FORM 10-Q

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

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

For the quarterly period ended JUNE 30, 2005

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) (I.R.S. Employer Identification No.)
2000 Galloping Hill Road (908) 298-4000
Road Kenilworth, NJ (Registrant's telephone number, including area code)
(Address of principal executive offices)
07033
(Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.

YES [X] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]

Common Shares Outstanding as of June 30, 2005: 1,476,378,678

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,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------

Net sales $ 2,532 $ 2,147 $ 4,900 $ 4,110
---------- ---------- ---------- ----------
Cost of sales 867 790 1,756 1,530
Selling, general and administrative 1,116 979 2,197 1,893
Research and development 442 451 825 824
Other (income)/expense, net (8) 43 9 78
Special charges 259 42 286 112
Equity income from cholesterol joint venture (170) (77) (389) (154)
---------- ---------- ---------- ----------

Income/(loss) before income taxes 26 (81) 216 (173)
Income tax expense/(benefit) 74 (16) 138 (35)
---------- ---------- ---------- ----------
Net (loss)/income $ (48) $ (65) $ 78 $ (138)
---------- ---------- ---------- ----------

Preferred stock dividends 22 -- 43 --
---------- ---------- ---------- ----------
Net (loss)/income available to common
shareholders $ (70) $ (65) $ 35 $ (138)
---------- ---------- ---------- ----------

Diluted (loss)/earnings per common share $ (.05) $ (.04) $ .02 $ (.09)
========== ========== ========== ==========

Basic (loss)/earnings per common share $ (.05) $ (.04) $ .02 $ (.09)
========== ========== ========== ==========

Dividends per common share $ .055 $ .055 $ .11 $ .11
========== ========== ========== ==========

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

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
(Amounts in millions)

Six Months Ended
June 30,
-----------------------------
2005 2004
---------- ----------

Operating Activities:
Net income/ (loss) $ 78 $ (138)
Adjustments to reconcile net income/(loss) to net cash provided
by operating activities:
Tax refund from U.S. loss carryback -- 404
Special charges 268 46
Depreciation and amortization 239 217
Changes in assets and liabilities:
Accounts receivable (378) (237)
Inventories 38 84
Prepaid expenses and other assets 62 (7)
Accounts payable and other liabilities 188 (36)
---------- ----------
Net cash provided by operating activities 495 333
---------- ----------
Investing Activities:

Capital expenditures (187) (227)
Dispositions of property and equipment 38 4
Purchases of investments -- (244)
Reduction in investments 194 --
Other, net (13) --
---------- ----------
Net cash provided by/(used for) investing activities 32 (467)
---------- ----------
Financing Activities:

Cash dividends paid to common shareholders (162) (162)
Cash dividends paid to preferred shareholders (43) --
Net change in short-term borrowings (1,188) 284
Other, net 27 (48)
---------- ----------
Net cash (used for)/provided by financing activities (1,366) 74
---------- ----------
Effect of exchange rates on cash and
cash equivalents (11) (3)
---------- ----------
Net decrease in cash and cash equivalents (850) (63)
Cash and cash equivalents, beginning of period 4,984 4,218
---------- ----------
Cash and cash equivalents, end of period $ 4,134 $ 4,155
========== ==========

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

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in millions, except per share figures)

June 30, December 31,
2005 2004
---------- ------------

Assets
Cash and cash equivalents $ 4,134 $ 4,984
Short-term investments 657 851
Accounts receivable, net 1,680 1,407
Inventories 1,483 1,580
Deferred income taxes 301 309
Prepaid and other current assets 822 872
---------- ------------
Total current assets 9,077 10,003
Property, plant and equipment 7,058 7,085
Less accumulated depreciation 2,569 2,492
---------- ------------
Property, net 4,489 4,593
Goodwill 206 209
Other intangible assets, net 359 371
Other assets 706 735
---------- ------------
Total assets $ 14,837 $ 15,911
========== ============
Liabilities and Shareholders' Equity
Accounts payable $ 1,102 $ 978
Short-term borrowings and current portion of long-term debt 378 1,569
Other accrued liabilities 2,769 2,619
---------- ------------
Total current liabilities 4,249 5,166
Long-term debt 2,392 2,392
Other long-term liabilities 859 797
---------- ------------
Total long-term liabilities 3,251 3,189

Commitments and contingent liabilities (Note 15)
Shareholders' equity:
6% Mandatory convertible preferred shares - $1 par value;
issued - 29; $50 per share face value 1,438 1,438
Common shares - $.50 per share par value; issued: 2,030 1,015 1,015
Paid-in capital 1,262 1,234
Retained earnings 9,487 9,613
Accumulated other comprehensive loss (426) (300)
---------- ------------
Total 12,776 13,000
Less treasury shares: 2005 - 553 shares;
2004 - 555 shares, at cost (5,439) (5,444)
---------- ------------
Total shareholders' equity 7,337 7,556
---------- ------------
Total liabilities and shareholders' equity $ 14,837 $ 15,911
========== ============

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

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 2004 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

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." Special
charges for the six months ended June 30, 2005 totaled $286 million.

Special charges for the three months ended June 30, 2004 were $42 million
primarily relating to employee termination costs. Special charges for the six
months ended June 30, 2004 totaled $112 million, comprised of $86 million in
employee termination costs and $26 million in asset impairment charges.

Employee Termination Costs

Amounts recognized relating to the VERP during the three and six months ended
June 30,

2005 were $2 million and $4 million, respectively; and $8 million and $17
million for the three and six months ended June 30, 2004, respectively; with
cumulative costs recognized of $188 million as of June 30, 2005.

In addition, the Company recognized $4 million and $23 million of other employee
severance costs as special charges for the three and six months ended June 30,
2005, respectively, and $34 million and $69 million for the three and six months
ended June 30, 2004, respectively.

The following summarizes the activity in the accounts related to employee
termination costs (Dollars in millions):

Employee Termination Costs 2005 2004
- -------------------------- ------ ------

Special charges liability balance at
December 31, 2004 and 2003, respectively $ 18 $ 29

Special charges incurred during
six months ended June 30, 27 86

Credit to retirement benefit plan liability
during the six months ended June 30, (4) (17)

Disbursements during the six
months ended June 30, (18) (59)
------ ------
Special charges liability balance at
June 30, $ 23 $ 39
====== ======

Asset Impairment and Other Charges

For the three months ended June 30, 2005, the Company recognized $3 million of
asset impairment and other charges. For the six months ended June 30, 2005 and
2004, the Company recognized asset impairment and other charges of $9 million
and $26 million, respectively.

3. EQUITY INCOME FROM CHOLESTEROL JOINT VENTURE

In May 2000, the Company and Merck and Company, Inc. (Merck) entered into
separate agreements to jointly develop and market in the U.S. (1) two
cholesterol lowering drugs and (2) an allergy/asthma drug. In December 2001, the
cholesterol agreement was 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 mode to the maximum degree possible
by relying on the respective infrastructures of the two companies. These
agreements generally provide for equal sharing of research and development costs
and for co-promotion of approved products by each company.

The cholesterol partnership 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 Partnership (the Partnership
or the joint venture). The cholesterol partnership agreements provide for the
sharing of operating income generated by the Partnership based upon percentages
that vary by product, sales level and country. In the U.S. market,
Schering-Plough 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 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 cholesterol joint venture as under U.S. GAAP 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 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.

For the three and six months ended June 30, 2005, Schering-Plough recognized
milestones of $6 million and $20 million, respectively. These milestones related
to certain European approvals of VYTORIN (ezetimibe/simvastatin) in 2005.

During the first quarter of 2004, Schering-Plough recognized a milestone of $7
million related to the approval of ezetimibe/simvastatin in Mexico.

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

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

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

The unaudited financial information below presents summarized combined financial
information for the Merck/Schering-Plough Cholesterol Partnership for the
three and

six months ended June 30, 2005:

Three Months Six Months
Ended Ended
(Dollars in millions) June 30, 2005 June 30, 2005
------------- -------------

Net sales $ 533 $ 1,049
Cost of sales 39 67
Income from operations 248 474

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, 2005 were $127 million and $296 million,
respectively. In the U.S. market, Schering-Plough receives a greater share of
income from operations on the first $300 million of annual Zetia sales. As a
result, Schering-Plough's share of the Partnership's income from operations is
generally higher in the first quarter than in subsequent quarters. In addition,
for the three and six months ended June 30, 2005, the Company's share of the
Partnership's income from operations includes milestones of $6 million and $20
million, respectively.

The following 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, 2005:

Three Months Six Months
Ended Ended
(Dollars in millions) June 30, 2005 June 30, 2005
------------- -------------

Schering-Plough's share of income from operations $ 127 $ 296
Reimbursement to Schering-Plough for physician details 44 89
Elimination of intercompany profit and other, net (1) 4
------------- -------------
Total Equity income from cholesterol joint venture $ 170 $ 389
------------- -------------

Equity income 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 Partnership, 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 Merck or the Company.

The allergy/asthma agreement provides for the development and marketing of a
once-daily, fixed-combination tablet containing CLARITIN and Singulair.
Singulair is Merck's once-daily leukotriene receptor antagonist for the
treatment of asthma and seasonal allergic rhinitis. In January 2002, the
Merck/Schering-Plough respiratory joint venture reported on results of Phase III
clinical trials of a fixed-combination tablet containing CLARITIN and Singulair.
This Phase III study did not demonstrate sufficient added benefits in the

treatment of seasonal allergic rhinitis. The CLARITIN and Singulair combination
tablet does not have approval in any country and remains in clinical
development.

4. ACCOUNTING FOR STOCK-BASED COMPENSATION

Currently, the Company accounts for its stock compensation arrangements using
the intrinsic value method. No stock-based employee compensation cost is
reflected in Net (loss)/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.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123R (Revised 2004), "Share-Based Payment." Statement 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 is required to implement
this SFAS in the first quarter of 2006 by recognizing compensation on all
share-based grants made on or after January 1, 2006, and for the unvested
portion of share-based grants made prior to January 1, 2006. Restatement of
previously issued statements is permitted, but not required. The Company is
currently evaluating the various implementation options available and related
financial impacts under SFAS 123R.

The following table reconciles Net (loss)/income available to common
shareholders and basic/diluted (loss)/earnings per common share, as reported, to
pro forma net (loss)/income available to common shareholders and basic/diluted
(loss)/earnings per common share, as if the Company had expensed the grant-date
fair value of both stock options and deferred stock units as permitted by SFAS
123, "Accounting for Stock-Based Compensation."

Three Months Ended Six Months Ended
(Dollars in millions) June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------

Net (loss)/income available to common shareholders,
as reported $ (70) $ (65) $ 35 $ (138)
Add back: Expense included in reported net (loss)/
income for deferred stock units, net of tax in 2004 26 8 40 20
Deduct: Pro forma expense as if both stock options
and deferred stock units were charged against
net (loss)/income, net of tax in 2004 (48) (24) (84) (53)
---------- ---------- ---------- ----------
Pro forma net (loss)/income available to common
shareholders using the fair value method $ (92) $ (81) $ (9) $ (171)
========== ========== ========== ==========

Diluted (loss)/earnings per common share:
Diluted (loss)/earnings per common share,
as reported $ (.05) $ (.04) $ .02 $ (.09)
---------- ---------- ---------- ----------
Pro forma diluted (loss)/earnings per common
share using the fair value method (.06) (.06) (.01) (.12)
---------- ---------- ---------- ----------
Basic (loss)/earnings per common share:
Basic (loss)/earnigns per common share,
as reported $ (.05) $ (.04) $ .02 $ (.09)
---------- ---------- ---------- ----------
Pro forma basic (loss)/earnings per common
share using the fair value method (.06) (.06) (.01) (.12)
---------- ---------- ---------- ----------

Basic and diluted (loss)/earnings per common share are calculated based on net
(loss)/income available to common shareholders.

5. OTHER (INCOME)/EXPENSE, NET

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

Three Months Ended Six Months Ended
(Dollars in millions) June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------

Interest cost incurred $ 44 $ 47 $ 92 $ 100
Less: amount capitalized on construction (4) (4) (6) (9)
---------- ---------- ---------- ----------
Interest expense 40 43 86 91
Interest income (40) (15) (74) (29)
Foreign exchange losses 1 4 4 4
Other, net (9) 11 (7) 12
---------- ---------- ---------- ----------
Total other (income)/expense, net $ (8) $ 43 $ 9 $ 78
========== ========== ========== ==========

6. INCOME TAXES

At December 31, 2004, the Company has approximately $1.0 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, 2005.

The Company's tax provision for the six-month period ended June 30, 2005 is
primarily related to foreign taxes and does not include any benefit related to
U.S. NOLs. The Company has established a valuation allowance on 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 Ended Six Months Ended
(Dollars in millions) June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------

Service cost $ 27 $ 23 $ 54 $ 49
Interest cost 30 31 65 66
Expected return on plan assets (31) (35) (67) (76)
Amortization, net 9 8 20 16
Termination benefits 2 5 4 11
Settlement -- 2 -- 4
---------- ---------- ---------- ----------
Net pension expense $ 37 $ 34 $ 76 $ 70
========== ========== ========== ==========

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

Three Months Ended Six Months Ended
(Dollars in millions) June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------

Service cost $ 4 $ 4 $ 7 $ 7
Interest cost 7 7 12 13
Expected return on plan assets (4) (4) (8) (8)
Amortization, net -- 1 1 2
Termination benefits -- 1 -- 2
---------- ---------- ---------- ----------
Net other post-retirement benefits expense $ 7 $ 9 $ 12 $ 16
========== ========== ========== ==========

8. EARNINGS PER COMMON SHARE

The following table reconciles the components of the basic and diluted
(loss)/earnings per share computations:

Three Months Ended Six Months Ended
(Dollars and Shares in millions) June 30, June 30,
-------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------

EPS Numerator:

Net (loss)/income $ (48) $ (65) $ 78 $ (138)
Less: Preferred stock dividends 22 -- 43 --
---------- ---------- ---------- ----------
Net (loss)/income available to common shareholders $ (70) $ (65) $ 35 $ (138)
---------- ---------- ---------- ----------
EPS Denominator:

Average shares outstanding for basic EPS 1,476 1,472 1,475 1,471
Dilutive effect of options and deferred stock units -- -- 7 --
---------- ---------- ---------- ----------
Average shares outstanding for diluted EPS 1,476 1,472 1,482 1,471
---------- ---------- ---------- ----------

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 100 million and 44 million, respectively, for
the three and six months ended June 30, 2005, and 90 million for the three and
six months ended June 30, 2004. Also, at June 30, 2005, 75 million common shares
obtainable upon conversion of the Company's 6% Mandatory Convertible Preferred
Stock were excluded from the computation of diluted earnings per share because
their effect would have been antidilutive.

9. COMPREHENSIVE LOSS

Comprehensive loss is comprised of the following:

Three Months Ended Six Months Ended
(Dollars in millions) June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------

Net (loss)/income $ (48) $ (65) $ 78 $ (138)
Foreign currency translation adjustment (59) (19) (124) (61)
Net unrealized loss on investments (15) (2) (1) (1)
---------- ---------- ---------- ----------
Total comprehensive loss $ (122) $ (86) $ (47) $ (200)
========== ========== ========== ==========

10. INVENTORIES

Inventories consisted of the following:

June 30, December 31,
(Dollars in millions) 2005 2004
---------- ------------

Finished products $ 615 $ 648
Goods in process 572 602
Raw materials and supplies 296 330
---------- ------------
Total inventories $ 1,483 $ 1,580
========== ============

11. OTHER INTANGIBLE ASSETS

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

(Dollars in millions)

June 30, 2005 December 31, 2004
---------------------------------------------- ----------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------------ ------------ ------------ ------------ ------------ ------------

Patents and
licenses $ 561 $ 308 $ 253 $ 558 $ 287 $ 271
Trademarks and
other 154 48 106 144 44 100
------------ ------------ ------------ ------------ ------------ ------------
Total other
intangible
assets $ 715 $ 356 $ 359 $ 702 $ 331 $ 371
============ ============ ============ ============ ============ ============

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

12. SHORT AND LONG-TERM BORROWINGS AND OTHER COMMITMENTS

Short and Long-Term Borrowings

At June 30, 2005 and December 31, 2004, short-term borrowings totaled $378
million and $1.6 billion, respectively.

On November 26, 2003, the Company issued $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
(collectively the Notes). Interest is payable semi-annually. The net proceeds
from this

offering were $2.37 billion. Upon issuance, the Notes were rated A3 by Moody's
Investors Service, Inc. (Moody's), and A+ by Standard & Poor's Rating Services
(S&P). The interest rates payable on the Notes are subject to adjustment as
follows: If the rating assigned to a particular series of Notes by either
Moody's or S&P changes to a rating set forth below, the interest rate payable on
that series of notes will be the initial interest rate (5.3 percent for the
notes due 2013 and 6.5 percent for the notes due 2033) plus the additional
interest rate set forth below for each rating assigned by Moody's and S&P.

Additional Additional
Moody's Rating Interest Rate SPRating Interest Rate
- -------------- ------------- ------------ -------------

Baa1 0.25% BBB+ 0.25%
Baa2 0.50% BBB 0.50%
Baa3 0.75% BBB- 0.75%
Ba1 or below 1.00% BB+ or below 1.00%

In no event will the interest rate for any of the Notes increase by more than 2
percent above the initial coupon rates of 5.3 percent and 6.5 percent,
respectively. If either Moody's or S&P subsequently upgrades its ratings, the
interest rates will be correspondingly reduced, but not below 5.3 percent or 6.5
percent, respectively. Furthermore, 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 both Moody's and S&P below A3 or A-, respectively, both Moody's and
S&P raise their rating to A3 and A-, respectively, or better.

On July 14, 2004, Moody's lowered its rating of the Notes to Baa1 and,
accordingly, the interest payable on each note increased by 25 basis points,
respectively, effective December 1, 2004. Therefore, on December 1, 2004, the
interest rate payable on the notes due 2013 increased from 5.3% to 5.55%, and
the interest rate payable on the notes due 2033 increased from 6.5% to 6.75%. At
June 30, 2005 the Notes were rated Baa1 by Moody's and A- by S&P.

The Notes are redeemable in whole or in part, at the Company's option at any
time, at a redemption price equal to the greater of (1) 100 percent of the
principal amount of such notes or (2) the sum of the present values of the
remaining scheduled payments of principal and interest discounted using the rate
of treasury notes with comparable remaining terms plus 25 basis points for the
2013 notes or 35 basis points for the 2033 notes.

Credit Facilities

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

U.S. parent company or by its wholly-owned foreign 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, 2005 no funds have
been drawn down under this facility.

6% Mandatory Convertible Preferred Stock and Shelf Registration

In August 2004, the Company issued 28,750,000 shares of 6% Mandatory Convertible
Preferred stock (the Preferred Stock) with a face value of $1.44 billion. Net
proceeds to the Company were $1.4 billion after deducting commissions, discounts
and other underwriting expenses. 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. The preferred shareholders may elect to convert at any time prior to
September 14, 2007, at the minimum conversion ratio of 2.2451 common shares per
share of the Preferred Stock. Additionally, if at any time prior to the
mandatory conversion date, the closing price of the Company's common shares
exceeds $33.41 (for at least 20 trading days within a period of 30 consecutive
trading days), the Company may elect to cause the conversion of all, but not
less than all, of the Preferred Stock then outstanding at the same minimum
conversion ratio of 2.2451 common shares for each preferred share.

The Preferred Stock accrues dividends at an annual rate of 6 percent on shares
outstanding. The dividends are cumulative from the date of issuance and, to the
extent the Company is legally permitted to pay dividends and the Board of
Directors declares a dividend payable, the Company will pay dividends on each
dividend payment date. The dividend payment dates are March 15, June 15,
September 15 and December 15.

As of June 30, 2005 the Company has the ability to issue $563 million (principal
amount) of securities under a currently effective SEC shelf registration.

Interest Rate Swap Contract

The Company previously disclosed an interest rate swap arrangement with a
counterparty bank. The arrangement utilized two long-term interest rate swap
contracts, one between a foreign-based subsidiary of the Company and a bank and
the other between a U.S. subsidiary of the Company and the same bank. The two
contracts had equal and offsetting terms and were covered by a master netting
arrangement. The contract involving the foreign-based subsidiary permitted the
subsidiary to prepay a portion of its future obligation to the bank, and the
contract involving the U.S. subsidiary permitted the bank to prepay a portion of
its future obligation to the U.S. subsidiary. Interest was paid on the prepaid
balances by both parties at market rates. Prepayments totaling $1.9 billion were
made under both contracts as of December 31, 2004.

The terms of the swap contracts, as amended, called for a phased termination of
the swaps based on an agreed repayment schedule that was to begin no later than
March 31, 2005. Termination would require the Company and the counterparty each
to repay all prepayments pursuant to the agreed repayment schedule. The terms
also allowed the Company, at its option, to accelerate the termination of the
arrangement and associated scheduled repayments for a nominal fee.

On February 28, 2005, the Company's foreign-based subsidiary and U.S. subsidiary
each gave notice to the counterparty of their intent to terminate the
arrangement. On March 21, 2005 the Company terminated these swap agreements and
all associated repayments were made by the respective obligors with no material
impact on the Company's Condensed

Consolidated Statement of Operations.

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 OTC, foot care and sun care products,
primarily in the U.S. The Animal Health segment discovers, develops,
manufactures and markets animal health products.

Net sales by segment:

Three Months Ended Six Months Ended
(Dollars in millions) June 30, June 30,
------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------

Prescription Pharmaceuticals $ 1,975 $ 1,644 $ 3,820 $ 3,125
Consumer Health Care 330 317 660 629
Animal Health 227 186 420 356
---------- ---------- ---------- ----------
Consolidated net sales $ 2,532 $ 2,147 $ 4,900 $ 4,110
========== ========== ========== ==========

Profit by segment:

Three Months Ended Six Months Ended
(Dollars in millions) June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------

Prescription Pharmaceuticals $ 254 $ -- $ 414 $ (41)
Consumer Health Care 64 46 170 146
Animal Health 39 16 56 21
Corporate and other, including
net interest expense of $0 and $12
in 2005 and $28 and $62 in 2004 (331) (143) (424) (299)
---------- ---------- ---------- ----------
Consolidated profit/(loss)
before tax $ 26 $ (81) $ 216 $ (173)
========== ========== ========== ==========

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 2004 10-K.

For the three and six months ended June 30, 2005, "Corporate and other" included
special charges of $259 million and $286 million, respectively, related to
certain litigation charges, VERP, other employee severance costs, and asset
impairment charges (see Note 2 "Special Charges" for additional information). 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.

For the three and six months ended June 30, 2004, "Corporate and other" included
special charges of $42 million and $112 million, respectively, related to VERP,
other employee severance costs and asset impairment charges (see Note 2 "Special
Charges" for additional information). It is estimated that special charges for
the three months ended June 30, 2004 related to the reportable segments as
follows: Prescription Pharmaceuticals - $38 million, Consumer Health Care - $1
million, Animal Health - $1 million and Corporate and other - $2 million.
Special charges for the six months ended June 30, 2004 is estimated to be as
follows: Prescription Pharmaceuticals - $96 million, Consumer Health Care - $2
million, Animal Health - $2 million and Corporate and other - $12 million.

Net sales of products comprising 10% or more of the Company's U.S. or
international net sales in the three and six months ended June 30, 2005 were as
follows:

Three Months Ended Six Months Ended
(Dollars in millions) June 30, 2005 June 30, 2005
---------------------- ----------------------
U.S. International U.S. International
------ ------------- ------ -------------

NASONEX $ 115 $ 84 $ 223 $ 159
OTC CLARITIN 126 7 234 14
REMICADE - 234 - 454

14. CONSENT DECREE

On May 17, 2002, the Company announced that it had reached an agreement with the
FDA for a consent decree to resolve issues involving the Company's compliance
with current Good Manufacturing Practices (cGMP) at certain manufacturing
facilities in New Jersey and Puerto Rico. The U.S. District Court for the
District of New Jersey approved and entered the consent decree on May 20, 2002.

Under terms of the consent decree, the Company agreed to pay a total of $500
million to the U.S. government in two equal installments of $250 million; the
first installment was paid in May 2002, and the second installment was paid in
May 2003.

The consent decree requires the Company to complete a number of actions,
including comprehensive cGMP Work Plans for the Company's manufacturing
facilities in New Jersey and Puerto Rico and revalidation of the finished drug
products and bulk active pharmaceutical ingredients manufactured at those
facilities.

Under the decree, the scheduled completion dates are December 31, 2005 for cGMP
Work Plans; September 30, 2005, for revalidation programs for bulk active
pharmaceutical ingredients; and December 31, 2005 for revalidation programs for
finished drugs.

The cGMP Work Plans contain a number of 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.

In general, the timely and satisfactory completion of the revalidations are
subject to payments of $15 thousand per business day for each deadline missed,
subject to the caps

described above. However, if a product scheduled for revalidation has not been
certified as having been validated by the last date on the validation schedule,
the FDA may assess a payment of 24.6 percent of the net domestic sales of the
uncertified product until the validation is certified. Further, in general, if a
product scheduled for revalidation under the consent decree is not certified
within six months of its scheduled date, the Company must cease production of
that product until certification is obtained.

The completion of the Significant Steps in the Work Plans and the completion of
the revalidation programs are subject to third-party expert certification, as
well as the FDA's acceptance of such certification.

The consent decree provides that if the Company believes that it may not be able
to meet a deadline, the Company has the right, upon the showing of good cause,
to request extensions of deadlines in connection with the cGMP Work Plans and
revalidation programs. However, there is no guarantee that the FDA will grant
any such requests.

Although the Company believes it has made significant progress in meeting its
obligations under the consent decree, it is possible that (1) the Company may
fail to complete a Significant Step or a revalidation by the prescribed
deadline; (2) the third-party expert may not certify the completion of the
Significant Step or revalidation; or (3) the FDA may disagree with an expert's
certification of a Significant Step or revalidation. In such a case, it is
possible that the FDA may assess payments as described above.

The Company would expense any payments assessed under the decree if and when
incurred.

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 the matters discussed in the remainder of this
Note on an ongoing basis. 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 of the items discussed
in the remainder of this Note, 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
the Company's 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 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 results of operations, cash flows or financial condition. 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, 2005, and the related expenses
incurred during the three and six-month periods ended June 30, 2005, were not
material. In the opinion of the Company, 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.

Prior to the quarter ended June 30, 2005, the Company had recorded a liability
of approximately $250 million related to the Massachusetts investigation. During
the 2005 second quarter, the Company increased this reserve by $250 million, to
a total of $500 million. This increase relates to the investigation by the U.S.
Attorney's Office for the District of Massachusetts into the Company's
marketing, sales, pricing and clinical trial practices, as well as previously
disclosed investigations and litigation relating to the Company's practices
regarding average wholesale price by the Department of Justice and certain
states. See "Pricing matters, AWP investigation" later in this Note. While no
agreement has been reached, the increase in litigation reserves reflects the
Company's current estimate to resolve these matters. 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.

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. The
FREEZE AWAY product was launched in March 2004. Net sales of this product
totaled approximately $20 million for the year-ended December 31, 2004 and $9
million for the six months ended June 30, 2005.

Investigation

Pennsylvania Investigation. On July 30, 2004, Schering-Plough Corporation, the
U.S. Department of Justice and the U.S. Attorney's Office for the Eastern
District of Pennsylvania announced settlement of the previously disclosed
investigation by that

Office. Under the settlement, Schering Sales Corporation, an indirect wholly
owned subsidiary of Schering-Plough Corporation, pled guilty to a single federal
criminal charge concerning a payment to a managed care customer. In connection
with the settlement:

- The aggregate settlement amount was $345.5 million in fines and damages.
Schering-Plough Corporation was credited with $53.6 million that was
previously paid in additional Medicaid rebates, leaving a net settlement
amount of $291.9 million. An amount of $294 million including interest was
paid during 2004.

- Schering Sales Corporation will be excluded from participating in federal
health care programs. The settlement will not affect the ability of
Schering-Plough Corporation to participate in those programs.

- Schering-Plough Corporation entered into a five-year corporate integrity
agreement with the Office of the Inspector General of the Department of
Health and Human Services, under which Schering-Plough Corporation agreed
to implement specific measures to promote compliance with regulations on
issues such as marketing. Failure to comply can result in financial
penalties.

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.

Schering-Plough has disclosed that, in connection with this investigation, on
May 28, 2003, Schering Corporation, a wholly owned and significant operating
subsidiary of Schering-Plough, received a letter (the Boston Target Letter) from
that Office advising that Schering Corporation (including its subsidiaries and
divisions) is a target of a federal criminal investigation with respect to four
areas:

1. Providing remuneration, such as drug samples, clinical trial grants and
other items or services of value, to managed care organizations,
physicians and others to induce the purchase of Schering pharmaceutical
products;

2. Sale of misbranded or unapproved drugs, which the Company understands to
mean drugs promoted for indications for which approval by the U.S. FDA had
not been obtained (so-called off-label uses);

3. Submitting false pharmaceutical pricing information to the government for
purposes of calculating rebates required to be paid to the Medicaid
program, by failing to include prices of a product manufactured and sold
under a private label arrangement with a managed care customer as well as
the prices of free and nominally priced goods provided to that customer to
induce the purchase of Schering products; and

4. Document destruction and obstruction of justice relating to the
government's investigation.

A target is defined in Department of Justice guidelines as a person as to whom
the prosecutor or the grand jury has substantial evidence linking him or her to
the commission of a crime and who, in the judgment of the prosecutor, is a
putative defendant (U.S. Attorney's Manual, Section 9-11.151).

The Company has implemented certain changes to its sales, marketing and clinical
trial

practices and is continuing to review those practices to foster compliance with
relevant laws and regulations. The Company is cooperating with this
investigation.

See information about prior increases to the liabilities reserved in the
financial statements, including in relation to this investigation and the other
potential impacts of the outcome of this investigation in the Background section
of this Note.

Prior to the quarter ended June 30, 2005, the Company had recorded a liability
of approximately $250 million related to this investigation. During the 2005
second quarter, the Company increased this reserve by $250 million, to a total
of $500 million. This increase relates to the investigation by the U.S.
Attorney's Office for the District of Massachusetts into the Company's
marketing, sales, pricing and clinical trial practices, as well as previously
disclosed investigations and litigation relating to the Company's practices
regarding average wholesale price by the Department of Justice and certain
states. While no agreement has been reached, the increase in litigation reserves
reflects the Company's current estimate to resolve these matters. 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.

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 Investigations. The Company continues to respond to existing and new
investigations by, among others, the U.S. Department of Health and Human
Services, the U.S. Department of Justice and certain states into industry and
Company practices regarding average wholesale price (AWP). These investigations
include a Department of Justice review of the merits of a federal action filed
by a private entity on behalf of the U.S. in the U.S. District Court for the
Southern District of Florida, as well as an investigation by the U.S. Attorney's
Office for the District of Massachusetts, regarding, inter alia, whether the AWP
set by pharmaceutical companies for certain drugs improperly exceeds the average
prices paid by dispensers 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.

Prescription Access Litigation. In December 2001, the Prescription Access
Litigation project (PAL), a Boston-based group formed in 2001 to litigate
against drug companies, filed a class action suit in Federal Court in
Massachusetts against the Company. In September 2002, a consolidated complaint
was filed in this court as a result of the coordination by the Multi-District
Litigation Panel of all federal court AWP cases from throughout the country. The
consolidated complaint alleges that the Company and Warrick Pharmaceuticals, the
Company's generic subsidiary, conspired with providers to defraud consumers by
reporting fraudulently high AWPs for prescription medications reimbursed by
Medicare or third-party payers. The complaint seeks a declaratory judgment and
unspecified damages, including treble damages.

Included in the litigation described in the prior paragraph are lawsuits that
allege that

the Company and Warrick reported inflated AWPs for prescription pharmaceuticals
and thereby caused state and federal entities and third-party payers to make
excess reimbursements to providers. Some of these actions also allege that the
Company and Warrick failed to report accurate prices under the Medicaid Rebate
Program and thereby underpaid rebates to some states. Some cases filed by State
Attorneys General also seek to recover on behalf of citizens of the State and
entities located in the State for excess payments as a result of inflated AWPs.
These actions, which began in October 2001, have been brought by State Attorneys
General, private plaintiffs, nonprofit organizations and employee benefit funds.
They allege violations of federal and state law, including fraud, antitrust,
Racketeer Influenced Corrupt Organizations Act(RICO) and other claims. During
the first quarter of 2004, the Company and Warrick were among five groups of
companies put on an accelerated discovery track in the proceeding. In addition,
Warrick and the Company are defendants in a number of such lawsuits in state
courts. The actions are generally brought by states and/or political
subdivisions and seek unspecified damages, including treble and punitive
damages.

Securities and Class Action Litigation

On February 15, 2001, the Company stated in a press release 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, primarily relating to
production processes, controls and procedures. The next day, February 16, 2001,
a lawsuit was filed in the U.S. District Court for the District of New Jersey
against the Company and certain named officers alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. Additional lawsuits of the same tenor followed. These
complaints were consolidated into one action in the U.S. District Court for the
District of New Jersey, and a lead plaintiff, the Florida State Board of
Administration, was appointed by the Court on July 2, 2001. On October 11, 2001,
a consolidated amended complaint was filed, alleging the same violations
described in the second sentence of this paragraph and 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 Company's motion to dismiss the consolidated amended complaint
was denied on May 24, 2002. On October 10, 2003, the Court certified the
shareholder class. Discovery is ongoing.

In addition to the lawsuits described in the immediately preceding paragraph,
two lawsuits were filed in the U.S. District Court for the District of New
Jersey, and two lawsuits were filed in New Jersey state court against the
Company (as a nominal defendant) and 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 in each of those four lawsuits relate to
the issues described in the Company's February 15, 2001, press release, and
allege a failure to disclose material information and breach of fiduciary duty
by the directors. One of the federal court lawsuits also includes allegations
related to the investigations by the U.S. Attorney's Offices for the Eastern
District of Pennsylvania and the District of Massachusetts, the FTC's
administrative proceeding against the Company, and the lawsuit by the state of
Texas against Warrick, the Company's generic subsidiary. The U.S. Attorney's
investigations and the FTC proceeding are described herein. The Texas litigation
is described in previously filed 10-Ks and 10-Qs. Each of these lawsuits is a
shareholder derivative action that purports to assert claims on behalf of the
Company, but as to which no demand was made on the Board of Directors and no
decision had been made on whether the Company can or should pursue such claims.
In August 2001, the plaintiffs in each of the New Jersey state court shareholder
derivative actions moved to dismiss voluntarily the complaints in those

actions, which motions were granted. The two shareholder derivative actions
pending in the U.S. District Court for the District of New Jersey have been
consolidated into one action, which is in its very early stages.

On January 2, 2002, the Company received a demand letter dated December 26,
2001, from a law firm not involved in the derivative actions described above, on
behalf of a shareholder who also is not involved in the derivative actions,
demanding that the Board of Directors bring claims on behalf of the Company
based on allegations substantially similar to those alleged in the derivative
actions. On January 22, 2002, the Board of Directors adopted a Board resolution
establishing an Evaluation Committee, consisting of three directors, to
investigate, review and analyze the facts and circumstances surrounding the
allegations made in the demand letter and the consolidated amended derivative
action complaint described above, but reserving to the full Board authority and
discretion to exercise its business judgment in respect of the proper
disposition of the demand. The Committee engaged independent outside counsel to
advise it and issued a report on the findings of its investigation to the
independent directors of the Board in late October 2002. That report determined
that the shareholder demand should be refused, and finding no liability on the
part of any officers or directors. In November 2002, the full Board adopted the
recommendation of the Evaluation Committee.

The Company is a defendant in a number of purported nationwide or state class
action lawsuits in which plaintiffs seek a refund of the purchase price of
laxatives or phenylpropanolamine-containing cough/cold remedies (PPA products)
they purchased. Other pharmaceutical manufacturers are co-defendants in some of
these lawsuits. In general, plaintiffs claim that they would not have purchased
or would have paid less for these products had they known of certain defects or
medical risks attendant with their use. In the litigation of the claims relating
to the Company's PPA products, courts in the national class action suit and
several state class action suits have denied certification and dismissed the
suits. A similar application to deny class certification in New Jersey, the only
remaining statewide class action suit involving the Company, was granted on
September 30, 2004. Approximately 96 individual lawsuits relating to the
laxative products, PPA products and recalled albuterol/VANCERIL/VANCENASE
inhalers are also pending against the Company seeking recovery for personal
injuries or death. In a number of these lawsuits punitive damages are claimed.

Litigation filed in 2003 in the U.S. District Court in New Jersey alleging that
the Company, Richard Jay Kogan, the Company's Employee Savings Plan (Plan)
administrator, several current and former directors, and certain corporate
officers 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' appeal
is pending.

Antitrust and FTC Matters

K-DUR. K-DUR is Schering-Plough's long-acting potassium chloride product
supplement used by cardiac patients. Schering-Plough had settled patent
litigation with Upsher-Smith, Inc. (Upsher-Smith) and ESI Lederle, Inc.
(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. The complaint alleged anti-competitive effects from
those settlements. In June 2002, the administrative law judge overseeing the
case 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. On December 18, 2003, the full
Commission issued an opinion that reversed the 2002 decision and ruled that the
settlements did violate the

antitrust laws. The full Commission issued a cease and desist order imposing
various injunctive restraints. By opinion filed March 8, 2005, the federal court
of appeals set aside that 2003 Commission ruling and vacated the cease and
desist order. The FTC filed a petition with the Court of Appeals seeking to have
the Court vacate its March 8, 2005 decision, which was denied on May 31, 2005.

Following the commencement of the FTC administrative proceeding, 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 and Lederle.
These suits all allege essentially the same facts and claim violations of
federal and state antitrust laws, as well as other state statutory and/or common
law causes of action. These suits seek unspecified damages. Discovery is
ongoing.

SEC Inquiries and Related Litigation

On September 9, 2003, the SEC and the Company announced settlement of the SEC
enforcement proceeding against the Company and Richard Jay Kogan, former
chairman and chief executive officer, regarding meetings held with investors the
week of September 30, 2002, and other communications. Without admitting or
denying the allegations, the Company agreed not to commit future violations of
Regulation FD and related securities laws and paid a civil penalty of $1
million. Mr. Kogan paid a civil penalty of $50 thousand.

On September 25, 2003, a lawsuit was filed in New Jersey Superior Court, Union
County, against Richard Jay Kogan and the Company's outside Directors alleging
breach of fiduciary duty, fraud and deceit and negligent misrepresentation, all
relating to the alleged disclosures made during the meetings mentioned above.
The Company removed this case to federal court. The case was remanded to state
court. The Company filed a motion to dismiss all claims, which was granted on
June 23, 2005.

Other Matters

EMEA Pharmacovigilance Matter. 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), serious
deficiencies in reporting processes were identified. Schering-Plough continues
to work on its action plan to rectify the deficiencies and provides regular
updates to EMEA. The Company does not know what action, if any, the EMEA or
national authorities will take in response to these findings. 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.

Biopharma Contract Dispute. Biopharma S.r.l. filed a claim in the Civil Court of
Rome on July 21, 2004 (docket No. 57397/2004, 9th Chamber) against certain
Schering-Plough subsidiaries. The matter relates to certain contracts dated
November 15, 1999, (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;
and July 26, 2002 (letter agreement among Biopharma, a Schering-Plough
subsidiary and Medipha Sante, S.A., appointing Medipha to distribute products in
France). Biopharma alleges that Schering-Plough did not fulfill its duties under
the contracts.

Tax Matters

In October 2001, IRS auditors asserted, in reports, that the Company is liable
for

additional tax for the 1990 through 1992 tax years. The reports allege that two
interest rate swaps that the Company entered into with an unrelated party should
be re-characterized as loans from affiliated companies. In April 2004, the
Company received a formal Notice of Deficiency (Statutory Notice) from the IRS
asserting additional federal income tax due. The Company received bills related
to this matter from the IRS on September 7, 2004. Payment in the amount of $194
million for income tax and $279 million for interest was made on September 13,
2004. The Company filed refund claims for the tax and interest with the IRS on
December 23, 2004. The Company was notified on February 16, 2005, that its
refund claims were denied by the IRS. The Company has filed a suit for refund
for the full amount of the tax and interest. 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). Except where a site is separately
disclosed, 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.

16. SUBSEQUENT EVENTS

On July 22, 2005, the Company agreed to restructure its INTEGRILIN co-promotion
agreement with Millennium Pharmaceuticals, Inc. ("Millennium"). Under the terms
of the restructured agreement, the Company will acquire exclusive U.S.
development and commercialization rights to INTEGRILIN and will pay to
Millennium an upfront payment of $35.5 million and future royalties on
INTEGRILIN sales. In 2006 and 2007, the restructured agreement calls for minimum
royalties of $85 million per year. The Company will also purchase existing
INTEGRILIN inventory from Millennium. The agreement is subject to customary
regulatory reviews and is expected to become effective during the third quarter
of 2005.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying condensed consolidated balance sheet of
Schering-Plough Corporation and subsidiaries (the "Corporation") as of June 30,
2005, and the related statements of condensed consolidated operations for the
three and six-month periods ended June 30, 2005 and 2004, and the statements of
condensed consolidated cash flows for the six-month periods ended June 30, 2005
and 2004. 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 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, 2004,
and the related statements of consolidated operations, shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated March 8, 2005, 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, 2004 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.

/s/Deloitte & Touche LLP

Parsippany, New Jersey
July 27, 2005

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

EXECUTIVE OVERVIEW

Overview of the Company

Schering-Plough Corporation (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, Schering-Plough's core strategy is
to invest substantial funds in scientific research with the goal of creating
important medical and commercial value. 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. Because of the high-risk nature of
research investments, financial resources typically must come from internal
sources (operations and cash reserves) or from equity-type capital.

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 far
greater financial resources than that of the Company. Due to the present
financial situation, it may be challenging for the Company to acquire or license
critical late-stage products that will have a positive material financial
impact.

ZETIA is the Company's novel cholesterol absorption inhibitor. VYTORIN is the
combination of ZETIA and Zocor, Merck & Co., Inc.'s 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. EZETROL has been launched in more than 60 countries. VYTORIN
(ezetimibe/simvastatin), marketed as INEGY internationally, has been launched in
21 countries, including the United States.

The cholesterol-reduction market is the single largest pharmaceutical market in
the world. VYTORIN and ZETIA are well positioned in this market. Although these
products compete against other well established cholesterol management products
marketed by companies with financial resources much greater than that of the
Company, together, to date, they have captured more than 12 percent of new
prescriptions of the U.S. cholesterol management market. The financial
commitment to compete in this market is shared with Merck and profits from the
sales of VYTORIN and ZETIA are also shared with Merck.

The Company expects that generic forms of some of the existing well established
cholesterol management products will be introduced in the United States as some
of these existing products lose patent protection in the United States beginning
in 2006 (generics have been introduced during 2005 in some international
markets). In addition, the intellectual property for the leading cholesterol
management product is being challenged by a generic manufacturer and, if
successful, this could lead to additional significant generic competition. The
Company cannot reasonably predict what effect the introduction of generic forms
of cholesterol

management products may have on ZETIA and VYTORIN, 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 ZETIA and VYTORIN.
A material change in the sales or market share of ZETIA and VYTORIN could have a
significant impact on the Company's operations and cash flow.

The Company continues to pursue its core strategy of supporting its marketed and
new products in its research and development pipeline and plans to invest in
sales and marketing and scientific research at historical levels. However, this
level of investment is not sustainable without a significant increase in profits
and cash flow from operations. The ability of the Company to generate profits
and significant operating cash flow is directly and predominantly dependent upon
the increasing profitability of the Company's cholesterol franchise (which
includes VYTORIN and ZETIA) and, to a much lesser extent, growing sales and
profitability of the base pharmaceutical business products, developing or
acquiring new products and controlling expenses. If the Company cannot generate
significant operating cash flow, its ability to invest in sales, marketing and
research efforts at historical levels may be negatively impacted.

During 2004, the Company entered into a strategic agreement with Bayer intended
to enhance the Company's pharmaceutical resources. Under the terms of this
agreement, the Company has exclusive rights in the U.S. and Puerto Rico to
market, sell and distribute the AVELOX and CIPRO antibiotics. The Company pays
Bayer royalties generally in excess of 50 percent on these products based on
sales, which has an unfavorable impact on the Company's gross margin percentage.

Under the agreement the Company also undertook Bayer's U.S. commercialization
activities for the erectile dysfunction medicine Levitra under Bayer's
co-promotion agreement with GlaxoSmithKline PLC. In the Japanese Market, Bayer
will co-market the Company's cholesterol absorption inhibitor ZETIA when
approved. The Company believes that this approval for ZETIA is not likely to be
completed until at least 2006 due to a general slow down in the regulatory
review process in Japan.

This agreement with Bayer potentially restricts the Company from marketing
products in the U.S. that would compete with any of the products under the
agreement. As a result, the Company expects that it may need to sublicense
rights to garenoxacin, the quinolone antibacterial agent that the Company
licensed from Toyama in 2004.

During the period 2002 to 2004, the Company experienced a number of negative
events that have strained and continue to strain the Company's financial
resources. These negative events included, but were not limited to, the
following matters:

- Entered into a formal consent decree with the U.S. Food and Drug
Administration (FDA) in 2002 and agreed to revalidate manufacturing
processes at certain manufacturing sites in the U.S. and Puerto Rico.
Significant increased spending associated with manufacturing compliance
efforts will continue through the completion of the FDA consent decree
obligation. In addition, the Company has found it necessary to
discontinue certain older profitable products and outsource other
products.

- Switch of CLARITIN in the U.S., beginning in December 2002, from
prescription to OTC status. This switch coupled with private label
competition has resulted in substantially lower overall sales of this
product starting in 2003 as well as lower average unit selling price
for this product and ongoing intense competition. The Company's
exposure to powerful retail purchasers has also

increased.

- Market shares and sales levels of certain other Company products have
fallen significantly and have experienced increased competition. Many
of these products compete in declining or volatile markets.

- Investigations into certain of the Company's sales and marketing
practices by the U.S. Attorney's Offices in Massachusetts and
Pennsylvania. During 2004, the Company made payments totaling $294
million to the U.S. Attorney's Office for the Eastern District of
Pennsylvania in settlement of that investigation.

In response to these matters, beginning in April 2003, the Company appointed
a new management team that formulated and has begun a six- to eight-year
Action Agenda with the goal of stabilizing, repairing and then turning around
the Company. Throughout 2004, Schering-Plough moved to stabilize its primary
business franchises, secure cost savings through a Value Enhancement
Initiative (VEI) and reinvest much of those savings into more productive
areas. In 2005, the Company continues to make progress on its Action Agenda
as evidenced by recent product approvals including, in the U.S., ASMANEX,
CLARINEX-D 24 hour and TEMODAR for First-Line Glioblastoma Multiforme, and
launches and performance in certain key products including VYTORIN and ZETIA.

Current State of Business

Second quarter 2005 net sales of $2.5 billion were 18 percent higher than the
2004 period. The second quarter 2005 sales increase was driven primarily by the
growth of prescription pharmaceuticals, 5 percent of which relates to the U.S.
sales contribution from the antibiotics AVELOX and CIPRO and other products
under an agreement with Bayer that became effective in October 2004, and a 3
percent positive impact from currency exchange.

Sales and marketing costs have increased due to the addition of Bayer sales
representatives and increased selling expenses in Europe to support the
continued launch of VYTORIN and ZETIA, and increased promotional spending,
primarily for NASONEX.

The Company had a Net loss available to common shareholders of $70 million in
the second quarter of 2005 as compared to a loss of $65 million in the second
quarter of 2004. Net income available to common shareholders was $35 million for
the first six months of 2005, compared to a loss of $138 million during the same
period of the prior year.

The earnings contribution from the Company's increased sales in the second
quarter of 2005 and higher equity income from the cholesterol joint venture with
Merck & Co., Inc. was offset by the impact from the special charges. The results
of the first half of 2005, after consideration of $286 million of special
charges primarily related to an increase in litigation reserves for the
Massachusetts investigation (see Note 2 "Special Charges"), may not be
indicative of future periods. Certain favorable circumstances helped benefit the
six-months ended June 30, 2005. These factors included a higher proportional
share of ZETIA profits from the Company's cholesterol joint venture, milestones
earned from the cholesterol joint venture partner, the seasonality of certain
allergy and suncare products, positive impact of foreign exchange and certain
other items. In addition, the Company expects to incur additional expenses in
the second half of the year related to the launch of newly approved products and
to advance its early stage pipeline.

During the period from 2003 through 2005, the Company's cash flow has declined
significantly. The overriding cause of this was the loss of marketing
exclusivity for two of the Company's major pharmaceutical products, CLARITIN and
REBETOL as well as increased competition in the hepatitis C market.

Many of the Company's manufacturing sites operate well below optimal production
levels primarily due to sales declines and to a lesser extent the reduction in
output related to the FDA consent decree. At the same time, overall costs of
operating manufacturing sites have significantly increased due to the consent
decree and other compliance activities. The Company continues to review the
carrying value of these assets for indications of impairment.

Management cannot provide assurance that profits in the near-term will be
sufficient for the Company to maintain its core marketing and research
strategies. If a sufficient level of profit and cash flow cannot be achieved,
the Company would need to evaluate strategic alternatives. With regard to an
examination of strategic alternatives, the contracts with Merck for VYTORIN and
ZETIA and the contract with Centocor, Inc. for REMICADE (exhibits 10(r) and
10(u), respectively, to the Company's 2003 Form 10-K) contain provisions related
to a change of control, as defined in those contracts. These provisions could
result in the aforementioned products being acquired by Merck or reverting back
to Centocor, Inc.

During the first quarter of 2005, the Company began repatriating previously
unremitted foreign earnings at a reduced tax rate as provided by the American
Job Creation Act of 2004 (the Act). Repatriating funds under the Act is
benefiting the Company in the following ways:

- The Company's U.S. operations currently incur significant negative cash
flow. Repatriations being made during 2005 under the Act are expected
to provide the Company with the ability to fund the U.S. cash needs for
the intermediate term.

- The negative cash flow from U.S. operations during 2004 and 2005
produced U.S. tax net operating losses (U.S. NOL's). Under the Act,
qualifying repatriations do not reduce U.S. tax losses. As such, the
Company will have both the cash necessary to fund its U.S. cash needs
as well as maintaining the potential benefit of being able to carry
forward U.S. NOL's to reduce U.S. taxable income in the future. This
potential future benefit could be significant but is dependent on the
Company achieving profitability in the U.S.

DISCUSSION OF OPERATING RESULTS

NET SALES

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

Consolidated net sales for the three months ended June 30, 2005 totaled $2.5
billion, an increase of $385 million or 18 percent compared with the same period
in 2004. For the six

months ended June 30, 2005, consolidated net sales totaled $4.9 billion, an
increase of $790 million or 19 percent compared with the same period in 2004.
Consolidated net sales for the three and six months ended June 30, 2005
reflected higher volumes, the inclusion of the sales of AVELOX and CIPRO and
favorable foreign exchange rate impacts of 3 and 4 percent, respectively.

Net sales for the three and six months ended June 30, 2005 and 2004 were as
follows:

(Dollars in millions)

Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------- ----------------------------------------
% Increase % Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
---------- ---------- ---------- ---------- ---------- ----------

PRESCRIPTION PHARMACEUTICALS
$ 1,975 $ 1,644 20% $ 3,820 $ 3,125 22%
REMICADE 234 182 29 454 347 31
CLARINEX / AERIUS 207 226 (8) 351 356 (1)
NASONEX 199 156 28 382 296 29
PEG-INTRON 182 144 26 352 293 20
TEMODAR 145 102 42 276 188 47
CLARITIN Rx (a) 100 82 22 211 173 22
REBETOL 91 88 3 155 187 (17)
INTEGRILIN 82 78 6 158 151 5
INTRON A 75 89 (15) 148 158 (6)
SUBUTEX 53 47 13 104 91 14
AVELOX 46 - N/M 119 - N/M
CAELYX 46 35 30 89 70 28
ELOCON 38 46 (18) 79 84 (7)
CIPRO 36 - N/M 72 - N/M
Other Pharmaceutical 441 369 20 870 731 19

CONSUMER HEALTH CARE 330 317 4 660 629 5
OTC (b) 162 150 8 324 306 6
Foot Care 89 89 0 173 166 5
Sun Care 79 78 2 163 157 4

ANIMAL HEALTH 227 186 22 420 356 18
---------- ---------- ---------- ---------- ---------- ----------

CONSOLIDATED NET SALES $ 2,532 $ 2,147 18% $ 4,900 $ 4,110 19%
---------- ---------- ---------- ---------- ---------- ----------

N/M -- Not a meaningful percentage.

(a) Amounts shown for 2005 and 2004 represents international sales of CLARITIN
Rx only.

(b) Includes OTC CLARITIN of $133 million and $117 million in the second
quarter of 2005 and 2004, respectively, and $248 million and $234 million
for the first six months of 2005 and 2004, respectively.

International net sales of REMICADE, for the treatment of rheumatoid arthritis,
early rheumatoid arthritis, psoriatic arthritis, Crohn's disease and ankylosing
spondylitis, were up $52 million or 29 percent in the second quarter of 2005 to
$234 million, and $107 million or 31 percent for the first six months of 2005 to
$454 million, due primarily to greater demand, expanded indications and
continued market growth. In the near future, additional competitive products for
the indications referred to above are likely to be introduced.

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 were $207 million in the second quarter of 2005, compared to $226
million in the second quarter of last year. Sales outside the U.S. increased 16
percent to $117 million in 2005 due to

market share gains. In the U.S., CLARINEX continued to experience reduced market
share in a declining market. As a result, sales in the U.S. decreased 28 percent
to $90 million. For the six months ended June 30, 2005, global net sales of
CLARINEX decreased 1 percent to $351 million.

Global net sales of NASONEX Nasal Spray, a once-daily corticosteroid nasal spray
for allergies, rose 28 percent to $199 million in the second quarter of 2005 and
29 percent to $382 million for the six-month period as the product captured
greater U.S. market share versus the 2004 period. U.S. sales also benefited from
the nationwide availability beginning in January 2005 of a new scent-free,
alcohol-free formulation of NASONEX nasal spray. In international markets,
NASONEX sales were up 19 percent to $84 million for the second quarter and up 23
percent to $159 million for the six-month period as a result of market share
gains.

Global net sales of PEG-INTRON Powder for Injection, a pegylated interferon
product for treating hepatitis C, increased 26 percent to $182 million for the
second quarter of 2005 and 20 percent to $352 million for the six-month period
driven primarily by higher sales in Japan as a result of the December 2004
launch of the PEG-INTRON and REBETOL combination therapy. Sales in Japan also
benefited from the significant number of patients who were waiting for approval
of PEG-INTRON before beginning treatment ("patient warehousing"). Comparisons in
2006 will be unfavorably impacted by the absence of this patient warehousing and
as a result, sales may decline materially. Sales and market share of PEG-INTRON
in the U.S. have declined compared to the prior year due to increased
competition and market decline.

Global net sales of TEMODAR Capsules, for treating certain types of brain
tumors, increased $43 million or 42 percent to $145 million in the second
quarter of 2005 and increased $88 million or 47 percent to $276 million for the
first six months of 2005 benefiting from increased utilization for treating
newly diagnosed glioblastoma multiforme (GBM), which is the most prevalent form
of brain cancer. This new indication was granted U.S. FDA approval in March
2005, and has been rapidly adopted by U.S. physicians. 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.

International net sales of prescription CLARITIN increased 22 percent to $100
million in the second quarter of 2005 and 22 percent to $211 million for the
year-to-date due to an unusually severe Japanese allergy season that may not
recur in the 2006 allergy season and the launch of CLARITIN REDITABS in Japan.

Global net sales of REBETOL Capsules, for use in combination with INTRON A or
PEG-INTRON for treating hepatitis C, increased 3 percent to $91 million in the
second quarter of 2005 due primarily to the launch of the PEG-INTRON and REBETOL
combination therapy in Japan in December 2004. Global sales of REBETOL decreased
17 percent to $155 million for the six-month period due to the launch of generic
versions of REBETOL in the U.S. in April 2004 and increased price competition
outside the U.S.

Global net sales of INTEGRILIN Injection, a glycoprotein platelet aggregation
inhibitor for the treatment of patients with acute coronary syndrome, which is
sold primarily in the U.S. by Schering-Plough, increased 6 percent to $82
million in the second quarter of 2005 and 5 percent to $158 million for the
six-month period due to increased patient utilization.

$35.5 million and future royalties on INTEGRILIN sales. The Company will also
purchase existing INTEGRILIN inventory from Millennium. The agreement is subject
to customary regulatory reviews and is expected to become effective during the
third quarter of 2005. The Company does not anticipate that this restructured
agreement will have an impact on sales or earnings, however, gross margin will
be negatively impacted as the royalty payments under the restructured agreement
will be reported as cost of sales. Selling, general and administrative costs
will decrease due to the elimination of profit sharing payments that had been
reflected in these expenses in earlier periods.

Global net sales of INTRON A Injection, for chronic hepatitis B and C and other
antiviral and anticancer indications, decreased 15 percent to $75 million in the
second quarter of 2005 and 6 percent to $148 million for the first six months of
2005, due to the conversion to PEG-INTRON in Japan. Net sales in the U.S. for
the first six months of 2005 increased $17 million or 35 percent reflecting
favorable trade inventory comparisons.

International net sales of SUBUTEX Tablets, for the treatment of opiate
addiction, increased 13 percent to $53 million in the second quarter of 2005 and
14 percent to $104 million for the six-month period due to increased market
penetration. SUBUTEX may be vulnerable to generic competition in the near
future.

Net sales of AVELOX, a fluoroquinolone antibiotic for the treatment of certain
respiratory and skin infections, which is sold primarily in the U.S. by
Schering-Plough as a result of the Company's license agreement with Bayer, were
$46 million and $119 million for the second quarter and first six months of
2005, respectively.

International sales of CAELYX, for the treatment of ovarian cancer, metastatic
breast cancer and Kaposi's sarcoma, increased 30 percent to $46 million in the
second quarter of 2005 and 28 percent to $89 million for the year-to-date
reflecting further adoption of the metastatic breast cancer and ovarian cancer
indications in patients who are at increased cardiac risk.

Global net sales of ELOCON cream, a medium-potency topical steroid, decreased 18
percent to $38 million in the second quarter of 2005 and 7 percent to $79
million for the first six months of 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, which is sold primarily
in the U.S. by Schering-Plough as a result of the Company's license agreement
with Bayer, were $36 million and $72 million for the second quarter and first
six months of 2005, respectively.

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

Global net sales of Consumer Health Care products, which include OTC, foot care
and sun care products, increased $13 million or 4 percent to $330 million in the
second quarter of 2005 and $31 million or 5 percent to $660 million for the
year-to-date. Sales of OTC CLARITIN were $133 million in the second quarter of
2005, an increase of $16 million from 2004, and year-to-date sales increased $14
million to $248 million. OTC CLARITIN

continues to face competition from private label and branded loratadine. In
addition, sales of OTC products containing pseudoephedrine (PSE), including
CLARITIN-D, may be adversely affected by both recent and future restrictions on
the retail sale of such products. Net sales of foot care products were
essentially unchanged compared to the second quarter of last year and increased
$7 million or 5 percent year-to-date due primarily to the new Memory Fit Insole
and Freeze Away products. Net sales of sun care products increased $1 million or
2 percent in the second quarter and $6 million or 4 percent for the
year-to-date, primarily due to the timing of shipments coupled with the launch
of new Coppertone Continuous Spray products.

The Company sells numerous non-prescription upper respiratory products which
contain pseudoephedrine (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 $305 million
in 2004 and $163 million and $141 million for the six months ended June 30, 2005
and 2004, respectively. These products include all CLARITIN-D products as well
as some DRIXORAL, CORICIDIN and CHLOR-TRIMETON products. The Company understands
that PSE has been used in the illicit manufacture of methamphetamine, a
dangerous and addictive drug. As of July 2005, 33 states, Canada and Mexico have
enacted regulations concerning the non-prescription sale of products containing
PSE, including limiting the amount of these products that can be purchased at
one time, or requiring that these products be located behind the pharmacist's
counter, with the stated goal of deterring the illicit/illegal manufacture of
methamphetamine. An additional two states have enacted limits on the quantity of
PSE any person can possess. One state is considering making products containing
PSE available only by prescription. Also, the U.S. Federal government has
proposed legislation placing restrictions on the sale of products containing
PSE. Further, major U.S. retailers that are customers of the Company have
announced that they may voluntarily place non-prescription products containing
PSE behind the pharmacist counter at all of their stores, whether or not
required by local law. To date, the regulations have not had a material impact
on the Company's operations or financial results, but some of these limitations
did not go into effect until July 1, 2005. However, the Company continues to
monitor developments in this area that could have a negative impact on
operations or financial results. It should be noted that these regulations do
not relate to the sale of prescription products, such as CLARINEX-D products,
that contain PSE.

The Company sources an OTC product with annual net sales of approximately $50
million from a third party manufacturer. The third party manufacturer informed
the Company that they have encountered manufacturing problems in the facility
producing this product. The Company is investigating alternative sourcing plans
to meet market requirements. There is a potential that supplies of this OTC
product may not be available in sufficient quantities to fully meet demand over
the next several months until an alternate manufacturing supply can be
established.

Global net sales of Animal Health products increased 22 percent in the second
quarter of 2005 to $227 million and 18 percent to $420 million for the
year-to-date. The increased sales reflected higher sales of products serving the
U.S. cattle market due to better product supply, and a favorable foreign
exchange impact of 4 percent for the second quarter and year-to-date.

COSTS, EXPENSES AND EQUITY INCOME

A summary of costs, expenses and equity income for the three and six months
ended June 30, 2005 and 2004 follows:

THREE MONTHS ENDED SIX MONTHS ENDED
(DOLLARS IN MILLIONS) JUNE 30, JUNE 30,
----------------------------------------- --------------------------------------
% INCREASE % INCREASE
2005 2004 (DECREASE) 2005 2004 (DECREASE)
-------- -------- ------------------ -------- -------- ----------------

Cost of sales................................... $ 867 $ 790 10% $ 1,756 $ 1,530 15%
% of net sales.................................. 34.2% 36.8% 35.8% 37.2%
Selling, general and administrative............. $ 1,116 $ 979 14% $ 2,197 $ 1,893 16%
% of net sales.................................. 44.1% 45.6% 44.8% 46.1%
Research and development........................ $ 442 $ 451 (2%) $ 825 $ 824 0%
% of net sales.................................. 17.4% 21.0% 16.8% 20.0%
Other (income) expense, net..................... $ (8) $ 43 N/M $ 9 $ 78 (88%)
% of net sales.................................. (0.3%) 2.0% 0.2% 1.9%
Special charges................................. $ 259 $ 42 N/M $ 286 $ 112 N/M
% of net sales.................................. 10.2% 2.0% 5.8% 2.7%
Equity income from cholesterol joint venture.... $ (170) $ (77) N/M $ (389) $ (154) N/M

N/M -- Not a meaningful percentage.

Cost of sales as a percentage of net sales decreased to 34.2 percent and 35.8
percent for the second quarter and first six months of 2005, respectively,
compared to 36.8 percent and 37.2 percent in the second quarter and first six
months of 2004, respectively. This improvement was due primarily to increased
sales of higher-margin products, supply chain process improvements and a
positive impact from foreign exchange, partly offset by higher royalties related
to the Bayer products.

Substantially all the sales of cholesterol products are not included in the
Company's net sales. The results of the operations of the joint venture are
reflected in equity income and have no impact on the Company's gross and other
operating margins.

Selling, general and administrative expenses (SG&A) increased 14 percent to $1.1
billion in the second quarter and 16 percent to $2.2 billion year-to-date versus
$1.0 billion and $1.9 billion for the second quarter and first six months of
2004, respectively. The increase was primarily due to the addition in the 2004
fourth quarter of Bayer sales representatives, and increased selling expenses in
Europe to support the continued launch of ZETIA and VYTORIN, coupled with
increased promotional spending, primarily for NASONEX. The second quarter and
year-to-date ratios to net sales of 44.1 percent and 44.8 percent, respectively,
decreased as compared to the ratios for the same periods in 2004, as a result of
the higher sales levels.

The Company has had several regulatory product successes in recent months,
including the approval of ASMANEX, which have resulted in new promotional
opportunities. This may increase promotional spending during the remainder of
2005.

Research and development (R&D) spending decreased 2 percent to $442 million in
the second quarter and at $825 million year-to-date, representing 17.4 percent
and 16.8 percent of net sales, respectively. R&D spending for the second quarter
and first six months of 2004 included an $80 million charge in conjunction with
the license from Toyama Chemical Company Ltd. for garenoxacin. Generally,
changes in R&D spending reflect the timing of the Company's funding of both
internal research efforts and research collaborations with various partners to
discover and develop a steady flow of innovative products. The Company expects
R&D spending in subsequent quarters to be higher, reflecting the timing of
clinical trials and the progression of the Company's early-stage pipeline. The
increase in other (income)/expense, net, for the second quarter and first six
months of 2005 includes higher interest income partly offset by higher interest
expense due to the higher interest rate on long-term debt beginning in December
2004.

SPECIAL CHARGES

The components of Special Charges for the three and six months ended June 30,
2005 and 2004 are as follows:

THREE MONTHS ENDED SIX MONTHS ENDED
(DOLLARS IN MILLIONS) JUNE 30, JUNE 30,
- --------------------------------- ------------------ ----------------
2005 2004 2005 2004
---- ---- ---- ----

Litigation ...................... $250 $ - $250 $ -
Employee termination costs....... 6 42 27 86
Asset impairment and other....... 3 - 9 26
---- ---- ---- ----

$259 $ 42 $286 $112
==== ==== ==== ====

Litigation charges

Litigation charges for the three months ended June 30, 2005 were $250 million
related to an increase in litigation reserves. This increase results in a total
reserve of $500 million for the Massachusetts investigation, representing the
Company's current estimate to resolve this matter. Additional information
regarding litigation reserves is also included in Note 15 "Legal, Environmental
and Regulatory Matters" in the Notes to Condensed Consolidated Financial
Statements.

Employee Termination Costs

In August 2003, the Company announced a global workforce reduction initiative.
The first phase of this initiative was a Voluntary Early Retirement Program
(VERP) in the U.S. Under this program, eligible employees in the U.S. had until
December 15, 2003 to elect early retirement and receive an enhanced retirement
benefit. Approximately 900 employees elected to retire under the program, of
which approximately 850 employees retired through year end 2004 and
approximately 50 employees have staggered retirement dates in 2005. The total
cost of this program is approximately $191 million, comprised of increased
pension costs of $108 million, increased post-retirement health care costs of
$57 million, vacation payments of $4 million and costs related to accelerated
vesting of stock grants of $22 million. For employees with staggered retirement
dates in 2005, these amounts will be recognized as a charge over the employees'
remaining service periods. Amounts recognized during the three and six months
ended June 30, 2005 were $2 million and $4 million, respectively, compared to $8
million and $17 million, respectively, during the same periods in the prior
year. The amount expected to be recognized in the remainder of 2005 is $4
million.

Termination costs not associated with the VERP totaled $4 million and $23
million for the three and six months ended June 30, 2005, compared to $34
million and $69 million, respectively, during the same periods of 2004. The
termination costs in 2005 related primarily to employee termination costs at a
manufacturing facility.

The following summarizes the activity in the accounts related to employee
termination costs:

(Dollars in millions)

Employee Termination Costs 2005 2004
- -------------------------- ---- ----

Special charges liability balance at
December 31, 2004 and 2003, respectively $ 18 $ 29

Special charges incurred during
six months ended June 30, 27 86

Credit to retirement benefit plan
liability during the six months
ended June 30, (4) (17)

Disbursements during the six
months ended June 30, (18) (59)
---- ----
Special charges liability balance at
June 30, $ 23 $ 39
==== ====

Asset Impairment and Other Charges

The Company recorded asset impairment and other charges of $3 million and $9
million in the second quarter and first six months of 2005, respectively. For
the six months ended June 30, 2004, the Company recognized asset impairment
charges of $26 million related primarily to the shutdown of a small European
research and development facility.

EQUITY INCOME FROM CHOLESTEROL JOINT VENTURE

Global cholesterol franchise sales, which include sales made by the Company and
the cholesterol joint venture with Merck of VYTORIN and ZETIA, totaled $518
million in the second quarter of 2005 and $1.0 billion year-to-date, compared
with sales of $247 million and $436 million in the second quarter and first six
months of 2004, respectively. The 2005 quarterly and year-to-date sales
comparisons benefited from the U.S. launch of VYTORIN in the second half of
2004. In the U.S., as of June 30, 2005, VYTORIN and ZETIA accounted for 12
percent of the lipid-lowering prescription market. VYTORIN has been approved in
more than 30 countries and has been launched in 21 countries, including the U.S.
in July 2004. ZETIA has been approved in more than 70 countries and was launched
in more than 60 international markets and the U.S. since November 2002.

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. Schering-Plough's allocation of joint venture
income is increased by milestones earned. 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. Schering-Plough reports this reimbursement as
part of equity income as under U.S. GAAP 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 Schering-Plough's sales effort related
to the joint venture as Schering-Plough's sales force and related costs
associated with the joint venture are generally estimated to be higher.

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

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

Equity income from the cholesterol joint venture, as defined, totaled $170
million and

$389 million in the second quarter and year-to-date 2005, respectively. For the
second quarter and year-to-date 2004, equity income from the cholesterol joint
venture totaled $77 million and $154 million, respectively. 2005 quarterly and
year-to-date equity income comparisons benefited from the U.S. launch of VYTORIN
in the second half of 2004.

During the first six months of 2005 Schering-Plough earned a milestone of $20
million of which $6 million was recognized in the second quarter for financial
reporting purposes. This milestone related to certain European approvals of
VYTORIN (ezetimibe/simvastatin) in the first quarter of 2005.

During the first six months of 2004 Schering-Plough earned and recognized a
milestone of $7 million related to the approval of ezetimibe/simvastatin in
Mexico in 2004.

Under certain other conditions, as specified in the partnership 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,
Schering-Plough's equity income in the first six months of 2005 was favorably
impacted by the proportionally greater share of income allocated from the joint
venture for the first $300 million of annual ZETIA sales.

It should be noted that the Company incurs substantial costs such as selling
costs that are not reflected in Equity income from cholesterol joint venture and
are borne entirely by the Company.

In the second quarter of 2005, the Merck/Schering-Plough Cholesterol Partnership
entered into inventory management agreements with the major U.S. pharmaceutical
wholesalers for VYTORIN and ZETIA.

PROVISION FOR INCOME TAXES

Tax expense/(benefit) was $74 million and $(16) million for the three months
ended June 30, 2005 and 2004, respectively. Tax expense/(benefit) was $138
million and $(35) million for the six months ended June 30, 2005 and 2004,
respectively.

At December 31, 2004, the Company had approximately $1.0 billion of U.S. Net
Operating Losses (U.S. NOLs) for tax purposes available to offset future U.S.
taxable income through 2024. Due to its continued U.S. tax loss position, the
Company continues to generate additional U.S. NOLs during 2005.

The Company's tax provision for the three and six months ended June 30, 2005 is
primarily related to foreign taxes and does not include any benefit related to
U.S. NOLs. The Company has established a valuation allowance on 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.

NET INCOME/(LOSS) AVAILABLE TO COMMON SHAREHOLDERS

Net income available to common shareholders for the second quarter and
year-to-date of 2005 includes the deduction of preferred stock dividends of $22
million and $43 million, respectively, related to the issuance of the 6%
Mandatory Convertible Preferred Stock in August 2004.

LIQUIDITY AND FINANCIAL RESOURCES

DISCUSSION OF CASH FLOW

SIX MONTHS ENDED
(DOLLARS IN MILLIONS) JUNE 30,
- ------------------------------------------- 2005 2004
------- -----

Cash flow from operating activities........ $ 495 $ 333
Cash flow from investing activities........ 32 (467)
Cash flow from financing activities (1,366) 74

In the first six months of 2005, operating activities generated $495 million of
cash, compared with $333 million in the first six months of 2004. The increase
was primarily due to higher net income and timing of payments of special charges
partially offset by an increase in accounts receivable due to sales growth. A
U.S. tax refund of $404 million as a result of loss carryback benefits favorably
impacted operating cash flow in 2004.

Net cash provided by investing activities during the first six months of 2005
was $32 million primarily related to the reduction 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 investing
activities for the first six months of 2004 was $467 million, and included
purchases of investments of $244 million and capital expenditures of $227
million.

Net cash used for financing activities was $1.4 billion for the first six months
of 2005, compared to net cash provided by financing activities of $74 million
for the same period in the prior year. Uses of cash for financing activities in
2005 includes the payment of dividends on common and preferred shares of $205
million and the repayment of $1.2 billion of commercial paper borrowings. The
net cash provided in the prior year primarily reflected net borrowings that were
repaid in less than 90 days of $284 million offset by the payment of dividends
on common shares of $162 million.

During 2004, operating activities on a worldwide basis generated insufficient
cash to fund capital expenditures and dividends. Due to the geographic mix of
product sales and profits and the corporate and R&D cash requirements in the
U.S., this annual cash flow deficit is particularly pronounced when
disaggregated on a geographic basis. Foreign operations generate cash in excess
of local cash needs. The U.S. operations must fund dividend payments, the vast
majority of research and development costs and U.S. capital expenditures. The
Company borrowed funds and issued equity securities during 2004 to finance U.S.
operations, and continued to accumulate cash in its foreign-based subsidiaries.

On an annual basis in 2005, management expects that dividends and capital
expenditures on a worldwide basis will again exceed cash generated from
operating activities and that U.S. operations will continue to generate negative
cash flow. Payments regarding litigation, investigations, and/or tax assessments
will likely increase cash needs.

Cash requirements in the U.S. during the first six months of 2005 including
operating cash needs, capital expenditures and dividends on common and preferred
shares approximated $900 million. During the first half of 2005 the Company
began the process of repatriating approximately $9.4 billion of previously
unremitted foreign earnings pursuant to the American Jobs Creation Act of 2004
(the Act). U.S. cash requirements included a payment

of approximately $230 million in the second quarter of 2005 related to U.S. tax
liabilities primarily related to taxes due on repatriations made during the
first half of 2005. Tax charges related to the Act were expensed in 2004.

The repatriations of qualified funds under the Act are expected to fund U.S.
cash needs for the intermediate term.

The funding of additional anticipated repatriations under the Act during 2005
will require the utilization of substantially all of the Company's current and
anticipated 2005 foreign cash and short-term investments, and may necessitate a
limited amount of borrowing by certain foreign subsidiaries in order to fully
fund dividends repatriated under the Act. The Company has the ability to factor
selected international accounts receivable, arrange new credit facilities, or
utilize its $1.5 billion revolving bank credit facility to provide additional
liquidity to fund the repatriations or provide working capital to its foreign
subsidiaries until such time as non-U.S. cash and short-term investment balances
are restored.

Total cash, cash equivalents and short-term investments less total debt was
approximately $2.0 billion at June 30, 2005. The Company anticipates this amount
to decline during the balance of 2005, but remain positive.

BORROWINGS AND CREDIT FACILITIES

On November 26, 2003, the Company issued $1.25 billion aggregate principal
amount of 5.3% senior unsecured notes due 2013 and $1.15 billion aggregate
principal amount of 6.5% senior unsecured notes due 2033 (collectively the
Notes). Proceeds from this offering of $2.4 billion were used for general
corporate purposes, including repaying commercial paper outstanding in the U.S.
Upon issuance, the Notes were rated A3 by Moody's Investors Service (Moody's)
and A+ (on Credit Watch with negative implications) by Standard & Poor's (S&P).
The interest rates payable on the Notes are subject to adjustment. If the rating
assigned to the Notes by either Moody's or S&P is downgraded below A3 or A-,
respectively, the interest rate payable on that series of notes would increase.
See Note 12 "Short and Long-Term Debt and Other Commitments" to the Condensed
Consolidated Financial Statements for additional information.

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% to 5.55%, and the interest rate payable on the
notes due 2033 increased from 6.5% to 6.75%. This adjustment to the interest
rate payable on the Notes will increase the Company's interest expense by
approximately $6 million annually.

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

The existing $1.5 billion credit facility matures in May 2009 and requires the
Company to maintain a total debt to 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 the
credit facility may be drawn by the U.S. parent company or by its wholly-owned
foreign 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, 2005 no funds have been drawn down under this facility. The Company
may utilize this facility to fund repatriations under the American Jobs Creation
Act of 2004 or to provide additional liquidity or working capital to its foreign
subsidiaries until such time as non-U.S. cash and investment balances are
restored. However, any borrowing under the facility to fund repatriations will
occur only to the extent the facility is not otherwise necessary to support
commercial paper borrowings.

At June 30, 2005, short-term borrowings totaled approximately $378 million. The
commercial paper 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 Ratings (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 such issuers is typically less than
that of higher-rated companies. The Company maintains sizable lines of credit
with commercial banks, as well as cash and short-term investments held by U.S.
and foreign-based subsidiaries, to serve as alternative sources of liquidity and
to support its commercial paper program.

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 long-term debt.
As discussed above, the Company believes that the repatriation of funds under
the American Jobs Creation Act of 2004 will allow the Company to fund its U.S.
cash needs for the intermediate term.

FINANCIAL ARRANGEMENTS CONTAINING CREDIT RATING DOWNGRADE TRIGGERS

The Company had an interest rate swap arrangement in effect with a counterparty
bank. The arrangement utilized two long-term interest rate swap contracts, one
between a foreign-based subsidiary of the Company and a bank and the other
between a U.S. subsidiary of the Company and the same bank. The two contracts
had equal and offsetting terms and were covered by a master netting arrangement.
The contract involving the foreign-based subsidiary permitted the subsidiary to
prepay a portion of its future obligation to the bank, and the contract
involving the U.S. subsidiary permitted the bank to prepay a portion of its
future obligation to the U.S. subsidiary. Prepayments totaling $1.9 billion were
made under both contracts as of December 31, 2004.

The terms of the swap contracts, as amended, called for a phased termination of
the swaps based on an agreed repayment schedule that was to begin no later than
March 31, 2005. Termination would require the Company and the counterparty each
to repay all prepayments pursuant to the agreed repayment schedule. The Company,
at its option, was allowed to accelerate the termination of the arrangement and
associated scheduled repayments for a nominal fee.

On February 28, 2005, the Company's foreign-based subsidiary and U.S. subsidiary
each gave notice to the counterparty of their intent to terminate the
arrangement. On March

21, 2005 the Company terminated these swap agreements and all associated
repayments were made by the respective obligors. The termination of this
arrangement did not have a material impact on the Company's Statement of
Condensed Consolidated Operations.

REGULATORY AND COMPETITIVE ENVIRONMENT IN WHICH THE COMPANY OPERATES

The Company is subject to the jurisdiction of various national, state and local
regulatory agencies and is, therefore, subject to potential administrative
actions. Of particular importance is the U.S. Food and Drug Administration (FDA)
in the U.S. It is a central regulator of the Company's business and has
jurisdiction over all the Company's businesses and administers requirements
covering the testing, safety, effectiveness, approval, manufacturing, labeling
and marketing of the Company's products. From time to time, agencies, including
the FDA, may require the Company to address various manufacturing, advertising,
labeling or other regulatory issues, such as those noted below relating to the
Company's current manufacturing issues. Failure to comply with governmental
regulations can result in delays in the release of products, seizure or recall
of products, suspension or revocation of the authority necessary for the
production and sale of products, discontinuance of products, fines and other
civil or criminal sanctions. Any such result could have a material adverse
effect on the Company's financial position and its results of operations.
Additional information regarding government regulation that may affect future
results is provided in Part I, Item I, Business, in the Company's 2004 Form
10-K. Additional information about cautionary factors that may affect future
results is provided under the caption Cautionary Factors That May Affect Future
Results (Cautionary Statements Under the Private Securities Litigation Reform
Act of 1995) in this Management's Discussion and Analysis of Financial Condition
and Results of Operations.

Since 2001, the Company has been working with the FDA 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. As
described in more detail in Note 14 "Consent Decree," to the Condensed
Consolidated Financial Statements, in 2002, the Company reached a formal
agreement with the FDA to enter into a consent decree. Under the terms of the
consent decree, the Company made payments totaling $500 million and agreed to
revalidate the manufacturing processes at these sites. These manufacturing sites
have remained open throughout this period; however, the consent decree has
placed significant additional controls on production and release of products
from these sites, including review and third-party certification of production
activities. The third-party certifications and other cGMP improvement projects
have resulted in higher costs as well as reduced output at these facilities. In
addition, the Company has found it necessary to discontinue certain profitable
older products. The Company's research and development operations have also been
negatively impacted by the decree because these operations share common
facilities with the manufacturing operations.

The consent decree requires the Company to complete a number of actions,
including completion of comprehensive cGMP Work Plans for the Company's
manufacturing facilities in New Jersey and Puerto Rico that are covered by the
decree and revalidation programs of the finished drug products and bulk active
pharmaceutical ingredients manufactured at the covered manufacturing facilities.
As described in more detail in Note 14 "Consent Decree" to the Condensed
Consolidated Financial Statements, in the event certain actions agreed upon in
the consent decree are not satisfactorily completed on time, the FDA may assess
payments for each deadline missed.

Although the Company believes it has made significant progress in meeting its
obligations under the consent decree, it is possible that the Company may fail
to complete a Significant Step or a revalidation by the prescribed deadline, the
third-party expert

may not certify the completion of the Significant Step or revalidation, or the
FDA may disagree with an expert's certification of a Significant Step or
revalidation. In such a case, it is possible that the FDA may assess payments as
described in Note 14.

Recently, clinical trials and post-marketing surveillance of certain marketed
drugs 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. The Company
maintains a process for monitoring and addressing adverse events and other new
data relating to its products around the world. In addition, 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.

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.

As described more specifically in Note 15 "Legal, Environmental and Regulatory
Matters" to the Condensed Consolidated Financial Statements, 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 most international
markets, the Company operates in an environment of government-mandated
cost-containment programs. 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. Several
governments have placed restrictions on physician prescription levels and
patient reimbursements, emphasized greater use of generic drugs and enacted
across-the-board price cuts as methods to control costs.

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 will take effect January 1, 2006, will offer 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 incident to a physician's services. The manner in which drugs
are reimbursed under Medicare Part B may limit Schering-Plough's ability to
offer larger price concessions or make large price increases on these drugs.
Other Schering-Plough drugs have a relatively small portion of their sales to
the Medicare population (e.g., CLARINEX, the hepatitis C franchise). The Company
could experience expanded utilization of VYTORIN and ZETIA and new drugs in the
Company's R&D pipeline. Of greater consequence for the Company may be the
legislation's impact on pricing, rebates and discounts.

The 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)resulted in serious deficiencies in
reporting processes. The Company continues to work on its action plan to rectify
the deficiencies and provides regular updates to the EMEA. The Company does not
know what action, if any, the EMEA or national authorities will take in response
to these findings. 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.

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.

The Company launched OTC CLARITIN in the U.S. in December 2002. Also in December
2002, a competing OTC loratadine product was launched in the U.S. and
private-label competition was introduced. The prescription allergy market has
been shrinking since that time. The Company continues to market prescription
CLARINEX (desloratadine) 5 mg Tablets for the treatment of allergic rhinitis.
CLARINEX is experiencing intense competition in the prescription U.S. allergy
market.

PEG-INTRON (pegylated interferon) and REBETOL (ribavirin) combination therapy
for hepatitis C has contributed substantially to sales in 2003 and 2002 and to a
lesser

extent in 2004. During the fourth quarter of 2002, a competing pegylated
interferon-based combination product, including a brand of ribavirin, received
regulatory approval in most major markets, including the U.S. The overall market
share of the hepatitis C franchise has declined sharply, reflecting this new
market competition. In addition, the overall market has contracted. Management
believes that the ability of PEG-INTRON and REBETOL combination therapy to
maintain market share in the international market will continue to be adversely
affected by competition in the hepatitis C marketplace. In 2005, the Company is
experiencing growth in worldwide PEG-INTRON sales due to the launch of
PEG-INTRON plus REBETOL combination therapy in Japan.

Generic forms of ribavirin entered the U.S. market in April 2004. In October
2004, another generic ribavirin was approved by the FDA. The generic forms of
ribavirin compete with the Company's REBETOL Capsules in the U.S. U.S. sales
were insignificant in 2005. Prior to the second half of 2004 the REBETOL patents
were material to the Company's business.

As a result of the introduction of a competitor for pegylated interferon and the
introduction of generic ribavirin, the value of an important Company product
franchise has been severely diminished and earnings and cash flow have been
materially and negatively impacted.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, the FASB issued Statement of Financial Accounting Standard
(SFAS) 151 "Inventory Costs". This SFAS requires that abnormal spoilage be
expensed in the period incurred (as opposed to inventoried and amortized to
income over inventory usage) and that fixed production facility overhead costs
be allocated over the normal production level of a facility. This SFAS is
effective for inventory costs incurred for annual periods beginning after June
15, 2005. The Company does not anticipate any material impact from the
implementation of this accounting standard.

In December 2004, the FASB issued SFAS 123R (Revised 2004) "Share-Based
Payment." Statement 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 is required to implement this SFAS in the first quarter
of 2006 by recognizing compensation on all share-based grants made on or after
January 1, 2006, and for the unvested portion of share-based grants made prior
to July 1, 2005. Restatement of previously issued statements is allowed, but not
required. The Company is currently evaluating the various implementation options
available and related financial impacts under SFAS 123R.

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, 2004 for disclosures regarding the Company's critical accounting
policies.

Rebates, Discounts and Returns

Rebate accruals for Federal and state governmental programs were $181 million at
June 30, 2005 and $155 million at December 31, 2004. Commercial discounts and
other rebate accruals were $157 million at June 30, 2005 and $123 million at
December 31, 2004. These and other rebate accruals are established in the period
the related revenue was recognized resulting in a reduction to sales and the
establishment of liabilities, which

are included in total current liabilities.

The following summarizes the activity in the accounts related to accrued
rebates, sales returns and discounts:

For the six months ended
June 30
------------------------
2005 2004
------ ------

Accrued Rebates/Returns/Discounts, Beginning of Period ...... $ 432 $ 487
------ ------

Provision for Rebates........................................ 234 216
Payments..................................................... (175) (249)
------ ------
59 (33)
------ ------

Provision for Returns........................................ 33 27
Returns...................................................... (30) (21)
------ ------
3 6
------ ------

Provision for Discounts...................................... 184 130
Discounts granted............................................ (179) (132)
------ ------
5 (2)
------ ------
Accrued Rebates/Returns/Discounts, End of Period............. $ 499 $ 458
====== ======

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

DISCLOSURE NOTICE

Cautionary Factors That May Affect Future Results (Cautionary Statements Under
the Private Securities Litigation Reform Act of 1995)

The disclosure in 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, future performance or results of current and anticipated products,
sales efforts, 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.

Any or all forward-looking statements here or in other publications may turn out
to be wrong. There are no guarantees about Schering-Plough's financial and
operational performance or the performance of Schering-Plough stock.
Schering-Plough does not assume the obligation to update any forward-looking
statement. Many factors could cause actual results to differ from
Schering-Plough's forward-looking statements. These factors include inaccurate
assumptions and a broad variety of other risks and uncertainties,

including some that are known and some that are not. Although it is not possible
to predict or identify all such factors, they may include the following:

o Cholesterol Franchise - The ability of the Company to generate profits
and significant operating cash flow is directly and predominantly
dependent on the increasing profitability of the Company's cholesterol
franchise. As existing products lose patent protection, generic forms
of some of the existing well-established cholesterol management
products may be introduced. The Company cannot predict reasonably what
effect the introduction of generic forms of cholesterol management
products may have on ZETIA and VYTORIN. Further, sales of VYTORIN may
impact negatively sales of ZETIA.

o Other Major Products - Products such as CLARITIN, CLARINEX, INTRON A,
PEG-INTRON, REBETOL Capsules, REMICADE, TEMODAR and NASONEX accounted
for a material portion of Schering-Plough's 2004 revenues. The impact
on revenue could be significant if any major product was to be become
subject to a problem such as the loss of its patent protection, OTC
availability of the Company's product or a competitive product (as has
been disclosed for CLARITIN and its current and potential OTC
competition) or the discovery of previously unknown side effects; there
is increased competition with the introduction of new, more effective
treatments or the generic availability of competitive products; or the
product is discontinued for any reason.

o Uncertain Pharmaceutical Product Development - Products that appear
promising in development may fail to reach market for numerous reasons.
They may be found to be ineffective or to have harmful side effects in
clinical or pre-clinical testing, they may fail to receive the
necessary regulatory approvals, they may turn out not to be
economically feasible because of manufacturing costs or other factors
or they may be precluded from commercialization by the proprietary
rights of others.

o Uncertain Regulatory and Approval Process - There are uncertainties in
the regulatory and approval process in the U.S. and other countries,
including delays in the approval of new products and new indications
and uncertainties in the FDA approval process and uncertainties
concerning regulatory decisions regarding labeling and other matters.

o Post-Market Development - Once a product is approved and marketed,
clinical trials of marketed products or post-marketing surveillance may
raise efficacy or safety concerns. Whether or not scientifically
justified, this new information could lead to recalls, withdrawals or
adverse labeling of marketed products, which may negatively impact
sales. Concerns of prescribers or patients relating to the safety or
efficacy of Schering-Plough products, or other companies' products or
pharmaceutical products generally, may also negatively impact sales.

o Limited Opportunities for Obtaining or Licensing Critical Late-stage
Products - It may be challenging for the Company to acquire or license
critical late-stage products because it competes for these
opportunities against companies often with far greater financial
resources than the Company.

o Competitive Factors - Competitive developments that impact the Company
include technological advances by, patents granted to, and new products
developed by competitors and new and existing generic, prescription
and/or OTC products that compete with products of Schering-Plough or
the Merck/Schering-Plough Cholesterol Partnership.

o Pricing Pressure - The Company faces increased pricing pressure in the
U.S. and abroad from managed care organizations, institutions and
government agencies and programs. In the U.S., consolidation among
customers and trends toward managed care and health care costs
containment may increase pricing pressures.

o Government Action - U.S. legislative and regulatory action that may
impact the Company include the Medicare Prescription Drug, Improvement
and Modernization Act of 2003; possible other legislation or regulatory
action affecting, among other things, pharmaceutical pricing and
reimbursement, including Medicaid and Medicare; involuntary approval of
prescription medicines for OTC use; and other health care reform
initiatives and drug importation legislation. Legislation or
regulations in markets outside the U.S. that may impact the company
include those involving product pricing, reimbursement or access.

o Legal Proceedings - If there are unfavorable outcomes in government
(local and federal, domestic and international) investigations,
litigation about product pricing, product liability claims, patent and
intellectual property disputes, other litigation and environmental
concerns, this could preclude commercialization of products, negatively
affect the profitability of existing products, materially and adversely
impact Schering-Plough's financial condition and results of operations,
or contain conditions that impact business operations, such as
exclusion from government reimbursement programs.

o Consent Decree - Failure to meet current Good Manufacturing Practices
established by the FDA and other governmental authorities can result in
delays in the approval of products, release of products, seizure or
recall of products, suspension or revocation of the authority necessary
for the production and sale of products, fines and other civil or
criminal sanctions. The resolution of manufacturing issues with the FDA
discussed in Schering-Plough's 10-Ks, 10-Qs and 8-Ks are subject to
substantial risks and uncertainties. These risks and uncertainties,
including the timing, scope and duration of a resolution of the
manufacturing issues, will depend on the ability of Schering-Plough to
assure the FDA of the quality and reliability of its manufacturing
systems and controls, and the extent of remedial and prospective
obligations undertaken by Schering-Plough.

o Patents - Patent positions can be highly uncertain and patent disputes
are not unusual. An adverse result in a patent dispute can preclude
commercialization of products or negatively impact sales of existing
products or result in injunctive relief and payment of financial
remedies. Certain foreign governments have indicated that compulsory
licenses to patents may be granted in the case of national emergencies.

o Tax Laws - The Company may be impacted by changes in tax laws including
changes related to taxation of foreign earnings.

o Fluctuations in Buying Patterns - Net sales and quarterly growth
comparisons may be affected by fluctuations in the buying patterns of
major distributors, retail chains and other trade buyers, which may
result from seasonality, pricing, wholesaler buying decisions or other
factors.

o Changes in Accounting and Auditing Standards - The Company may be
affected by accounting and audited standards promulgated by the
American Institute of Certified

Public Accountants, the Financial Accounting Standards Board, the SEC,
or the Public Company Accounting Oversight Board that would require a
significant change to Schering-Plough's accounting practices.

o Economic Factors - There are economic factors over which
Schering-Plough has no control, including changes in inflation,
interest rates and foreign currency exchange rates.

o Changes in Business and Political Positions - 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.

For further details and a discussion of these and other risks and uncertainties,
see Schering-Plough's past and future SEC reports and filings.

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 2004 10-K.

Item 4. Controls and Procedures

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

As part of the changing business environment in which the Company operates, the
Company is replacing and upgrading a number of information systems. This process
will be ongoing for several years. In connection with these changes, as part of
the Company's management of both internal control over financial reporting and
disclosure controls and procedures, management has concluded that the new
systems are at least as effective with respect to those controls as the prior
systems. An example of a change in information systems that occurred in the
second quarter 2005 is the replacement of the order entry and accounts
receivable information systems within its U.S. prescription pharmaceutical
business.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Material pending legal proceedings involving the Company are described in Item 3
of the 2004 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 quarter ended June 30,
2005, or subsequent thereto, but before the filing of this report. This section
should be read in conjuction with Item 3 of the 2004 10-K.

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,
pricing and clinical trial practices and programs along with those of Warrick
Pharmaceuticals (Warrick), the Company's generic subsidiary. Details of this
matter are included in Item 3 of the 2004 10-K and in Note 15 "Legal,
Environmental and Regulatory Matters" to the Condensed Consolidated Financial
Statements in this 10-Q.

The Company has implemented certain changes to its sales, marketing and clinical
trial practices and is continuing to review those practices to foster compliance
with relevant laws and regulations. The Company is cooperating with this
investigation.

The Company previously recorded a liability of approximately $250 million
related to this investigation. During the 2005 second quarter, the Company
increased this reserve by $250 million, to a total of $500 million. This
increase relates to the investigation by the U.S. Attorney's Office for the
District of Massachusetts into the Company's marketing, sales, pricing and
clinical trial practices, as well as previously disclosed investigations and
litigation relating to the Company's practices regarding average wholesale price
by the Department of Justice and certain states. While no agreement has been
reached, the increase in litigation reserves reflects the Company's current
estimate to resolve these matters.

SEC Inquiries and Related Litigation

On September 25, 2003, a lawsuit was filed in New Jersey Superior Court, Union
County, against Richard Jay Kogan, former chairman and chief executive officer
of the Company and the Company's outside Directors alleging breach of fiduciary
duty, fraud and deceit and negligent misrepresentation, relating to alleged
disclosures made during meetings held with investors the week of September 30,
2002. The Company filed a motion to dismiss all claims, which was granted on
June 23, 2005.

Senate Finance Committee Inquiry

The United States Senate Committee on Finance has requested information from the
Company on the Company's practices relating to educational and other grants and
to the application of the provision in the Medicaid drug rebate law excluding
certain deeply-discounted sales from the calculation of rebates. The Company
understands that the Committee has directed similar requests to other
pharmaceutical companies. The Company is cooperating with the Committee and is
in the process of responding to its requests.

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 1990
through 1992. In April 2004, the Company received a formal Notice of Deficiency
from the IRS asserting additional federal income tax due and the Company was
billed on September 7, 2004. Payment in the amount of $194 million for income
tax and $279 million for interest was made on September 13, 2004. The Company
filed refund claims for the tax and interest with the IRS on December 23, 2004.
The Company was notified on February 16, 2005, that its refund claims were
denied by the IRS. The Company has filed suit for refund for the full amount of
the tax and interest.

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 2005.

ISSUER PURCHASES OF EQUITY SECURITIES

Total Number of
Shares Purchased as Maximum Number of
Part of Publicly Shares that May Yet Be
Total Number of Shares Average Price Paid Announced Plans or Purchased Under the
PERIOD Purchased per Share Programs Plans or Programs
- --------------------------- ---------------------- ------------------ ------------------- ----------------------

April 1, 2005 through
April 30, 2005 4,312(1) $ 19.55 N/A N/A

May 1, 2005 through
May 31, 2005 27,158(1) $ 20.34 N/A N/A

June 1, 2005 through
June 30, 2005 5,979(1) $ 19.48 N/A N/A

Total April 1, 2005 through
June 30, 2005 37,449(1) $ 20.12 N/A N/A

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

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

The annual meeting of shareholders was held on April 26, 2005 for the purpose
of:

1. electing three directors for three-year terms;

2. ratifying the designation of Deloitte & Touche LLP to audit
Schering-Plough's books and accounts for 2005; and

3. considering a shareholder proposal on the annual election of directors.

At the meeting, three nominees for director were elected for a three-year term
by a vote of shares as follows:

For Withheld
------------- ----------

Hans W. Becherer 1,269,622,866 53,790,157
Kathryn C. Turner 1,297,161,421 26,251,602
Robert F. W. van Oordt 1,288,519,454 34,893,569

The terms of the following directors continued after the meeting: Fred Hassan,
Philip Leder, M.D., Eugene R. McGrath, Carl E. Mundy, Jr., Richard de J.
Osborne, Patricia F. Russo and Arthur F. Weinbach.

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, 2005 was
ratified with a vote of 1,297,865,480 shares for, 16,050,803 shares against, and
9,496,740 abstentions.

The shareholder proposal on the annual election of directors received a vote of
833,439,095 shares for, 271,222,904 shares against, 14,950,866 abstentions and
203,800,158 broker non-votes.

Item 6. Exhibits

Exhibit Number Description

12 Computation of Ratio of Earnings to Fixed Charges

15 Awareness letter

31.1 Sarbanes-Oxley Act of 2002, Section 302 Certification for Chairman of the Board,
Chief Executive Officer and President

31.2 Sarbanes-Oxley Act of 2002, Section 302 Certification for Executive Vice President
and Chief Financial Officer

32.1 Sarbanes-Oxley Act of 2002, Section 906 Certification for Chairman of the Board,
Chief Executive Officer and President

32.2 Sarbanes-Oxley Act of 2002, Section 906 Certification for Executive Vice President
and Chief Financial Officer

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)

Date July 27, 2005 /s/ Douglas J. Gingerella
-----------------------------
Douglas J. Gingerella
Vice President and Controller
(Duly Authorized Officer and
Chief Accounting Officer)