Inspector General of the Department of Health and Human Services, the FDA, the Federal Trade Commission (FTC) and various state Attorneys General offices. Many of the health care laws under which certain of these governmental entities operate, including the federal and state anti-kickback statutes and statutory and common law false claims laws, have been construed broadly by the courts and permit the government entities to exercise significant discretion. In the event that any of those governmental entities believes that wrongdoing has occurred, one or more of them could institute civil or criminal proceedings, which, if instituted and resolved unfavorably, could subject the Company to substantial fines, penalties and injunctive or administrative remedies, including exclusion from government reimbursement programs. The Company also cannot predict whether any investigations will affect its marketing practices or sales. Any such result could have a material adverse impact on the Company’s results of operations, cash flows, financial condition, or its business.

      In the U.S., many of the Company’s pharmaceutical products are subject to increasingly competitive pricing as managed care groups, institutions, government agencies and other groups seek price discounts. In the U.S. market, the Company and other pharmaceutical manufacturers are required to provide statutorily defined rebates to various government agencies in order to participate in Medicaid, the veterans’ health care program and other government-funded programs.

      In most international markets, the Company operates in an environment of government mandated cost-containment programs. Several governments have placed restrictions on physician prescription levels and patient reimbursements, emphasized greater use of generic drugs and enacted across-the-board price cuts as methods to control costs. For example, Japan generally enacts biennial price reductions and this occurred again in April 2006. Pricing actions will occur in 2006 in certain major European markets.

      Since the Company is unable to predict the final form and timing of any future domestic or international governmental or other health care initiatives, including the passage of laws permitting the importation of pharmaceuticals into the U.S., their effect on operations and cash flows cannot be

33

reasonably estimated. Similarly, the effect on operations and cash flows of decisions of government entities, managed care groups and other groups concerning formularies and pharmaceutical reimbursement policies cannot be reasonably estimated.

      The Company cannot predict what net effect the Medicare prescription drug benefit will have on markets and sales. The new Medicare Drug Benefit (Medicare Part D), which took effect January 1, 2006, offers voluntary prescription drug coverage, subsidized by Medicare, to over 40 million Medicare beneficiaries through competing private prescription drug plans (PDPs) and Medicare Advantage (MA) plans. Many of the Company’s leading drugs are already covered under Medicare Part B (e.g., TEMODAR, INTEGRILIN and INTRON A). Medicare Part B provides payment for physician services which can include prescription drugs administered along with other physician services. The manner in which drugs are reimbursed under Medicare Part B may limit the Company’s ability to offer larger price concessions or make large price increases on these drugs. Other Schering-Plough drugs have a relatively small portion of their sales to the Medicare population (e.g., CLARINEX, the hepatitis C franchise). The Company could experience expanded utilization of VYTORIN and ZETIA and new drugs in the Company’s R&D pipeline. Of greater consequence for the Company may be the legislation’s impact on pricing, rebates and discounts.

      The market for pharmaceutical products is competitive. The Company’s operations may be affected by technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products of competitors, new information from clinical trials of marketed products or post-marketing surveillance and generic competition as the Company’s products mature. In addition, patent positions are increasingly being challenged by competitors, and the outcome can be highly uncertain. An adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products. The effect on operations of competitive factors and patent disputes cannot be predicted.

OUTLOOK

      As it relates to financial performance, the Company anticipates that sales and profits from the cholesterol joint venture will continue to grow in 2006, but there are uncertainties about changes that may occur in the cholesterol reduction market as new generic products enter the market.

      Despite the anticipated growth in the cholesterol franchise, earnings in the first half of 2006 are expected to be higher than the second half, primarily due to the seasonal pattern of the Company’s business, continued R&D spending to support the Company’s pipeline and expected unfavorable hepatitis franchise sales comparisons in Japan. In addition, there may be an unfavorable impact on sales and earnings due to increasing restrictions on the non-prescription pseudoephedrine (PSE) market.

      The Company anticipates that R&D expenses will continue to increase faster than net sales, but will depend on the timing of studies and the success of Phase II trials now underway for the Thrombin Receptor Antagonist, the Hepatitis Protease Inhibitor and the HIV drug vicriviroc.

      As the Company moves forward in the Action Agenda, additional investments are anticipated to enhance the infrastructure in areas such as clinical development, pharmacovigilance and information technology.

      The risks set forth in Part I, Item 1A, “Risk Factors,” of the Company’s 2005 10-K could cause actual results to differ from the expectation provided in this section.

CRITICAL ACCOUNTING POLICIES

      Refer to “Management’s Discussion and Analysis of Operations and Financial Condition” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 for disclosures regarding the Company’s critical accounting policies.

34

Rebates, Discounts and Returns

      The Company’s rebate accruals for Federal and State governmental programs at March 31, 2006 and 2005 were $139 million and $161 million, respectively. Commercial discounts, returns and other rebate accruals at March 31, 2006 and 2005 were $413 million and $399 million, respectively. These and other rebate accruals are established in the period the related revenue was recognized resulting in a reduction to sales and the establishment of liabilities, which are included in total current liabilities.

      The following summarizes the activity in the accounts related to accrued rebates, sales returns and discounts for the three months ended March 31, 2006 and 2005:

	Three Months
	Ended March 31,
	2006			2005
	(Dollars in
	millions)
Accrued Rebates/ Returns/ Discounts, Beginning of Period	$	522		$	537
Provision for Rebates		128			124
Payments		(97	)		(107	)
		31			17
Provision for Returns		41			61
Returns		(33	)		(51	)
		8			10
Provision for Discounts		112			95
Discounts granted		(121	)		(99	)
		(9	)		(4	)
Accrued Rebates/ Returns/ Discounts, End of Period	$	552		$	560

      Management makes estimates and uses assumptions in recording the above accruals. Actual amounts paid in the current period were consistent with those previously estimated.

DISCLOSURE NOTICE

Cautionary Statements Under the Private Securities Litigation Reform Act of 1995

      Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report and other written reports and oral statements made from time to time by the Company may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not relate strictly to historical or current facts and are based on current expectations or forecasts of future events. You can identify these forward-looking statements by their use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “project,” “intend,” “plan,” “potential,” “will,” and other similar words and terms. In particular, forward-looking statements include statements relating to future actions, ability to access the capital markets, prospective products or product approvals, timing and conditions of regulatory approvals, patent and other intellectual property protection, future performance or results of current and anticipated products, sales efforts, research and development programs, estimates of rebates, discounts and returns, expenses and programs to reduce expenses, the cost of and savings from reductions in work force, the outcome of contingencies such as litigation and investigations, growth strategy and financial results.

      Actual results may vary materially from the Company’s forward-looking statements and there are no guarantees about the performance of Schering-Plough’s stock or business. Schering-Plough does not assume the obligation to update any forward-looking statement. A number of risks and uncertainties could cause results to differ from forward-looking statements, including market forces, economic factors, product

35

availability, patent and other intellectual property protection, current and future branded, generic or over-the-counter competition, the regulatory process, and any developments following regulatory approval, among other uncertainties. For further details of these and other risks and uncertainties that may impact forward-looking statements, see Schering-Plough’s Securities and Exchange Commission filings, including the risks and uncertainties set forth in Part I, Item 1A, “Risk Factors,” of the Company’s 2005 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

      The Company is exposed to market risk primarily from changes in foreign currency exchange rates and, to a lesser extent, from interest rates and equity prices. Refer to “Management’s Discussion and Analysis of Operations and Financial Condition” in the Company’s 2005 10-K.

Item 4. Controls and Procedures

      Management, including the chief executive officer and the chief financial officer, has evaluated the Company’s disclosure controls and procedures as of the end of the quarterly period covered by this Form 10-Q and has concluded that the Company’s disclosure controls and procedures are effective. They also concluded that there were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

      As part of the changing business environment in which the Company operates, the Company is replacing and upgrading a number of information systems. This process will be ongoing for several years. In connection with these changes, as part of the Company’s management of both internal control over financial reporting and disclosure controls and procedures, management has concluded that the new systems are at least as effective with respect to those controls as the prior systems.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

      There were no material legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company, or any of its subsidiaries, became a party during the quarter ended March 31, 2006, or subsequent thereto, but before the filing of this report. All material pending legal proceedings involving the Company are described in Part II, Item 3, “Legal Proceedings,” of the Company’s 2005 10-K.

Item 1A. Risk Factors

      There are no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the Company’s 2005 10-K. Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business.

36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

      This table provides information with respect to purchases by the Company of its common shares during the first quarter of 2006.

						Total Number of		Maximum Number
						Shares Purchased as		of Shares that May
				Average		Part of Publicly		Yet Be Purchased
	Total Number of			Price Paid		Announced Plans or		Under the Plans or
Period	Shares Purchased			per Share		Programs		Programs
January 1, 2006 through January 31, 2006		7,947	(1)	$	20.34		N/A		N/A
February 1, 2006 through February 28, 2006		28,059	(1)	$	19.04		N/A		N/A
March 1, 2006 through March 31, 2006		4,304	(1)	$	18.37		N/A		N/A
Total January 1, 2006 through March 31, 2006		40,310	(1)	$	19.23		N/A		N/A

(1)  All of the shares included in the table above were repurchased pursuant to the Company’s stock incentive program and represent shares delivered to the Company by option holders for payment of the exercise price and tax withholding obligations in connection with stock options and stock awards.

Item 6. Exhibits

Exhibit
Number			Description
	12		Computation of Ratio of Earnings to Fixed Charges
	15		Awareness letter
	31	.1	Sarbanes-Oxley Act of 2002, Section 302 Certification for Chairman of the Board and Chief Executive Officer.
	31	.2	Sarbanes-Oxley Act of 2002, Section 302 Certification for Executive Vice President and Chief Financial Officer.
	32	.1	Sarbanes-Oxley Act of 2002, Section 906 Certification for Chairman of the Board and Chief Executive Officer.
	32	.2	Sarbanes-Oxley Act of 2002, Section 906 Certification for Executive Vice President and Chief Financial Officer.

37

SIGNATURE(S)

      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.

SCHERING-PLOUGH CORPORATION

(Registrant)

By  /s/ STEVEN H. KOEHLER

Steven H. Koehler

Vice President and Controller

(Duly Authorized Officer

and Chief Accounting Officer)

Date: April 27, 2006

38 EX-12 2 y20167exv12.htm EX-12: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

Exhibit 12

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

		Three
		Months
		Ended		Years Ended December 31
		March 31,
		2006		2005			2004			2003			2002		2001
		(Dollars in millions)
Income/(loss) before income taxes		$	436	$	497		$	(168	)	$	(46	)	$	2,563	$	2,523
Less: Equity income			311		873			347			54			—		—
Income/(loss) before income taxes and equity income			125		(376	)		(515	)		(100	)		2,563		2,523
Add: Fixed charges:
	Preference dividends		22		86			34			—			—		—
	Interest expense		46		163			168			81			28		40
	One-third of rental expense		9		37			30			30			27		24
	Capitalized interest		4		14			20			11			24		25
	Total fixed charges		81		300			252			122			79		89
Less: Capitalized interest			4		14			20			11			24		25
Less: Preference dividends			22		86			34			—			—		—
Add: Amortization of capitalized interest			2		10			9			9			8		7
Add: Distributed income of equity investees			205		647			228			32			—		—
Earnings/(loss) before income taxes and fixed charges (other than capitalized interest)		$	387	$	481		$	(80	)	$	52		$	2,626	$	2,594
Ratio of earnings to fixed charges			4.8		1.6			(0.3	)*		0.4	**		33.2		29.1

*  For the year ended December 31, 2004, earnings were insufficient to cover fixed charges by $332 million.

**  For the year ended December 31, 2003, earnings were insufficient to cover fixed charges by $70 million.

      “Earnings” consist of income/(loss) before income taxes and equity income, plus fixed charges (other than capitalized interest and preference dividends), amortization of capitalized interest and distributed income of equity investee. “Fixed charges” consist of interest expense, capitalized interest, preference dividends and one-third of rentals which Schering-Plough believes to be a reasonable estimate of an interest factor on leases.

39 EX-15 3 y20167exv15.htm EX-15: AWARENESS LETTER

Exhibit 15

April 27, 2006

To the Shareholders and Board of Directors of Schering-Plough Corporation:

      We have made a review, in accordance with the standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim financial information of Schering-Plough Corporation and subsidiaries for the three-month periods ended March 31, 2006 and 2005, as indicated in our report dated April 27, 2006; because we did not perform an audit, we expressed no opinion on that information.

      We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, is incorporated by reference in Registration Statements No. 2-83963, No. 33-50606, No. 333-30331, No. 333-87077, No. 333-91440, No. 333-104714, No. 333-105567, No. 333-105568, No. 333-112421 and No. 333-121089 on Form S-8, Post Effective Amendment No. 1 to Registration Statement No. 2-84723 on Form S-8, Post Effective Amendment No. 1 to Registration Statement No. 333-105567 on Form S-8 and Registration Statements No. 333-12909, No. 333-30355, and No. 333-113222 on Form S-3.

      We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meanings of Sections 7 and 11 of that Act.

/s/  Deloitte & Touche LLP

Parsippany, New Jersey

40 EX-31.1 4 y20167exv31w1.htm EX-31.1: CERTIFICATION

Exhibit 31.1

CERTIFICATION

I, Fred Hassan, Chairman of the Board and Chief Executive Officer, certify that:

      1. I have reviewed this quarterly report on Form 10-Q of Schering-Plough Corporation (the “registrant”);

      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

      a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

      b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

      a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Fred Hassan

Fred Hassan

Chairman of the Board and Chief Executive Officer

Date: April 27, 2006

EX-12

EX-12

EX-15

EX-15

EX-31.1

EX-31.1

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Robert J. Bertolini, Executive Vice President and Chief Financial Officer, certify that:

      1. I have reviewed this quarterly report on Form 10-Q of Schering-Plough Corporation (the “registrant”);

      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

      a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

      b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

      a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Robert J. Bertolini

Robert J. Bertolini

Executive Vice President and Chief Financial Officer

Date: April 27, 2006

EX-32.1

Exhibit 32.1

CERTIFICATION

      I, Fred Hassan, Chairman of the Board and Chief Executive Officer of Schering-Plough Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

      (1) the Quarterly Report on Form 10-Q for the period ended March 31, 2006 (the “Report”) which this statement accompanies fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

      (2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Schering-Plough Corporation.

/s/ Fred Hassan

Fred Hassan

Chairman of the Board and Chief Executive Officer

Dated: April 27, 2006

EX-32.2

Exhibit 32.2

CERTIFICATION

      I, Robert J. Bertolini, Executive Vice President and Chief Financial Officer of Schering-Plough Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

      (1) the Quarterly Report on Form 10-Q for the period ended March 31, 2006 (the “Report”) which this statement accompanies fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

      (2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Schering-Plough Corporation.

/s/ Robert J. Bertolini

Robert J. Bertolini

Executive Vice President and Chief Financial Officer

Dated: April 27, 2006