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 June 30, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period from           to

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 (Address of principal executive offices)	07033 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 June 30, 2006: 1,481,323,452

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information.
Item 6. Exhibits
SIGNATURE(S)
EX-3.A: AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
EX-3.B: AMENDED AND RESTATED BY-LAWS
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						Six Months
	Ended						Ended
	June 30,						June 30,
	2006			2005			2006			2005
Net sales	$	2,818		$	2,532		$	5,369		$	4,900
Cost of sales		1,004			867			1,897			1,756
Selling, general and administrative		1,224			1,116			2,310			2,197
Research and development		539			442			1,020			825
Other (income)/expense, net		(19	)		(8	)		(52	)		9
Special charges		80			259			80			286
Equity income from cholesterol joint venture		(355	)		(170	)		(666	)		(389	)
Income before income taxes		345			26			780			216
Income tax expense		86			74			172			138
Net income/(loss) before cumulative effect of a change in accounting principle		259			(48	)		608			78
Cumulative effect of a change in accounting principle, net of tax		—			—			22			—
Net income/(loss)		259			(48	)		630			78
Preferred stock dividends		22			22			43			43
Net income/(loss) available to common shareholders	$	237		$	(70	)	$	587		$	35
Diluted earnings/(loss) per common share:
Earnings/(loss) available to common shareholders before cumulative effect of a change in accounting principle	$	0.16		$	(0.05	)	$	0.38		$	0.02
Cumulative effect of a change in accounting principle, net of tax		—			—			0.02			—
Diluted earnings/(loss) per common share	$	0.16		$	(0.05	)	$	0.40		$	0.02
Basic earnings/(loss) per common share:
Earnings/(loss) available to common shareholders before cumulative effect of a change in accounting principle	$	0.16		$	(0.05	)	$	0.38		$	0.02
Cumulative effect of a change in accounting principle, net of tax		—			—			0.02			—
Basic earnings/(loss) per common share	$	0.16		$	(0.05	)	$	0.40		$	0.02
Dividends per common share	$	0.055		$	0.055		$	0.11		$	0.11

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)

	Six Months Ended
	June 30,
	2006			2005
Operating Activities:
Net income	$	630		$	78
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		608			78
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash special charges		70			268
Depreciation and amortization		251			239
Accrued share-based compensation		79			—
Changes in assets and liabilities:
Accounts receivable		(332	)		(378	)
Inventories		13			38
Prepaid expenses and other assets		5			62
Accounts payable and other liabilities		116			188
Net cash provided by operating activities		810			495
Investing Activities:
Capital expenditures		(192	)		(187	)
Dispositions of property and equipment		8			38
Purchases of short-term investments		(3,795	)		(1,444	)
Reduction of short-term investments		1,270			1,638
Other, net		—			(13	)
Net cash (used for)/provided by investing activities		(2,709	)		32
Financing Activities:
Cash dividends paid to common shareholders		(162	)		(162	)
Cash dividends paid to preferred shareholders		(43	)		(43	)
Net change in short-term borrowings		(849	)		(1,188	)
Other, net		32			27
Net cash used for financing activities		(1,022	)		(1,366	)
Effect of exchange rates on cash and cash equivalents		(4	)		(11	)
Net decrease in cash and cash equivalents		(2,925	)		(850	)
Cash and cash equivalents, beginning of period		4,767			4,984
Cash and cash equivalents, end of period	$	1,842		$	4,134

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)

	June 30,			December 31,
	2006			2005
ASSETS
Current Assets:
Cash and cash equivalents	$	1,842		$	4,767
Short-term investments		3,339			818
Accounts receivable, net		1,863			1,479
Inventories		1,617			1,605
Deferred income taxes		349			294
Prepaid expenses and other current assets		827			769
Total current assets		9,837			9,732
Property, plant and equipment		7,235			7,197
Less accumulated depreciation		2,839			2,710
Property, plant and equipment, net		4,396			4,487
Goodwill		205			204
Other intangible assets, net		341			365
Other assets		588			681
Total assets	$	15,367		$	15,469
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,152		$	1,078
Short-term borrowings and current portion of long-term debt		430			1,278
U.S., foreign and state income tax		257			213
Accrued compensation		513			632
Other accrued liabilities		1,550			1,458
Total current liabilities		3,902			4,659
Long-term Liabilities:
Long-term debt		2,413			2,399
Deferred income tax		113			117
Other long-term liabilities		971			907
Total long-term liabilities		3,497			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		1,525			1,416
Retained earnings		9,897			9,472
Accumulated other comprehensive income		(473	)		(516	)
Total		13,402			12,825
Less treasury shares: 2006, 548; 2005, 550; at cost		5,434			5,438
Total shareholders’ equity		7,968			7,387
Total liabilities and shareholders’ equity	$	15,367		$	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 and Manufacturing Streamlining

On June 1, 2006, the Company announced changes to its manufacturing operations in Puerto Rico and New Jersey that will streamline its global supply chain and further enhance the Company’s long-term competitiveness. The Company’s manufacturing operations in Manati, Puerto Rico, will be phased out during 2006 and additional workforce reductions in Las Piedras, Puerto Rico and New Jersey will take place. In total, the actions taken will result in the elimination of approximately 1,100 positions. Approximately 500 positions were eliminated in the second quarter of 2006.

Special Charges

Special charges for the three and six months ended June 30, 2006 totaled $80 million related to the changes in the Company’s manufacturing operations, consisting of $25 million of severance and $55 million of fixed asset impairments.

Special charges for the three months ended June 30, 2005 totaled $259 million primarily related to an increase in litigation reserves for the Massachusetts investigation of $250 million with the majority of the remaining amount related to charges as a result of the consolidation of the Company’s U.S. biotechnology organizations. Additional information regarding litigation reserves is also included in Note 15 “Legal, Environmental and Regulatory Matters” in this 10-Q. Special charges for the six months ended June 30, 2005 totaled $286 million.

Cost of Sales

Included in cost of sales for the three and six months ended June 30, 2006 is $13 million of accelerated depreciation and $45 million of inventory write-offs related to the announced closure of the Company’s manufacturing facilities in Manati, Puerto Rico.

The following table summarizes the activities reflected in the Condensed Consolidated Financial Statements for the special charges and manufacturing streamlining for the three and six months ended June 30, 2006:

	Charges												Accrued
	Included in		Special		Total		Cash			Non-Cash			Liability at
	Cost of Sales		Charges		Charges		Payments			Charges			June 30, 2006
	(Dollars in millions)
Severance	$	—	$	25	$	25	$	(6	)	$	—		$	19
Asset impairments		—		55		55		—			(55	)		—
Accelerated depreciation		13		—		13		—			(13	)		—
Inventory write-offs		45		—		45		—			(45	)		—
Total	$	58	$	80	$	138	$	(6	)	$	(113	)	$	19

4

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 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 three and six months ended June 30, 2005, the Company recognized milestones of $6 million and $20 million 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.

5

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 and six months ended June 30, 2006 and 2005:

	Three Months				Six Months
	Ended				Ended
	June 30,				June 30,
	2006		2005		2006		2005
	(Dollars in millions)
Net sales	$	973	$	533	$	1,767	$	1,049
Cost of sales		46		39		85		67
Income from operations		634		248		1,091		474

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 and six months ended June 30, 2006 was $311 million and $577 million, respectively, and $127 million and $296 million, respectively, for the three and six months ended June 30, 2005. In the U.S. market, Schering-Plough receives a greater share of income from operations on the first $300 million of annual ZETIA sales.

The following unaudited information provides a summary of the components of the Company’s equity income from the cholesterol joint venture for the three and six months ended June 30, 2006 and 2005:

	Three Months					Six Months
	Ended					Ended
	June 30,					June 30,
	2006		2005			2006		2005
	(Dollars in millions)
Schering-Plough’s share of income from operations	$	311	$	127		$	577	$	296
Contractual reimbursement to Schering-Plough for physician details		42		44			83		89
Elimination of intercompany profit and other, net		2		(1	)		6		4
Total equity income from cholesterol joint venture	$	355	$	170		$	666	$	389

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 Phase III clinical development.

6

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 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 elected the modified prospective transition method and therefore adjustments to prior periods were 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 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.

In the second quarter of 2006, the 2006 Stock Incentive Plan (the 2006 Plan) was approved by the Company’s shareholders. Under the terms of the 2006 Plan, 92 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 2011. As of June 30, 2006, 76 million options and deferred stock units remain available for future year grants under the 2006 Plan.

The Company intends to utilize 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 of 2006, the Company recognized a 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 three and six months ended June 30, 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, under the 2006 Plan, generally vest over three years and have a term of seven years. Certain options granted under previous plans vest over longer periods ranging from three to nine years and have a term of 10 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,

7

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

net of estimated forfeitures, over the vesting period of the options using an accelerated method. Expense recognized for the three and six months ended June 30, 2006 was approximately $12 million and $26 million, respectively.

The weighted-average assumptions used in the Black-Scholes option-pricing model for the three and six months ended June 30, 2006 and 2005 were as follows:

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2006			2005			2006			2005
Dividend yield		1.1	%		1.7	%		1.1	%		1.7	%
Volatility		25.7	%		32.1	%		25.7	%		32.1	%
Risk-free interest rate		5.0	%		4.1	%		5.0	%		4.1	%
Expected term of options (in years)		4.5			7.0			4.5			7.0

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 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 for the three and six months ended June 30, 2006 was $5 million and $32 million, respectively. The amount of cash received for the three and six months ended June 30, 2005 was $19 million and $28 million, respectively.

Stock-based compensation prior to January 1, 2006 was determined using the intrinsic value method. The following table provides supplemental information for the three and six months ended June 30, 2005 as if stock-based compensation had been computed under SFAS 123:

	Three Months			Six Months
	Ended			Ended
	June 30, 2005			June 30, 2005
	(Dollars in millions
	except per share figures)
Net (loss)/income available to common shareholders, as reported	$	(70	)	$	35
Add back: Expense included in reported net (loss)/income for deferred stock units		26			40
Deduct: Pro forma expense as if both stock options and deferred stock units were charged against net (loss)/income available to common shareholders in accordance with SFAS 123		(48	)		(84	)
Pro forma net (loss)/income available to common shareholders using the fair value method	$	(92	)	$	(9	)
Diluted (loss)/earnings per common share:
Diluted (loss)/earnings per common share, as reported	$	(0.05	)	$	0.02
Pro forma diluted (loss)/earnings per common share using the fair value method		(0.06	)		(0.01	)
Basic (loss)/earnings per common share:
Basic (loss)/earnings per common share, as reported	$	(0.05	)	$	0.02
Pro forma basic (loss)/earnings per common share using the fair value method		(0.06	)		(0.01	)

8

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Summarized information about stock options outstanding and exercisable at June 30, 2006 is as follows:

	Outstanding						Exercisable
			Weighted-		Weighted-				Weighted-
	Number		Average		Average		Number		Average
	of		Remaining		Exercise		of		Exercise
Exercise Price Range	Options		Term in Years		Price		Options		Price
	(In thousands)						(In thousands)
Under $20		48,255		6.8	$	18.22		28,941	$	18.04
$20 to $30		9,951		8.7		20.83		3,410		20.99
$30 to $40		15,431		3.6		36.57		15,365		36.59
Over $40		14,935		3.8		46.35		14,745		46.32
		88,572						62,461

The weighted-average fair value of stock options granted for the three and six months ended June 30, 2006 was $5.22. The weighted-average fair value of stock options granted for the three and six months ended June 30, 2005 was $7.12 and $7.04, respectively. The intrinsic value of stock options exercised was $1 million and $9 million for the three and six months ended June 30, 2006, respectively. The intrinsic value of stock options exercised was $6 million and $12 million for the three and six months ended June 30, 2005, respectively. The total fair value of shares vested during the three and six months ended June 30, 2006 was $26 million and $68 million, respectively. The total fair value of shares vested during the three and six-months ended June 30, 2005 was $4 million and $52 million, respectively.

As of June 30, 2006, the total remaining unrecognized compensation cost related to non-vested stock options amounted to $73 million, which will be amortized over the weighted-average remaining requisite service period of 2.4 years.

The following table summarizes stock option activities over the six months ended June 30, 2006 under the current and prior plans:

				Weighted-
				Average
	Number of			Exercise
	Options			Price
	(In thousands)
Outstanding at January 1, 2006		82,484		$	27.00
Granted		9,586			19.23
Exercised		(2,136	)		14.87
Canceled or expired		(1,362	)		26.97
Outstanding, ending balance		88,572		$	26.45
Exercisable at June 30, 2006		62,461		$	29.44

The aggregate intrinsic value of stock options outstanding at June 30, 2006 was $43 million. The aggregate intrinsic value of stock options currently exercisable at June 30, 2006 was $31 million. Intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted price of the Company’s common stock as of the reporting date.

9

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table summarizes nonvested stock option activity over the six months ended June 30, 2006 under the current and prior plans:

				Weighted-
	Number of			Average
	Options			Fair Value
	(In thousands)
Nonvested at January 1, 2006		28,022		$	6.41
Granted		9,586			5.22
Vested		(10,735	)		6.32
Forfeited		(762	)		6.13
Nonvested at June 30, 2006		26,111		$	6.02

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 and six months ended June 30, 2006 was $36 million and $56 million, respectively. Expense recognized for the three and six months ended June 30, 2005 was $26 million and $40 million, respectively.

Summarized information about deferred stock units outstanding at June 30, 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		1,444		1.2	$	17.19
$18 to $20		9,211		2.3		18.95
$20 to $22		6,446		1.8		20.71
Over $22		352		0.7		34.50
		17,453

The weighted-average fair value of deferred stock units granted was $19.23 for the three and six months ended June 30, 2006. The weighted-average fair value of deferred stock units granted for the three and six months ended June 30, 2005 was $20.68 and $20.67, respectively. The total fair value of deferred stock units vested during the three and six months ended June 30, 2006 was $0 and $1 million, respectively. The total fair value of deferred stock units vested during the three and six months ended June 30, 2005 was $1 million and $3 million, respectively.

As of June 30, 2006, the total remaining unrecognized compensation cost related to deferred stock units amounted to $240 million, which will be amortized over the weighted-average remaining requisite service period of 2.3 years.

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SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table summarizes deferred stock unit activity over the six months ended June 30, 2006 under the current and prior plans:

	Number
	of Nonvested			Weighted-
	Deferred Stock			Average
	Units			Fair Value
	(In thousands)
Nonvested at January 1, 2006		11,416		$	20.12
Granted		6,507			19.23
Vested		(40	)		26.46
Canceled or expired		(430	)		20.21
Nonvested at June 30, 2006		17,453		$	19.77

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 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, other than the impact of the cumulative effect of a change in accounting principle, in the Statements of Condensed Consolidated Operations for the three months and six months ended June 30, 2006 related to these liability awards was not material.

As of June 30, 2006, the total remaining unrecognized compensation cost related to the incentive plans amounted to $26 million, which will be amortized over the weighted-average remaining requisite service period of 2.2 years. This amount will vary each reporting period based on changes in fair value.

5.   Other (Income)/Expense, Net

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

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Dollars in millions)
Interest cost incurred	$	48		$	44		$	98		$	92
Less: amount capitalized on construction		(3	)		(4	)		(7	)		(6	)
Interest expense		45			40			91			86
Interest income		(69	)		(40	)		(137	)		(74	)
Foreign exchange losses		5			1			6			4
Other, net		—			(9	)		(12	)		(7	)
Total other (income)/expense, net	$	(19	)	$	(8	)	$	(52	)	$	9

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SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 six months ended June 30, 2006.

The Company’s tax provisions for the three and six months ended June 30, 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 expense were as follows:

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Dollars in millions)
Service cost	$	30		$	27		$	59		$	54
Interest cost		28			30			56			65
Expected return on plan assets		(28	)		(31	)		(56	)		(67	)
Amortization, net		10			9			21			20
Termination benefits		—			2			—			4
Settlement		2			—			2			—
Net pension expense	$	42		$	37		$	82		$	76

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

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Dollars in millions)
Service cost	$	4		$	4		$	9		$	7
Interest cost		6			7			13			12
Expected return on plan assets		(3	)		(4	)		(7	)		(8	)
Amortization, net		1			—			2			1
Net other post-retirement benefits expense	$	8		$	7		$	17		$	12

For the three and six months ended June 30, 2006, the Company contributed $17 million and $40 million, respectively, to its retirement plans. The Company expects to contribute approximately $70 million to its retirement plans during the second half of 2006. The contribution in the U.S. may change based on the outcome of pending funding reform legislation.

12

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 (EPS) computations:

	Three Months					Six Months
	Ended					Ended
	June 30,					June 30,
	2006		2005			2006		2005
	(Dollars and shares in millions)
EPS Numerator:
Net income/(loss) before cumulative effect of a change in accounting principle and preferred stock dividends	$	259	$	(48	)	$	608	$	78
Add: Cumulative effect of a change in accounting principle, net of tax		—		—			22		—
Less: Preferred stock dividends		22		22			43		43
Net income/(loss) available to common shareholders	$	237	$	(70	)	$	587	$	35
EPS Denominator:
Weighted average shares outstanding for basic EPS		1,481		1,476			1,480		1,475
Dilutive effect of options and deferred stock units		8		—			7		7
Average shares outstanding for diluted EPS		1,489		1,476			1,487		1,482

The equivalent common shares issuable under the Company’s stock incentive plans which were excluded from the computation of diluted EPS because their effect would have been antidilutive were 55 million and 100 million for the second quarter of 2006 and 2005, respectively, and 51 million and 44 million for the first six months of 2006 and 2005, respectively. Also, at June 30, 2006 and 2005, 76 million and 75 million, respectively, of common shares 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/(Loss)

Comprehensive income/(loss) is comprised of the following:

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Dollars in millions)
Net income/(loss)	$	259		$	(48	)	$	630		$	78
Foreign currency translation adjustment		34			(59	)		48			(124	)
Unrealized loss on investments available for sale, net of tax		(3	)		(15	)		(3	)		(1	)
Total comprehensive income/(loss)	$	290		$	(122	)	$	675		$	(47	)

13

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

10.   Inventories

Inventories consisted of the following:

	June 30,		December 31,
	2006		2005
	(Dollars in millions)
Finished products	$	550	$	665
Goods in process		773		614
Raw materials and supplies		294		326
Total inventories	$	1,617	$	1,605

11.   Other Intangible Assets

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

	June 30, 2006						December 31, 2005
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
	(Dollars in millions)
Patents and licenses	$	579	$	350	$	229	$	579	$	329	$	250
Trademarks and other		166		54		112		166		51		115
Total other intangible assets	$	745	$	404	$	341	$	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. Amortization expense for the three and six months ended June 30, 2006 was $13 million and $24 million, respectively, and $14 million and $25 million for the three and six months ended June 30, 2005, respectively. Annual amortization expenses related to these intangible assets for the years 2007 to 2012 is expected to be approximately $50 million.

12.   Short-Term Borrowings

Short-term borrowings primarily consist of bank loans and commercial paper. Short-term borrowings at June 30, 2006 and December 31, 2005 totaled $430 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.

14

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Net sales by segment:

	Three Months				Six Months
	Ended				Ended
	June 30,				June 30,
	2006		2005		2006		2005
	(Dollars in millions)
Prescription Pharmaceuticals	$	2,230	$	1,975	$	4,263	$	3,820
Consumer Health Care		349		330		659		660
Animal Health		239		227		447		420
Consolidated net sales	$	2,818	$	2,532	$	5,369	$	4,900

Profit by segment:

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Dollars in millions)
Prescription Pharmaceuticals	$	371		$	254		$	720		$	414
Consumer Health Care		67			64			162			170
Animal Health		40			39			70			56
Corporate and other, including net interest income of $24 and $46, respectively, in 2006, and net interest expense of $0 and $12, respectively, in 2005		(133	)		(331	)		(172	)		(424	)
Income before income taxes	$	345		$	26		$	780		$	216

Schering-Plough’s net sales do not include sales of VYTORIN and ZETIA that are marketed in the 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 Prescription Pharmaceuticals segment includes equity income from the cholesterol joint venture.

“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 10-K.

For the three and six months ended June 30, 2006, “Corporate and other” included special charges of $80 million related to the changes to the Company’s manufacturing operations in the U.S. and Puerto Rico announced in June 2006, all of which related to the Prescription Pharmaceuticals segment (see Note 2, “Special Charges and Manufacturing Streamlining,” for additional information).

For the three and six months ended June 30, 2005, “Corporate and other” included special charges of $259 million and $286 million, respectively, primarily related to an increase in litigation reserves for the Massachusetts investigation (see Note 15, “Legal, Environmental and Regulatory Matters,” for additional information) with the majority of the remaining amount related to charges as a result of the consolidation of the Company’s U.S. biotechnology organizations. It is estimated that special charges of $259 million for the three months ended June 30, 2005 related to the Prescription Pharmaceuticals segment. Special charges for the six months ended June 30, 2005 is estimated to be as follows: Prescription Pharmaceuticals — $282 million, Consumer Health Care — $2 million, Animal Health — $1 million and Corporate and other — $1 million.

15

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Sales of products comprising 10 percent or more of the Company’s U.S. or international sales for the three and six months ended June 30, 2006, were as follows:

	Three Months				Six Months
	Ended				Ended
	June 30, 2006				June 30, 2006
	Amount		Percentage		Amount		Percentage
	(Dollars in		(%)		(Dollars in		(%)
	millions)				millions)
U.S
NASONEX	$	144		13	$	288		14
OTC CLARITIN		106		10		211		10
International
REMICADE		307		18		585		18
PEG-INTRON		169		10		323		10

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.

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.

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.

16

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 June 30, 2006, and the related expenses incurred during the three and six months ended June 30, 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.

17

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 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

18

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 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

19

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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. The Supreme Court denied the petition on June 26, 2006.

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. This matter was settled with no material impact on the Company’s financial statements and the claim was withdrawn on July 19, 2006.

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.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying condensed consolidated balance sheet of Schering-Plough Corporation and subsidiaries (the “Corporation”) as of June 30, 2006, and the related statements of condensed consolidated operations for the three and six-month periods ended June 30, 2006 and 2005, and the statements of condensed consolidated cash flows for the six-month periods ended June 30, 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 statements of consolidated operations, 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 Corporation adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment”.

/s/ Deloitte & Touche LLP

Parsippany, New Jersey
July 28, 2006

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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. VYTORIN (ezetimibe/simvastatin), marketed as INEGY internationally, has been launched in more than 35 countries and ZETIA/EZETROL in more than 80 countries.

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, 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.

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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 together have captured more than 15 percent of both new and total prescriptions in the U.S. cholesterol management market (based on June 2006 IMS data). The Company believes that total prescription data is a better measure of market share during this period of generic introductions.

During 2005 and 2006, the Company’s results of operations and cash flows have been 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 three and six months ended June 30, 2006, equity income from the cholesterol joint venture was $355 million and $666 million, respectively, and net income available to common shareholders was $237 million and $587 million, respectively. 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 VYTORIN and ZETIA may be impacted by the introduction of new innovative competing treatments and generic versions of existing products. Currently, the U.S. cholesterol lowering market is adjusting to the entry into the market of generic forms of Zocor and generic forms of Pravachol. 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, and certain Asian markets. 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 in 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 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.

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Current State of the Business

Net sales in the second quarter of 2006 were $2.8 billion or 11 percent higher than the second quarter of 2005. As discussed below, the sales increase was driven primarily by the growth of REMICADE, NASONEX, and PEG-INTRON. The sales growth included a 1 percent unfavorable impact from foreign exchange.

The Company had net income available to common shareholders of $237 million and $587 million, respectively, for the three and six months ended June 30, 2006 as compared to a net loss of $70 million in the second quarter of 2005 and net income of $35 million for the first six months of 2005. The net income available to common shareholders for the three and six months ended June 30, 2006 included charges totaling $138 million related to actions to streamline the Company’s manufacturing operations. The six months ended June 30, 2006 included an income item 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. For the three and six months ended June 30, 2005, net income available to common shareholders included special charges of $259 million (see Note 2, “Special Charges and Manufacturing Streamlining,” for additional information).

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, are decreasing as the Company goes through the process of certifying the Work Plan, 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.

Pursuant to the Company’s continuing work to enhance long-term competitiveness, on June 1, 2006, the Company announced plans to close manufacturing facilities in Manati, Puerto Rico and additional changes to its manufacturing operations in Puerto Rico and New Jersey that will streamline its global supply chain (see Note 2, “Special Charges and Manufacturing Streamlining,” and Discussion of Operating Results for additional information).

The Company continually reviews the business, including manufacturing operations, to identify actions that will enhance long-term competitiveness. However, the Company’s manufacturing cost base is relatively fixed, and actions to significantly reduce the Company’s manufacturing infrastructure involve complex issues. As a result, shifting products between manufacturing plants can take many years due to construction and regulatory requirements, including revalidation and registration requirements. The Company continues to review the carrying value of manufacturing assets for indications of impairment. Future events and decisions may lead to additional asset impairments 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.

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Consolidated net sales for the three months ended June 30, 2006 totaled $2.8 billion, an increase of $286 million or 11 percent compared with the same period in 2005. For the six months ended June 30, 2006, consolidated net sales totaled $5.4 billion, an increase of $469 million or 10 percent as compared to the same period in 2005. Consolidated net sales for the three and six months ended June 30, 2006 reflected higher volumes tempered by an unfavorable impact from foreign exchange of 1 percent and 3 percent, respectively.

Net sales for the three and six months ended June 30, 2006 and 2005 were as follows:

	Three Months Ended							Six Months Ended
	June 30,							June 30,
					Increase							Increase
	2006		2005		(Decrease)			2006		2005		(Decrease)
	(Dollars in millions)				(%)			(Dollars in millions)				(%)
PRESCRIPTION PHARMACEUTICALS	$	2,230	$	1,975		13		$	4,263	$	3,820		12
REMICADE		307		234		31			585		454		29
NASONEX		242		199		21			471		382		23
PEG-INTRON		226		182		25			423		352		20
CLARINEX/AERIUS		226		207		10			386		351		10
TEMODAR		171		145		18			334		276		21
CLARITIN Rx		104		100		4			205		211		(3	)
REBETOL		86		91		(5	)		164		155		6
INTEGRILIN		82		82		—			162		158		3
INTRON A		64		75		(15	)		124		148		(17	)
AVELOX		58		46		26			138		119		17
CAELYX		53		46		15			104		89		16
SUBUTEX		53		53		—			101		104		(3	)
ELOCON		38		38		—			72		79		(9	)
CIPRO		34		36		(6	)		58		72		(19	)
Other Pharmaceutical		486		441		10			936		870		8
CONSUMER HEALTH CARE		349		330		5			659		660		—
OTC(a)		149		162		(8	)		302		324		(7	)
Sun Care		104		79		31			178		163		10
Foot Care		96		89		7			179		173		3
ANIMAL HEALTH		239		227		6			447		420		7
CONSOLIDATED NET SALES	$	2,818	$	2,532		11		$	5,369	$	4,900		10

(a) Includes OTC CLARITIN net sales of $111 million and $133 million in the second quarter of 2006 and 2005, respectively, and $222 million and $248 million for the first six months of 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 $73 million or 31 percent to $307 million in the second quarter of 2006, and $131 million or 29 percent to $585 million for the first six months of 2006, as compared to the same periods in 2005, primarily due to expanded indications and continued market growth. In January 2006, REMICADE was approved for the additional indication of ulcerative colitis in Europe. During 2006, competitive products for the indications referred to above will be introduced.

Global net sales of NASONEX nasal spray, a once-daily corticosteroid nasal spray for allergies, rose 21 percent to $242 million in the second quarter and 23 percent to $471 million for the first six months of

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2006. Second quarter U.S. sales climbed 25 percent to $144 million and international sales climbed 16 percent to $98 million, as the product captured greater market share versus the 2005 periods. A generic form of 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 25 percent to $226 million in the second quarter and 20 percent to $423 million in the first six months of 2006 versus the 2005 periods, driven primarily by growth in Japan. The growth in Japan was due to continued enrollment of new hepatitis C patients. PEG-INTRON sales in Japan are expected to decline in the second half of 2006 as new patient enrollment moderates.

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 10 percent to $226 million in the second quarter, and 10 percent to $386 million in the first six months of 2006, as compared to the same periods in 2005. Sales outside the U.S. rose 11 percent to $129 million in the second quarter and 13 percent to $219 million in the first six months of 2006, as compared to 2005 periods, due to increased demand.

Global net sales of TEMODAR capsules, a treatment for certain types of brain tumors, increased $26 million or 18 percent to $171 million in the second quarter and $58 million or 21 percent to $334 million in the first six months of 2006 versus 2005 periods due to increased utilization for treating newly diagnosed glioblastoma multiforme (GBM), which is the most prevalent form of brain cancer. This 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 has been granted approval to treat malignant glioma.

International net sales of prescription CLARITIN increased 4 percent to $104 million in the second quarter resulting in a net decrease of 3 percent to $205 million in the first six months of 2006, as compared to the same periods in 2005. Sales in 2005 reflected an unusually severe allergy season in Japan.

Global net sales of REBETOL capsules, for use in combination with INTRON A or PEG-INTRON for treating hepatitis C, decreased 5 percent to $86 million in the second quarter of 2006 as compared to the first quarter of 2005. Net sales of this product increased 6 percent to $164 million in the first six months of 2006, as compared to the same period in 2005. The decrease in sales in the second quarter of 2006 was due to lower sales in Europe partially offset by higher sales in Japan as this product is utilized in combination therapy with PEG-INTRON. Sales of REBETOL in Japan are expected to be lower in the second half of 2006 due to the moderation of hepatitis C patient enrollments in Japan. Sales of REBETOL going forward will continue to be impacted by government mandated price reductions in Japan.

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, were flat at $82 million in the second quarter of 2006 and increased 3 percent to $162 million for the first six months of 2006, due in part to favorable trade inventory comparisons.

Global net sales of INTRON A injection, for chronic hepatitis B and C and other antiviral and anticancer indications, decreased 15 percent to $64 million in the second quarter and 17 percent to $124 million in the first six months of 2006, as compared to the same periods in 2005, due primarily to the conversion to PEG-INTRON in Japan.

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 $12 million or 26 percent to $58 million in the second quarter and $19 million or 17 percent to $138 million in the first six months of 2006, as compared to the 2005 periods, due to market share growth and new indications.

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International sales of CAELYX, for the treatment of ovarian cancer, metastatic breast cancer and Kaposi’s sarcoma, increased 15 percent to $53 million in the second quarter and 16 percent to $104 million in the first six months of 2006, as compared to the same periods in 2005, 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, were flat at $53 million in the second quarter and decreased 3 percent to $101 million in the first six months of 2006, as compared to the same periods in 2005, due to an unfavorable impact from foreign exchange and the initiation of generic competition.

Global net sales of ELOCON cream, a medium-potency topical steroid, were flat at $38 million in the second quarter and decreased 9 percent to $72 million in the first six months of 2006, as compared to the same periods in 2005, 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.

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 6 percent to $34 million in the second quarter and 19 percent to $58 million in the first six months of 2006, as compared to the same periods in 2005, 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. These 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, increased $19 million or 5 percent to $349 million in the second quarter and were flat at $659 million in the first six months of 2006, as compared to the same periods in 2005. Sales of sun care products grew 31 percent to $104 million in the second quarter and were up 10 percent to $178 million for the first six months of 2006 primarily due to timing of shipments. Sales of OTC CLARITIN were $111 million and $222 million in the second quarter and the first six months of 2006, respectively, down $22 million and $26 million, respectively, from the same periods in 2005, reflecting the continued adverse impact on retail 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 $58 million and $124 million for the three and six months ended June 30, 2006, respectively, down 30 percent in the second quarter and 24 percent for the first six months of 2006, as compared to $83 million and $163 million, respectively, for the same periods in 2005. 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 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 unfavorably 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 6 percent in the second quarter of 2006 to $239 million and 7 percent to $447 million in the first six months of 2006, as compared to the same periods

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in 2005. The increased sales reflected growth of core brands across most geographic and species areas, led by higher sales of companion animal products. The sales growth was tempered by an unfavorable impact from foreign exchange of 1 percent in the second quarter and 3 percent in the first six months of 2006.

Costs, Expenses and Equity Income

A summary of costs, expenses and equity income for the three and six months ended June 30, 2006 and 2005 is as follows:

	Three Months Ended									Six Months Ended
	June 30,									June 30,
							Increase									Increase
	2006			2005			(Decrease)			2006			2005			(Decrease)
	(Dollars in millions)						%			(Dollars in millions)						%
Cost of sales	$	1,004		$	867			16		$	1,897		$	1,756			8
Selling, general and administrative (SG&A)		1,224			1,116			10			2,310			2,197			5
Research and development (R&D)		539			442			22			1,020			825			24
Other (income)/expense, net		(19	)		(8	)		N/M			(52	)		9			N/M
Special charges		80			259			(69	)		80			286			(72	)
Equity income from cholesterol joint venture		(355	)		(170	)		109			(666	)		(389	)		71

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 for the three months ended June 30, 2006 was 64.4 percent as compared to 65.8 percent in the second quarter of 2005, reflecting the negative impact of $58 million of costs associated with manufacturing changes included in Cost of sales (see Note 2, “Special Charges and Manufacturing Streamlining,” for additional information). Gross margin for the first six months of 2006 was 64.7 percent as compared to 64.2 percent in the same period in 2005. This increase in gross margin was primarily due to increased sales of higher margin products and supply chain efficiency improvements, partly offset by the costs associated with the manufacturing changes and 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.

Selling, General and Administrative

Selling, general and administrative expenses (SG&A) were $1.2 billion in the second quarter of 2006 and $2.3 billion in the first six months of 2006, or an increase of 10 percent in the second quarter and 5 percent for the first six months of 2006, as compared to $1.1 billion and $2.2 billion, respectively, in the prior year periods. SG&A in the first six months of 2006 reflected higher promotional spending, ongoing investments in emerging markets and support for market introductions of ZETIA and VYTORIN tempered by the restructured INTEGRILIN agreement.

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Research and Development

Research and development (R&D) spending increased 22 percent to $539 million in the second quarter and 24 percent to $1 billion for the first six months of 2006 as compared to the same periods in 2005. The increase was primarily due to increased R&D headcount and higher costs associated with clinical trials. Generally, changes in R&D spending reflect fluctuations due to the timing of 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.

As a result, 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 began 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 $19 million and $52 million of other income, net, in the second quarter and the first six months of 2006, respectively, as compared to $8 million of other income, net, in the second quarter and $9 million of other expense, net, in the first six months of 2005, due primarily to higher interest rates earned in 2006 on cash equivalents and short-term investments.

Special Charges and Manufacturing Streamlining

On June 1, 2006, the Company announced changes to its manufacturing operations in Puerto Rico and New Jersey that will streamline its global supply chain and further enhance the Company’s long-term competitiveness. The Company’s manufacturing operations in Manati, Puerto Rico, will be phased out during 2006 and additional workforce reductions in Las Piedras, Puerto Rico, and New Jersey will take place. In total, the actions taken will result in the elimination of approximately 1,100 positions. Approximately 500 positions were eliminated in the second quarter with the majority of the remaining positions expected to be eliminated by year-end 2006. Total expenses associated with these actions are expected to be in the range of $250 million to $260 million. The Company expects these actions to result in annual savings of approximately $100 million in 2007 and thereafter.

Special Charges

Special charges for the three and six months ended June 30, 2006 totaled $80 million related to the changes in the Company’s manufacturing operations consisting of $25 million of severance and $55 million of fixed asset impairments.

Special charges for the three months ended June 30, 2005 totaled $259 million primarily related to an increase in litigation reserves for the Massachusetts investigation of $250 million with the majority of the remaining amount related to charges as a result of the consolidation of the Company’s U.S. biotechnology organizations. Additional information regarding litigation reserves is also included in Note 15 “Legal, Environmental and Regulatory Matters” in this 10-Q. Special charges for the six months ended June 30, 2005 totaled $286 million.

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Cost of Sales

Included in cost of sales for the three and six months ended June 30, 2006 is $13 million of accelerated depreciation and $45 million of inventory write-offs related to the announced closure of the Company’s manufacturing facilities in Manati, Puerto Rico.

The following table summarizes the activities in the accounts reflected in the Condensed Consolidated Financial Statements for the special charges and manufacturing streamlining for the three and six months ended June 30, 2006:

	Charges												Accrued
	Included in		Special		Total		Cash			Non-Cash			Liability at
	Cost of Sales		Charges		Charges		Payments			Charges			June 30, 2006
	(Dollars in millions)
Severance	$	—	$	25	$	25	$	(6	)	$	—		$	19
Asset impairments		—		55		55		—			(55	)		—
Accelerated depreciation		13		—		13		—			(13	)		—
Inventory write-offs		45		—		45		—			(45	)		—
Total	$	58	$	80	$	138	$	(6	)	$	(113	)	$	19

The Company anticipates to incur from $110 million to $120 million of additional charges related to the announced changes in the Company’s manufacturing operations. Substantially all of these additional charges will be incurred during 2006. Special charges are anticipated to be in the range of $30 million to $40 million, consisting primarily of severance. Accelerated depreciation of approximately $80 million, related to the phase-out of the remaining manufacturing operations in Manati, will be charged to Cost of sales.

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 $965 million and $1.8 billion during the three and six months ended June 30, 2006, respectively, as compared to $518 million and $1.0 billion for the three and six months ended June 30, 2005, respectively. As a franchise, the two products together have captured more than 15 percent of both new and total prescriptions in the U.S. cholesterol management market (based on June 2006 IMS data). The Company believes that total prescription data is a better measure of market share during this period of generic introductions. VYTORIN has been launched in more than 35 countries, including the U.S. in August 2004. ZETIA has been launched in more than 80 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.

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Equity income from cholesterol joint venture totaled $355 million and $666 million in the second quarter and the first six months of 2006, respectively, as compared to $170 million and $389 million, respectively, for the same periods in 2005. The increase in equity income reflected the strong sales performance for VYTORIN and ZETIA during the three and six months ended June 30, 2006. The three-month period ended June 30, 2006 was also favorably impacted by a modest increase in U.S. trade inventory buying patterns during 2006.

During the first six months of 2005 the Company recognized a milestone of $20 million for financial reporting purposes, of which $6 million was recognized in the second quarter of 2005. 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.

In addition to the milestone recognized in the first six months of 2005, the Company’s equity income in the first six months of 2006 and 2005 was favorably impacted by the proportionally greater share of income allocated from the joint venture on 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 $172 million for the three and six months ended June 30, 2006, respectively. Tax expense for the three and six months ended June 30, 2005 was $74 million and $138 million, 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 six months ended June 30, 2006.

Net Income Available to Common Shareholders

Net income available to common shareholders includes the deduction of preferred stock dividends of $22 million in each three-month period of 2006 and 2005. The preferred stock dividends related to the issuance of the 6 percent Mandatory Convertible Preferred Stock in August 2004. In addition, net income available to common shareholders for the three and six months ended June 30, 2006 included charges totaling $138 million related to actions to streamline the Company’s manufacturing operations. The six months ended June 30, 2006 included an income item 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. For the three and six months ended June 30, 2005, net income available to common shareholders included special charges of $259 million (see Note 2, “Special Charges and Manufacturing Streamlining,” for additional information).

LIQUIDITY AND FINANCIAL RESOURCES

Discussion of Cash Flow

	Six Months Ended
	June 30,
	2006			2005
	(Dollars in millions)
Cash flow from operating activities	$	810		$	495
Cash flow from investing activities		(2,709	)		32
Cash flow from financing activities		(1,022	)		(1,366	)

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Net cash provided by operating activities for the first six months of 2006 was $810 million, an increase of $315 million, as compared with $495 million in the same period of 2005. The increase primarily resulted from higher net income after considering the non-cash portion of special charges in both periods and stock-based compensation activity during 2006. This increase was partially offset by increased working capital requirements during the first six months of 2006 due to timing of cash payments. Future payments regarding previously disclosed litigation and investigations and pension plan contributions will likely increase cash needs.

Net cash used for investing activities during the first six months of 2006 was $2.7 billion primarily related to the net purchase of short-term investments of $2.5 billion and $192 million of capital expenditures. Net cash provided by investing activities for the six months of 2005 was $32 million primarily related to net reductions in short-term investments of $194 million and proceeds from sales of property and equipment of $38 million offset by $187 million of capital expenditures.

Net cash used for financing activities in the first six months of 2006 and 2005 was $1.0 billion and $1.4 billion, respectively. Uses of cash for financing activities for the six months ended June 30, 2006 and 2005 included the payment of dividends on common and preferred shares of $205 million in each period, and the repayment of short-term borrowings of $849 million and $1.2 billion, respectively.

As the Company’s financial situation continues 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 $2.3 billion at June 30, 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 $1.5 billion credit facility with a syndicate of banks. This 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 June 30, 2006, no borrowings were outstanding under this facility.

In addition to the above credit facility, the Company entered into a $575 million credit facility during the fourth quarter of 2005, all of which was drawn at December 31, 2005 by a wholly-owned international subsidiary to fund repatriations under the American Jobs Creation Act of 2004 (AJCA). This credit facility

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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 June 30, 2006, the outstanding balance under this facility was $200 million.

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

At June 30, 2006 and December 31, 2005, short-term borrowings, including the amount borrowed under the credit facilities mentioned above, totaled $430 million and $1.3 billion, respectively, including outstanding commercial paper of $148 million and $298 million, respectively. The short-term credit ratings 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		Stable
Standard and Poor’s		A-		A-2		Stable
Fitch Ratings		A-		F-2		Stable

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 Percent 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 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.

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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 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

34

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.

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

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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 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 and 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

Despite uncertainties about changes that may occur in the cholesterol reduction market as new generic products enter the market, the Company anticipates that sales from the cholesterol joint venture will grow in the second half of 2006.

The financial performance of the Company in the first half of 2006 is expected to be stronger than the second half of 2006.

Certain situations, such as the seasonal pattern of the Company’s business, continued R&D spending to support the Company’s pipeline and the expected unfavorable hepatitis franchise sales comparisons in Japan as new patient enrollments moderate, will have an impact on the second half of 2006.

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.

Certain factors, including those set forth in Part II, Item 1.A. “Risk Factors,” could cause actual results to differ materially from the forward-looking statements in this section.

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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods.

FIN 48 will be effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The company is currently evaluating the potential impact of FIN 48 on its financial statements.

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.

Rebates, Discounts and Returns

The Company’s rebate accruals for Federal and State governmental programs at June 30, 2006 and 2005 were $299 million and $252 million, respectively. Commercial discounts, returns and other rebate accruals at June 30, 2006 and 2005 were $304 million and $351 million, respectively. These 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, or in the case of returns and other receivable adjustments, an allowance provided against accounts receivable.

The following summarizes the activity in the accounts related to accrued rebates, sales returns and discounts for the six months ended June 30, 2006 and 2005:

	For the
	Six Months Ended
	June 30,
	2006			2005
Accrued Rebates/Returns/Discounts, Beginning of Period	$	522		$	537
Provision for Rebates		260			265
Payments		(213	)		(213	)
		47			52
Provision for Returns		99			103
Returns		(61	)		(94	)
		38			9
Provision for Discounts		265			192
Discounts granted		(269	)		(187	)
		(4	)		5
Accrued Rebates/Returns/Discounts, End of Period	$	603		$	603

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

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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 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 II, Item 1A, “Risk Factors,” of this 10-Q.

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 for additional information.

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

Material pending legal proceedings involving the Company are described in Item 3. Legal Proceedings of the 2005 10-K. The following discussion is limited to material developments to previously reported proceedings and new legal proceedings, which the Company, or any of its subsidiaries, became a party during the

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quarter ended June 30, 2006, or subsequent thereto, but before the filing of this report. This section should be read in conjunction with Item 3. Legal Proceedings of the 2005 10-K.

Antitrust Matters

K-DUR.   The FTC had appealed the federal court of appeal’s ruling that settlements relating to Schering-Plough’s patent litigation with Upsher-Smith and Lederle did not violate antitrust laws. On June 26, 2006, the U.S. Supreme Court denied the FTC’s petition for a hearing.

Other Matters

Biopharma Contract Dispute.   Biopharma S.r.l. filed a claim in the Civil Court of Rome on July 21, 2004 against certain Schering-Plough subsidiaries, alleging that the Company did not fulfill its duties under distribution and supply agreements with Biopharma. This matter was settled with no material impact on the Company’s financial statements and the claim was withdrawn on July 19, 2006.

Item 1A.   Risk Factors

The Company’s future operating results and cash flows may differ materially from the results described in this 10-Q due to risks and uncertainties related to the Company’s business, including those discussed below. In addition, these factors represent risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements contained in this report.

Key Company products generate a significant amount of the Company’s profits and cash flows, and any events that adversely affect the market for its leading products could have a material and negative impact on results of operations and cash flows.

The Company’s ability to generate profits and operating cash flow is dependent upon the increasing profitability of the Company’s cholesterol franchise, consisting of VYTORIN and ZETIA. In addition, products such as PEG-INTRON, REBETOL, REMICADE, TEMODAR, OTC CLARITIN and NASONEX accounted for a material portion of 2005 revenues. As a result of the Company’s dependence on key products, any events that adversely affect the markets for these products could have a significant impact on results of operations. These events include loss of patent protection, increased costs associated with manufacturing, OTC availability of the Company’s product or a competitive product, the discovery of previously unknown side effects, increased competition from the introduction of new, more effective treatments, and discontinuation or removal from the market of the product for any reason.

More specifically, the profitability of the Company’s cholesterol franchise may be adversely affected by the introduction of generic forms of two competing cholesterol products that lost patent protection in the first half of 2006. In addition, a generic form of Flonase (fluticasone propionate) was approved in 2006 and may unfavorably impact the corticosteroid nasal spray market.

In recent years, the market for PEG-INTRON and REBETOL has been adversely affected. As a result of the introduction of a competitor’s product for pegylated interferon and the introduction of generic ribavirin, the value of PEG-INTRON (pegylated interferon) and REBETOL (ribavirin) combination therapy for hepatitis has been severely diminished and earnings and cash flow have been materially and negatively impacted.

There is a high risk that funds invested in research will not generate financial returns because the development of novel drugs requires significant expenditures with a low probability of success.

There is a high rate of failure inherent in the research to develop new drugs to treat diseases. As a result, there is a high risk that 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 market may take a decade or more and failure can occur at any point in the process, including later in the process after significant funds have been invested.

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The Company’s success is dependent on the development and marketing of new products, and uncertainties in the regulatory and approval process may result in the failure of products to reach the market.

Products that appear promising in development may fail to reach market for numerous reasons, including the following:

•  findings of ineffectiveness or harmful side effects in clinical or pre-clinical testing;

•  failure to receive the necessary regulatory approvals, including delays in the approval of new products and new indications;

•  lack of economic feasibility due to manufacturing costs or other factors; and

•  preclusion from commercialization by the proprietary rights of others.

Intellectual property protection is an important contributor to the Company’s profitability and as patents covering the Company’s products expire or if they are found to be invalid, generic forms of the Company’s products may be introduced to the market, which may have a material and negative effect on results of operations.

Intellectual property protection is critical to Schering-Plough’s ability to successfully commercialize its products. Upon the expiration or the successful challenge of the Company’s patents covering a product, competitors may introduce generic versions of such products, which may include the Company’s well-established products. Such generic competition could result in the loss of a significant portion of sales or downward pressures on the prices at which the Company offers formerly patented products, particularly in the United States. Patents and patent applications relating to Schering-Plough’s significant products are of material importance to Schering-Plough.

Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies, which could diminish or eliminate sales and profits from those regions and negatively affect the Company’s results of operations.

Patent disputes can be costly to prosecute and defend and adverse judgments could result in damage awards, increased royalties and other similar payments and decreased sales.

Patent positions can be highly uncertain and patent disputes in the pharmaceutical industry are not unusual. An adverse result in a patent dispute involving the Company’s patents may lead to a loss of market exclusivity and render the Company’s patents invalid. An adverse result in a patent dispute involving patents held by a third party may preclude the commercialization of the Company’s products, force the Company to obtain licenses in order to continue manufacturing or marketing the affected products, negatively affect sales of existing products or result in injunctive relief and payment of financial remedies. For example, the Company’s product, DR. SCHOLL’S FREEZE AWAY wart removal product, is currently the subject of a patent infringement action brought by a third party company, and an adverse outcome in this action may result in the Company’s inability to continue manufacturing the product.

Even if the Company is ultimately successful in a particular dispute, the Company may incur substantial costs in defending its patents and other intellectual property rights. For example, a generic manufacturer may file an Abbreviated New Drug Application seeking approval after the expiration of the applicable data exclusivity and alleging that one or more of the patents listed in the innovator’s New Drug Application are invalid or not infringed. This allegation is commonly known as a Paragraph IV certification. The innovator then has the ability to file suit against the generic manufacturer to enforce its patents. In recent years, generic manufacturers have used Paragraph IV certifications extensively to challenge patents on a wide array of innovative pharmaceuticals, and it is anticipated that this trend will continue. The potential for litigation regarding Schering-Plough’s intellectual property rights always exists and may be initiated by third parties attempting to abridge Schering-Plough’s rights, as well as by Schering-Plough in protecting its rights.

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U.S. and foreign regulations, including those establishing the Company’s ability to price products, may negatively affect the Company’s sales and profit margins.

The Company faces increased pricing pressure in the U.S. and abroad from managed care organizations, institutions and government agencies and programs that could negatively affect the Company’s sales and profit margins. For example, the Medicare Prescription Drug Improvement and Modernization Act of 2003 contains a prescription drug benefit for individuals who are eligible for Medicare. The prescription drug benefit became effective on January 1, 2006, and it is anticipated that it may result in increased purchasing power of those negotiating on behalf of Medicare recipients.

In addition to legislation concerning price controls, other trends that could affect the Company’s business include legislative or regulatory action relating to pharmaceutical pricing and reimbursement, health care reform initiatives and drug importation legislation, involuntary approval of medicines for OTC use, consolidation among customers, and trends toward managed care and health care costs containment.

As a result of the U.S. government’s efforts to reduce Medicaid expenses, managed care organizations continue to grow in influence and the Company faces increased pricing pressure as managed care organizations continue to seek price discounts with respect to the Company’s products.

In the international markets, cost control methods including restrictions on physician prescription levels and patient reimbursements, emphasis on greater use of generic drugs, and across the board price cuts may decrease revenues internationally.

There are material pending government investigations against the Company, which could lead to 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, and which could give rise to other investigations or litigation by government entities or private parties.

The Company cannot predict with certainty the outcome of the pending investigations to which it is subject, any of which may lead to a judgment or settlement involving a significant monetary award or restrictions on its operations.

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 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 resolved unfavorably, could subject the Company to substantial fines, penalties and injunctive or administrative remedies, including exclusion from government reimbursement programs. In addition, an adverse outcome to a government investigation could prompt other government entities to commence investigations of the Company, or cause those entities or private parties to bring civil claims against it. 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.

Regardless of the merits or outcomes of these investigations, government investigations are costly, divert management’s attention from the Company’s business and may result in substantial damage to the Company’s reputation. Please refer to Item 3. Legal Proceedings in the Company’s 2005 10-K for descriptions of these pending investigations.

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There are other legal matters in which adverse outcomes could negatively affect the Company’s business.

Unfavorable outcomes in other pending litigation matters, including litigation concerning product pricing, securities law violations, product liability claims, ERISA matters, patent and intellectual property disputes, and antitrust matters could preclude the commercialization of products, negatively affect the profitability of existing products, materially and adversely affect the Company’s financial condition and results of operations, or subject the Company to conditions that affect business operations, such as exclusion from government reimbursement programs.

Please refer to Item 3. Legal Proceedings in the Company’s 2005 10-K for descriptions of significant pending litigation.

The Company is subject to governmental regulations, and the failure to comply with, as well as the costs of compliance of, these regulations may adversely affect the Company’s financial position and results of operations.

The Company’s manufacturing facilities must meet stringent regulatory standards and are subject to regular inspections. The cost of regulatory compliance, including that associated with compliance failures, can materially affect the Company’s financial position and results of operations. Failure to comply with regulations, which include pharmacovigilance reporting requirements and standards relating to clinical, laboratory and manufacturing practices, can result in delays in the approval of drugs, seizure or recalls of drugs, suspension or revocation of the authority necessary for the production and sale of drugs, fines and other civil or criminal sanctions.

For example, 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 at certain of the Company’s facilities in New Jersey and Puerto Rico. 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 number of products produced 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.

The Company also is subject to other regulations, including environmental, health and safety and labor regulations.

Developments following regulatory approval may decrease demand for the Company’s products.

Even after a product reaches market, certain developments following regulatory approval may decrease demand for the Company’s products, including the following:

•  the re-review of products that are already marketed;

•  uncertainties concerning safety labeling changes; and

•  greater scrutiny in advertising and promotion.

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. These situations also have raised concerns among some prescribers and patients relating to the safety and efficacy of pharmaceutical products in general, which have negatively affected the sales of such products.

In addition, following the wake of recent product withdrawals of other companies and other significant safety issues, health authorities such as the FDA, the European Medicines Agency and the Pharmaceuticals and Medicines Device Agency 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.

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If previously unknown side effects are discovered or if there is an increase in the prevalence of negative publicity regarding known side effects of any of the Company’s products, it could significantly reduce demand for the product or may require the Company to remove the product from the market.

New products and technological advances developed by the Company’s competitors may negatively affect sales.

The Company operates in a highly competitive industry. Many of the Company’s competitors have been conducting research and development in areas both served by the Company’s current products and by those products the Company is in the process of developing. Competitive developments that may impact the Company include technological advances by, patents granted to, and new products developed by competitors or new and existing generic, prescription and/or OTC products that compete with products of Schering-Plough or the Merck/ Schering-Plough Cholesterol Partnership. In addition, it is possible that doctors, patients and providers may favor those products offered by competitors due to safety, efficacy, pricing or reimbursement characteristics, and as a result the Company will be unable to maintain its sales for such products.

Because the Company often competes with other companies to acquire or license products (whether in early stage development or already approved for commercial sale) that the Company believes to be clinically or commercially attractive, it may be difficult for the Company to enter into such transactions.

One aspect of the Company’s business is to acquire or license rights to develop or sell products from other companies. It may be challenging to acquire or license products that the Company believes to be clinically or commercially attractive on acceptable terms or at all because the Company competes for these opportunities against companies that often have far greater financial resources than the Company. The Company’s prospects may be adversely affected if it is unable to obtain rights to additional products on acceptable terms.

The Company relies on third party relationships for its key products and changes to the third parties that are outside its control may impact the business.

The Company relies on third party relationships for many of its key products. Any time that third parties are involved, there may be changes to or influences or impact on the third parties that are outside the control of the Company that may also, directly or indirectly, impact the Company’s business operation.

The Company does not have operational or financial control over these third parties and may only have limited influence, if any, with respect to the manner in which they conduct their businesses or behave in their relationships with the Company. Also, in many cases, these third parties may offer or develop products that may compete with the Company’s products or have other conflicting interests relative to the Company.

The Company operates a global business that exposes the Company to additional risks, and any adverse events could have a material negative impact on results of operations.

The Company operates in over 120 countries, and non-U.S. operations generate the majority of the Company’s profit and cash flow. Non-U.S. operations are subject to certain risks, which are inherent in conducting business overseas. These risks include possible nationalization, expropriation, importation limitations, pricing and reimbursement restrictions, and other restrictive governmental actions or economic destabilization. Also, fluctuations in inflation, interest rate, and foreign currency exchange rates can impact Schering-Plough’s consolidated financial results.

In addition, there may be changes to the Company’s business and political position if there is instability, disruption or destruction in a significant geographic region, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest; and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease.

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Insurance coverage for product liability may become unavailable or cost prohibitive.

The Company maintains insurance coverage with such deductibles and self-insurance to reflect market conditions (including cost and availability) existing at the time it is written, and the relationship of insurance coverage to self-insurance varies accordingly. However, as a result of increased product liability claims in the pharmaceutical industry, the availability of third party insurance may become unavailable or cost prohibitive.

The Company is subject to evolving and complex tax laws, which may result in additional liabilities that may affect results of operations.

The Company is subject to evolving and complex tax laws in the U.S. and in foreign jurisdictions. Significant judgment is required for determining the Company’s tax liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company’s U.S. federal income tax returns for the 1997-2002 period are currently under audit by the Internal Revenue Service. The Company may be challenged by the IRS and other tax authorities on positions it has taken in its income tax returns. Although the Company believes that its accrual for tax contingencies is adequate for all open years, based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities, due to the complexity of tax contingencies, the ultimate resolution may result in payments that materially affect shareholders’ equity, liquidity and/or cash flow.

In addition, the Company may be impacted by changes in tax laws including tax rate changes, new tax laws and revised tax law interpretations in domestic and foreign jurisdictions.

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 second quarter of 2006.

					Total Number of		Maximum Number
	Total				Shares Purchased as		of Shares that May
	Number of		Average		Part of Publicly		Yet Be Purchased
	Shares		Price Paid		Announced Plans or		Under the Plans or
Period	Purchased		per Share		Programs		Programs
April 1, 2006 through April 30, 2006		742	$	18.84		N/A		N/A
May 1, 2006 through May 31, 2006		3,654	$	19.06		N/A		N/A
June 1, 2006 through June 30, 2006		763	$	19.25		N/A		N/A
Total April 1, 2006 through June 30, 2006		5,159	$	19.05		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.

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

The annual meeting of shareholders was held on May 19, 2006 and shareholders voted on the following matters with the results indicated:

(1) Election of Directors:

Five nominees for director were elected for a one-year term by a vote of shares as follows:

	Shares Voted For*				Shares Withheld
	Number of		Percentage		Number of		Percentage
	Shares		of Votes Cast		Shares		of Votes Cast
Thomas J. Colligan		1,326,011,765		98.31%		22,844,158		1.69%
C. Robert Kidder		1,321,343,755		97.96%		27,512,168		2.04%
Carl E. Mundy		1,316,270,876		97.58%		32,585,047		2.42%
Patricia F. Russo		1,288,468,622		95.52%		60,387,301		4.48%
Arthur F. Weinbach		1,291,116,387		95.72%		57,739,536		4.28%

* Includes 183,389,211 broker non-votes

The terms of the following directors continued after the meeting: Hans W. Becherer, Fred Hassan, Philip Leder, M.D., Eugene R. McGrath, Kathryn C. Turner, and Robert F.W. van Oordt.

(2) Ratification of Auditors:

The designation by the Audit Committee of Deloitte & Touche LLP to audit the books and accounts of the Company for the year ending December 31, 2006 was ratified with a vote of 1,324,307,573 shares for (including 183,389,211 broker non-votes), 13,693,703 shares against and 10,854,647 abstentions.

(3) Annual Election of Directors:

The amendments to the governing instruments to provide for the annual election of Directors was approved with a vote of 1,321,736,377 shares for, 15,812,784 shares against and 11,306,762 abstentions.

(4) Directors Compensation Plan:

The Directors Compensation Plan was approved with a vote of 1,096,134,536 shares for, 53,295,759 shares against, 16,036,417 abstentions and 183,389,211 broker non-votes.

(5) Stock Incentive Plan:

The 2006 Stock Incentive Plan was approved with a vote of 1,053,731,083 shares for, 97,373,717 shares against, 14,361,912 abstentions and 183,389,211 broker non-votes.

(6) Shareholder Proposal:

A shareholder proposal to amend the certificate of incorporation to add a majority vote standard for the election of directors received a vote of 518,481,905 shares for, 623,442,942 shares against, 23,541,865 abstentions and 183,389,211 broker non-votes.

(7) Shareholder Proposal:

A shareholder proposal to adopt a simple majority vote requirement and make it applicable to the greatest number of governance issues practicable received a vote of 722,407,461 shares for, 426,343,527 shares against, 16,715,724 abstentions and 183,389,211 broker non-votes.

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Item 5.   Other Information.

As disclosed in Item 4 above, on May 19, 2006, shareholders approved the Directors Compensation Plan, which covers all compensation to outside Directors (including the issuance of up to 1 million Common Shares), and the 2006 Stock Incentive Plan, which covers equity awards (including the issuance of up to 92 million shares) to officers and other key employees. A description of the material terms and provisions of the Plans were previously reported in the Company’s definitive proxy statement filed on March 22, 2006 and the Plans were included in the proxy statement as Exhibits J and K.

Item 6.   Exhibits

All exhibits are part of Commission File Number 1-6571.

Exhibit
Number			Description	Location
	3	(a)	Amended and Restated Certificate of Incorporation of Schering-Plough Corporation.	Attached.
	3	(b)	Amended and Restated By-Laws of Schering-Plough Corporation.	Attached.
	10	(d)(ii)	Schering-Plough Corporation 2006 Stock Incentive Plan.	Incorporated by reference to Exhibit K to the Company’s 2006 Proxy Statement on Schedule 14A filed with the Commission on March 22, 2006.
	10	(h)(ii)	Schering-Plough Corporation Directors Compensation Plan (replaces Exhibits 10(f)(i), 10(h), 10(v) and 10(w) to the Company’s 2005 10-K).	Incorporated by reference to Exhibit J to the Company’s 2006 Proxy Statement on Schedule 14A filed with the Commission on March 22, 2006.
	12		Computation of Ratio of Earnings to Fixed Charges.	Attached.
	15		Awareness letter.	Attached.
	31	.1	Sarbanes-Oxley Act of 2002, Section 302 Certification for Chairman of the Board and Chief Executive Officer.	Attached.
	31	.2	Sarbanes-Oxley Act of 2002, Section 302 Certification for Executive Vice President and Chief Financial Officer.	Attached.
	32	.1	Sarbanes-Oxley Act of 2002, Section 906 Certification for Chairman of the Board and Chief Executive Officer.	Attached.
	32	.2	Sarbanes-Oxley Act of 2002, Section 906 Certification for Executive Vice President and Chief Financial Officer.	Attached.

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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: July 28, 2006

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