10-K

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

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For fiscal year ended December 31, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For transition period from          to

Commission file number 1-6571

SCHERING-PLOUGH CORPORATION

(Exact name of registrant as specified in its charter)

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

Registrant’s telephone number, including area code:

(908) 298-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Shares, $.50 par value	New York Stock Exchange
Mandatory Convertible Preferred Stock	New York Stock Exchange
Preferred Share Purchase Rights*	New York Stock Exchange

* At the time of filing, the Rights were not traded separately from the Common Shares.

Securities registered pursuant to section 12(g) of the Act:
None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

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

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2006 (the last business day of the registrant’s most recently completed second fiscal quarter): $28,174,450,381

Common Shares outstanding as of January 31, 2007: 1,487,743,906

	Part of Form 10-K
Documents Incorporated by Reference	Incorporated into
Schering-Plough Corporation Proxy Statement for the Annual Meeting of Shareholders on May 18, 2007	Part III

TABLE OF CONTENTS

			Page
PART I
	Item 1.	Business		3
	Item 1A.	Risk Factors		13
	Item 1B.	Unresolved Staff Comments		18
	Item 2.	Properties		19
	Item 3.	Legal Proceedings		19
	Item 4.	Submission of Matters to a Vote of Security Holders		22
		Executive Officers of the Registrant		23
PART II
	Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		25
	Item 6.	Selected Financial Data		27
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		53
	Item 8.	Financial Statements and Supplementary Data		54
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		99
	Item 9A.	Controls and Procedures		99
		Management’s Report on Internal Control over Financial Reporting		99
PART III
	Item 10.	Directors and Executive Officers of the Registrant		101
	Item 11.	Executive Compensation		101
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		101
	Item 13.	Certain Relationships and Related Transactions		102
	Item 14.	Principal Accountant Fees and Services		102
PART IV
	Item 15.	Exhibits and Financial Statement Schedules		102
SIGNATURES				108
EX-10.E.V: EMPLOYMENT AGREEMENT
EX-10.E.VI: EMPLOYMENT AGREEMENT
EX-10.E.VIII: EMPLOYMENT AGREEMENT
EX-10.E.IX: FORM OF CHANGE OF EMPLOYMENT AGREEMENT
EX-10.L: SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
EX-12: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-21: SUBSIDIARIES
EX-23.1: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EX-23.2: INDEPENDENT AUDITOR'S CONSENT
EX-24: POWER OF ATTORNEY
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

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Part I

Item 1.   Business

OVERVIEW OF THE BUSINESS

Schering-Plough refers to Schering-Plough Corporation and its subsidiaries, except as otherwise indicated by the context. Schering Corporation, a predecessor company, was incorporated in New York in 1928 and New Jersey in 1935. The trademarks indicated by CAPITAL LETTERS in this 10-K are the property of, licensed to, promoted or distributed by Schering-Plough Corporation, its subsidiaries or related companies.

Schering-Plough is a global science-based health care company with leading prescription, consumer and animal health products. Through internal research and collaborations with business partners, Schering-Plough discovers, develops, manufactures and markets advanced drug therapies to meet important medical needs. Schering-Plough’s vision is to earn the trust of the physicians, patients and customers that it serves around the world, as well as its shareholders who own Schering-Plough. Schering-Plough’s worldwide headquarters is in Kenilworth, New Jersey, and its website is www.schering-plough.com.

In April 2003, the Board of Directors named Fred Hassan as the new Chairman of the Board and Chief Executive Officer of Schering-Plough. Under his leadership, a strategic plan was initiated with the goals of stabilizing, repairing and turning around Schering-Plough to produce a long-term value for shareholders. That plan, the six- to eight-year Action Agenda, has been implemented by the new leadership team recruited by Mr. Hassan. In 2006, Schering-Plough announced that it had entered the fourth of the Action Agenda’s five phases slightly ahead of schedule.

SEGMENT INFORMATION

The new management team reorganized the business from one managed along geographic lines, with the primary segments being U.S. and rest-of-world, to a business organized around its products. Currently, Schering-Plough has three reportable segments: Prescription Pharmaceuticals, Consumer Health Care and Animal Health. The segment sales and profit data that follow are consistent with Schering-Plough’s current management reporting structure.

Prescription Pharmaceuticals

The Prescription Pharmaceuticals segment discovers, develops, manufactures and markets human pharmaceutical products. Within the Prescription Pharmaceutical segment, there are three areas of focus: Primary Care, Specialty Care and the Cholesterol Franchise. Principal products in this segment include:

Primary Care

Allergy/Respiratory:  NASONEX, a once-daily, nasal-inhaled steroid for nasal allergy symptoms, including congestion, and for the treatment of nasal polyps in patients 18 years of age and older; CLARINEX, a non-sedating antihistamine for the treatment of allergic rhinitis; FORADIL AEROLIZER, a long-acting beta2-agonist marketed by Schering-Plough in the United States for the maintenance treatment of asthma and chronic obstructive pulmonary disease, and for the acute prevention of exercise-induced bronchospasm; ASMANEX TWISTHALER, an oral dry-powder corticosteroid inhaler for first-line maintenance treatment of asthma; and PROVENTIL (albuterol) Inhaler for the relief of bronchospasm in patients 12 years or older.

Antibiotics:  AVELOX, a broad-spectrum fluoroquinolone antibiotic for certain respiratory and skin infections, and CIPRO, a broad-spectrum fluoroquinolone antibiotic for certain respiratory, skin, urinary tract and other infections.

Dermatologicals:  ELOCON, a medium-potency topical steroid cream, lotion and ointment.

Other Disorders:  LEVITRA, a phosphodiesterase type 5 inhibitor (PDE5) co-marketed by Schering-Plough in the United States for the treatment of male erectile dysfunction.

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Specialty Care

Anti-Inflammatories:  REMICADE, an anti-TNF antibody marketed by Schering-Plough outside of the United States, Japan and certain Asian markets for the treatment of rheumatoid arthritis, Crohn’s disease, ankylosing spondylitis, ulcerative colitis, psoriatic arthritis, psoriasis, and as first-line therapy for the treatment of early rheumatoid arthritis.

Anti-virals:  PEG-INTRON Powder for Injection, the only pegylated interferon product for chronic hepatitis C approved for dosing according to patient body weight; INTRON A Injection for chronic hepatitis B and C and other antiviral indications; and REBETOL Capsules for use with PEG-INTRON or INTRON A for chronic hepatitis C.

Oncology:  TEMODAR Capsules for certain types of brain tumors, including newly diagnosed glioblastoma multiforme; CAELYX, a long-circulating pegylated liposomal formulation of the cancer drug doxorubicin marketed by Schering-Plough outside the United States for the treatment of certain ovarian cancers, Kaposi’s sarcoma and metastatic breast cancer; and INTRON A Injection, marketed for numerous anticancer indications worldwide, including as adjuvant therapy for malignant melanoma.

Antifungals:  NOXAFIL Oral Suspension for prophylaxis (prevention) and treatment (EU only) of invasive fungal infections in high-risk patients and the treatment of oropharyngeal candidiasis (US and EU).

Acute Coronary Care:  INTEGRILIN Injection, a platelet receptor GP IIb-IIIa inhibitor for the treatment of patients with acute coronary syndrome and those undergoing percutaneous coronary intervention in the United States, as well as for the prevention of early myocardial infarction in patients with acute coronary syndrome in most countries.

Other Disorders:  SUBUTEX, a sublingual tablet formulation of buprenorphine, and SUBOXONE, a sublingual tablet combination of buprenorphine and naloxone, marketed by Schering-Plough in certain countries outside the United States for the treatment of opiate addiction.

Cholesterol Franchise

ZETIA, a novel cholesterol-absorption inhibitor discovered by Schering-Plough scientists, for use as monotherapy or in combination with either statins or fenofibrate to lower cholesterol.

VYTORIN, a cholesterol-lowering tablet combining the dual action of ZETIA and Merck & Co., Inc.’s statin, Zocor.

Consumer Health Care

The Consumer Health Care segment develops, manufactures and markets OTC, foot care and sun care products. Principal products in this segment include:

Over-the-counter (OTC) Products:  CLARITIN non-sedating antihistamines; DRIXORAL cold and allergy, allergy sinus, flu and nasal decongestant tablets; AFRIN nasal decongestant spray; and CORRECTOL laxative tablets.

Foot Care:  DR. SCHOLL’S foot care products; LOTRIMIN topical antifungal products; and TINACTIN topical antifungal products; and foot and sneaker odor/wetness products.

Sun Care:  COPPERTONE sun care lotions, sprays, dry oils and lip-protection products and sunless tanning products; and SOLARCAINE sunburn relief products.

Animal Health

The Animal Health segment discovers, develops, manufactures and markets animal health products. Principal products in this segment include:

Livestock Products:  NUFLOR bovine and swine antibiotic; BANAMINE bovine and swine anti-inflammatory; and M+PAC swine pneumonia vaccine.

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Poultry Products:  PARACOX and COCCIVAC coccidiosis vaccines for poultry.

Companion Animal Products:  OTOMAX, a steroid for otitis in dogs; EXSPOT topical insecticide for dogs; HOMEAGAIN pet recovery service; and ZUBRIN, an anti-inflammatory/analgesic for dogs.

Aquaculture Products:  SLICE parasiticide for sea lice in salmon and AQUAFLOR antibiotic for farm-raised fish.

Net sales by segment

	Year Ended December 31,
	2006		2005		2004
	(Dollars in millions)
Prescription Pharmaceuticals	$	8,561	$	7,564	$	6,417
Consumer Health Care		1,123		1,093		1,085
Animal Health		910		851		770
Consolidated net sales	$	10,594	$	9,508	$	8,272

Profit by segment

	Year Ended December 31,
	2006			2005			2004
	(Dollars in millions)
Prescription Pharmaceuticals	$	1,394		$	733		$	13
Consumer Health Care		228			235			234
Animal Health		120			120			88
Corporate and other (including net interest income of $125 million and $13 million in 2006 and 2005, respectively, and $88 million of net interest expense in 2004)		(259	)		(591	)		(503	)
Consolidated profit/(loss) before tax and cumulative effect of a change in accounting principle	$	1,483		$	497		$	(168	)

Schering-Plough’s net sales do not include sales of VYTORIN and ZETIA that are managed in partnership with Merck, as Schering-Plough accounts for this joint venture under the equity method of accounting (see Note 3, “Equity Income From Cholesterol Joint Venture,” under Item 8, “Financial Statements and Supplementary Data,” for additional information). Equity income from the cholesterol joint venture is included in the Prescription Pharmaceuticals segment profit.

“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,” under Item 8, “Financial Statements and Supplementary Data.”

In 2006, “Corporate and other” includes special charges of $102 million primarily related to changes to streamlining Schering-Plough’s manufacturing operations in the U.S. and Puerto Rico announced in June 2006, all of which related to the Prescription Pharmaceuticals segment. Included in 2006 cost of sales were charges of approximately $146 million from the manufacturing streamlining actions which were primarily related to the Prescription Pharmaceuticals segment.

In 2005, “Corporate and other” includes special charges of $294 million, including $28 million of employee termination costs, $16 million of asset impairment and other charges, and an increase in litigation reserves by $250 million resulting in a total reserve of approximately $500 million representing Schering-Plough’s then current estimate to resolve the Massachusetts investigation as well as the investigations and the state litigation disclosed under “AWP Litigation and Investigations,” in Note 19, “Legal, Environmental and Regulatory Matters,” in Item 8, “Financial Statements and Supplementary Data.” It is estimated that the charges relate to the reportable

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segments as follows: Prescription Pharmaceuticals — $289 million, Consumer Health Care — $2 million, Animal Health — $1 million and Corporate and other — $2 million.

In 2004, “Corporate and other” includes special charges of $153 million, including $119 million of employee termination costs, as well as $34 million of asset impairment and other charges. It is estimated the charges relate to the reportable segments as follows: Prescription Pharmaceuticals — $135 million, Consumer Health Care — $3 million, Animal Health — $2 million and Corporate and other — $13 million.

See Note 2, “Special Charges and Manufacturing Streamlining,” under Item 8, “Financial Statements and Supplementary Data,” for additional information.

STRATEGIC ALLIANCES

Schering-Plough markets products that were developed through internal research and products that are licensed from business partners through strategic alliances. In addition to the Merck/Schering-Plough joint ventures and the strategic alliance with Centocor described in more detail below, Schering-Plough is engaged in a number of alliances, including:

•  Schering-Plough has exclusive rights in the U.S. and Puerto Rico under a 2004 strategic agreement with Bayer to market, sell and distribute Bayer’s AVELOX (moxifloxacin HCI) and CIPRO (ciprofloxacin HCI) antibiotics and to undertake Bayer’s U.S. commercialization activities for the erectile dysfunction medicine LEVITRA (vardenafil HCI) under Bayer’s co-promotion agreement with GlaxoSmithKline PLC.

•  Through a licensing agreement with Millenium Pharmaceuticals, Inc., Schering-Plough markets INTEGRILIN (eptifibatide) Injection, a GP IIb/IIIa inhibitor, in the U.S. and certain countries outside the U.S.

•  Through a license agreement with ALZA Corporation (a division of Johnson & Johnson) , Schering-Plough markets CAELYX outside the United States, Japan and Israel for the treatment of certain cancers. CAELYX is marketed as Doxil in the U.S. by Ortho Biotech Products, L.P.

•  Schering-Plough has exclusive marketing rights to SUBOXONE and SUBUTEX in Europe, Canada and certain other countries. SUBOXONE and SUBUTEX were developed by Reckitt Benckiser Healthcare Ltd. for the treatment of opioid dependence, within a framework of medical, social and psychological treatment. These products are marketed in the U.S. by Reckitt Benckiser Pharmaceuticals Inc.

Schering-Plough has also entered into strategic alliances for the development and commercialization of new drug therapies, including the following:

•  Schering-Plough has a global collaboration with Novartis AG to develop and commercialize a new combination therapy using a new molecular entity (NME) to treat asthma and chronic obstructive pulmonary disease (COPD). Schering-Plough’s once-daily inhaled corticosteroid mometasone, the active ingredient in ASMANEX (mometasone furoate), and Novartis’ once-daily beta2-agonist indacaterol (QAB149) will be combined in a single inhalation device. The combination product, with once-daily dosing, has the potential to offer patient benefits including enhanced disease control and convenience.

•  Schering-Plough entered into a North American development and marketing agreement with ALK-Abello for tablet-based sublingual immunotherapy (SLIT) compounds for the treatment of certain allergies. One compound for grass-pollen allergies is currently in Phase III clinical development in the U.S.

•  Schering-Plough entered into definitive licensing agreements with Valeant Pharmaceuticals International and Metabasis Therapeutics, Inc., for exclusive worldwide development and commercial rights to pradefovir, an investigational oral antiviral compound currently in Phase II clinical development for the treatment of chronic hepatitis B.

•  Schering-Plough entered into an exclusive, worldwide agreement with Anacor Pharmaceuticals to develop and market AN2690, an investigational compound for the topical treatment of onychomycosis (nail fungus). The compound is currently in Phase II clinical development.

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•  Schering-Plough announced it entered into an exclusive North American licensing agreement with Santarus, Inc. for the development and commercialization of a low-dose form of ZEGERID for over-the-counter use in heartburn-related indications. ZEGERID is an immediate-release proton pump inhibitor currently sold as a prescription product.

Information About the Merck/Schering-Plough Joint Ventures

In May 2000, Schering-Plough and Merck & Co., Inc. (Merck) entered into two separate sets of agreements to jointly develop and market certain products in the U.S., including (1) two cholesterol-lowering drugs and (2) an allergy/asthma drug. In December 2001, the cholesterol agreements were expanded to include all countries of the world except Japan. In general, the companies agreed that the collaborative activities under these agreements would operate in a virtual joint venture to the maximum degree possible by relying on the respective infrastructures of the two companies. The cholesterol agreements do not provide for any jointly owned facilities and, as such, products resulting from the collaboration are manufactured in facilities owned by either Schering-Plough or Merck.

The cholesterol agreements provide for Schering-Plough 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 several international markets.

Schering-Plough utilizes the equity method of accounting for the cholesterol joint venture. See Note 3, “Equity Income from Cholesterol Joint Venture,” under Item 8, “Financial Statements and Supplemental Data,” for additional information regarding the profits and costs sharing and accounting as provided by the cholesterol agreements.

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

Information About the Centocor Licenses

REMICADE is licensed from and manufactured by Centocor, Inc., a Johnson & Johnson company. Schering-Plough has the exclusive marketing rights to this product outside of the U.S., Japan and certain Asian markets. During 2005, Schering-Plough exercised an option under its contract with Centocor for license rights to develop and commercialize golimumab, a fully human monoclonal antibody, in the same territories as REMICADE. Golimumab is currently in Phase III trials. Schering-Plough and Centocor have been collaborating in resolving the difference in the parties’ opinions as to the expiration date of Schering-Plough’s rights to golimumab. In August 2006, Schering-Plough received a determination through arbitration that its rights to market golimumab will extend to 15 years after the first commercial sales in its territories, but Centocor has appealed this ruling.

GLOBAL OPERATIONS

Non-U.S. operations generate the majority of Schering-Plough’s profits and cash flow. Non-U.S. activities are carried out primarily through wholly-owned subsidiaries wherever market potential is adequate and circumstances permit. In addition, Schering-Plough is represented in some markets through licensees or other distribution

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arrangements. Currently, Schering-Plough has business operations in more than 120 countries and has approximately 19,200 employees outside the U.S.

Non-U.S. operations are subject to certain risks that are inherent in conducting business overseas. These risks include possible nationalization, expropriation, importation limitations, pricing and reimbursement restrictions, and other restrictive governmental actions or economic destabilization. Also, fluctuations in foreign currency exchange rates can impact Schering-Plough’s consolidated financial results. For additional information on global operations, see Item 7, “Management’s Discussion and Analysis,” and the segment information described above.

Net sales by geographic area

	2006		2005		2004
	(Dollars in millions)
United States	$	4,192	$	3,589	$	3,219
Europe and Canada		4,403		4,040		3,595
Pacific Area and Asia		1,009		995		676
Latin America		990		884		782
Total International		6,402		5,919		5,053
Consolidated net sales	$	10,594	$	9,508	$	8,272

Schering-Plough has subsidiaries in more than 50 countries outside the U.S. Net sales are presented in the geographic area in which Schering-Plough’s customers are located. The following countries accounted for 5 percent or more of consolidated net sales during any of the past three years:

	2006					2005					2004
			% of					% of					% of
			Consolidated			Net		Consolidated			Net		Consolidated
	Net Sales		Net Sales			Sales		Net Sales			Sales		Net Sales
	(Dollars in millions)
Total International net sales	$	6,402		60	%	$	5,919		62	%	$	5,053		61	%
France		809		8	%		771		8	%		729		9	%
Japan		669		6	%		687		7	%		385		5	%
Canada		478		5	%		418		4	%		365		4	%
Italy		441		4	%		457		5	%		443		5	%

Net sales by customer

Sales to a single customer that accounted for 10 percent or more of Schering-Plough’s consolidated net sales during any of the past three years were as follows:

	2006				2005				2004
			% of				% of				% of
			Consolidated		Net		Consolidated		Net		Consolidated
	Net Sales		Net Sales		Sales		Net Sales		Sales		Net Sales
	(Dollars in millions)
McKesson Corporation	$	1,159		11%	$	1,073		11%	$	868		10%
Cardinal Health	$	1,019		10%	$	841		9%	$	447		5%

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Supplemental sales information

Sales of products comprising 10 percent or more of Schering-Plough’s U.S. or international sales for the year ended December 31, 2006, were as follows:

	Amount		Percentage
	(Dollars in millions)
U.S.
NASONEX	$	611		15%
International
REMICADE	$	1,240		19%
PEG-INTRON		636		10%

Long-lived assets by geographic location

	2006		2005		2004
	(Dollars in millions)
United States	$	2,547	$	2,538	$	2,447
Singapore		824		840		884
Ireland		488		486		449
Puerto Rico		152		307		298
Other		653		602		768
Total	$	4,664	$	4,773	$	4,846

Long-lived assets shown by geographic location are primarily property.

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

RESEARCH AND DEVELOPMENT

Schering-Plough’s research activities are primarily aimed at discovering and developing new prescription products and enhancements to existing prescription products of medical and commercial significance. Company-sponsored research and development expenditures were $2.2 billion, $1.9 billion, and $1.6 billion in 2006, 2005, and 2004, respectively. As a percentage of consolidated net sales, research and development expenditures represented approximately 21 percent, 20 percent and 19 percent in 2006, 2005 and 2004, respectively.

Schering-Plough’s research activities are concentrated in the therapeutic areas of respiratory diseases, inflammatory diseases, infectious diseases, oncology, cardiovascular and metabolic diseases and central nervous system disorders. Schering-Plough also has substantial efforts directed toward biotechnology and immunology. Research activities include expenditures for both internal research efforts and research collaborations with various partners.

While several pharmaceutical compounds are in varying stages of development, it cannot be predicted when or if these compounds will become available for commercial sale. Schering-Plough’s product pipeline lists significant products in development and is available on Schering-Plough’s website at www.schering-plough.com. Due to the nature of the development and approval process — as well as the fact that human health is involved and the science of human health is constantly evolving — the status of any compounds in development is subject to change. Schering-Plough does not assume any duty to update this information.

Four of Schering-Plough’s Phase II projects have been granted fast-track designation by the FDA: a novel thrombin receptor antagonist for acute coronary syndrome and secondary prevention of subsequent cardiovascular events; vicriviroc for HIV; a protease inhibitor compound for hepatitis C; and a new potential treatment for patients with Parkinson’s disease. If any of these products advance to Phase III clinical trials, significant expenditures would be required due to the large number of patients necessary for Phase III trials.

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PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY RIGHTS

Overview

Intellectual property protection is critical to Schering-Plough’s ability to successfully commercialize its product innovations. Schering-Plough owns, has applied for, or has licensed rights to, a large number of patents, both in the U.S. and in other countries, relating to molecules, products, product uses, formulations and manufacturing processes. There is no assurance that the patents Schering-Plough is seeking will be granted or that the patents Schering-Plough has been granted would be found valid if challenged. Moreover, patents relating to particular molecules, products, uses, formulations, or processes do not preclude other manufacturers from employing alternative processes or from marketing alternative products or formulations that might successfully compete with Schering-Plough’s patented products.

Outside the U.S., the standard of intellectual property protection for pharmaceuticals varies widely. While many countries have reasonably strong patent laws, other countries currently provide little or no effective protection for inventions or other intellectual property rights. Under the Trade-Related Aspects of Intellectual Property Agreement (TRIPs) administered by the World Trade Organization (WTO), more than 140 countries have now agreed to provide non-discriminatory protection for most pharmaceutical inventions and to assure that adequate and effective rights are available to all patent owners. It is possible that changes to this agreement will be made in the future that will diminish or further delay its implementation in developing countries. It is too soon to assess how much, if at all, Schering-Plough will be impacted commercially from these changes.

When a product patent expires, the patent holder often loses effective market exclusivity for the product. This can result in a rapid, sharp and material decline in sales of the formerly patented product, particularly in the U.S. However, in some cases the innovator company can obtain additional commercial benefits through manufacturing trade secrets; later-expiring patents on processes, uses, or formulations; trademark use; or exclusivity that may be available under pharmaceutical regulatory laws.

Schering-Plough’s Intellectual Property Portfolio

Patent protection for certain Schering-Plough molecules, products, processes and uses are important to Schering-Plough’s business and financial results. For many of Schering-Plough’s products, in addition to patents on the compound, Schering-Plough holds other patents on manufacturing processes, formulations, or uses that may extend exclusivity beyond the expiration of the compound patent.

Schering-Plough’s subsidiaries own (or have licensed rights under) a number of patents and patent applications, both in the U.S. and abroad. Patents and patent applications relating to Schering-Plough’s significant products, including, without limitation, VYTORIN, ZETIA, REMICADE, NASONEX, INTRON A, PEG-INTRON, TEMODAR and CLARINEX, are of material importance to Schering-Plough.

Worldwide, Schering-Plough sells all major products under trademarks that also are material in the aggregate to its business and financial results. Trademark protection varies throughout the world, with protection continuing in some countries as long as the mark is used and in other countries as long as it is registered. Registrations are normally for fixed but renewable terms.

Patent Challenges Under the Hatch-Waxman Act

The Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as Hatch-Waxman, made a complex set of changes to both patent and new drug approval laws in the U.S. Before Hatch-Waxman, no drug could be approved without providing the U.S. Food and Drug Administration (FDA) complete safety and efficacy studies, known as a complete New Drug Application (NDA). Hatch-Waxman authorizes the FDA to approve generic versions of innovative medicines without such information upon the filing of an Abbreviated New Drug Application (ANDA). In an ANDA, the generic manufacturer must demonstrate only bioequivalence between the generic version and the NDA-approved drug — not safety and efficacy. Hatch-Waxman provides for limited patent term restoration to partially make up for patent term lost during the time an NDA-approved drug is in regulatory review. NDA-approved drugs also receive a limited period of data exclusivity which prevents the approval of ANDA applications for specific time periods after approval of the NDA-approved drug.

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Absent a successful patent challenge, the FDA cannot approve an ANDA until after the innovator’s patents expire. However, a generic manufacturer may file an ANDA seeking approval after the expiration of the applicable data exclusivity, and alleging that one or more of the patents listed in the innovator’s NDA are invalid or not infringed. This allegation is commonly known as a Paragraph IV certification. The innovator must then file suit against the generic manufacturer to protect its patents. If one or more of the NDA-listed patents are successfully challenged, the first filer of a Paragraph IV certification may be entitled to a 180-day period of market exclusivity over all other generic manufacturers. In recent years, generic manufacturers have used Paragraph IV certifications extensively to challenge patents on a wide array of innovative pharmaceuticals, and it is anticipated that this trend will continue.

A number of generic companies have filed ANDAs for CLARINEX tablets, REDITABS, and D-24 and in response, Schering-Plough brought patent infringement actions in 2006. An adverse outcome in this action may result in the introduction of generic desloratadine to prior the expiration of the patent(s) that are the subject of these litigations. In addition, in February 2007, Schering-Plough received a notice from a generic company indicating that it had filed an ANDA for ZETIA and that it is challenging the U.S. patents that are listed for ZETIA. Merck and Schering-Plough are considering the appropriate response.

MARKETING ACTIVITIES AND COMPETITION

Schering-Plough, through its trained professional sales representatives, introduces and makes known its prescription drugs to physicians, pharmacists, hospitals, managed care organizations and buying groups. Schering-Plough sells prescription drugs to hospitals, certain managed care organizations, wholesale distributors and retail pharmacists. Schering-Plough also introduces and makes known its prescription products through journal advertising, direct mail advertising, the distribution of samples to physicians and through television, radio, Internet, print and other advertising media.

Schering-Plough, through its trained professional sales representatives, promotes its animal health products to veterinarians, distributors and animal producers.

Schering-Plough sells over-the-counter, foot care and sun care products through wholesale and retail drug, food chain and mass merchandiser outlets. Schering-Plough promotes directly to the consumer through television, radio, Internet, print and other advertising media.

The pharmaceutical industry is highly competitive and includes other large companies, some significantly larger than Schering-Plough, with substantial resources for research, product development, advertising, promotion and field selling support. There are numerous domestic and international competitors in this industry. Some of the principal competitive techniques used by Schering-Plough for its products include research and development of new and improved products, varied dosage forms and strengths, and switching prescription products to non-prescription status. In the U.S., many of Schering-Plough’s products are subject to increasingly competitive pricing as managed care groups, institutions, federal and state government entities and agencies, and buying groups seek price discounts and rebates. Governmental and other pressures toward the dispensing of generic products may significantly reduce the sales of certain products when they, or competing products in the same therapeutic category, are no longer protected by patents or exclusivity available under pharmaceutical regulatory laws.

Schering-Plough operates primarily in the prescription pharmaceutical marketplace. However, where appropriate, Schering-Plough seeks regulatory approval to switch prescription products to over-the-counter status as a means of extending a product’s life cycle. In this way, the OTC marketplace is another means of maximizing the return on investments in discovery and development.

GOVERNMENT REGULATION

Each of Schering-Plough’s major business segments is subject to significant regulation in multiple jurisdictions. This section describes the general regulatory framework. Additional information about the cost of regulatory compliance and specific impacts on Schering-Plough’s business and financial condition are described under the heading “Regulatory And Competitive Environment In Which Schering-Plough Operates” in Item 7, “Management’s Discussion and Analysis.” Additional information about other regulatory matters can be found in

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Item 3, “Legal Matters”, Note 18, “Consent Decree,” and Note 19, “Legal, Environmental and Regulatory Matters,” under Item 8, “Financial Statements and Supplementary Data.”

In the prescription drug segment, regulations apply at all phases of the business, including:

•  regulatory requirements to conduct, and standards for, clinical trials (for example, requiring the use of Good Clinical Practices or GCPs), which apply at the research and development stage;

•  regulatory requirements to conduct, and standards for, post-approval clinical trials;

•  required regulatory approval to begin marketing a new drug or to market an existing drug product for new indications;

•  regulations prescribing the manner in which drugs are manufactured, packaged, labeled, advertised, marketed and distributed;

•  regulations impacting the pricing of drugs;

•  regulatory requirements to assess and report adverse impacts and side effects of drugs used in clinical trials, as well as marketed drugs, called “pharmacovigilance;” and

•  the ability of regulatory authorities to remove a product from the market or recall certain batches of products.

In the U.S., the national regulation of all phases of the prescription drug business except pricing is centralized at the Food and Drug Administration (FDA). The FDA is responsible for protecting the U.S. public health by assuring the safety, efficacy, and security of human and veterinary drugs, biological products and medical devices. Generally, there is free market pricing in the U.S., although the Centers for Medicare and Medicaid Services (CMS) and Medicare Part B and D include provisions about pricing drugs for the elderly, disabled and indigent who receive federal prescription benefits. Schering-Plough is also committed to complying with voluntary best practices of the Pharmaceutical Research and Manufacturers of America (PhRMA), a trade industry group of which it is a member, regarding marketing and advertising practices.

In the European Union (EU), including Schering-Plough’s key markets in the United Kingdom, France, Germany and Italy, there is regulation at the local country level and additional regulation at the EU level, through the European Medicines Agency (EMEA). Pharmaceutical products are regulated at both of these levels through various national, mutual recognition or centralized regulatory procedures. The EMEA coordinates the evaluation and supervision of medicinal products throughout the EU. There is no pan-EU market pricing system; however, individual member states have various systems/agencies that regulate price at a local level.

In Japan, there is regulation through the Pharmaceuticals and Medical Device Agency (PMDA). The PMDA regulates pharmaceuticals and medical devices from development through post-marketing use. The Japanese government regulates the pricing/reimbursement of pharmaceutical products in Japan through a complicated pricing process that includes benchmarks with prices in other Western countries such as the U.S., Canada and select EU countries.

As all of the major countries have some influence over pricing, even with the CMS in the United States, there is increasing pressure on the pharmaceutical industry to bring products to market that provide differentiation versus existing products. This can lead to more expensive and scientifically challenging clinical trials in order to generate this type of data for new products versus marketed comparators.

RAW MATERIALS

Raw materials essential to Schering-Plough’s operations are available in adequate quantities from a number of potential suppliers. Energy is expected to be available to Schering-Plough in sufficient quantities to meet its operating requirements.

SEASONALITY

Certain of Schering-Plough’s products, particularly the respiratory and sun care categories, are seasonal in nature. Seasonal patterns do not have a pronounced effect on the consolidated operations of Schering-Plough.

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ENVIRONMENT

To date, compliance with federal, state and local laws regarding discharge of materials into the environment, or protection of the environment, have not had a material effect on Schering-Plough’s capital expenditures, earnings and competitive position.

EMPLOYEES

At December 31, 2006, Schering-Plough employed approximately 33,500 people worldwide.

AVAILABLE INFORMATION

Schering-Plough’s 10-Ks, 10-Qs, 8-Ks and amendments to those reports are filed with or furnished to the SEC and are available free of charge on Schering-Plough’s website as soon as reasonably practicable after such materials are electronically filed with the SEC. Schering-Plough’s address on the World Wide Web is www.schering-plough.com. Since Schering-Plough began this practice in the third quarter of 2002, each such report has been available on Schering-Plough’s website within 24 hours of filing. Reports filed by Schering-Plough with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Item 1A.   Risk Factors

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

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

Schering-Plough’s ability to generate profits and operating cash flow is largely dependent upon the continued profitability of Schering-Plough’s cholesterol franchise, consisting of VYTORIN and ZETIA. In addition, products such as PEG-INTRON, REBETOL, REMICADE, TEMODAR, OTC CLARITIN and NASONEX accounted for a material portion of 2006 revenues. As a result of Schering-Plough’s dependence on key products, any events that adversely affect the markets for these products could have a significant impact on results of operations. These events include loss of patent protection, increased costs associated with manufacturing, OTC availability of Schering-Plough’s product or a competitive product, the discovery of previously unknown side effects, increased competition from the introduction of new, more effective treatments and discontinuation or removal from the market of the product for any reason.

For example, the profitability of Schering-Plough’s cholesterol franchise may be adversely affected by the introduction of multiple generic forms in December 2006 of two competing cholesterol products that lost patent protection earlier in the year.

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

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

There is a high rate of failure inherent in the research to develop new drugs to treat diseases. As a result, there is a high risk that funds invested in research programs will not generate financial returns. This risk profile is

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compounded by the fact that this research has a long investment cycle. To bring a pharmaceutical compound from the discovery phase to market may take a decade or more and failure can occur at any point in the process, including later in the process after significant funds have been invested.

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

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

•  findings of ineffectiveness, superior safety or efficacy of competing products, or harmful side effects in clinical or pre-clinical testing;

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

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

•  preclusion from commercialization by the proprietary rights of others.

Intellectual property protection for innovation is an important contributor to Schering-Plough’s profitability. Generic forms of Schering-Plough’s products may be introduced to the market as a result of the expiration of patents covering Schering-Plough’s products, a successful challenge to Schering-Plough’s patent, or the at-risk launch of a generic version of a Schering-Plough product, which may have a material and negative effect on results of operations.

Intellectual property protection is critical to Schering-Plough’s ability to successfully commercialize its products. Upon the expiration or the successful challenge of Schering-Plough’s patents covering a product, competitors may introduce lower-priced generic versions of such products, which may include Schering-Plough’s well-established products. In recent years, some generic manufacturers have launched generic versions of products before the ultimate resolution of patent litigation (commonly known as “at-risk” product launches). Such generic competition could result in the loss of a significant portion of sales or downward pressures on the prices at which Schering-Plough offers formerly patented products, particularly in the U.S. Patents and patent applications relating to Schering-Plough’s significant products are of material importance to Schering-Plough.

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

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

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

Even if Schering-Plough is ultimately successful in a particular dispute, Schering-Plough may incur substantial costs in defending its patents and other intellectual property rights. For example, a generic manufacturer may file an Abbreviated New Drug Application seeking approval after the expiration of the applicable data exclusivity and alleging that one or more of the patents listed in the innovator’s New Drug

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Application are invalid or not infringed. This allegation is commonly known as a Paragraph IV certification. The innovator then has the ability to file suit against the generic manufacturer to enforce its patents. In recent years, generic manufacturers have used Paragraph IV certifications extensively to challenge patents on a wide array of innovative pharmaceuticals, and it is anticipated that this trend will continue. The potential for litigation regarding Schering-Plough’s intellectual property rights always exists and may be initiated by third parties attempting to abridge Schering-Plough’s rights, as well as by Schering-Plough in protecting its rights. See “Patent Challenges Under the Hatch-Waxman Act” in Item 1, “Business”, for a discussion of current Paragraph IV certifications for Schering-Plough products.

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

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

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

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

Outside of the U.S., many governmental agencies strictly control, directly or indirectly, the prices at which pharmaceutical products are sold. In the international markets, cost control methods including restrictions on physician prescription levels and patient reimbursements; emphasis on greater use of generic drugs; and across-the-board price cuts may decrease revenues internationally.

There are material pending government investigations against Schering-Plough, which could lead to the commencement of civil and/or criminal proceedings involving the imposition of substantial fines, penalties and injunctive or administrative remedies, including exclusion from government reimbursement programs, and which could give rise to other investigations or litigation by government entities or private parties.

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

The pricing, sales and marketing programs and arrangements, and related business practices of Schering-Plough and other participants in the health care industry are under increasing scrutiny from federal and state regulatory, investigative, prosecutorial and administrative entities. These entities include the Department of Justice and its U.S. Attorney’s Offices, the Office of Inspector General of the Department of Health and Human Services, the FDA, the Federal Trade Commission and various state Attorneys General offices. Many of the health care laws under which certain of these governmental entities operate, including the federal and state anti-kickback statutes and statutory and common law false claims laws, have been construed broadly by the courts and permit the government entities to exercise significant discretion. In the event that any of those governmental entities believes that wrongdoing has occurred, one or more of them could institute civil or criminal proceedings which, if resolved unfavorably, could subject Schering-Plough to substantial fines, penalties and injunctive or administrative remedies, including exclusion from government reimbursement programs. In addition, an adverse outcome to a government investigation could prompt other government entities to commence investigations of Schering-Plough or cause those entities or private parties to bring civil claims against it. Schering-Plough also cannot predict whether

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any investigations will affect its marketing practices or sales. Any such result could have a material adverse impact on Schering-Plough’s results of operations, cash flows, financial condition, or its business.

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

There are other legal matters in which adverse outcomes could negatively affect Schering-Plough’s business.

Unfavorable outcomes in other pending litigation matters, or in future litigation, including litigation concerning product pricing, securities law violations, product liability claims, ERISA matters, patent and intellectual property disputes, and antitrust matters could preclude the commercialization of products, negatively affect the profitability of existing products and could subject Schering-Plough to substantial fines, penalties and injunctive or administrative remedies, including exclusion from government reimbursement programs. Any such result could materially and adversely affect Schering-Plough’s results of operations, cash flows, financial condition, or its business.

Please refer to Item 3, “Legal Proceedings” for descriptions of significant pending litigation.

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

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

For example, in May 2002, Schering-Plough agreed with the FDA to the entry of a Consent Decree to resolve issues related to compliance with current Good Manufacturing Practices at certain of Schering-Plough’s facilities in New Jersey and Puerto Rico. The Consent Decree work placed significant additional controls on production and release of products from these sites, which increased costs and slowed production and led to a reduction in the number of products produced at the sites. Further, Schering-Plough’s research and development operations were negatively impacted by the Consent Decree because these operations share common facilities with the manufacturing operations.

Schering-Plough also is subject to other regulations, including environmental, health and safety, and labor regulations.

Developments following regulatory approval may decrease demand for Schering-Plough’s products.

Even after a product reaches market, certain developments following regulatory approval, including results in post-marketing Phase IV trials, may decrease demand for Schering-Plough’s products, including the following:

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

•  new scientific information and evolution of scientific theories;

•  the recall or loss of marketing approval of products that are already marketed;

•  uncertainties concerning safety labeling changes; and

•  greater scrutiny in advertising and promotion.

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In the past several years, clinical trials and post-marketing surveillance of certain marketed drugs of competitors within the industry have raised safety concerns that have led to recalls, withdrawals or adverse labeling of marketed products. These situations also have raised concerns among some prescribers and patients relating to the safety and efficacy of pharmaceutical products in general, which have negatively affected the sales of such products.

In addition, following the wake of recent product withdrawals of other companies and other significant safety issues, health authorities such as the FDA, the European Medicines Agency and the Pharmaceuticals and Medicines Device Agency have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications and are re-reviewing select products that are already marketed, adding further to the uncertainties in the regulatory processes. There is also greater regulatory scrutiny, especially in the U.S., on advertising and promotion and in particular, direct-to-consumer advertising.

If previously unknown side effects are discovered or if there is an increase in the prevalence of negative publicity regarding known side effects of any of Schering-Plough’s products, it could significantly reduce demand for the product or may require Schering-Plough to remove the product from the market. Further, in the current environment in which all pharmaceutical companies operate, Schering-Plough is at risk for product liability claims for its products.

New products and technological advances developed by Schering-Plough’s competitors may negatively affect sales.

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

Competition from third parties may make it difficult for Schering-Plough to acquire or license new products or product candidates (regardless of stage of development) or to enter into such transactions on terms that permit Schering-Plough to generate a positive financial impact.

Schering-Plough depends on acquisition and in-licensing arrangements as a source for new products. Opportunities for obtaining or licensing new products are limited, however, and securing rights to them typically requires substantial amounts of funding or substantial resource commitments. Schering-Plough competes for these opportunities against many other companies and third parties that have greater financial resources and greater ability to make other resource commitments. Schering-Plough may not be able to acquire or license new products, which could adversely impact Schering-Plough and its prospects. Schering-Plough may also have difficulty acquiring or licensing new products on acceptable terms. To secure rights to new products, Schering-Plough may have to make substantial financial or other resource commitments that could limit its ability to produce a positive financial impact from such transactions.

Schering-Plough relies on third-party relationships for its key products, and the conduct and changing circumstances of such third parties may adversely impact the business.

Schering-Plough has several relationships with third parties on which Schering-Plough depends for many of its key products. Very often these third parties compete with Schering-Plough or have interests that are not aligned with the interests of Schering-Plough. Notwithstanding any contracts Schering-Plough has with these third parties,

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Schering-Plough may not be able to control or influence the conduct of these parties, or the circumstances that affect them, either of which could adversely impact Schering-Plough.

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

Schering-Plough operates in more than 120 countries, and non-U.S. operations generate the majority of Schering-Plough’s profit and cash flow. Non-U.S. operations are subject to certain risks, which are inherent in conducting business overseas. These risks include:

•  changes in foreign medical reimbursement policies and programs and pricing restrictions;

•  multiple foreign regulatory requirements that could restrict Schering-Plough’s ability to manufacture and sell its products;

•  fluctuations in inflation, interest rate, and foreign currency exchange rates;

•  trade protection measures and import or export licensing requirements;

•  diminished protection of intellectual property in some countries; and

•  possible nationalization and expropriation.

In addition, there may be changes to Schering-Plough’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.

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

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

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

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

In addition, Schering-Plough may be impacted by changes in tax laws including tax rate changes, changes to the laws related to the remittance of foreign earnings, new tax laws and revised tax law interpretations in domestic and foreign jurisdictions.

Item 1B.   Unresolved Staff Comments

None.

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Item 2.   Properties

Schering-Plough’s corporate headquarters is located in Kenilworth, New Jersey. Principal research facilities are located in Kenilworth, Union and Summit, New Jersey; Palo Alto, California; Cambridge, Massachusetts; and Elkhorn, Nebraska. Principal manufacturing facilities are as follows:

Location	Product Type
Belgium	Pharmaceuticals
Cleveland, Tennessee, U.S.A.	Consumer Products
Ireland	Pharmaceuticals, Consumer Products, Animal Health
Kenilworth, New Jersey, U.S.A.	Pharmaceuticals, Consumer Products
Mexico	Pharmaceuticals
Omaha, Nebraska, U.S.A.	Animal Health
Puerto Rico	Pharmaceuticals
Singapore	Pharmaceuticals

Schering-Plough owns these properties, with the exception of the Massachusetts research facility. In general, the properties are adequately maintained and suitable for their purposes. As discussed in more detail in Part II of this 10-K, certain of Schering-Plough’s manufacturing sites operate below capacity. During 2006, Schering-Plough took actions to streamline manufacturing operations and continues to work on enhancing long-term competitiveness. See Item 7, “Management Discussion and Analysis,” Note 2, “Special Charges and Manufacturing Streamlining,” and Note 18, “Consent Decree,” under Item 8, “Financial Statements and Supplementary Data,” for additional information.

Schering-Plough is currently in the process of building a U.S. pharmaceutical sciences center in New Jersey. Capital expenditures of approximately $38 million were made in 2006 related to this center. Additional capital expenditures of approximately $260 million are expected over the next three years. Schering-Plough is also upgrading processes and systems and strengthening talent in the R&D area.

Item 3.   Legal Proceedings

Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which Schering-Plough Corporation or any of its subsidiaries or to which any of their property is subject, are disclosed below.

Additional information on legal proceedings, including important financial information, can be found in the Litigation Charges discussion in Note 2, “Special Charges and Manufacturing Streamlining,” Item 7, “Management’s Discussion and Analysis,” and Note 19, “Legal, Environmental and Regulatory Matters” contained in Item 8, “Financial Statements and Supplementary Data.”

Patent Matters

As described in “Patents, Trademarks, and Other Intellectual Property Rights” under Item 1, “Business,” intellectual property protection is critical to Schering-Plough’s ability to successfully commercialize its product innovations. The potential for litigation regarding Schering-Plough’s intellectual property rights always exists and may be initiated by third parties attempting to abridge Schering-Plough’s rights, as well as by Schering-Plough in protecting its rights. Patent matters described below have a potential material effect on Schering-Plough.

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.

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Massachusetts Investigation

On August 29, 2006, Schering-Plough announced it had reached an agreement with the U.S. Attorney’s Office for the District of Massachusetts to settle an investigation involving Schering-Plough’s sales, marketing and clinical trial practices and programs along with those of Warrick Pharmaceuticals (Warrick), Schering-Plough’s generic subsidiary (the “Massachusetts Investigation”). The investigation was focused on the following alleged practices: providing remuneration to managed care organizations, physicians and others to induce the purchase of Schering pharmaceutical products; off-label marketing of drugs; and submitting false pharmaceutical pricing information to the government for purposes of calculating rebates required to be paid to the Medicaid program.

The agreement provided for an aggregate settlement amount of $435 million — a criminal fine of $180 million and $255 million to resolve civil aspects of the investigation. On January 17, 2007, Schering Sales Corporation, a subsidiary of Schering-Plough, pled guilty to one count of conspiracy to make false statements to the government. In connection with the settlement, Schering-Plough signed an addendum to an existing corporate integrity agreement with the Office of Inspector General of the U.S. Department of Health and Human Services. The addendum will not affect Schering-Plough’s ongoing business with any customers, including the federal government.

In 2005, Schering-Plough had recorded a liability of $500 million related to the Massachusetts Investigation as well as the investigations and the state litigation described below under “AWP Litigation and Investigations.” The settlement amount of $435 million relates only to the Massachusetts Investigation. The AWP litigation and investigations are ongoing.

AWP Litigation and Investigations

Schering-Plough continues to respond to existing and new litigation by certain states and private payors and investigations by the Department of Health and Human Services, the Department of Justice and several states into industry and Schering-Plough practices regarding average wholesale price (AWP). Schering-Plough is cooperating with these investigations. These litigations and investigations relate to whether the AWP used by pharmaceutical companies for certain drugs improperly exceeds the average prices paid by providers and, as a consequence, results in unlawful inflation of certain reimbursements for drugs by state programs and private payors that are based on AWP. The complaints allege violations of federal and state law, including fraud, Medicaid fraud and consumer protection violations, among other claims. In the majority of cases, the plaintiffs are seeking class certifications. In some cases, classes have been certified. The outcome of these litigations and investigations could include substantial damages, the imposition of substantial fines, penalties and injunctive or administrative remedies.

Securities and Class Action Litigation

Federal Securities Litigation

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

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Shareholder Derivative Actions

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

ERISA Litigation

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

K-DUR Antitrust litigation

Schering-Plough had settled patent litigation with Upsher-Smith, Inc. (Upsher-Smith) and ESI Lederle, Inc. (Lederle), relating to generic versions of K-DUR, Schering-Plough’s long-acting potassium chloride product supplement used by cardiac patients, for which Lederle and Upsher Smith had filed Abbreviated New Drug Applications. Following the commencement of an FTC administrative proceeding alleging anti-competitive effects from those settlements, 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 claim violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. These suits seek unspecified damages. Discovery is ongoing.

Third-Party Payor Actions

Several purported class action litigations have been filed following the announcement of the settlement of the Massachusetts Investigation. Plaintiffs in these actions seek damages on behalf of third-party payors resulting from the allegations of off-label promotion and improper payments to physicians that were at issue in the Massachusetts Investigation.

Tax Matters

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

Pending Administrative Obligations

In connection with the settlement of an investigation with the U.S. Department of Justice and the U.S. Attorney’s Office for the Eastern District of Pennsylvania, Schering-Plough entered into a five-year corporate integrity agreement (CIA). The CIA was amended in August of 2006 in connection with the

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settlement of the Massachusetts Investigation, commencing a new five-year term. As disclosed in Note 18, “Consent Decree,” Schering-Plough is subject to obligations under a Consent Decree with the FDA. Failure to comply with the obligations under the CIA or the Consent Decree can result in financial penalties.

For a discussion of pending pharmacovigilance matters resulting from pharmacovigilance inspections by officials of the British and French medicines agencies conducted at the request of the European Medicines Agency (EMEA), refer to “Regulatory and Competitive Environment in Which Schering-Plough Operates” in Item 7, “Management’s Discussion and Analysis.”

Other Matters

NITRO-DUR Investigation

In August 2003, Schering-Plough 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 Schering-Plough’s classification of NITRO-DUR for Medicaid rebate purposes, and Schering-Plough’s use of nominal pricing and bundling of product sales. Schering-Plough 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.

Senate Finance Committee Inquiry

In January 2006, the United States Senate Committee on Finance followed up on previous requests to Schering-Plough with a request for further information on Schering-Plough’s practices relating to educational and other grants. Schering-Plough understands that the Committee has directed similar follow-up requests to other pharmaceutical companies. Schering-Plough is cooperating with the Committee and has responded to its requests.

French Matter

Based on a complaint to the French competition authority from a competitor in France and pursuant to a court order, the French competition authority has obtained documents from a French subsidiary of Schering-Plough relating to one of the products that the subsidiary markets and sells. Any resolution of this matter adverse to the French subsidiary could result in the imposition of civil fines and injunctive or administrative remedies.

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

Not applicable.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Listed below are the executive officers and corporate officers of Schering-Plough as of February 27, 2007. Unless otherwise indicated, each has held the position indicated for the past five years. Officers serve for one year and until their successors have been duly appointed.

Name	Title	Age
Robert J. Bertolini*	Executive Vice President and Chief Financial Officer(1)		45
John M. Carroll	Vice President, Global Internal Audits(2)		46
C. Ron Cheeley*	Senior Vice President, Global Human Resources(3)		56
Carrie S. Cox*	Executive Vice President and President, Global Pharmaceuticals(4)		49
William J. Creelman	Vice President, Tax(5)		51
Fred Hassan*	Chairman and Chief Executive Officer(6)		61
Steven H. Koehler*	Vice President and Controller(7)		56
Thomas P. Koestler, Ph.D.*	Executive Vice President and President, Schering-Plough Research Institute(8)		55
Raul E. Kohan*	Senior Vice President and President, Animal Health(9)		54
Joseph J. LaRosa	Vice President, Legal Affairs(10)		48
Ian A.T. McInnes	Senior Vice President, Global Supply Chain(11)		54
E. Kevin Moore	Vice President and Treasurer		54
Lori Queisser*	Senior Vice President, Global Compliance and Business Practices(12)		46
Thomas J. Sabatino, Jr.*	Executive Vice President and General Counsel(13)		48
Karl Salnoske	Vice President and Chief Information Officer(14)		53
Brent Saunders*	Senior Vice President and President, Consumer Health Care(15)		37
Susan Ellen Wolf	Corporate Secretary, Associate General Counsel and Vice President, Corporate Governance(16)		52

*	Officers as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934.
(1)	Mr. Bertolini joined Schering-Plough in 2003 as Executive Vice President and Chief Financial Officer. Mr. Bertolini was a partner at PricewaterhouseCoopers from 1993 to 2003.
(2)	Mr. Carroll joined Schering-Plough in 2006 as Vice President, Global Internal Audits. Mr. Carroll was Vice President and General Auditor of American Standard Companies from 2003 to 2006, General Auditor of American Standard Companies from 2002 to 2003 and Assistant Treasurer of Bristol-Myers Squibb from 2000 to 2002.
(3)	Mr. Cheeley joined Schering-Plough in 2003 as Senior Vice President, Global Human Resources. Mr. Cheeley was Group Vice President, Global Compensation and Benefits, Pharmacia Corporation, from 1998 to 2003.
(4)	Ms. Cox joined Schering-Plough in 2003 as Executive Vice President and President, Global Pharmaceuticals. Ms. Cox was Executive Vice President and President, Global Prescription Business, Pharmacia Corporation, from 1999 to 2003.
(5)	Mr. Creelman joined Schering-Plough in 2004 as Vice President, Tax. Mr. Creelman was Senior Tax Counsel, Pfizer from 2003 to 2004. Mr. Creelman was Assistant Vice President-International Tax, CIGNA Corporation, from 2002 to 2003.
(6)	Mr. Hassan joined Schering-Plough in 2003 as Chairman of the Board and Chief Executive Officer. Mr. Hassan was Chairman of the Board and Chief Executive Officer of Pharmacia Corporation from 2001 to 2003.

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(7)	Mr. Koehler joined Schering-Plough in 2006 as Vice President and Controller. Mr. Koehler was Senior Vice President, Chief Financial Officer and Treasurer from 2004 to 2006, and Vice President, Chief Financial Officer, Treasurer, and Corporate Secretary from 2002 to 2004, of The Medicines Company.
(8)	Dr. Koestler was named Executive President and President of Schering-Plough Research Institute in September of 2006. Dr. Koestler was Executive Vice President, Global Development, Schering-Plough Research Institute from 2005 to September of 2006, Executive Vice President in Schering-Plough Research Institute from 2003 to 2005, and Senior Vice President, Global Regulatory Affairs, Pharmacia Corporation, from 2001 to 2003.
(9)	Mr. Kohan was named Senior Vice President and President, Animal Health in February 2007. Mr. Kohan was appointed President of Schering-Plough Animal Health in 1993 and became Group Head of Specialty Operations in 2003.
(10)	Mr. LaRosa became Vice President, Legal Affairs, in 2004. Mr. LaRosa was Staff Vice President, Secretary and Associate General Counsel, from 2001 to 2004.
(11)	Dr. McInnes joined Schering-Plough in 2004 as Senior Vice President, Global Supply Chain. Dr. McInnes was Executive Vice President, Supply Chain, Watson Pharmaceuticals, Inc., from 2003 to 2004 and Senior Vice President, Global Supply Chain, Pharmacia Corporation from 1994 to 2003.
(12)	Ms. Queisser joined Schering-Plough in February of 2007 as Senior Vice President, Global Compliance and Business Practices. Ms. Queisser was Vice President, Chief Compliance Officer, from October 2002 to February 2007, and Executive Director and General Auditor from March 2002 to October 2002 of Eli Lilly and Company.
(13)	Mr. Sabatino joined Schering-Plough in 2004 as Executive Vice President and General Counsel. Mr. Sabatino was Senior Vice President and General Counsel, Baxter International, Inc., from 2001 to 2004.
(14)	Mr. Salnoske joined Schering-Plough in 2004 as Vice President and Chief Information Officer. Mr. Salnoske was CEO of Adaptive Trade from 2001 to 2004.
(15)	Mr. Saunders was appointed Senior Vice President and President, Consumer Health Care in February 2007. Mr. Saunders joined Schering-Plough in 2003 as Senior Vice President, Global Compliance and Business Practices. Mr. Saunders was a partner at PricewaterhouseCoopers from 2000 to 2003.
(16)	Ms. Wolf was named Vice President, Corporate Secretary and Associate General Counsel, in 2004. She held various positions in Schering-Plough’s Law Department from 2002 to 2004.

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Part II

Item 5.   Market for Registrant’s Common Equity and Related Stockholder Matters

The principal market for Schering-Plough’s common stock is the New York Stock Exchange. Additional information required by this Item is incorporated by reference from the table captioned “Quarterly Data” (unaudited) under Item 8, “Financial Statements and Supplementary Data.”

The following table provides information with respect to purchases by Schering-Plough of its common shares during the fourth quarter of 2006.

ISSUER PURCHASES OF EQUITY SECURITIES

					Total Number of		Maximum Number
					Shares Purchased as		of Shares that May
			Average		Part of Publicly		Yet be Purchased
	Total Number of		Price Paid		Announced Plans or		Under the Plans or
Period	Shares Purchased		per Share		Programs		Programs
October 1, 2006 through October 31, 2006		10,894	$	22.46		N/A		N/A
November 1, 2006 through November 30, 2006		49,886		21.89		N/A		N/A
December 1, 2006 through December 31, 2006		1,107,471		22.49		N/A		N/A
Total October 1, 2006 through December 31, 2006		1,168,251		22.46		N/A		N/A

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

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Performance Graph

Comparison of Cumulative Total Return
For the Five Years Ended December 31, 2006

	2001		2002		2003		2004		2005		2006
Schering-Plough Corporation		100		64		51		63		63		72
Composite Peer Group		100		78		85		79		75		88
S&P 500 Index		100		78		100		111		116		134

The graph above assumes a $100 investment on December 31, 2001, and reinvestment of all dividends, in each of Schering-Plough’s Common Shares, the S&P 500 Index, and a composite peer group of the major U.S.-based pharmaceutical companies, which are: Abbott Laboratories, Bristol-Myers Squibb Company, Johnson & Johnson, Eli Lilly and Company, Merck & Co., Inc., Pfizer Inc. and Wyeth. (Warner Lambert Company and Pharmacia Corporation, which are no longer publicly traded after being acquired by Pfizer, Inc., are no longer included in the peer index.)

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Item 6.   Selected Financial Data

	2006			2005			2004			2003			2002
	(In millions, except per share figures and percentages)
Operating Results
Net sales	$	10,594		$	9,508		$	8,272		$	8,334		$	10,180
Equity (income) from cholesterol joint venture		(1,459	)		(873	)		(347	)		(54	)		—
Income/(loss) before income taxes(1)		1,483			497			(168	)		(46	)		2,563
Net income/(loss)(1)		1,143			269			(947	)		(92	)		1,974
Net income/(loss) available to common shareholders		1,057			183			(981	)		(92	)		1,974
Diluted earnings/(loss) per common share(1)		0.71			0.12			(0.67	)		(0.06	)		1.34
Basic earnings/(loss) per common share(1)		0.71			0.12			(0.67	)		(0.06	)		1.35
Research and development expenses		2,188			1,865			1,607			1,469			1,425
Depreciation and amortization expenses		568			486			453			417			372
Financial Position and Cash Flows
Property, net	$	4,365		$	4,487		$	4,593		$	4,527		$	4,236
Total assets		16,071			15,469			15,911			15,271			14,136
Long-term debt		2,414			2,399			2,392			2,410			21
Shareholders’ equity		7,908			7,387			7,556			7,337			8,142
Capital expenditures		458			478			489			711			776
Financial Statistics
Net income/(loss) as a percent of net sales		10.8	%		2.8	%		(11.4	)%		(1.1	)%		19.4	%
Return on average shareholders’ equity		14.9	%		3.6	%		(12.7	)%		(1.2	)%		25.9	%
Net book value per common share(2)	$	5.10		$	4.77		$	4.91		$	4.99		$	5.55
Other Data
Cash dividends per common share	$	0.22		$	0.22		$	0.22		$	0.565		$	0.67
Cash dividends paid on common shares		326			324			324			830			983
Cash dividends on preferred shares		86			86			30			—			—
Average shares outstanding used in calculating diluted earnings/(loss) per common share		1,491			1,484			1,472			1,469			1,470
Average shares outstanding used in calculating basic earnings/(loss) per common share		1,482			1,476			1,472			1,469			1,466
Common shares outstanding at year-end		1,487			1,479			1,474			1,471			1,468

(1)

2006, 2005, 2004, 2003, and 2002 include Special Charges and Manufacturing Streamlining costs of $248, $294, $153, $599, and $150, respectively. See Note 2, “Special Charges and Manufacturing Streamlining,” for additional information on these charges that have been incurred in 2006, 2005, and 2004. The special charges incurred in 2003 and 2002 included the increases in litigation reserves of $350 million and $150 million, respectively, that resulted from the investigations into Schering-Plough’s sales and marketing practices. The 2003 special charges also included approximately $179 million of employee termination costs related to the Voluntary Early Retirement Program announced in August 2003 and $70 million of asset impairment and other charges related to the closure of a manufacturing facility in the United Kingdom, the write-down of production equipment related to products that were no longer going to be produced at a manufacturing site operating under the FDA Consent Decree, and the write-down of a drug license and a sun care trade name for which expected cash flows did not support the carrying value.

(2)

Assumes conversion of all preferred shares into approximately 65 million common shares for 2006, 69 million common shares for 2005 and 65 million common shares for 2004.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE SUMMARY

Overview of Schering-Plough

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

There are two sources of new products: products acquired through acquisition and licensing arrangements, and products in Schering-Plough’s late-stage research pipeline. With respect to acquisitions and licensing, Schering-Plough has recently acquired some new product licenses. However, there are limited opportunities for obtaining or licensing critical late-stage products that will have a positive material financial impact. These limited opportunities typically require substantial amounts of funding. Schering-Plough often competes for these opportunities against companies with greater financial resources.

Strategy — Focused on Science

Earlier this decade, Schering-Plough experienced a number of business, regulatory, and legal challenges. In April 2003, the Board of Directors named Fred Hassan as the new Chairman of the Board and Chief Executive Officer of Schering-Plough Corporation. With support from the Board, he recruited a new senior executive team and initiated a strategic plan, with the goal of stabilizing, repairing and turning around Schering-Plough in order to build long-term shareholder value. That strategic plan, the Action Agenda, is a six- to eight-year, five-phase plan. In October 2006, Schering-Plough announced that it entered the fourth phase of the Action Agenda — Build the Base. During the Build the Base phase, Schering-Plough continues to focus on its strategy of value creation across a broad front, including:

•  growing the business;

•  penetrating new markets;

•  expanding existing products; and

•  discovering and developing or acquiring new products.

As part of this effort, Schering-Plough is enhancing infrastructure, upgrading processes and systems, and strengthening talent—both the recruitment of talented individuals and the development of key employees. While these efforts are companywide, Schering-Plough is focusing especially on research and development.

A key component of the Action Agenda is applying science to meet unmet medical needs. Research and development activities focus on mechanisms to treat serious diseases. As a result, a core strategy of Schering-Plough is to invest substantial funds in scientific research with the goal of creating therapies and treatments with important medical and commercial value. Consistent with this core strategy, Schering-Plough has been increasing its investment in research and development. Schering-Plough’s progressing pipeline includes drug candidates across a wide range of therapeutic areas with 21 compounds now approaching or in Phase I development. As Schering-Plough continues to develop the later phase growth-drivers of the pipeline (e.g., thrombin receptor antagonist, golimumab, vicriviroc and HCV protease inhibitor), it anticipates higher spending on clinical trial activities.

2006 Results — Highlights of Schering-Plough’s performance in 2006 are as follows:

•  Schering-Plough’s net sales in 2006 were $10.6 billion, an increase of $1.1 billion, or 11 percent, as compared to the 2005 period. Net Income Available to Common Shareholders in 2006 was $1.1 billion, as compared to $183 million in 2005. Cash flow from operating activities was $2.2 billion in 2006.

•  Global sales of Schering-Plough’s cholesterol franchise products, VYTORIN and ZETIA, made by the cholesterol joint venture with Merck & Company, Inc. (Merck) continued to grow in 2006 and significantly contributed to Schering-Plough’s improved operating results and cash flow. In addition, increased sales of

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pharmaceutical products such as REMICADE, NASONEX, TEMODAR, and CLARINEX also contributed favorably to Schering-Plough’s overall operating results and cash flow.

•  Schering-Plough gained approvals for new products and indications, including for the life-saving antifungal medicine NOXAFIL Oral Suspension in the United States and EU for the prevention of invasive fungal infections (NOXAFIL was discovered in Schering-Plough’s research laboratories); TEMODAL in Japan for the treatment of a form of brain cancer, malignant glioma; REMICADE in the EU for ulcerative colitis; and SUBOXONE Sublingual Tablets in the EU for opioid dependence.

•  Schering-Plough streamlined the global supply chain to yield expected annualized cost savings of about $100 million.

•  Schering-Plough reached an agreement with the U.S. Attorney’s Office for the District of Massachusetts and the U.S. Department of Justice to settle a previously disclosed investigation that related to actions that took place prior to 2003. The agreement provided for an aggregate settlement amount of $435 million. This settlement did not have a material adverse effect on Schering-Plough’s results of operations, financial condition or its business.

Strategic Alliances

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

In addition, any potential strategic alternatives may be impacted by the change of control provisions in those arrangements, which could result in VYTORIN and ZETIA being acquired by Merck or REMICADE reverting back to Centocor. The change in control provision relating to VYTORIN and ZETIA is included in the contract with Merck, filed as Exhibit 10(r) to Schering-Plough’s 10-K, and the change of control provision relating to REMICADE is contained in the contract with Centocor, filed as Exhibit 10(v) to Schering-Plough’s 10-K.

Cholesterol Franchise

Schering-Plough’s cholesterol franchise products, VYTORIN and ZETIA, are managed through a joint venture between Schering-Plough and Merck for the treatment of elevated cholesterol levels. ZETIA is Schering-Plough’s novel cholesterol absorption inhibitor. VYTORIN is the combination of ZETIA and Zocor, Merck’s statin medication. The financial commitment to compete in the cholesterol reduction market is shared with Merck, and profits from the sales of VYTORIN and ZETIA are also shared with Merck. The operating results of the joint venture with Merck are recorded using the equity method of accounting.

A material change in the sales or market share of Schering-Plough’s cholesterol franchise would have a significant impact on Schering-Plough’s results of operations and cash flows. In order to maintain and enhance its infrastructure and business, Schering-Plough must continue to increase profits. This increased profitability is largely dependent upon the performance of Schering-Plough’s cholesterol franchise.

The cholesterol-reduction market is the single largest pharmaceutical category in the world. VYTORIN and ZETIA are competing in this market and, on a combined basis, these products continued to grow in terms of market share during 2006. As a franchise, the two products together have captured more than 15 percent of total prescriptions for the U.S. cholesterol management market (based on January 2007 IMS data).

Japan is not included in the joint venture with Merck. In the Japanese market, Bayer Healthcare will co-market Schering-Plough’s cholesterol-absorption inhibitor, ZETIA, upon approval. Schering-Plough anticipates receiving this approval in Japan in 2007, but due to a backlog of new drug applications in Japan, Schering-Plough cannot precisely predict the timing of the approval.

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License Arrangements with Centocor

REMICADE is prescribed for the treatment of immune-mediated inflammatory disorders such as rheumatoid arthritis, early rheumatoid arthritis, psoriatic arthritis, Crohn’s disease, ankylosing spondylitis, plaque psoriasis and ulcerative colitis. REMICADE is Schering-Plough’s second largest marketed pharmaceutical product line (after the cholesterol franchise). REMICADE is licensed from and manufactured by Centocor, Inc., a Johnson & Johnson company. Schering-Plough has the exclusive marketing rights to this product outside of the U.S., Japan and certain Asian markets. During 2005, Schering-Plough exercised an option under its contract with Centocor for license rights to develop and commercialize golimumab, a new TNF-alpha monoclonal antibody, in the same territories as REMICADE. Golimumab is currently in Phase III trials. Schering-Plough and Centocor have been collaborating in resolving the difference in the parties’ opinions as to the expiration date of Schering-Plough’s rights to golimumab. In August 2006, Schering-Plough received a determination through arbitration that its rights to market golimumab will extend to 15 years after the first commercial sales in its territories, but Centocor has appealed the ruling.

Manufacturing, Sales and Marketing

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

Schering-Plough continually reviews the business, including manufacturing operations, to identify actions that will enhance long-term competitiveness. However, Schering-Plough’s manufacturing cost base is relatively fixed, and actions to significantly reduce Schering-Plough’s manufacturing infrastructure involve complex issues. As a result, shifting products between manufacturing plants can take many years due to construction and regulatory requirements, including revalidation and registration requirements. During 2006, Schering-Plough closed one manufacturing plant and took other streamlining actions. Schering-Plough continues to review the carrying value of manufacturing assets for indications of impairment. Future events and decisions may lead to additional asset impairments or related costs.

Regulatory and Competitive Environment

•  Schering-Plough is subject to the jurisdiction of various national, state and local regulatory agencies. Regulatory compliance is complex and costly, impacting the timing needed to bring new drugs to market and to market drugs for new indications.

•  Since 2002, Schering-Plough has been working under a U.S. FDA Consent Decree to resolve issues involving Schering-Plough’s compliance with current Good Manufacturing Practices at certain of its manufacturing sites in New Jersey and Puerto Rico. Under the terms of the Decree, provided that the FDA has not notified Schering-Plough of a significant violation of FDA law, regulations, or the Decree in any five-year period since the Decree’s entry in May 2002, Schering-Plough may petition the court to have the Decree dissolved and FDA will not oppose Schering-Plough’s petition. There is no assurance about any particular date when the Consent Decree will be lifted.

•  Schering-Plough is subject to pharmacovigilance reporting requirements in many countries and other jurisdictions, including the U.S., the EU, and the EU-member states.

•  Schering-Plough engages in clinical trial research in many countries around the world. Research activities must comply with stringent regulatory standards and are subject to inspection by U.S., the EU, and local country regulatory authorities. Clinical trials and post-marketing surveillance of certain marketed drugs of competitors within the industry have raised safety concerns that have led to recalls, withdrawals or adverse labeling of marketed products.

•  The pricing, sales and marketing programs and arrangements, and related business practices of Schering-Plough and other participants in the health care industry are under increasing scrutiny from federal and state regulatory, investigative, prosecutorial and administrative entities.

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•  In the U.S., many of Schering-Plough’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, Schering-Plough operates in an environment of government mandated cost-containment programs.

•  The market for pharmaceutical products is competitive. Schering-Plough’s operations may be affected by technological advances of competitors, industry consolidation, patents granted to competitors, loss of patent protection due to challenges by competitors, competitive combination products, new products of competitors, new information from clinical trials of marketed products or post-marketing surveillance and generic competition as Schering-Plough’s products mature.

DISCUSSION OF OPERATING RESULTS

Net Sales

A significant portion of net sales is made to major pharmaceutical and health care product 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. In addition to these fluctuations, sales of many pharmaceutical products in the U.S. are subject to increased pricing pressure from managed care groups, institutions, government agencies, and other groups seeking discounts. Schering-Plough and other pharmaceutical manufacturers in the U.S. market are also required to provide statutorily defined rebates to various government agencies in order to participate in the Medicaid program, the veterans’ health care program, and other government-funded programs. In most international markets, Schering-Plough operates in an environment where governments may and have mandated cost-containment programs, 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.

Consolidated net sales in 2006 were $10.6 billion, an increase of $1.1 billion or 11 percent as compared to 2005. The increase primarily reflected the growth in sale volumes of REMICADE, NASONEX, PEG-INTRON and TEMODAR. This increase also reflected an unfavorable impact of 1 percent from foreign exchange.

Consolidated net sales in 2005 totaled $9.5 billion, an increase of $1.2 billion or 15 percent compared to 2004, reflecting higher volumes of REMICADE, NASONEX, PEG-INTRON, TEMODAR and the inclusion of a full year of sales of AVELOX and CIPRO. In addition, foreign exchange had a favorable impact of 1 percent.

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Net sales for the years ended December 31, 2006, 2005, and 2004 were as follows:

							% Increase (Decrease)
	2006		2005		2004		2006/2005			2005/2004
	(Dollars in millions)
PRESCRIPTION PHARMACEUTICALS	$	8,561	$	7,564	$	6,417		13	%		18	%
REMICADE		1,240		942		746		32			26
NASONEX		944		737		594		28			24
PEG-INTRON		837		751		563		11			33
CLARINEX/AERIUS		722		646		692		12			(7	)
TEMODAR		703		588		459		20			28
CLARITIN Rx		356		371		321		(4	)		16
INTEGRILIN		329		315		325		5			(3	)
REBETOL		311		331		287		(6	)		15
AVELOX		304		228		44		34			N/M
INTRON A		237		287		318		(17	)		(10	)
CAELYX		206		181		150		13			21
SUBUTEX		203		197		185		3			6
ELOCON		141		144		168		(2	)		(14	)
CIPRO		111		146		43		(24	)		N/M
Other Pharmaceutical		1,917		1,700		1,522		13			12
CONSUMER HEALTH CARE		1,123		1,093		1,085		3			1
OTC		558		556		578		N/M			(4	)
Foot Care		343		333		331		3			1
Sun Care		222		204		176		9			16
ANIMAL HEALTH		910		851		770		7			11
CONSOLIDATED NET SALES	$	10,594	$	9,508	$	8,272		11	%		15	%

N/M — Not a meaningful percentage.

International net sales of REMICADE, a drug for the treatment of immune-mediated inflammatory disorders such as rheumatoid arthritis, early rheumatoid arthritis, psoriatic arthritis, Crohn’s disease, ankylosing spondylitis, plaque psoriasis, and ulcerative colitis, were up 32 percent to $1.2 billion in 2006 as compared to 2005, and 26 percent in 2005 to $942 million as compared to 2004, due to greater demand, expanded indications and continued market growth. During 2006, competitive products for the indications referred to above have been introduced, and additional competitive products are expected to be introduced in 2007.

Global net sales of NASONEX Nasal Spray, a once-daily corticosteroid nasal spray for allergies, rose 28 percent to $944 million in 2006 as compared to 2005, and 24 percent to $737 million in 2005 as compared to 2004, as the product captured greater U.S. and international market share in both 2006 and 2005. In 2005, U.S. sales benefited from an increased promotional effort and the introduction of a new scent-free, alcohol-free formulation of NASONEX nasal spray. A generic form of Flonase (fluticasone propionate) was approved early in 2006 and may unfavorably impact the corticosteroid nasal spray market going forward.

Global net sales of PEG-INTRON Powder for Injection, a pegylated interferon product for treating hepatitis C, increased 11 percent to $837 million in 2006 as compared to 2005, and 33 percent to $751 million in 2005 as compared to 2004. The sales increase in 2006 reflected higher sales volume in Japan and the U.S. Sales growth in 2005 was due to the December 2004 launch of the PEG-INTRON and REBETOL combination therapy in Japan. In Japan, sales in 2005 benefited from a significant number of patients who were waiting for approval of PEG-INTRON before beginning treatment. PEG-INTRON sales in Japan have begun to decline toward the end of 2006,

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and this trend is expected to continue into 2007 as new patient enrollment for hepatitis C treatment moderates and new competition enters the Japanese market.

Global net sales of CLARINEX (marketed as AERIUS in many countries outside the U.S.), for the treatment of seasonal outdoor allergies and year-round indoor allergies, increased 12 percent to $722 million as compared to 2005 due to increased demand in Europe and Latin America as well as increased sales in the U.S. despite slightly declining market share. Global net sales of CLARINEX in 2005 decreased 7 percent to $646 million as compared to 2004 primarily due to reduced market share in a declining market in the U.S.

Global net sales of TEMODAR Capsules, a treatment for certain types of brain tumors, increased 20 percent to $703 million in 2006 as compared to 2005, and increased 28 percent to $588 million in 2005 as compared to 2004. The increases in 2006 and 2005 sales were due to the increased utilization for new indications. In 2005, TEMODAR was approved by the U.S. FDA for treating newly diagnosed glioblastoma multiforme (GBM), which is the most prevalent form of brain cancer, and by the European Commission for use in combination with radiotherapy for GBM patients in 25 EU-member states as well as in Iceland and Norway. In 2006, TEMODAR was approved in Japan for the treatment of malignant glioma. The growth rates for TEMODAR are expected to moderate, as significant market penetration has already been achieved in the treatment of GBM.

International net sales of prescription CLARITIN decreased 4 percent to $356 million in 2006 as compared to 2005. Sales in 2005 increased 16 percent to $371 million as compared to 2004 due to the launch of CLARITIN REDITABS in Japan coupled with an unusually severe Japanese allergy season during 2005.

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 5 percent to $329 million in 2006 as compared to 2005. During 2005, sales decreased 3 percent to $315 million as compared to 2004.

Effective September 1, 2005, Schering-Plough restructured its INTEGRILIN co-promotion agreement with Millennium. Under the terms of the restructured agreement, Schering-Plough acquired exclusive U.S. development and commercialization rights to INTEGRILIN in exchange for an upfront payment of $36 million and royalties on INTEGRILIN sales. The restructured agreement calls for minimum royalty payments of $85 million per year to Millennium in 2006 and 2007.

Global 2006 net sales of REBETOL Capsules, for use in combination with PEG-INTRON or INTRON A for treating hepatitis C, decreased 6 percent to $311 million as compared to 2005 due to lower sales in Europe and increased competition. Global net sales in 2005 increased 15 percent to $331 million as compared to 2004 due primarily to the launch of the PEG-INTRON and REBETOL combination therapy in Japan in December 2004. In Japan, sales in 2005 benefited from the significant number of patients who were waiting for approval of PEG-INTRON before beginning hepatitis C treatment. Sales are expected to continue to decline as a result of the moderation of hepatitis C patient enrollments in Japan and as new competition enters the Japanese market.

Net sales of AVELOX, a fluoroquinolone antibiotic for the treatment of certain respiratory and skin infections, sold primarily in the U.S. by Schering-Plough as a result of its license agreement with Bayer, increased 34 percent to $304 million in 2006 as compared to $228 million in 2005 due to share growth and new indications. Sales of AVELOX in 2004 represented the initial three months of sales under the agreement with Bayer, which was effective October 1, 2004.

Global net sales of INTRON A Injection, for chronic hepatitis B and C and other antiviral and anticancer indications, decreased 17 percent to $237 million in 2006 as compared to 2005, and 10 percent in 2005 to $287 million as compared to 2004, due to the conversion to PEG-INTRON for treating hepatitis C in Japan.

International net sales of CAELYX, for the treatment of ovarian cancer, metastatic breast cancer and Kaposi’s sarcoma, increased 13 percent to $206 million in 2006 as compared to 2005 primarily due to an expanding market for this product. Sales in 2005 increased 21 percent to $181 million as compared to 2004, reflecting further adoption of the ovarian cancer and metastatic breast cancer indications.

International net sales of SUBUTEX Tablets, for the treatment of opiate addiction, increased 3 percent to $203 million in 2006 as compared to 2005 due to increased market share. Sales increased 6 percent to $197 million

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in 2005 as compared to 2004 due to increased market penetration. In October 2006, SUBOXONE was approved by the EU, including the 25 member states as well as Iceland and Norway, for the treatment of opioid dependence.

Global net sales of ELOCON cream, a medium-potency topical steroid, decreased 2 percent to $141 million in 2006 as compared to 2005, and decreased 14 percent to $144 million in 2005 as compared to 2004, reflecting generic competition that was introduced in the U.S. during the first quarter of 2005. Generic competition is expected to continue to adversely affect sales of this product.

Net sales of CIPRO, a fluoroquinolone antibiotic for the treatment of certain respiratory, skin, urinary tract and other infections, sold primarily in the U.S. by Schering-Plough as a result of its license agreement with Bayer, decreased 24 percent to $111 million in 2006 as compared to $146 million in 2005 due to market share erosion from generic competition. Sales of CIPRO in 2004 represented the initial three months of sales under the agreement with Bayer.

Other pharmaceutical net sales include a large number of lower sales volume prescription pharmaceutical products. Several of these products are sold in limited markets outside the U.S., and many are multiple source products no longer protected by patents. These products include treatments for respiratory, cardiovascular, dermatological, infectious, oncological and other diseases. Included in other pharmaceutical sales is sales of Schering-Plough’s albuterol products. In 2005, the FDA issued a Final Rule that requires all CFC albuterol products, including Schering-Plough’s PROVENTIL CFC, be removed from the market no later than December 31, 2008. Schering-Plough and other manufacturers of albuterol CFC have to transition to albuterol HFA (PROVENTIL HFA) prior to this 2008 year-end deadline. Schering-Plough has begun the transition to the HFA product. Schering-Plough is uncertain as to the ultimate impact on Schering-Plough’s overall future sales of PROVENTIL products, due to the complexities and multiple external factors influencing this transition, including competing albuterol HFA products.

Global net sales of Consumer Health Care products, which include OTC, foot care and sun care products, increased 3 percent or $30 million as compared to 2005 reflecting an increase in sales of sun care products and DR. SCHOLL’S and other foot care products. Sales were $1.1 billion in 2005 and 2004. Sales of OTC CLARITIN decreased 1 percent to $390 million in 2006 as compared to 2005, and 6 percent to $394 million in 2005 as compared to 2004 as a result of the restrictions on the retail sale of OTC products containing pseudoephedrine (PSE). In addition, OTC CLARITIN continues to face competition from private labels and branded loratadine. Net sales of sun care products increased $18 million or 9 percent in 2006 as compared to 2005, and $28 million or 16 percent in 2005 as compared to 2004, primarily due to the success of new COPPERTONE CONTINUOUS SPRAY products launched in 2005. Sales of sun care products in 2005 also reflected a stronger overall suncare season in the U.S. Future sales are difficult to predict because the consumer health care market is highly competitive, with heavy advertising to consumers and frequent competitive product introductions.

Global net sales of Animal Health products increased 7 percent to $910 million in 2006 as compared to 2005, and 11 percent in 2005 to $851 million as compared to 2004, reflecting strong growth of core brands across most geographic and species areas led by higher sales of companion animal products in 2006 while the products serving the U.S. cattle market, including NUFLOR, and the vaccine business led sales growth in 2005. The increased net sales were also due in part to better product supply in the U.S. Schering-Plough expects this growth rate to moderate due to increased competition, including the introduction of generic products.

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Costs, Expenses and Equity Income

A summary of costs, expenses and equity income for the years ended December 31, 2006, 2005 and 2004 is as follows:

										% Increase (Decrease)
	2006			2005			2004			2006/2005			2005/2004
	(Dollars in millions)
Gross margin		65.1	%		64.8	%		62.9	%		0.3	%		1.9	%
Selling, general and administrative (SG&A)	$	4,718		$	4,374		$	3,811			7.9	%		14.8	%
Research and development (R&D)		2,188			1,865			1,607			17.3	%		16.1	%
Other (income)/expense, net		(135	)		5			146			N/M			N/M
Special charges		102			294			153			N/M			N/M
Equity income from cholesterol joint venture		(1,459	)		(873	)		(347	)		N/M			N/M

N/M — Not a meaningful percentage

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

Gross margin

Despite negative impacts on cost of sales from the costs resulting from Schering-Plough’s actions to streamline its manufacturing operations during 2006, gross margin increased to 65.1 percent in 2006 from 64.8 percent in 2005. This improvement in gross margin is primarily due to increased sales of higher margin products and process improvements within Schering-Plough’s supply chain, including cost savings from the manufacturing streamlining activities completed during 2006. In 2006, cost of sales included charges totaling $146 million associated with Schering-Plough’s actions to streamline its manufacturing operations, offset by savings of approximately $30 million as a result of these actions. See Note 2, “Special Charges and Manufacturing Streamlining,” under Item 8, “Financial Statements and Supplemental Data,” for additional information.

Gross margin increased to 64.8 percent in 2005 from 62.9 percent in 2004, primarily due to supply chain process improvements, increased sales of higher-margin products and a favorable impact from foreign exchange, partly offset by higher royalties related to the Bayer products and, beginning September 1, 2005, royalties for INTEGRILIN.

Selling, general and administrative

Selling, general and administrative expenses (SG&A) increased 8 percent to $4.7 billion in 2006 as compared to 2005, reflecting ongoing investments in emerging markets and field support for product launches as well as higher promotional spending.

SG&A expenses increased 15 percent to $4.4 billion in 2005 as compared to $3.8 billion in 2004. This increase was primarily due to the addition in the 2004 fourth quarter of Bayer sales representatives, increased selling expenses in Europe to support the continued launch of VYTORIN and ZETIA, and increased promotional spending, primarily for NASONEX, ASMANEX and the products under the agreement with Bayer.

Research and development

Research and development (R&D) spending increased 17 percent to $2.2 billion in 2006 as compared to the 2005 period. In 2005, R&D spending increased 16 percent to $1.9 billion as compared to the 2004 period. The 2006 increase was due to higher costs associated with clinical trials as well as building greater breadth and capacity to support Schering-Plough’s progressing pipeline. The 2005 increase is partially due to a $124 million charge in the third quarter of 2005 resulting from Schering-Plough’s exercise of its rights to develop and commercialize golimumab. R&D spending for 2004 included an $80 million charge in conjunction with the license from Toyama

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Chemical Company Ltd. for garenoxacin. Generally, changes in R&D spending reflect the timing of Schering-Plough’s funding of both internal research efforts and research collaborations with various partners to discover and develop a steady flow of innovative products.

To maximize Schering-Plough’s chances for the successful development of new products, Schering-Plough began a Development Excellence initiative in 2005 to build talent and critical mass, create a uniform level of excellence and deliver on high-priority programs within R&D. In 2006, Schering-Plough began a Global Clinical Harmonization Program to maximize and globalize the quality of clinical trial execution, pharmacovigilance and regulatory processes.

Other (income)/expense, net

Schering-Plough had other income, net, of $135 million in 2006 as compared to other expense, net, of $5 million and $146 million in 2005 and 2004, respectively, due to higher interest rates on larger overall balances of cash equivalents and short-term investments.

Special charges and Manufacturing Streamlining

2006 Manufacturing Streamlining

During 2006, Schering-Plough implemented changes to its manufacturing operations in Puerto Rico and New Jersey to streamline its global supply chain and further enhance Schering-Plough’s long-term competitiveness. These changes resulted in the phase-out and closure of Schering-Plough’s manufacturing operations in Manati, Puerto Rico, and additional workforce reductions in Las Piedras, Puerto Rico, and New Jersey. In total, these actions have resulted in the elimination of over 1,000 positions. Schering-Plough expects these actions to yield annualized cost savings of approximately $100 million.

Special Charges:  Special charges in 2006 related to the changes in Schering-Plough’s manufacturing operations totaled $102 million. These charges consisted of approximately $47 million of severance and $55 million of fixed asset impairments.

Cost of Sales:  Included in 2006 cost of sales was approximately $146 million consisting of $93 million of accelerated depreciation, $46 million of inventory write-offs, and $7 million of other charges related to the closure of Schering-Plough’s manufacturing facilities in Manati, Puerto Rico.

The following table summarizes activities reflected in the consolidated financial statements related to changes to Schering-Plough’s manufacturing operations which were completed in 2006:

	Charges
	included in		Special		Total		Cash			Non-Cash			Accrued
	Cost of Sales		Charges		Charges		Payments			Charges			Liability
	(Dollars in millions)
Accrued liability at January 1, 2006													$	—
Severance	$	—	$	47	$	47	$	(35	)	$	—			12
Asset impairments		—		55		55		—			(55	)		—
Accelerated depreciation		93		—		93		—			(93	)		—
Inventory write-offs		46		—		46		—			(46	)		—
Other		7		—		7		(2	)		(5	)		—
Total	$	146	$	102	$	248	$	(37	)	$	(199	)
Accrued liability at December 31, 2006													$	12

The accrued liability balance at December 31, 2006, is expected to be paid during the first quarter of 2007. Schering-Plough does not expect to incur any material additional charges related to the manufacturing streamlining actions announced in 2006.

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2004-2005 Special Charge Activities

Special charges incurred in 2005 and 2004 are as follows:

	2005		2004
	(Dollars in millions)
Litigation charges	$	250	$	—
Employee termination costs		28		119
Asset impairment and other charges		16		34
	$	294	$	153

Litigation charges:  In 2005, litigation reserves were increased by $250 million. This increase resulted in a total reserve of $500 million for the Massachusetts Investigation, as well as the investigations and the state litigation disclosed under “AWP Litigation and Investigations” in Note 19, “Legal, Environmental and Regulatory Matters,” representing Schering-Plough’s then current estimate to resolve this matter. On August 29, 2006, Schering-Plough announced it had reached an agreement with the U.S. Attorney’s Office for the District of Massachusetts and the U.S. Department of Justice to settle the Massachusetts Investigation for an aggregate amount of $435 million plus interest. This settlement amount relates only to the Massachusetts Investigation. The AWP investigations and litigation are ongoing. Subsequent to December 31, 2006, Schering-Plough made payments totaling $388 million related to this settlement including interest of $12 million. Substantially all the remaining payments under this settlement agreement will be paid in the remainder of 2007. See Note 19, “Legal, Environmental and Regulatory Matters,” under Item 8, “Financial Statements and Supplementary Data,” for additional information.

Employee termination costs:  In August 2003, Schering-Plough 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, all of which retired by December 31, 2005. The total cost of this program was 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. Amounts recognized in 2005 and 2004 for this program were $7 million and $20 million, respectively. No additional amounts are expected to be recognized under this program.

Termination costs not associated with the VERP totaled $21 million and $99 million in 2005 and 2004, respectively.

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

	Employee
	Termination Costs
	(Dollars in millions)
Special charges liability balance at December 31, 2003	$	29
Special charges incurred during 2004	$	119
Credit to retirement benefit plan liability		(20	)
Disbursements		(110	)
Special charges liability balance at December 31, 2004	$	18
Special charges incurred during 2005	$	28
Credit to retirement benefit plan liability		(7	)
Disbursements		(35	)
Special charges liability balance at December 31, 2005	$	4
Disbursements		(4	)
Special charges liability balance at December 31, 2006	$	—

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Asset impairment and other charges:  For the year ended December 31, 2005, Schering-Plough recognized asset impairment and other charges of $16 million related primarily to the consolidation of Schering-Plough’s U.S. biotechnology organizations.

Schering-Plough recorded asset impairment and other charges of $34 million in 2004, 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 of VYTORIN and ZETIA, made by the cholesterol joint venture with Merck and Schering-Plough totaled $3.9 billion, $2.4 billion, and $1.2 billion in 2006, 2005, and 2004, respectively. The sales growth in 2006 was due to an increase in market share. The 2005 sales comparison benefited from the U.S. launch of VYTORIN in the second half of 2004. As a franchise, the two products combined have captured more than 15 percent of total prescriptions in the U.S. cholesterol management market (based on January 2007 IMS data).

Schering-Plough 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. Merck and Schering-Plough (the Partners) bear the costs of their own general sales forces and commercial overhead in marketing joint venture products around the world. In the U.S., Canada and Puerto Rico, the cholesterol agreements provide for a reimbursement to each Partner for physician details that are set on annual basis, and in Italy, a contractual amount is included in the profit sharing calculation that is not reimbursed. These amounts are equal to each Partner’s physician details multiplied by a contractual fixed fee. Schering-Plough reports these amounts as part of equity income from the cholesterol joint venture. These amounts do not represent specific, incremental and identifiable costs for Schering-Plough’s detailing of the cholesterol products in these markets. In addition, these amounts are 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. Additional information regarding the joint venture with Merck is also included in Note 3, “Equity Income from Cholesterol Joint Venture,” under Item 8, “Financial Statements and Supplementary Data.”

Equity income from cholesterol joint venture totaled $1.5 billion, $873 million and $347 million in 2006, 2005 and 2004, respectively. The increase in 2006 equity income as compared to 2005 reflecting continued strong sales of VYTORIN and ZETIA. The 2005 equity income comparison benefited from the U.S. launch of VYTORIN in the second half of 2004.

During 2005 and 2004, Schering-Plough recognized milestones from Merck of $20 million and $7 million, respectively. The $20 million milestone in 2005 related to certain European approvals of VYTORIN (ezetimibe/simvastatin) in 2005. The $7 million milestone in 2004 related to the approval of ezetimibe/simvastatin in Mexico in 2004. Under certain other conditions, as specified in the joint venture agreements with Merck, Schering-Plough could earn additional milestones totaling $105 million.

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

Provision for Income Taxes

Tax expense was $362 million, $228 million and $779 million in 2006, 2005 and 2004, respectively. The tax provisions in 2006, 2005 and 2004 do not include any benefit related to U.S. operating losses. During 2004, Schering-Plough established a valuation allowance on its net U.S. deferred tax assets, including the benefit of U.S. operating losses, as management concluded that it is not more likely than not that the benefit of the U.S. net deferred tax assets can be realized. At December 31, 2006, Schering-Plough continues to maintain a valuation allowance against its

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U.S. deferred tax assets. Schering-Plough expects to report a U.S. Net Operating Loss (NOL) carryforward of $1.54 billion on its tax return for the year ended December 31, 2006. This U.S. NOL carryforward could be materially reduced after examination of Schering-Plough’s income tax returns by the Internal Revenue Service (IRS).

In 2006, Schering-Plough generated approximately $600 million in U.S. operating losses; however, due to differences between financial and tax reporting, the expected NOL to be generated on the 2006 U.S. tax return will be less than the U.S. operating loss for the year. Schering-Plough expects to continue to generate U.S. operating losses in 2007; however, the U.S. NOL will be subject to differences between financial and tax reporting.

The 2006 and 2005 income tax provision primarily relates to foreign taxes. The 2005 tax provision includes a benefit of $46 million related to an IRS Notice issued in August 2005, which resulted in a reduction of the previously accrued tax liability attributable to repatriations under the American Jobs Creation Act of 2004 (AJCA). The 2004 tax provision includes a $417 million charge related to the intended AJCA repatriation that took place in 2005.

The IRS is examining Schering-Plough’s 1997-2002 federal income tax returns and is in the process of completing that examination. Schering-Plough anticipates that the examination will be completed before the end of 2007. The finalization of this IRS audit may result in adjustments to Schering-Plough’s accruals for tax contingencies and the U.S. NOLs as reported on Schering-Plough’s income tax returns. Schering-Plough’s tax reserves reflect its best estimate of the probable tax liability; however, it is reasonably possible that the ultimate resolution of these tax matters may be materially greater or less than the amount accrued.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” Schering-Plough is required to apply the provisions of this interpretation beginning on January 1, 2007. The provisions of FIN 48 will be applied to all existing uncertain income tax positions on the effective date. Upon the implementation of FIN 48, the cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of Schering-Plough’s retained earnings in 2007. Although Schering-Plough is still evaluating the potential impact of FIN 48, it expects a decrease to opening retained earnings as of January 1, 2007, from $225 million to $300 million with a corresponding increase to the appropriate tax liability accounts upon the adoption of this Interpretation.

Net Income/(Loss) Available to Common Shareholders

Schering-Plough had net income/(loss) available to common shareholders of $1.1 billion, $183 million and $(981) million for 2006, 2005 and 2004, respectively. Net income available to common shareholders for 2006 and 2005 included the deduction of preferred stock dividends of $86 million, in each period, related to the issuance of the 6 percent Mandatory Convertible Preferred Stock in August 2004. The 2004 net loss available to common shareholders included the deduction of preferred stock dividends of $34 million. Net income/(loss) available to common shareholders for 2006, 2005 and 2004 also included special charges and manufacturing streamlining costs of approximately $248 million, $294 million and $153 million, respectively. See Note 2, “Special Charges and Manufacturing Streamlining,” under Item 8, “Financial Statements and Supplementary Data,” for additional information. In addition, 2006 net income available to common shareholders included an income item of $22 million resulting from the cumulative effect of a change in accounting principle, net of tax, related to the implementation of SFAS 123R, “Share-Based Compensation.”

LIQUIDITY AND FINANCIAL RESOURCES

Discussion of Cash Flow

	For the Years Ended December 31,
	2006			2005			2004
	(Dollars in millions)
Cash flow from operating activities	$	2,161		$	882		$	(154	)
Cash flow from investing activities		(2,908	)		(454	)		(621	)
Cash flow from financing activities		(1,361	)		(633	)		1,534

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Operating Activities

In 2006, net cash provided by operating activities was $2.2 billion, an increase of $1.3 billion as compared to 2005. The increase primarily resulted from higher net income and the timing of operating cash payments and receipts. As disclosed in Note 19, “Legal, Environment and Regulatory Matters,” Schering-Plough has reached an agreement with the U.S. Attorney’s Office for the District of Massachusetts and the U.S. Department of Justice to settle the Massachusetts Investigation for an aggregate amount of $435 million plus interest. Subsequent to December 31, 2006, Schering-Plough made payments totaling $388 million related to this settlement, including interest of $12 million. Substantially all the remaining payments under this settlement agreement will be paid in the remainder of 2007.

In 2005, operating activities generated $882 million of cash, compared with a use of $154 million in 2004. The increase was primarily due to higher net income and timing of payments of special charges related to litigation, partially offset by an increase in accounts receivable due to sales growth; payments of approximately $375 million to tax authorities for tax liabilities related to the repatriation of foreign earnings under the AJCA; and tax payments of $239 million related to the settlement of certain tax contingencies for the tax years 1993 through 1996. Tax charges related to the AJCA were expensed in 2004.

In 2004, operating cash flow was favorably impacted by a U.S. tax refund of $404 million as a result of loss carryback. However, cash flow was unfavorably impacted by a $473 million payment to the U.S. government for a tax deficiency related to certain transactions in tax years 1991 to 1992 and the payment of $294 million under the settlement agreement with the U.S. Attorney’s office for the Eastern District of Pennsylvania.

Investing Activities

Net cash used for investing activities during 2006 was $2.9 billion primarily related to the net purchases of short-term investments of $2.4 billion previously invested in cash equivalents and $458 million of capital expenditures.

Net cash used for investing activities during 2005 was $454 million, primarily related to $478 million of capital expenditures and the purchase of intangible assets of $51 million, partially offset by proceeds from sales of property and equipment of $43 million and the net reduction in short-term investments of $33 million.

Net cash used for investing activities in 2004 was $621 million and included capital expenditures of $489 million and net purchases of investments of $264 million, partially offset by cash proceeds of $118 million from the transfer of license rights and $7 million from the dispositions of property and equipment.

Financing Activities

Net cash used for financing activities during 2006 and 2005 was $1.4 billion and $633 million, respectively. Uses of cash for financing activities in 2006 and 2005 include the payment of dividends on common and preferred shares of $412 million and $410 million, respectively; the repayment of $1.0 billion of bank debt and short-term commercial borrowings in 2006, and $1.2 billion of short-term commercial paper borrowings in 2005. Uses of cash for financing activities in 2005 was partially offset by proceeds of $900 million from bank debt incurred by a foreign subsidiary related to funding of a portion of the repatriations under the AJCA during 2005. This bank debt was fully repaid in 2006.

The net cash provided by financing activities in 2004 reflected proceeds of $1.4 billion from the preferred stock issuance and $546 million from the increase in short-term borrowings, partially offset by the payment of dividends on common and preferred shares of $354 million.

Other Discussion of Cash Flows

Schering-Plough is moving forward with additional investments to enhance its infrastructure and business and currently is in the process of building a U.S. pharmaceutical sciences center in New Jersey. Capital expenditures of approximately $38 million were made in 2006 related to this center. Additional capital expenditures of approximately $260 million are expected over the next three years. This center will allow Schering-Plough to streamline and integrate its drug development process, where products are moved from the drug discovery pipeline to market. There will be additional related expenditures to upgrade equipment and staffing for this center.

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In 2006, U.S. operations generated negative cash flow. U.S. operations have cash needs in excess of cash generated in the U.S. The U.S. operations must fund dividend payments, the majority of research and development costs and U.S. capital expenditures. It is expected that the U.S. operation will also generate negative cash flow in 2007.

Total cash, cash equivalents and short-term investments less total debt was approximately $3.3 billion at December 31, 2006. Cash generated from operations and available cash and short-term investments are expected to provide Schering-Plough with the ability to fund cash needs for the intermediate term.

  6 Percent Mandatory Convertible Preferred Stock

In August 2004, Schering-Plough issued 6 percent mandatory convertible preferred stock and received net proceeds of $1.4 billion after deducting commissions, discounts and other underwriting expenses. The proceeds were used to reduce short-term commercial paper borrowings, pay tax and litigation settlement amounts and litigation costs, and to fund operating expenses and capital expenditures. The preferred stock was issued under Schering-Plough’s $2.0 billion shelf registration, and each preferred share will automatically convert into between 2.2451 and 2.7840 common shares of Schering-Plough depending on the average closing price of Schering-Plough’s common shares over a period immediately preceding the mandatory conversion date of September 14, 2007, as defined in the prospectus. See Note 15, “Shareholders’ Equity,” under Item 8, “Financial Statements and Supplementary Data,” for additional information. The conversion of these preferred shares will not trigger any cash payment by Schering-Plough. At December 31, 2006, $563 million remains registered and un-issued under the shelf registration.

Borrowings and Credit Facilities

On November 26, 2003, Schering-Plough 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. 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 13, “Short-Term Borrowings, Long-Term Debt and Other Commitments,” under Item 8, “Financial Statements and Supplementary Data,” 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 percent to 5.55 percent, and the interest rate payable on the notes due 2033 increased from 6.5 percent to 6.75 percent. This adjustment to the interest rate payable on the notes increased Schering-Plough’s interest expense by approximately $6 million annually. The interest rate payable on a particular series of notes will return to 5.3 percent and 6.5 percent, respectively, and the rate adjustment provisions will permanently cease to apply if, following a downgrade by either Moody’s or S&P below A3 or A-, respectively, the notes are subsequently rated above Baa1 by Moody’s and BBB+ by S&P.

Schering-Plough has a $1.5 billion credit facility with a syndicate of banks. This facility matures in May 2009 and requires Schering-Plough to maintain a total debt to total capital ratio of no more than 60 percent, which was met at December 31, 2006. This credit line is available for general corporate purposes and is considered as support to Schering-Plough’s commercial paper borrowings. Borrowings under this credit facility may be drawn by the U.S. parent company or by its wholly-owned international subsidiaries when accompanied by a parent guarantee. This facility does not require compensating balances; however, a nominal commitment fee is paid. As of December 31, 2005, $325 million was drawn under this facility by a wholly-owned international subsidiary for the purposes of funding repatriations under the AJCA. During 2006, this borrowing amount was fully repaid. As of December 31, 2006, no borrowings were outstanding under this facility.

In addition to the above credit facility, Schering-Plough entered into a $575 million credit facility during the fourth quarter of 2005 for the purposes of funding repatriations under the AJCA. As of December 31, 2005, the entire amount was drawn by a wholly-owned international subsidiary to fund the repatriations. This facility was paid in full and terminated in 2006.

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As of December 31, 2006 and 2005, short-term borrowings, including the credit facilities mentioned above, totaled $242 million and $1.3 billion, respectively, including outstanding commercial paper of $149 million and $298 million, respectively. The weighted-average interest rate for short-term borrowings at December 31, 2006 and 2005 was 6.4 percent and 4.7 percent, respectively.

Credit Ratings

Schering-Plough’s current unsecured senior credit ratings and outlook are as follows:

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

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

Schering-Plough’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 Schering-Plough’s short and long-term debt. As discussed above, Schering-Plough believes that existing cash, short-term investments and cash generated from operations will allow Schering-Plough to fund its cash needs for the intermediate term.

Contractual Obligations and Off-Balance Sheet Arrangements

Schering-Plough has various contractual obligations that are reported as liabilities in the Consolidated Balance Sheets and others that are not required to be recognized as liabilities such as certain purchase commitments and other executory contracts. The following table summarizes payments due by period under Schering-Plough’s known contractual obligations at December 31, 2006.

	Payments Due by Period
			Less						More
			Than						Than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
	(Dollars in millions)
Short-term borrowings and current portion of long-term debt	$	242	$	242	$	—	$	—	$	—
Long-term debt obligations(1)		2,414		2		3		2		2,407
Operating lease obligations		264		85		106		38		35
Purchase obligations:
Advertising contracts		117		117		—		—		—
Research contracts(2)		141		126		9		4		2
Capital expenditure commitments		181		179		2		—		—
Other purchase obligations(3)		1,643		1,562		55		19		7
Deferred compensation plan obligations		85		14		11		18		42
Other obligations(4)		391		247		19		16		109
Total	$	5,478	$	2,574	$	205	$	97	$	2,602

(1) Long-term debt obligations include the $1,250 million aggregate principal amount of 5.55 percent senior, unsecured notes due 2013 and $1,150 million aggregate principal amount of 6.75 percent senior, unsecured notes due 2033 and excludes interest obligations. See Note 13, “Short-Term Borrowings, Long-Term Debt and

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	Other Commitments,” under Item 8, “Financial Statements and Supplementary Data,” for additional information.
(2)	Research contracts do not include any potential milestone payments to be made since such payments are contingent on the occurrence of certain events. The table also excludes those research contracts that are cancelable by Schering-Plough without penalty.
(3)	Other purchase obligations consist of both cancelable and non-cancelable inventory and expense items.
(4)	This caption includes obligations, based on undiscounted amounts, for estimated payments under certain of Schering-Plough’s pension plans, preferred stock dividends and other contractual obligations.

REGULATORY AND COMPETITIVE ENVIRONMENT IN WHICH SCHERING-PLOUGH OPERATES

Schering-Plough is subject to the jurisdiction of various national, state and local regulatory agencies. These regulations are described in more detail in Item 1, “Business.” Regulatory compliance is complex, as regulatory standards (including Good Clinical Practices, Good Laboratory Practices and Good Manufacturing Practices) vary by jurisdiction and are constantly evolving. Regulatory compliance is also costly. Regulatory compliance also impacts the timing needed to bring new drugs to market and to market drugs for new indications. Further, failure to comply with regulations can result in delays in the approval of drugs, seizure or recall of drugs, suspension or revocation of the authority necessary for the production and sale of drugs, fines and other civil or criminal sanctions.

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

Much is still unknown about the science of human health and with every drug there are benefits and risks that may be balanced. Societal and government pressures are constantly shifting between the demand for innovation to meet urgent unmet medical needs and adversity to risk. These pressures impact the regulatory environment and the market for Schering-Plough’s products.

Regulatory Compliance and Pharmacovigilance

Consent Decree

Since 2002, Schering-Plough has been working under a U.S. FDA Consent Decree to resolve issues involving Schering-Plough’s compliance with current Good Manufacturing Practices (cGMP) at certain of its manufacturing sites in New Jersey and Puerto Rico. See details in Note 18, “Consent Decree” under Item 8, “Financial Statements and Supplementary Data.”

Under the terms of the Consent Decree, Schering-Plough made payments totaling $500 million. As of the end of 2005, Schering-Plough has completed the revalidation programs for bulk active pharmaceutical ingredients and finished drug products, as well as all 212 Significant Steps of the cGMP Work Plan, in accordance with the schedules required by the Consent Decree. Schering-Plough has obtained third-party expert certification of completion of the cGMP Work Plan as required by the Decree. This certification is in turn subject to acceptance by the FDA. Under the terms of the Decree, provided that the FDA has not notified Schering-Plough of a significant violation of FDA law, regulations, or the Decree in any five-year period since the Decree’s entry in May of 2002, Schering-Plough may petition the court to have the Decree dissolved and the FDA will not oppose Schering-Plough’s petition. There is no assurance about any particular date when the Consent Decree will be lifted.

Regulatory Inspections

Schering-Plough is subject to pharmacovigilance reporting requirements in many countries and other jurisdictions, including the U.S., the 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 drug’s manufacturer and the governmental agency to potential problems.

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

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

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

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

Regulatory Compliance and Post-Marketing Surveillance

Schering-Plough engages in clinical trial research in many countries around the world. These clinical trial research activities must comply with stringent regulatory standards and are subject to inspection by U.S., EU, and local country regulatory authorities. Failure to comply with current Good Clinical Practices, other applicable laws or regulations or quality processes can result in delays in approval of clinical trials, suspension of ongoing clinical trials, delays in approval of marketing authorizations, criminal sanctions against Schering-Plough and/or responsible individuals, changes in the conditions of marketing authorizations for Schering-Plough’s products and increased costs.

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

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

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

Some health authorities, such as the PMDA, have publicly acknowledged a significant backlog in workload due to resource constraints within their agency. This backlog has caused long regulatory review times for new indications and products, including the initial approval of ZETIA in Japan, and has added to the uncertainty in

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predicting approval timelines in these markets. While the PMDA has committed to correcting the backlog and has made some progress over the last year, it is expected to continue for the foreseeable future.

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

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

Pricing Pressures

As described more specifically in Note 19, “Legal, Environmental and Regulatory Matters,” under Item 8, “Financial Statements and Supplementary Data,” the pricing, sales and marketing programs and arrangements, and related business practices of Schering-Plough 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 Schering-Plough to substantial fines, penalties and injunctive or administrative remedies, including exclusion from government reimbursement programs. Schering-Plough also cannot predict whether any investigations will affect its marketing practices or sales. Any such result could have a material adverse impact on Schering-Plough’s results of operations, cash flows, financial condition, or its business.

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

In most international markets, Schering-Plough operates in an environment of government mandated cost-containment programs. Several governments have placed restrictions on physician prescription levels and patient reimbursements; emphasized greater use of generic drugs; and enacted across-the-board price cuts as methods to control costs.

Since Schering-Plough 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.

Medicare

Schering-Plough cannot predict what net effect the Medicare prescription drug benefit will have on markets and sales. The new Medicare Drug Benefit (Medicare Part D), which took effect January 1, 2006, offers voluntary prescription drug coverage, subsidized by Medicare, to more than 40 million Medicare beneficiaries through competing private prescription drug plans (PDPs) and Medicare Advantage (MA) plans. Many of Schering-Plough’s leading drugs are already covered under Medicare Part B (e.g., TEMODAR, INTEGRILIN and INTRON

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A). Medicare Part B provides payment for physician services that can include prescription drugs administered along with other physician 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). Schering-Plough could experience expanded utilization of VYTORIN and ZETIA and new drugs in Schering-Plough’s R&D pipeline. Of greater consequence for Schering-Plough may be the legislation’s impact on pricing, rebates and discounts.

Competition

The market for pharmaceutical products is competitive. Schering-Plough’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 Schering-Plough’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.

2007 OUTLOOK

Schering-Plough is on track with the actions to build long-term high performance in the Build the Base phase of the Action Agenda. Schering-Plough will continue to make investments to support its geographical expansion strategy and plans to make sound promotional investments to continue driving the growth of key brands worldwide. Schering-Plough remains focused on controlling its overhead spending and maintaining a right-sized sales force for its current opportunities in the U.S.

Schering-Plough currently does not provide numeric guidance. However, the following outlook may be helpful to readers in assessing future prospects:

Currently, the U.S. cholesterol lowering market is adjusting to the entry into the market of multiple generic forms of competing cholesterol products. Despite the introduction of new innovative competing treatments and generic versions of competing products, Schering-Plough continues to anticipate that sales from VYTORIN and ZETIA will grow in 2007. The decisions of government entities, managed care groups and other groups concerning formularies and reimbursement policies could negatively impact the dollar size and/or growth of the cholesterol management market, including VYTORIN and ZETIA.

As Schering-Plough’s pipeline continues to progress, it expects that the number of patients in Schering-Plough’s clinical trials will increase substantially in 2007. Schering-Plough also will continue to invest in research and development with a focus on enhancing infrastructure and upgrading processes, systems and talent. As a result, Schering-Plough expects R&D expenses, excluding any upfront payments, will grow faster than adjusted net sales in 2007. Adjusted net sales is defined as net sales plus an assumed 50 percent of global cholesterol joint venture net sales. Schering-Plough believes that this growth comparison provides a useful guideline to review our outlook for R&D expenses.

As a result of Schering-Plough’s actions to streamline its manufacturing operations, Schering-Plough expects annualized cost savings of approximately $100 million in 2007, and gross margin should improve accordingly.

The risks described in Item 1A. “Risk Factors” could cause actual results to differ from the expectations provided in this section.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which is effective for calendar-year companies on January 1, 2008. The Statement defines fair value, establishes a framework for measuring fair value in accordance with Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. The Statement codifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The

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standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Schering-Plough is currently assessing the potential impacts of implementing this standard.

In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) Topic 1N (SAB 108), “Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which is effective for calendar-year companies as of December 31, 2006. SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the financial statements are materially misstated. Under this guidance, companies should take into account both the effect of a misstatement on the current year balance sheet as well as the impact upon the current year income statement in assessing the materiality of a current year misstatement. Once a current year misstatement has been quantified, the guidance in SAB Topic 1M, “Financial Statements — Materiality,” (SAB 99) should be applied to determine whether the misstatement is material. The implementation of SAB 108 did not have any impact on Schering-Plough’s financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” Schering-Plough is required to apply the provisions of this interpretation beginning on January 1, 2007. The provisions of FIN 48 will be applied to all existing uncertain income tax positions on the effective date. Upon the implementation of FIN 48, the cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings. Although Schering-Plough is still evaluating the potential impact of FIN 48, upon the adoption of FIN 48, it expects a decrease to opening retained earnings as of January 1, 2007 from $225 million to $300 million with a corresponding increase to other accrued liability accounts upon the adoption of this Interpretation.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following accounting policies and estimates are considered significant because changes to certain judgments and assumptions inherent in these policies could affect Schering-Plough’s financial statements:

•  Revenue Recognition

•  Rebates, Discounts and Returns

•  Provision for Income Taxes

•  Impairment of Intangible Assets and Property

•  Accounting for Pensions and Post-retirement Benefit Plans

•  Accounting for Legal and Regulatory Matters

Revenue Recognition

Schering-Plough’s pharmaceutical products are sold to direct purchasers, which include wholesalers, retailers and certain health maintenance organizations. Price discounts and rebates on such sales are paid to federal and state agencies, other indirect purchasers and other market participants such as managed care organizations that indemnify beneficiaries of health plans for their pharmaceutical costs and pharmacy benefit managers.

Schering-Plough recognizes revenue when title and risk of loss pass to the purchaser and when reliable estimates of the following can be determined:

i. commercial discount and rebate arrangements;

ii. rebate obligations under certain federal and state governmental programs; and

iii. sales returns in the normal course of business.

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When recognizing revenue, Schering-Plough estimates and records the applicable commercial and governmental discounts and rebates as well as sales returns that have been or are expected to be granted or made for products sold during the period. These amounts are deducted from sales for that period. If reliable estimates of these items cannot be made, Schering-Plough defers the recognition of revenue. Estimates recorded in prior periods are re-evaluated as part of this process.

Revenue recognition for new products is based on specific facts and circumstances including estimated acceptance rates from established products with similar marketing characteristics. Absent the ability to make reliable estimates of rebates, discounts and returns, Schering-Plough would defer revenue recognition.

Product discounts granted are based on the terms of arrangements with wholesalers, managed-care organizations and government purchasers, and certain other market conditions. Rebates are estimated based on sales and contract terms, historical experience, trend analysis and projected market conditions in the various markets served. Schering-Plough evaluates market conditions for products or groups of products primarily through the analysis of third-party demand and market research data as well as internally generated information. Data and information provided by purchasers and obtained from third parties are subject to inherent limitations as to their accuracy and validity.

Sales returns are estimated and recorded based on historical sales and returns information, analysis of recent wholesale purchase information, consideration of stocking levels at wholesalers and forecasted demand amounts. Products that exhibit unusual sales or return patterns due to dating, competition including expected generic introductions, or other marketing matters are specifically investigated and analyzed as part of the formulation of return reserves.

Schering-Plough’s agreements with the major U.S. pharmaceutical wholesalers address a number of commercial issues, such as product returns, timing of payment, processing of chargebacks and the quantity of inventory held by these wholesalers. With respect to the quantity of inventory held by these wholesalers, these agreements provide a financial disincentive for these wholesalers to acquire quantities of product in excess of what is necessary to meet current patient demand. Through the use of these agreements, Schering-Plough expects to avoid situations where Schering-Plough’s shipments of product are not reflective of current demand.

Rebates, Discounts and Returns

Schering-Plough’s rebate accruals for Federal and State governmental programs, including Medicaid and Medicare Part D, at December 31, 2006 and 2005 were $115 million and $144 million, respectively. Commercial discounts, returns and other rebate accruals in the U.S. at December 31, 2006 and 2005 were $371 million and $378 million, respectively. These accruals are established in the period the related revenue was recognized resulting in a reduction to sales and the establishment of liabilities, which are included in total current liabilities, or in the case of returns and other receivable adjustments, an allowance provided against accounts receivable.

In the case of the governmental rebate programs, Schering-Plough’s payments involve interpretations of relevant statutes and regulations. These interpretations are subject to challenges and changes in interpretive guidance by governmental authorities. The result of such a challenge or change could affect whether the estimated governmental rebate amounts are ultimately sufficient to satisfy Schering-Plough’s obligations. Additional information on governmental inquiries focused in part on the calculation of rebates is contained in Note 19, “Legal, Environmental and Regulatory Matters,” under Item 8, “Financial Statements and Supplementary Data.” In addition, it is possible that, as a result of governmental challenges or changes in interpretive guidance, actual rebates could materially exceed amounts accrued.

48

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

	Year Ended			Year Ended
	December 31,			December 31,
	2006			2005
	(Dollars in millions)
Accrued Rebates/Returns/Discounts, Beginning of Period	$	522		$	537
Provision for Rebates		474			479
Adjustment to prior-year estimates(1)		(56	)		—
Payments		(460	)		(495	)
		(42	)		(16	)
Provision for Returns		124			116
Adjustment to prior-year estimates		(8	)		—
Returns		(121	)		(167	)
		(5	)		(51	)
Provision for Discounts		605			459
Adjustment to prior-year estimates		(6	)		—
Discounts granted		(588	)		(407	)
		11			52
Accrued Rebates/Returns/Discounts, End of Period	$	486		$	522

(1) For the year ended December 31, 2006, the adjustment to prior-year estimates for rebates includes $24 million resulting from the reversal of the accrued rebate amounts recorded in 2005 and 2004 for the TRICARE Retail Pharmacy Program that in August 2006, the U.S. Federal Court of Appeals ruled pharmaceutical manufacturers are not obligated to pay.

In formulating and recording the above accruals, management utilizes assumptions and estimates that include historical experience, wholesaler data, the projection of market conditions, the estimated lag time between sale and payment of a rebate, utilization estimates, and forecasted product demand amounts as discussed under the critical accounting policy entitled “Revenue Recognition.”

As part of its review of these accruals, management performs a sensitivity analysis that considers differing assumptions, which are most subject to judgment in its rebate accrual calculation. Based upon Schering-Plough’s sensitivity analysis, reasonably possible changes to assumptions related to rebate accruals for Federal and State governmental programs could favorably or unfavorably impact net sales and income before taxes by approximately $20 million for 2006.

Provision for Income Taxes

As of December 31, 2006, taxes have not been provided on approximately $4.2 billion of earnings of international subsidiaries as Schering-Plough considers these earnings indefinitely reinvested in its international subsidiaries.

Schering-Plough believes that its accrual for tax contingencies is adequate for all open years, based on past experience, interpretations of tax law, and judgments about potential actions by taxing authorities. Schering-Plough accrues liabilities for identified tax contingencies that result from tax positions taken that could be challenged by tax authorities. Schering-Plough’s tax reserves reflect Schering-Plough’s best estimate of the probable tax liability, however, it is reasonably possible that the ultimate resolution of any tax matters may be materially greater or less than the amount accrued. Schering-Plough will adopt FIN 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. See “Impact of Recently Issued Accounting Standards” as discussed above for additional

49

information regarding the expected impacts on Schering-Plough’s financial statements from the implementation of FIN 48.

Schering-Plough’s potential tax exposures result from the varying application of statutes, regulations and interpretations and include exposures on intercompany terms of cross border arrangements and utilization of cash held by foreign subsidiaries (investment in U.S. property). Although Schering-Plough’s cross border arrangements between affiliates are based upon internationally accepted standards, tax authorities in various jurisdictions may disagree with and subsequently challenge the amount of profits taxed in their country.

Schering-Plough records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Schering-Plough has considered ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. In the event Schering-Plough were to determine that it would be able to realize all or an additional portion of its net deferred tax assets, an adjustment to the valuation allowance would increase income in the period such determination is made. Likewise, should Schering-Plough subsequently determine that it would not be able to realize all or an additional portion of its remaining net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Impairment of Intangible Assets and Property

Intangible assets representing the capitalized costs of purchased goodwill, patents, licenses and other forms of intellectual property totaled $492 million at December 31, 2006. Annual amortization expense in each of the next five years is estimated to be approximately $45 million per year based on the intangible assets recorded as of December 31, 2006. The value of these assets is subject to continuing scientific, medical and marketplace uncertainty. For example, if a marketed pharmaceutical product were to be withdrawn from the market for safety reasons or if marketing of a product could only occur with pronounced warnings, amounts capitalized for such a product may need to be reduced due to impairment. Events giving rise to impairment are an inherent risk in the pharmaceutical industry and cannot be predicted. Management regularly reviews intangible assets for possible impairment.

Certain of Schering-Plough’s manufacturing sites operate below capacity. Overall costs of operating manufacturing sites have significantly increased due to the Consent Decree and other compliance activities. Schering-Plough’s manufacturing cost base is relatively fixed. Actions on the part of management to significantly reduce Schering-Plough’s manufacturing infrastructure involve complex issues. As a result, shifting products between manufacturing plants can take many years due to construction and regulatory requirements, including revalidation and registration requirements. Management continues to review the carrying value of certain manufacturing assets for indications of impairment. Future events and decisions may lead to additional asset impairments and/or related costs.

Accounting for Pension and Post-retirement Benefit Plans

Pension and other post-retirement benefit plan information for financial reporting purposes is calculated using actuarial assumptions. Schering-Plough assesses its pension and other post-retirement benefit plan assumptions on a regular basis. In evaluating these assumptions, Schering-Plough considers many factors, including evaluation of the discount rate, expected rate of return on plan assets, healthcare cost trend rate, retirement age assumption, Schering-Plough’s historical assumptions compared with actual results and analysis of current market conditions and asset allocations. See Note 7, “Retirement Plans and Other Post-Retirement Benefits,” under Item 8, “Financial Statements and Supplementary Data,” for additional information.

Discount rates used for pension and other post-retirement benefit plan calculations are evaluated annually and modified to reflect the prevailing market rates at the measurement date of a high-quality fixed income debt instrument portfolio that would provide the future cash flows needed to pay the benefits included in the benefit obligations as they come due. In countries where debt instruments are thinly traded, estimates are based on available market rates.

50

Actuarial assumptions are based upon management’s best estimates and judgment. With other assumptions held constant, an increase of 50 basis points in the discount rate would have an estimated favorable impact of $23 million on net pension and post-retirement benefit cost and an increase of 50 basis points in the expected rate of return assumption would have an estimated favorable impact of $8 million on net pension and post-retirement benefit cost. With other assumptions held constant, a decrease of 50 basis points in the discount rate would have an estimated unfavorable impact of $33 million on net pension and post-retirement benefit cost and a decreased of 50 basis points in the expected rate of return assumption would have an estimated unfavorable impact of $8 million on net pension and post-retirement benefit cost.

The expected rates of return for the pension and other post-retirement benefit plans represent the average rates of return to be earned on plan assets over the period during which the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, Schering-Plough determines expected returns for each of the major asset classes, principally equities, fixed income and real estate. The return expectations for these asset classes are based on assumptions for economic growth and inflation, which are supported by long-term historical data as well as Schering-Plough’s actual experience of return on plan assets. The expected portfolio performance also reflects the contribution of active management as appropriate.

Unrecognized net loss amounts reflect experience differentials primarily relating to differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions. Expected returns are based primarily on a calculated market-related value of assets. Under this methodology, asset gains/losses resulting from actual returns that differ from Schering-Plough’s expected returns for the majority of the assets are realized in the market-related value of assets ratably over a five-year period. Total unrecognized net loss amounts in excess of certain thresholds are amortized into net pension and other post-retirement benefit cost over the average remaining service life of employees.

The targeted investment portfolio of Schering-Plough’s U.S. pension plan is allocated 65 percent to equities; 28 percent to fixed income investments; and 7 percent to real estate. The targeted investment portfolio of Schering-Plough’s U.S. other post-retirement benefit plans is allocated 70 percent to equities and 30 percent to fixed income investments. The portfolios’ equity weightings are consistent with the long-term nature of the plans’ benefit obligations. For non-U.S. pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local governmental rules and regulations.

Substantially all investments in equities and fixed income are valued based on quoted public market values. All investments in real estate are valued based on periodic appraisals.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” an amendment of FASB Statements No. 87, 88, 106, and 132R. Effective December 31, 2006, Schering-Plough accounts for its retirement and other post-retirement benefit plans in accordance with SFAS No. 158. Shareholders’ equity at December 31, 2006, was reduced by approximately 7 percent upon the adoption of SFAS No. 158. See Note 7, “Retirement Plans and Other Post-Retirement Benefits,” under Item 8, “Financial Statements and Supplemental Data,” for additional information.

SFAS No. 158 allows an extended adoption date for year-end measurement date requirement as allowed under this Statement. Currently, a majority of Schering-Plough’s retirement and other post-retirement benefit plans’ assets and liabilities are measured at December 31. For the remaining plans, which have measurement dates other then year-end, Schering-Plough anticipates adopting the year-end measurement date effective on December 31, 2007. Schering-Plough does not expect any material impact on its financial statements upon the adoption.

Accounting for Legal and Regulatory Matters

Management judgments and estimates are required in the accounting for legal and regulatory matters on an ongoing basis including insurance coverages. Schering-Plough reviews the status of all claims, investigations and legal proceedings on an ongoing basis. From time to time, Schering-Plough may settle or otherwise resolve these matters on terms and conditions management believes are in the best interests of Schering-Plough. Resolution of

51

any or all claims, investigations and legal proceedings, individually or in the aggregate, could have a material adverse effect on Schering-Plough’s results of operations, cash flows or financial condition.

MARKET RISK DISCLOSURE

Schering-Plough is exposed to market risk primarily from changes in foreign currency exchange rates and, to a lesser extent, from interest rates and equity prices. The following describes the nature of these risks.

Foreign Currency Exchange Risk

Schering-Plough has subsidiaries in more than 50 countries. In 2006, sales outside the U.S. accounted for approximately 60 percent of global sales. Virtually all these sales were denominated in currencies of the local country. As such, Schering-Plough’s reported profits and cash flows are exposed to changing exchange rates.

To date, management has not deemed it cost effective to engage in a formula-based program of hedging the profits and cash flows of international operations using derivative financial instruments. Because Schering-Plough’s international subsidiaries purchase significant quantities of inventory payable in U.S. dollars, managing the level of inventory and related payables and the rate of inventory turnover can provide a level of protection against adverse changes in exchange rates. The risk of adverse exchange rate change is also mitigated by the fact that Schering-Plough’s international operations are widespread.

In addition, at any point in time, Schering-Plough’s international subsidiaries hold financial assets and liabilities that are denominated in currencies other than U.S. dollars. These financial assets and liabilities consist primarily of short-term, third-party and intercompany receivables and payables. Changes in exchange rates affect the translated value of these financial assets and liabilities. Gains or losses that arise from translation do not affect net income.

On occasion, Schering-Plough has used derivatives to hedge specific foreign currency exposures. However, these derivative transactions have not been material.

Interest Rate and Equity Price Risk

Financial assets exposed to changes in interest rates and/or equity prices are primarily cash equivalents, short-term investments and the debt and equity securities held in non-qualified trusts for employee benefits. These assets totaled more than $6 billion at December 31, 2006. For cash equivalents and short-term investments, a 10 percent decrease in interest rates would decrease interest income by approximately $25 million. For securities held in non-qualified trusts, due to the long-term nature of the liabilities that these trust assets will fund, Schering-Plough’s exposure to market risk is deemed to be low.

Financial obligations exposed to variability in interest rates are primarily short-term borrowings. Schering-Plough currently maintains an investment portfolio of short-term investment instruments in excess of the amount of borrowings. Accordingly, Schering-Plough has mitigated its exposure for changes in interest rates relating to its financial obligations.

Schering-Plough has long-term debt outstanding, on which a 10 percent decrease in interest rates would increase the fair value of the debt by approximately $115 million. However, Schering-Plough does not currently expect to refund this debt.

DISCLOSURE NOTICE

Cautionary Statements Under the Private Securities Litigation Reform Act of 1995

Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report and other written reports and oral statements made from time to time by Schering-Plough may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-

52

looking statements do not relate strictly to historical or current facts and are based on current expectations or forecasts of future events. You can identify these forward- looking statements by their use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “project,” “intend,” “plan,” “potential,” “will,” and other similar words and terms. In particular, forward-looking statements include statements relating to future actions, ability to access the capital markets, prospective products or product approvals, timing and conditions of regulatory approvals, patent and other intellectual property protection, future performance or results of current and anticipated products, sales efforts, research and development programs, estimates of rebates, discounts and returns, expenses and programs to reduce expenses, the cost of and savings from reductions in work force, the outcome of contingencies such as litigation and investigations, growth strategy and financial results.

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’s stock. Schering-Plough does not assume the obligation to update any forward-looking statement. Many factors could cause actual results to differ materially 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, we refer you to Item 1A, “Risk Factors” of this report, which we incorporate herein by reference, for identification of important factors with respect to these risks and uncertainties.

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

See the Market Risk Disclosures as set forth in Item 7, “Management’s Discussion and Analysis.”

53

Item 8.   Financial Statements and Supplementary Data

Index to Financial Statements

Statements of Consolidated Operations for the Years Ended December 31, 2006, 2005 and 2004	55
Statements of Consolidated Cash Flows for the Years Ended December 31, 2006, 2005 and 2004	56
Consolidated Balance Sheets at December 31, 2006 and 2005	57
Statements of Consolidated Shareholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004	58
Notes to Consolidated Financial Statements	59
Report of Independent Registered Public Accounting Firm	97

54

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED OPERATIONS

(Amounts in millions, except per share figures)

	For the Years Ended December 31,
	2006			2005			2004
Net sales	$	10,594		$	9,508		$	8,272
Cost of sales		3,697			3,346			3,070
Selling, general and administrative		4,718			4,374			3,811
Research and development		2,188			1,865			1,607
Other (income)/expense, net		(135	)		5			146
Special charges		102			294			153
Equity income from cholesterol joint venture		(1,459	)		(873	)		(347	)
Income/(loss) before income taxes		1,483			497			(168	)
Income tax expense		362			228			779
Net income before cumulative effect of a change in accounting principle		1,121			269			(947	)
Cumulative effect of a change in accounting principle, net of tax		(22	)		—			—
Net income/(loss)		1,143			269			(947	)
Preferred stock dividends		86			86			34
Net income/(loss) available to common shareholders	$	1,057		$	183		$	(981	)
Diluted earnings/(loss) per common share:
Earnings available to common shareholders before cumulative effect of a change in accounting principle	$	0.69		$	0.12		$	(0.67	)
Cumulative effect of a change in accounting principle, net of tax		0.02			—			—
Diluted earnings/(loss) per common share	$	0.71		$	0.12		$	(0.67	)
Basic earnings/(loss) per common share:
Earnings available to common shareholders before cumulative effect of a change in accounting principle	$	0.69		$	0.12		$	(0.67	)
Cumulative effect of a change in accounting principle		0.02			—			—
Basic earnings/(loss) per common share	$	0.71		$	0.12		$	(0.67	)
Dividends per common share	$	0.22		$	0.22		$	0.22

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

55

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(Amounts in millions)

	For the Years Ended December 31,
	2006			2005			2004
Operating Activities:
Net income/(loss)	$	1,143		$	269		$	(947	)
Cumulative effect of a change in accounting principle, net of tax		22			—			—
Net income before cumulative effect of a change in accounting principle, net of tax	$	1,121		$	269		$	(947	)
Adjustments to reconcile net income/(loss) to net cash provided by/(used for) operating activities:
Payments to U.S. taxing authorities		—			(239	)		(473	)
Tax refunds from U.S. loss carryback		—			57			404
Special charges		65			265			(265	)
Depreciation and amortization		568			486			453
Accrued share-based compensation		168			—			—
Changes in assets and liabilities:
Accounts receivable		(241	)		(209	)		(7	)
Inventories		(25	)		(92	)		92
Prepaid expenses and other assets		16			168			174
Accounts payable and other liabilities		395			241			174
Income taxes payable		94			(64	)		241
Net cash provided by (used for) operating activities		2,161			882			(154	)
Investing Activities:
Capital expenditures		(458	)		(478	)		(489	)
Dispositions of property and equipment		9			43			7
Proceeds from transfer of license		—			—			118
Purchases of investments		(6,648	)		(2,608	)		(2,852	)
Maturity of investments		4,199			2,641			2,588
Other, net		(10	)		(52	)		7
Net cash used for investing activities		(2,908	)		(454	)		(621	)
Financing Activities:
Cash dividends paid to common shareholders		(326	)		(324	)		(324	)
Cash dividends paid to preferred shareholders		(86	)		(86	)		(30	)
Proceeds from preferred stock issuance, net		—			—			1,394
Short-term borrowings		—			900			546
Payments of short-term borrowings		(1,035	)		(1,183	)		—
Reductions of long-term debt		—			—			(18	)
Stock options exercised and other, net		86			60			(34	)
Net cash (used for) provided by financing activities		(1,361	)		(633	)		1,534
Effect of exchange rates on cash and cash equivalents		7			(12	)		7
Net (decrease) increase in cash and cash equivalents		(2,101	)		(217	)		766
Cash and cash equivalents, beginning of year		4,767			4,984			4,218
Cash and cash equivalents, end of year	$	2,666		$	4,767		$	4,984
Supplemental Disclosure:
Cash paid for interest, net of amounts capitalized	$	170		$	159		$	166
Cash paid (refunded) for income taxes (see Note 6)		234			592			(144	)

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

56

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share figures)

	At December 31,
	2006			2005
ASSETS
Current Assets:
Cash and cash equivalents	$	2,666		$	4,767
Short-term investments		3,267			818
Accounts receivable, less allowances: 2006, $237; 2005, $211		1,804			1,479
Inventories		1,676			1,605
Deferred income taxes		266			294
Prepaid expenses and other current assets		744			769
Total current assets		10,423			9,732
Property, at cost:
Land		67			67
Buildings and improvements		3,387			3,238
Equipment		3,240			3,131
Construction in progress		627			761
Total		7,321			7,197
Less accumulated depreciation		2,956			2,710
Property, net		4,365			4,487
Goodwill		206			204
Other intangible assets, net		286			365
Other assets		791			681
Total assets	$	16,071		$	15,469
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,254		$	1,078
Short-term borrowings and current portion of long-term debt		242			1,278
U.S., foreign and state income taxes		323			213
Accrued compensation		794			632
Other accrued liabilities		1,549			1,458
Total current liabilities		4,162			4,659
Long-term Liabilities:
Long-term debt		2,414			2,399
Deferred income taxes		122			117
Other long-term liabilities		1,465			907
Total long-term liabilities		4,001			3,423
Commitments and contingent liabilities (Note 19)
Shareholders’ Equity:
Mandatory convertible preferred shares — $1 par value; issued: 29; $50 per share face value		1,438			1,438
Common shares — authorized shares: 2,400, $.50 par value; issued: 2,034		1,017			1,015
Paid-in capital		1,661			1,416
Retained earnings		10,119			9,472
Accumulated other comprehensive loss		(872	)		(516	)
Total		13,363			12,825
Less treasury shares: 2006, 547; 2005, 550; at cost		5,455			5,438
Total shareholders’ equity		7,908			7,387
Total liabilities and shareholders’ equity	$	16,071		$	15,469

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

57

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY

(Amounts in millions)

														Accumulated
	Mandatory													Other			Total
	Convertible													Compre-			Share-
	Preferred		Common		Paid-in			Retained			Treasury			hensive			holders’
	Shares		Shares		Capital			Earnings			Shares			Loss			Equity
Balance January 1, 2004		—	$	1,015	$	1,272		$	10,918		$	(5,442	)	$	(426	)	$	7,337
Comprehensive income/(loss):
Net loss									(947	)								(947	)
Foreign currency translation															107			107
Minimum pension liability, net of tax, in accordance with SFAS No. 87/88															14			14
Unrealized gain on investments available for sale, net of tax,															5			5
Total comprehensive (loss)																		(821	)
Issuance of preferred stock		1,438				(44	)											1,394
Cash dividends on common shares									(324	)								(324	)
Dividends on preferred shares									(34	)								(34	)
Stock incentive plans and other		—		—		6			—			(2	)		—			4
Balance December 31, 2004	$	1,438	$	1,015	$	1,234		$	9,613		$	(5,444	)	$	(300	)	$	7,556
Comprehensive income/(loss):
Net income									269									269
Foreign currency translation															(160	)		(160	)
Minimum pension liability, net of tax, in accordance with SFAS No. 87/88															(56	)		(56	)
Total comprehensive income																		53
Cash dividends on common shares									(324	)								(324	)
Dividends on preferred shares									(86	)								(86	)
Stock incentive plans and other		—		—		182			—			6			—			188
Balance December 31, 2005	$	1,438	$	1,015	$	1,416		$	9,472		$	(5,438	)	$	(516	)	$	7,387
Comprehensive income:
Net income									1,143									1,143
Foreign currency translation															94			94
Minimum pension liability, net of tax, in accordance with SFAS No. 87/88															67			67
Unrealized gain on investments available for sale, net of tax															4			4
Total comprehensive income																		1,308
Cash dividends paid on common shares									(326	)								(326	)
Dividends on preferred shares									(86	)								(86	)
Accrued dividends on common shares									(81	)								(81	)
Adjustment of pension and other-post-retirement liabilities upon the adoption of SFAS No. 158, net of tax of $25															(521	)		(521	)
Stock incentive plans and other		—		2		245			(3	)		(17	)		—			227
Balance December 31, 2006	$	1,438	$	1,017	$	1,661		$	10,119		$	(5,455	)	$	(872	)	$	7,908

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

58

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview

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

Principles of Consolidation

The consolidated financial statements include Schering-Plough Corporation and its subsidiaries (Schering-Plough). Intercompany balances and transactions are eliminated.

Use of Estimates

The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and use assumptions that affect certain reported amounts and disclosures. Actual amounts may differ.

Equity Method of Accounting

Schering-Plough accounts for its share of activity from the Merck/Schering-Plough cholesterol joint venture (the Partnership or the joint venture) with Merck & Co., Inc. (Merck) using the equity method of accounting as Schering-Plough has significant influence over the joint venture’s operating and financial policies. Accordingly, Schering-Plough’s net sales do not include sales from the joint venture, and Schering-Plough’s share of earnings in the joint venture is included in consolidated net income/(loss). Equity income from the cholesterol joint venture is included in profit from the Prescription Pharmaceutical segment.

Revenue from the sales of VYTORIN and ZETIA are recognized by the joint venture when title and risk of loss has passed to the customer. Equity income from the joint venture excludes any profit arising from transactions between Schering-Plough 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 Schering-Plough or Merck. See Note 3, “Equity Income From Cholesterol Joint Venture,” for information regarding this joint venture.

Cash and Cash Equivalents

Cash and cash equivalents include operating cash and highly liquid investments with original maturities of three months or less.

Short-term Investments

Short-term investments are carried at their fair value and are classified as available-for-sale. These investments consist of time deposits, certificates of deposit and commercial paper with maturities of less than a year.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (LIFO) method for a substantial portion of inventories located in the U.S. The cost of all other inventories is determined by the first-in, first-out method (FIFO).

Depreciation of Property and Equipment

Depreciation is provided over the estimated useful lives of the properties, generally by use of the straight-line method.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Useful lives of property are generally as follows:

Asset Category	Years
Buildings		40
Building Improvements		25
Equipment		3 - 15

Schering-Plough reviews the carrying value of property and equipment for indications of impairment in accordance with Statement of Financial Accounting Standard (SFAS) 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.”

Depreciation expense, including accelerated depreciation related to the manufacturing streamlining of $93 million, was $443 million, $362 million, and $340 million in 2006, 2005, and 2004, respectively.

Foreign Currency Translation

The net assets of most of Schering-Plough’s international subsidiaries are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in the foreign currency translation account, which is included in other comprehensive income loss. For the remaining international subsidiaries, non-monetary assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in income.

Exchange gains and losses arising from translating intercompany balances of a long-term investment nature are recorded in the foreign currency translation account. Transactional exchange gains and losses are included in income.

Revenue Recognition

Schering-Plough’s pharmaceutical products are sold to direct purchasers which include wholesalers, retailers and certain health maintenance organizations. Price discounts and rebates on such sales are paid to federal and state agencies, other indirect purchasers and other market participants such as managed care organizations that indemnify beneficiaries of health plans for their pharmaceutical costs and pharmacy benefit managers.

Schering-Plough recognizes revenue when title and risk of loss pass to the purchaser and when reliable estimates of the following can be determined:

i. commercial discount and rebate arrangements;

ii. rebate obligations under certain federal and state governmental programs; and

iii. sales returns in the normal course of business.

When recognizing revenue, Schering-Plough estimates and records the applicable commercial and governmental discounts and rebates as well as sales returns that have been or are expected to be granted or made for products sold during the period. These amounts are deducted from sales for that period. If reliable estimates of these items cannot be made, Schering-Plough defers the recognition of revenue. Estimates recorded in prior periods are re-evaluated as part of this process.

Earnings Per Common Share

Diluted earnings/(loss) per common share is computed by dividing net income/(loss) available to common shareholders by the sum of the weighted average number of common shares outstanding plus the dilutive effect of shares issuable through deferred stock units and the exercise of stock options and any dilutive effect of shares issuable upon conversion of Schering-Plough’s Mandatory Convertible Preferred Stock.

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Basic earnings/(loss) per common share is computed by dividing net income/(loss) available to common shareholders by the weighted average number of common shares outstanding.

Goodwill and Other Intangible Assets

SFAS 142, “Goodwill and Other Intangible Assets,” requires that intangible assets acquired either individually or with a group of other assets be initially recognized and measured based on fair value. An intangible with a finite life is amortized over its useful life, while an intangible with an indefinite life, including goodwill, is not amortized.

Schering-Plough evaluates goodwill for impairment using a fair-value-based test. If goodwill is determined to be impaired, it is written down to its estimated fair value. Schering-Plough’s goodwill is primarily related to the Animal Health business.

Other Assets

Included in other assets is capitalized software of $246 million and $219 million at December 31, 2006 and 2005, respectively. Amortization expense were $76 million, $71 million, and $67 million in 2006, 2005, and 2004, respectively.

Income Taxes

Deferred income taxes are recognized for the future tax effects of temporary differences between the financial and income tax reporting basis of Schering-Plough’s assets and liabilities based on enacted tax laws and rates.

Accounting for Share-Based Compensation

Prior to January 1, 2006, Schering-Plough accounted for its stock-based compensation arrangements using the intrinsic value method. No share-based employee compensation cost was reflected in net income/(loss), other than for Schering-Plough’s deferred stock units and performance plans, 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.

Effective January 1, 2006, Schering-Plough accounts for all share-based compensation in accordance with FASB Statement of Financial Accounting Standard No. 123 (Revised 2004) “Share-Based Payment” (SFAS 123R). See Note 4, “Share-Based Compensation,” for additional information.

Impact of Other Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which is effective for calendar year companies on January 1, 2008. The Statement defines fair value, establishes a framework for measuring fair value in accordance with Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. The Statement codifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Schering-Plough is currently assessing the potential impacts of implementing this standard.

In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) Topic 1N (SAB 108), “Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which is effective for calendar year companies as of December 31, 2006. SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the financial statements are materially misstated. Under this guidance, companies should take into account both the effect of a misstatement on the current year balance sheet as well as the impact upon the current year income statement in assessing the materiality of a current year misstatement. Once a current year misstatement has been quantified, the guidance in

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

SAB Topic 1M, “Financial Statements — Materiality,” (SAB 99) should be applied to determine whether the misstatement is material. The implementation of SAB 108 did not have any impact on Schering-Plough’s financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” Schering-Plough is required to apply the provisions of this interpretation beginning on January 1, 2007. The provisions of FIN 48 will be applied to all existing uncertain income tax positions on the effective date. Upon the implementation of FIN 48, the cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings. See Note 6, “Income Taxes,” for additional information regarding the expected impacts of the adoption of FIN 48 on Schering-Plough’s financial statements.

2.   SPECIAL CHARGES AND MANUFACTURING STREAMLINING

2006 Manufacturing Streamlining

During 2006, Schering-Plough implemented changes to its manufacturing operations in Puerto Rico and New Jersey that have streamlined its global supply chain and further enhanced Schering-Plough’s long-term competitiveness. These changes resulted in the phase-out and closure of Schering-Plough’s manufacturing operations in Manati, Puerto Rico, and additional workforce reductions in Las Piedras, Puerto Rico, and New Jersey. In total, these actions have resulted in the elimination of more than 1,000 positions.

Special Charges

Special charges in 2006 related to the changes in Schering-Plough’s manufacturing operations totaled $102 million. These charges consisted of approximately $47 million of severance and $55 million of fixed asset impairments.

Cost of Sales

Included in 2006 cost of sales was approximately $146 million consisting of $93 million of accelerated depreciation, $46 million of inventory write-offs, and $7 million of other charges related to the closure of Schering-Plough’s manufacturing facilities in Manati, Puerto Rico.

The following table summarizes activities reflected in the consolidated financial statements related to changes to Schering-Plough’s manufacturing operations that were completed in 2006:

	Charges
	Included in		Special		Total		Cash			Non-Cash			Accrued
	Cost of Sales		Charges		Charges		Payments			Charges			Liability
	(Dollars in millions)
Accrued liability at January 1, 2006													$	—
Severance	$	—	$	47	$	47	$	(35	)	$	—			12
Asset impairments		—		55		55		—			(55	)		—
Accelerated depreciation		93		—		93		—			(93	)		—
Inventory write-offs		46		—		46		—			(46	)		—
Other		7		—		7		(2	)		(5	)		—
Total	$	146	$	102	$	248	$	(37	)	$	(199	)		—
Accrued liability at December 31, 2006													$	12

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The accrued liability balance at December 31, 2006, is expected to be paid during the first quarter of 2007. Schering-Plough does not expect to incur any material additional charges related to the manufacturing streamlining actions announced in 2006.

2004 — 2005 Special Charges Activity

Special charges incurred in 2005 and 2004 are as follows:

	2005		2004
	(Dollars in millions)
Litigation charges	$	250	$	—
Employee termination costs		28		119
Asset impairment and related charges		16		34
	$	294	$	153

Litigation Charges

In 2005, litigation reserves were increased by $250 million resulting in a total reserve of approximately $500 million for the Massachusetts Investigation as well as the investigations and the state litigation disclosed under “AWP Litigation and Investigations” in Note 19, “Legal, Environmental and Regulatory Matters.” On August 29, 2006, Schering-Plough announced it had reached an agreement with the U.S. Attorney’s Office for the District of Massachusetts and the U.S. Department of Justice to settle the Massachusetts Investigation for an aggregate amount of $435 million plus interest. This settlement amount relates only to the Massachusetts Investigation. The AWP investigations and litigation are ongoing, and the remaining reserve is adequate to cover these matters. Subsequent to December 31, 2006, Schering-Plough made payments totaling $388 million related to the Massachusetts settlement including interest of $12 million. Schering-Plough expects to pay the remaining payments over the next several quarters. See Note 19, “Legal, Environmental and Regulatory Matters,” for additional information.

Employee Termination Costs

In August 2003, Schering-Plough 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, all of which retired by December 31, 2005. The total cost of this program was 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. Amounts recognized in 2005 and 2004 for this program were $7 million and $20 million, respectively.

Employee termination costs not associated with the VERP totaled $21 million and $99 million in 2005 and 2004, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	Employee
	Termination
	Costs
	(Dollars
	in millions)
Special charges liability balance at December 31, 2003	$	29
Special charges incurred during 2004	$	119
Credit to retirement benefit plan liability		(20	)
Disbursements		(110	)
Special charges liability balance at December 31, 2004	$	18
Special charges incurred during 2005	$	28
Credit to retirement benefit plan liability		(7	)
Disbursements		(35	)
Special charges liability balance at December 31, 2005	$	4
Disbursements		(4	)
Special charges liability balance at December 31, 2006	$	—

Asset Impairment and Other Charges

For the year ended December 31, 2005, Schering-Plough recognized asset impairment and other charges of $16 million related primarily to the consolidation of Schering-Plough’s U.S. biotechnology organizations.

For the year ended December 31, 2004, Schering-Plough recognized asset impairment charges of $27 million based on discounted cash flows, and other charges of $7 million related primarily to the shutdown of a small European research and development facility.

3.   EQUITY INCOME FROM CHOLESTEROL JOINT VENTURE

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

The cholesterol agreements provide for Schering-Plough 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 several international markets.

Schering-Plough utilizes the equity method of accounting in recording its share of activity from the Merck/Schering-Plough cholesterol joint venture. As such, Schering-Plough’s net sales do not include the sales of the joint

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

venture. The cholesterol joint venture agreements provide for the sharing of operating income generated by the joint venture based upon percentages that vary by product, sales level and country. In the U.S. market, 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 the joint venture income is increased by milestones recognized. Further, either Partner’s share of the joint venture’s income from operations is subject to a reduction if the Partner fails to perform a specified minimum number of physician details in a particular country. The Partners agree annually to the minimum number of physician details by country.

The Partners bear the costs of their own general sales forces and commercial overhead in marketing joint venture products around the world. In the U.S., Canada and Puerto Rico, the cholesterol agreements provide for a reimbursement to each Partner for physician details that are set on an annual basis, and in Italy, a contractual amount is included in the profit sharing calculation that is not reimbursed. In the U.S., Canada and Puerto Rico this amount is equal to Partner’s physician details multiplied by a contractual fixed fee. Schering-Plough reports these amounts as part of equity income from the cholesterol joint venture. These amounts do not represent a reimbursement of specific, incremental and identifiable costs for Schering-Plough’s detailing of the cholesterol product in these markets. In addition, these amounts are 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 year ended December 31, 2005, Schering-Plough recognized milestones of $20 million. These milestones related to certain European approvals of VYTORIN (ezetimibe/simvastatin) in 2005. During 2004, Schering-Plough recognized a milestone of $7 million related to the approval of ezetimibe/simvastatin in Mexico during 2004.

Under certain other conditions, as specified in the joint venture agreements with Merck, Schering-Plough 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 following information provides a summary of the components of Schering-Plough’s equity income from the cholesterol joint venture for the year ended December 31:

	2006			2005			2004
	(Dollars in millions)
Schering-Plough’s share of net income (including milestones of $20 and $7 in 2005 and 2004, respectively)	$	1,273		$	689		$	244
Contractual amounts for physician details		204			196			121
Elimination of intercompany profit and other, net		(18	)		(12	)		(18	)
Total equity income from cholesterol joint venture	$	1,459		$	873		$	347

Equity income from the joint venture excludes any profit arising from transactions between Schering-Plough 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 Schering-Plough or Merck.

Due to the virtual nature of the cholesterol joint venture, Schering-Plough 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 Schering-Plough. These costs are reported on their respective line items in the Statements of Consolidated Operations and are not separately identifiable. The cholesterol agreements do not provide for any

65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

jointly owned facilities and, as such, products resulting from the joint venture are manufactured in facilities owned by either Schering-Plough or Merck.

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

4.   SHARE-BASED COMPENSATION

Prior to January 1, 2006, Schering-Plough accounted for its stock compensation arrangements using the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and the related Interpretations. Prior to 2006, there was no stock-based employee compensation cost reflected in net income for stock options, because the Schering-Plough plans under which the stock options were granted required that the exercise price equal the market value of the underlying common stock on the grant date.

Schering-Plough adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R), effective January 1, 2006. SFAS 123R requires companies to recognize compensation expense in an amount equal to the fair value of all share-based payments granted to employees. Schering-Plough elected the modified prospective transition method, and therefore, adjustments to prior periods were not required as a result of adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted after the date of adoption and to any unrecognized expense of awards unvested at the date of adoption based on the grant date fair value. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits that had been reflected as operating cash flows be reflected as financing cash flows.

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123R—3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” Schering-Plough has elected to adopt the transition method provided in this FASB Staff Position for purposes of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R.

In the second quarter of 2006, the 2006 Stock Incentive Plan (the 2006 Plan) was approved by Schering-Plough’s shareholders. Under the terms of the 2006 Plan, 92 million of Schering-Plough’s authorized common shares may be granted as stock options or awarded as deferred stock units to officers and certain employees of Schering-Plough through December 2011. As of December 31, 2006, 76 million options and deferred stock units remain available for future year grants under the 2006 Plan.

Schering-Plough intends to utilize unissued authorized shares to satisfy stock option exercises and for the issuance of deferred stock units.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Implementation of SFAS 123R

In the first quarter of 2006, Schering-Plough recognized a benefit to income of $22 million for the cumulative effect of a change in accounting principle related to two long-term compensation plans required to be accounted for as liability plans under SFAS 123R.

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

Stock Options

Stock options are granted to employees at exercise prices equal to the fair market value of Schering-Plough’s stock at the dates of grant. Stock options under the 2006 Plan generally vest over three years and have a term of seven years. Certain options granted under previous plans vest over longer periods ranging from three to nine years and have a term of 10 years. Compensation costs for all stock options are recognized over the requisite service period for each separately vesting portion of the stock option award. Expense is recognized, net of estimated forfeitures, over the vesting period of the options using an accelerated method. Expense recognized in 2006 was approximately $56 million.

The weighted-average assumptions used in the Black-Scholes option-pricing model in 2006, 2005 and 2004 were as follows:

	2006			2005			2004
Dividend yield		1.1	%		1.7	%		1.7	%
Volatility		25.7	%		31.6	%		32.9	%
Risk-free interest rate		5.0	%		4.1	%		3.9	%
Expected term of options (in years)		4.5			7.0			7.0

Dividend yields are based on historical dividend yields. Expected volatilities are based on historical volatilities of Schering-Plough’s common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options. The expected term of options represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and Schering-Plough’s historical exercise patterns.

The amount of cash received from the exercise of stock options in 2006, 2005 and 2004 was $87 million, $60 million and $27 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock-based compensation prior to January 1, 2006, was determined using the intrinsic value method. The following table provides supplemental information for 2005 and 2004 as if stock-based compensation had been computed under SFAS 123:

	2005			2004
	(Dollars in millions except per share figures)
Net income available to common shareholders, as reported	$	183		$	(981	)
Add back: Expense included in reported net income for deferred stock units		89			59
Deduct: Pro forma expense as if both stock options and deferred stock units were charged against net income available to common shareholders in accordance with SFAS 123		(177	)		(160	)
Pro forma net income available to common shareholders using the fair value method	$	95		$	(1,082	)
Diluted earnings per common share:
Diluted earnings per common share, as reported	$	0.12		$	(0.67	)
Pro forma diluted earnings per common share using the fair value method		0.06			(0.74	)
Basic earnings per common share:
Basic earnings per common share, as reported	$	0.12		$	(0.67	)
Pro forma basic earnings per common share using the fair value method		0.06			(0.74	)

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

	Outstanding						Exercisable
			Weighted-		Weighted-				Weighted-
	Number		Average		Average		Number		Average
	of		Remaining		Exercise		of		Exercise
Exercise Price Range	Options		Term in Years		Price		Options		Price
	(In thousands)						(In thousands)
Under $20		44,413		6.4	$	18.22		26,489	$	18.01
$20 to $30		9,845		8.2		20.84		3,438		21.00
$30 to $40		15,155		4.2		36.58		15,155		36.58
Over $40		14,676		3.3		46.36		14,556		46.35
		84,089						59,638

The weighted-average fair value of stock options granted in 2006, 2005 and 2004 was $5.22, $7.04 and $6.15, respectively. The intrinsic value of stock options exercised was $21 million, $24 million and $14 million in 2006, 2005 and 2004, respectively. The total fair value of options vested in 2006, 2005 and 2004 was $73 million, $69 million and $77 million, respectively.

As of December 31, 2006, the total remaining unrecognized compensation cost related to non-vested stock options amounted to $45 million, which will be amortized over the weighted-average remaining requisite service period of 2.0 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes stock option activity as of December 31, 2006, and changes during the year then ended under the current and prior plans:

				Weighted-
	Number			Average
	of			Exercise
	Options			Price
	(In thousands)
Outstanding at January 1		82,484		$	27.00
Granted		9,708			19.25
Exercised		(5,172	)		16.77
Canceled or expired		(2,931	)		26.64
Outstanding at December 31		84,089			26.75
Exercisable at December 31		59,638		$	29.82

The aggregate intrinsic value of stock options outstanding at December 31, 2006, was $267 million. The aggregate intrinsic value of stock options currently exercisable at December 31, 2006, was $158 million. Intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted price of Schering-Plough’s common stock as of the reporting date.

The following table summarizes nonvested stock option activity as of December 31, 2006, and changes during the year then ended under the current and prior plans:

				Weighted-
	Number			Average
	of			Fair
	Options			Value
	(In thousands)
Nonvested at January 1		28,022		$	6.41
Granted		9,708			5.22
Vested		(11,505	)		6.33
Forfeited		(1,774	)		6.03
Nonvested at December 31		24,451		$	6.00

Deferred Stock Units

The fair value of deferred stock units is determined based on the number of shares granted and the quoted price of Schering-Plough’s common stock at the date of grant. Deferred stock units generally vest at the end of three years provided the employee remains in the service of Schering-Plough. Expense is recognized on a straight-line basis over the vesting period. Deferred stock units are payable in an equivalent number of common shares. Expense recognized in 2006, 2005 and 2004 was $112 million, $89 million and $59 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	Outstanding
			Weighted-
	Number of		Average		Weighted-
	Deferred Stock		Remaining		Average
Deferred Stock Unit Price Range	Units		Term in Years		Fair Value
	(In thousands)
Under $18		755		0.8	$	17.39
$18 to $20		6,627		2.3		19.21
$20 to $22		6,414		1.4		20.72
Over $22		3		0.9		22.61
		13,799

The weighted-average fair value of deferred stock units granted was $19.27, $20.65 and $18.11 for 2006, 2005 and 2004, respectively. The total fair value of deferred stock units vested during 2006, 2005 and 2004 was $68 million, $39 million and $51 million, respectively.

As of December 31, 2006, the total remaining unrecognized compensation cost related to deferred stock units amounted to $173 million, which will be amortized over the weighted-average remaining requisite service period of 1.9 years.

The following table summarizes deferred stock unit activity as of December 31, 2006, and changes during the year then ended under the current and prior plans:

	Number
	of Nonvested			Weighted-
	Deferred Stock			Average
	Units			Fair Value
	(In thousands)
Nonvested at January 1, 2006		11,416		$	20.12
Granted		6,678			19.27
Vested		(3,429	)		19.72
Forfeited		(866	)		20.04
Nonvested at December 31, 2006		13,799		$	19.81

Incentive Plans

Schering-Plough has two compensation plans that are classified as liability plans under SFAS 123R, as the ultimate cash payout of these plans will be based on Schering-Plough’s stock performance as compared to the stock performance of a peer group. Upon adoption of SFAS 123R on January 1, 2006, Schering-Plough recognized a cumulative income effect of a change in accounting principle of $22 million in order to recognize the liability plans at fair value. Income or expense amounts related to these liability plans are based on the change in fair value at each reporting date. Fair value for the plans were estimated using a lattice valuation model using expected volatility assumptions and other assumptions appropriate for determining fair value. The amount recognized in 2006, exclusive of the impact of the cumulative effect of a change in accounting principle, in the Statements of Consolidated Operations related to these liability awards was an expense of $24 million.

As of December 31, 2006, the total remaining unrecognized compensation cost related to the incentive plans amounted to $28 million, which will be amortized over the weighted-average remaining requisite service period of 1.8 years. This amount will vary each reporting period based on changes in fair value.

70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.   OTHER (INCOME)/EXPENSE, NET

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

	2006			2005			2004
	(Dollars in millions)
Interest cost incurred	$	184		$	177		$	188
Less: amount capitalized on construction		(12	)		(14	)		(20	)
Interest expense		172			163			168
Interest income		(297	)		(176	)		(80	)
Foreign exchange losses		2			8			5
Other, net		(12	)		10			53
Total other (income)/expense, net	$	(135	)	$	5		$	146

During 2006, Schering-Plough participated in healthcare refinancing programs adopted by a local government fiscal authorities in a major European market. At December 31, 2006, Schering-Plough has transferred $38 million of its trade accounts receivables owned by a foreign subsidiary to a third-party financial institution without recourse. The transfer of trade accounts receivable qualified as sales of accounts receivable under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” For the year ended December 31, 2006, the loss on the transfer of these trade accounts receivable was immaterial and included in interest expense. Cash flows from these transactions are included in the change in accounts receivable in operating activities.

6.   INCOME TAXES

The components of consolidated income/(loss) before income taxes for the years ended December 31 are as follows:

	2006			2005			2004
	(Dollars in millions)
United States	$	(593	)	$	(1,436	)	$	(1,548	)
Foreign		2,098			1,933			1,380
Total income/(loss) before income taxes and including cumulative effect of a change in accounting principle	$	1,505		$	497		$	(168	)

Income from the cholesterol joint venture is included in the above table based on the jurisdiction in which the income is earned.

71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of income tax expense for the years ended December 31 are as follows:

	Federal			State			Foreign			Total
	(Dollars in millions)
2006
Current	$	42		$	25		$	251		$	318
Deferred		(3	)		—			47			44
Total	$	39		$	25		$	298		$	362
2005
Current	$	(46	)	$	23		$	227		$	204
Deferred		—			(9	)		33			24
Total	$	(46	)	$	14		$	260		$	228
2004
Current	$	365		$	24		$	182		$	571
Deferred		240			(14	)		(18	)		208
Total	$	605		$	10		$	164		$	779

During 2005, Schering-Plough repatriated approximately $9.4 billion in accordance with its planned repatriation under the provisions of the AJCA, which was the maximum amount of foreign earnings that qualified for an effectively reduced tax rate of 5.25 percent. In the fourth quarter of 2004, Schering-Plough accrued a U.S. federal tax liability of approximately $417 million and a state income tax liability of approximately $6 million for the intended repatriation. Schering-Plough will continue to use the repatriated funds for qualified spending.

Schering-Plough’s tax provision for the year ended December 31, 2005, includes a U.S. federal income tax benefit of approximately $42 million as a result of an IRS Notice issued in August 2005. The provisions of this Notice resulted in a reduction of the previously accrued tax liability attributable to the American Jobs Creation Act of 2004 (AJCA) repatriation and also reduced the 2005 U.S. Net Operating Loss (NOL) carried forward to subsequent years.

Prior to the AJCA, Schering-Plough’s intent was to indefinitely reinvest all unremitted earnings of its international subsidiaries, and except for the amounts repatriated under the AJCA, Schering-Plough maintains its intent to indefinitely reinvest earnings of its international subsidiaries. Schering-Plough has not provided deferred taxes on approximately $4.2 billion of undistributed foreign earnings as of December 31, 2006. Determining the tax liability that would arise if these earnings were remitted is not practicable. That liability would depend on a number of factors, including the amount of the earnings distributed and whether the U.S. operations were generating taxable profits or losses.

During 2004, due to changes in tax planning strategies triggered by Schering-Plough’s intent to repatriate earnings under the AJCA, management was no longer able to conclude that it was more likely than not that it would realize the benefit of its net U.S. deferred tax assets, including any benefit related to its U.S. operating losses. Therefore, in general, Schering-Plough established a valuation allowance on its net U.S. deferred tax asset at December 31, 2004, and continues to maintain a valuation allowance for its net U.S. deferred tax asset at December 31, 2006.

Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of Schering-Plough’s assets and liabilities. Schering-Plough’s deferred tax assets result principally from the recording of certain items that currently are not deductible for tax purposes and net operating loss and other tax credit carryforwards. Schering-Plough’s deferred tax liabilities principally result from the use of accelerated depreciation for tax purposes.

72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of Schering-Plough’s deferred tax assets and liabilities at December 31 are as follows:

	2006			2005
	(Dollars in millions)
Deferred tax assets:
Net operating loss (NOL) carryforwards	$	374		$	542
Other tax credit carryforwards		341			323
Post-retirement and other employee benefits		553			275
Inventory related		158			170
Sales return reserves		142			149
Litigation accruals		156			126
Other		239			223
Total deferred tax assets:	$	1,963		$	1,808
Deferred tax liabilities:
Depreciation	$	(288	)	$	(310	)
Inventory valuation		(33	)		(26	)
Other		(61	)		(89	)
Total deferred tax liabilities:	$	(382	)	$	(425	)
Deferred tax valuation allowance	$	(1,358	)	$	(1,143	)
Net deferred tax assets	$	223		$	240

The change in the valuation allowance from 2005 to 2006 is due to the decrease in the deferred tax asset recorded for the U.S. NOL carryforward offset by an increase to the deferred tax assets recorded for expenses currently non-deductible for tax purposes. The decrease to the deferred asset recorded for the U.S. NOL carryforward is primarily attributable to a reduction for the estimated impact of IRS examination of Schering-Plough’s open tax years, which had no impact on the statement of operations. This balance may be subsequently increased or decreased following resolution of these examinations.

The deferred tax assets for net operating losses and other tax credit carryforwards principally relate to U.S. NOLs, Research and Development (R&D) tax credits, U.S. foreign tax credits and Federal Alternative Minimum Tax (AMT) credit carryforwards. At December 31, 2006, Schering-Plough had approximately $1.54 billion of U.S. NOLs for income tax purposes that are available to offset future U.S. taxable income. U.S. NOLs are U.S. operating losses adjusted for the differences between financial and tax reporting. These U.S. NOLs will expire in varying amounts between 2024 and 2026, if unused. At December 31, 2006, Schering-Plough had approximately $105 million of R&D tax credits carryforwards that will expire between 2022 and 2026; $188 million of foreign tax credit carryforwards that will expire between 2011 and 2016; and $44 million of AMT tax credit carryforwards that have an indefinite life. The U.S. NOL carryforward could be materially reduced after examination of Schering-Plough’s income tax returns by the IRS. Schering-Plough has reduced the deferred tax assets and related valuation allowance recorded for its U.S. NOLs and tax credit carryforwards to reflect the estimated resolution of these examinations.

73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The difference between income taxes based on the U.S. statutory tax rate and Schering-Plough’s income tax expense for the years ending December 31 was due to the following:

	2006			2005			2004
	(Dollars in millions)
Income tax expense/(benefit) at U.S. statutory rate	$	527		$	174		$	(59	)
Increase/(decrease) in taxes resulting from:
Lower rates in other jurisdictions, net		(436	)		(417	)		(319	)
Federal (benefit) tax on repatriated foreign earnings under the Act, net of credits		—			(42	)		417
U.S. operating losses for which no tax benefit was recorded		215			437			384
Permanent differences		(7	)		66			98
Provision for valuation allowance of net U.S. deferred tax assets		—			—			240
Provision for other tax matters		42			—			—
State income tax		25			14			10
All other, net		(4	)		(4	)		8
Income tax at effective tax rate	$	362		$	228		$	779

The lower tax rates in other jurisdictions in 2006, 2005, and 2004, net, are primarily attributable to Schering-Plough’s manufacturing subsidiaries in Puerto Rico, Singapore and Ireland, which operate under various incentive tax grants that begin to expire in 2011. Overall income tax expense primarily relates to foreign taxes and does not include any benefit related to U.S. operating losses.

Net consolidated income tax payments/(refunds), exclusive of payments related to the tax examinations and litigation discussed below, during 2006, 2005, and 2004 were $234 million, $592 million, and $(144) million, respectively.

In January 2006, the Internal Revenue Service (IRS) completed its examination of Schering-Plough’s 1993-1996 federal income tax returns. Schering-Plough had made cash payment in the third quarter of 2005 in the form of a tax deposit of approximately $239 million in anticipation of the settlement of the 1993-1996 tax examination and to prevent additional IRS interest charges. This payment fully satisfied the liability associated with the tax examination and was consistent with the previously recorded reserves. The IRS is now in the process of completing its examination of Schering-Plough’s 1997-2002 federal income tax returns. Schering-Plough anticipates that the examination will be completed before the end of 2007. The finalization of this examination may result in adjustments to Schering-Plough’s accrual for tax contingencies and U.S. NOLs as reported on Schering-Plough’s income tax returns. Schering-Plough’s 2003-2005 U.S. federal income tax returns remain subject to examination.

Schering-Plough believes that its accrual for tax contingencies is adequate for all open years, based on experience, interpretations of tax law, and judgments about potential actions by taxing authorities. Schering-Plough accrues liabilities for identified tax contingencies that result from tax positions taken that could be challenged by tax authorities. Schering-Plough’s tax reserves reflect the probable outcome of identified tax contingencies; however, it is reasonably possible that the ultimate resolution of any tax matters may be materially greater or less than the amount accrued. Schering-Plough will adopt FIN 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. See Impact of Recently Issued Accounting Standards in Note 1, “Summary of Significant Accounting Policies.” Although Schering-Plough is still evaluating the potential impact of FIN 48, it expects a decrease to opening retained earnings as of January 1, 2007, from $225 million to $300 million with a corresponding increase to the appropriate tax liability accounts upon the adoption of this Interpretation.

Schering-Plough’s potential tax exposures result from the varying application of statutes, regulations and interpretations and include exposures on intercompany terms of cross border arrangements and utilization of cash held by foreign subsidiaries (investment in U.S. property). Although Schering-Plough’s cross border arrangements

74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

between affiliates are based upon internationally accepted standards, tax authorities in various jurisdictions may disagree with and subsequently challenge the amount of profits taxed in their country.

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

7.   RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS

Plan Descriptions

Schering-Plough has defined benefit pension plans covering eligible employees in the U.S. and certain foreign countries. For the U.S. plan, benefits for normal retirement are primarily based upon the participant’s average final earnings, years of service and Social Security income, and are modified for early retirement. Death and disability benefits are also available under the plan. Benefits become fully vested after five years of service. The plan provides for the continued accrual of credited service for employees who opt to postpone retirement and remain employed with Schering-Plough after reaching the normal retirement age. Non-U.S. pension plans offer benefits that are competitive with local market conditions.

In addition, Schering-Plough provides post-retirement medical and life insurance benefits primarily to its eligible U.S. retirees and their dependents through its post-retirement benefit plans.

Effective December 31, 2006, Schering-Plough accounts for its retirement plans and other post-retirement benefit plans (the plans) in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” an amendment of SFAS No. 87, 88, 106, and 132R. SFAS No. 158 requires the recognition of an asset for the over-funded plans and a liability for the under-funded plans in Schering-Plough’s consolidated balance sheets. This Statement also requires the recognition of changes in the funded status of the plans in the year in which the changes occur. As provided by SFAS No. 158, the requirement to measure all plans’ assets and liabilities as of fiscal year-end has been extended to be effective for the years ending after December 15, 2008. Currently, a majority of Schering-Plough’s retirement and other post-retirement benefit plans’ assets and liabilities are measured at December 31.

75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The incremental effects resulting from the implementation of SFAS No. 158 on the individual line items of Schering-Plough’s Consolidated Balance Sheets at December 31, 2006, are as follows:

	Balance Sheets									Balance Sheets
	Amounts Prior to									Amounts After
	SFAS No. 87/88/158			SFAS No. 87/88			SFAS No. 158			SFAS No. 87/88/158
	Adjustments			Adjustments			Adjustments			Adjustments
ASSETS
Other intangible assets		347			(2	)		(59	)		286
Other long-term assets (including deferred tax asset)		780			15			(4	)		791
LIABILITIES
Accrued compensation		779			—			15			794
Other long-term liabilities		1,076			(54	)		443			1,465
EQUITY
Accumulated other comprehensive loss, net of tax effects		(418	)		67			(521	)		(872	)

At December 31, 2006, included in Schering-Plough’s accumulated other comprehensive loss was $841 million ($692 million, net of tax effects) of costs that were not recognized as components of net periodic benefit costs pursuant to SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The components of these costs at December 31, 2006, were as follows:

			Other
			Post-Retirement
	Retirement Plans		Benefits
Actuarial loss	$	604	$	216
Prior service cost/(credit)		64		(43	)
Total	$	668	$	173

The actuarial losses primarily represent the cumulative difference between the actuarial assumptions and the actual returns from plan assets, changes in discount rates and plans’ experience. Total loss amounts, net in excess of certain thresholds, are amortized into net pension and other post-retirement benefit cost over the average remaining service life of employees. The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic costs during 2007 are as follows:

			Other
			Post-Retirement
	Retirement Plans		Benefits
Actuarial loss recognition	$	10	$	10
Prior service cost/(credit) recognition		1		(5	)

76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Actuarial Assumptions

The consolidated weighted average assumptions used to determine benefit obligations at December 31 were:

					Other Post-
	Retirement				Retirement
	Plans				Benefits
	2006		2005		2006			2005
Discount rate		5.5%		5.3%		6.0	%		5.7	%
Rate of increase in future compensation		3.8%		3.8%		N/A			N/A

The assumptions above were used to develop the benefit obligations at year-end.

The consolidated weighted average assumptions used to determine net benefit costs for the years ended December 31 were:

							Other
	Retirement Plans						Post-Retirement Benefits
	2006		2005		2004		2006			2005			2004
Discount rate		5.3%		5.6%		5.7%		5.7	%		6.0	%		6.0	%
Long-term expected rate of return on plan assets		7.7%		7.5%		7.6%		7.5	%		7.5	%		7.5	%
Rate of increase in future compensation		3.8%		3.9%		3.9%		N/A			N/A			N/A

The assumptions used to determine net periodic benefit costs for each year are established at the end of each previous year, while the assumptions used to determine benefit obligations are established at each year-end. The net periodic benefit costs and the actuarial present value of the benefit obligations are based on actuarial assumptions that are determined annually based on an evaluation of long-term trends, as well as market conditions, that may have an impact on the cost of providing retirement benefits.

The long-term expected rates of return on plan assets are derived from return assumptions determined for each of the major asset classes: equities, fixed income and real estate, on a proportional basis. The return expectations for each of these asset classes are based largely on assumptions about economic growth and inflation, which are supported by long-term historical data.

The weighted average assumed healthcare cost trend rate used for post-retirement measurement purposes is 10 percent for 2007, trending down to 4.8 percent by 2015. A one percent increase in the assumed healthcare cost trend rate would increase combined post-retirement service and interest cost by $9 million and the post-retirement benefit obligation by $83 million. A one percent decrease in the assumed health care cost trend rate would decrease combined post-retirement service and interest cost by $7 million and the post-retirement benefit obligation by $67 million.

Average retirement age is assumed based on the annual rates of retirement experienced by Schering-Plough.

Components of Net Periodic Benefit Costs

The net pension and other post-retirement benefit costs totaled $204 million, $165 million, and $155 million in 2006, 2005, and 2004, respectively.

77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

										Other
	Retirement Plans									Post-Retirement Benefits
	2006			2005			2004			2006			2005			2004
	(Dollars in millions)
Service cost	$	119		$	102		$	91		$	18		$	15		$	13
Interest cost		113			106			102			26			24			22
Expected return on plan assets		(113	)		(112	)		(115	)		(13	)		(15	)		(16	)
Amortization, net		44			31			27			6			2			2
Termination benefits		—			7			18			—			1			2
Settlement		4			4			9			—			—			—
Net pension and other post-retirement benefit costs	$	167		$	138		$	132		$	37		$	27		$	23

In accordance with FASB Staff Position 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Act), Schering-Plough began accounting for the effect of the federal subsidy under the Medicare Act in the third quarter of 2004. As a result, Schering-Plough’s net other post-retirement benefits expense was reduced by $7 million during 2004. This reduction in the other post-retirement benefits expense during 2004 consists of reductions in service cost, interest cost and net amortization of $2 million, $3 million and $2 million, respectively.

Benefit Obligations

The components of the changes in the benefit obligations were as follows:

							Other Post-Retirement
	Retirement Plans						Benefits
	2006			2005			2006			2005
	(Dollars in millions)
Benefit obligations at beginning of year	$	2,155		$	1,995		$	451		$	409
Service cost		119			102			18			15
Interest cost		113			106			26			24
Medicare drug subsidy received		—			—			2			—
Participant contributions		6			4			3			1
Effects of exchange rate changes		53			(59	)		—			—
Benefits paid		(110	)		(91	)		(25	)		(23	)
Acquisitions/plan transfers		14			5			1			6
Actuarial losses/(gains) (including assumption change)		33			91			33			38
Plan amendments		4			—			—			(19	)
Termination benefits		—			2			—			—
Curtailment		(6	)		—			—			—
Settlement		(12	)		—			—			—
Benefit obligations at end of year	$	2,369		$	2,155		$	509		$	451
Benefit obligations of over-funded plans	$	99		$	84		$	—		$	—
Benefit obligations of under-funded plans		2,270			2,071			509			451

78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Funded Status and Balance Sheets Presentation

The components of the changes in plan assets were as follows:

							Other Post-
							Retirement
	Retirement Plans						Benefits
	2006			2005			2006			2005
	(Dollars in millions)
Fair value of plan assets, primarily stocks and bonds, at beginning of year	$	1,441		$	1,429		$	185		$	197
Actual gain (loss) on plan assets		186			122			24			9
Employer contributions		115			23			2			1
Participant contributions		6			4			3			1
Acquisitions/plan transfers		10			1			—			—
Effects of exchange rate changes		37			(47	)		—			—
Settlements		(12	)		—			—			—
Benefits paid		(110	)		(91	)		(25	)		(23	)
Fair value of plan assets at end of year	$	1,673		$	1,441		$	189		$	185
Plan assets of over-funded plans	$	120		$	96		$	—		$	—
Plan assets of under-funded plans		1,553			1,345			189			185

In addition to the plan assets indicated above, at December 31, 2006 and 2005, securities investments of $71 million and $70 million, respectively, were held in a non-qualified trust designated to provide pension benefits for certain under-funded plans.

In accordance with SFAS No. 158, at December 31, 2006, the net asset of the over-funded plans was $21 million, all of which related to Schering-Plough’s retirement plans, and is included in other long-term assets. The net liability from the under-funded plans at December 31, 2006, totaled $1,037 million as follows:

			Other
	Retirement		Post-Retirement
	Plan		Benefits
	(Dollars in millions)
Accrued compensation (current)	$	15	$	—
Other long-term liabilities		702		320
Total	$	717	$	320

Prior to December 31, 2006, Schering-Plough accounted for its retirement plans and other post-retirement benefit plans in accordance with SFAS No. 87, 88, 106 and 132R. The following table is a reconciliation of the funded status of the plans to the net asset/(liability) at December 31, 2005:

				Other
	Retirement			Post-Retirement
	Plan			Benefits
	(Dollars in millions)
Benefit obligations in excess of plan assets	$	(714	)	$	(266	)
Post measurement date contributions		4			—
Unrecognized prior service costs		69			(48	)
Unrecognized net actuarial loss		669			203
Net asset/(liability) at end of year	$	28		$	(111	)

79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At December 31, 2005, the components of the net asset/(liability) were recorded in the consolidated balance sheets as follows:

				Other
	Retirement			Post-Retirement
	Plans			Benefits
	(Dollars in millions)
Prepaid benefit cost	$	51		$	—
Accrued benefit cost		(439	)		(111	)
Intangible assets		61			—
Accumulated other comprehensive loss		355			—
Net asset/(liability) at end of year	$	28		$	(111	)

At December 31, 2005, Schering-Plough’s additional minimum pension liability was $416 million primarily related to domestic retirement plans. This resulted in an adjustment to accumulated other comprehensive loss, net of tax, of $56 million in 2005.

At December 31, 2006 and 2005, the accumulated benefit obligations (ABO) for the retirement plans were $2,042 million and $1,844 million, respectively. The aggregated accumulated benefit obligations and fair values of plan assets for retirement plans with accumulated benefit obligations in excess of plan assets were $1,780 million and $1,357 million, respectively, at December 31, 2006, and $1,671 million and $1,232 million, respectively, at December 31, 2005.

Plan Assets at Fair Value

The asset allocation for the consolidated retirement plans at December 31, 2006 and 2005, and the target allocation for 2007 are as follows:

				Percentage of
	Target			Plan Assets at
	Allocation			December 31,
Asset Category	2007			2006			2005
Equity securities		59	%		62	%		62	%
Debt securities		36			31			32
Real estate		5			7			6
Total		100	%		100	%		100	%

The asset allocation for the post-retirement benefit trusts at December 31, 2006 and 2005, and the target allocation for 2007 are as follows:

				Percentage of
	Target			Plan Assets at
	Allocation			December 31,
Asset Category	2007			2006			2005
Equity securities		70	%		76	%		72	%
Debt securities		30			24			28
Total		100	%		100	%		100	%

Schering-Plough’s investments related to these plans are broadly diversified, consisting primarily of equities and fixed income securities, with an objective of generating long-term investment returns that are consistent with an acceptable level of overall portfolio market value risk. The assets are periodically rebalanced back to the target allocations.

80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

			Other
	Retirement		Post-Retirement
	Plans		Benefits(1)
	(Dollars in millions)
2007	$	98	$	25
2008		92		27
2009		95		28
2010		98		30
2011		121		32
Years 2012-2016		652		184

Schering-Plough’s practice is to fund qualified pension plans at least at sufficient amounts to meet the minimum requirements set forth in applicable laws. Schering-Plough expects to contribute approximately $180 million to its retirement plans during 2007, including approximately $125 million to its U.S. Retirement Plan.

Defined Contribution Plans

Schering-Plough makes contributions to defined contribution savings plans equal to three percent of eligible employee earnings, plus a matching of up to two percent of eligible employee earnings based on employee contributions to this plan. The total Schering-Plough contributions to this plan in 2006 and 2005 were $70 million and $58 million, respectively.

8.   EARNINGS PER COMMON SHARE

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

	2006		2005		2004
	(Dollars and shares in millions)
EPS Numerator:
Net income/(loss) before cumulative effect of a change in accounting principle and preferred stock dividends	$	1,121	$	269	$	(947	)
Add: Cumulative effect of a change in accounting principle, net of tax		22		—		—
Less: Preferred stock dividends		86		86		34
Net income/(loss) available to common shareholders	$	1,057	$	183	$	(981	)
EPS Denominator:
Average shares outstanding for basic EPS		1,482		1,476		1,472
Dilutive effect of options and deferred stock units		9		8		—
Average shares outstanding for diluted EPS		1,491		1,484		1,472

The equivalent common shares issuable under Schering-Plough’s stock incentive plans that were excluded from the computation of diluted EPS because their effect would have been antidilutive were 48 million, 39 million, and 89 million, respectively, for the years ended December 31, 2006, 2005, and 2004, respectively. In addition, for the years ended December 31, 2006, 2005 and 2004, 65 million, 69 million, and 27 million common shares, respectively, obtainable upon conversion of the Mandatory Convertible Preferred Stock were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.   ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive income/(loss) at December 31, 2006 and 2005 were as follows:

	2006			2005
	(Dollars in millions)
Foreign currency translation adjustment	$	(197	)	$	(291	)
Minimum pension liability, net of tax effects, in accordance with SFAS No. 87/88 provisions					(238	)
Pension and other post-retirement liabilities, net of tax effects, in accordance with SFAS No. 158 provisions(1)		(692	)
Unrealized gain on investments available for sale, net of tax		17			13
Total	$	(872	)	$	(516	)

(1) See Note 7, “Retirement Plans and Other Postretirement Benefits,” for additional information regarding the impacts on Schering-Plough’s financial statements upon the adoption of SFAS No. 158.

Effective December 31, 2006, Schering-Plough accounts for its retirement and other post-retirement benefit plans in accordance with SFAS No. 158. The implementation of SFAS No. 158 resulted in an increase of $521 million, net of tax effects, to accumulated other comprehensive loss that reduced shareholders’ equity.

Gross unrealized pre-tax gains on investments in 2006 and 2005 were $4 million and $0 million, respectively; unrealized losses were immaterial.

10.   INVENTORIES

Inventories consisted of the following at December 31:

	2006		2005
	(Dollars in millions)
Finished products	$	728	$	665
Goods in process		771		614
Raw materials and supplies		248		326
Total inventories and inventory classified in other non-current assets	$	1,747	$	1,605

Included in 2006 non-current assets is $71 million of inventory not expected to be sold within one year.

Inventories valued on a last-in, first-out (LIFO) basis comprised approximately 20 percent and 19 percent of total inventories at December 31, 2006 and 2005, respectively. The estimated replacement cost of total inventories at December 31, 2006 and 2005 was $1,795 million and $1,652 million, respectively. The cost of all other inventories is determined by the first-in, first-out method (FIFO).

82

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11.   OTHER INTANGIBLE ASSETS

The components of other intangible assets, net, are as follows at December 31:

	2006						2005
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
	(Dollars in millions)
Patents and licenses	$	599	$	368	$	231	$	579	$	329	$	250
Trademarks and other		114		59		55		166		51		115
Total other intangible assets	$	713	$	427	$	286	$	745	$	380	$	365

Included in other are pension assets of $61 million at December 31, 2005. Effective on December 31, 2006, these pension assets were eliminated as a result of Schering-Plough’s adoption of SFAS 158 (see Note 7, “Retirement Plans and Other Postretirement Benefit Plans,” for additional information).

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

During the fourth quarter of 2006, Schering-Plough received the rights to trademarks and tradenames from an entity in which it had a minority interest. These trademarks and tradenames had a fair value of approximately $18 million. These trademarks and tradenames were included in Schering-Plough’s other intangible assets at December 31, 2006, and are being amortized on straight-line method and over 10 years.

Included in intangible assets is approximately $120 million related to the license and co-promotion agreements with Bayer. These amounts are being amortized over the effective useful lives of the agreements ranging from seven to 14 years.

See Note 12, “Product Licenses and Acquisitions,” for additional information on the above transactions.

Amortization expense related to other intangible assets in 2006, 2005, and 2004 was $47 million, $49 million, and $42 million, respectively, and is included primarily in selling, general and administrative expenses in the statement of consolidated operations. All intangible assets are reviewed to determine their recoverability by comparing their carrying values to their expected undiscounted future cash flows when events or circumstances warrant such a review. Annual amortization expenses related to these intangible assets for the years 2007 to 2012 is expected to be approximately $45 million.

12.   PRODUCT LICENSES & ACQUISITIONS

In August 2005, Schering-Plough announced that it exercised its right to develop and commercialize with Centocor, Inc. (Centocor), golimumab, a new anti-TNF-alpha monoclonal antibody being developed as a therapy for the treatment of rheumatoid arthritis and other immune-mediated inflammatory diseases. Pursuant to the exercise, Schering-Plough received exclusive worldwide marketing rights to golimumab, excluding the U.S., Japan, China (including Hong Kong), Taiwan, and Indonesia. In exchange for its rights under this agreement, Schering-Plough made an upfront payment in the amount of $124 million to Centocor before a tax benefit of $6 million. This payment was included in Research and Development expenses for the year ended December 31, 2005. Schering-Plough is sharing development costs with Centocor. Schering-Plough and Centocor have been collaborating in resolving the difference in the parties’ opinions as to the expiration date of Schering-Plough’s rights to golimumab. In August 2006, Schering-Plough received a determination through arbitration that its rights to market golimumab will extend to 15 years after the first commercial sales in its territories, but Centocor has appealed the ruling.

Effective September 1, 2005, Schering-Plough restructured its INTEGRILIN co-promotion agreement with Millennium. Under the terms of the restructured agreement, Schering-Plough acquired exclusive U.S. development and commercialization rights to INTEGRILIN in exchange for an upfront payment of $36 million and royalties on INTEGRILIN sales. Schering-Plough has agreed to pay minimum royalties of $85 million per year to Millennium

83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

for 2006 and 2007. Schering-Plough also purchased existing INTEGRILIN inventory from Millennium. The $36 million upfront payment has been capitalized and included in other intangible assets.

During 2004, Schering-Plough entered into a collaboration and license agreement with Toyama Chemical Co. Ltd (Toyama). Under the terms of the agreement, Schering-Plough has acquired the exclusive worldwide rights, excluding Japan, Korea and China, to develop, use and sell garenoxacin for all human and veterinary uses (excluding topical ophthalmic applications). Garenoxacin is Toyama’s quinolone antibacterial agent currently under regulatory review in the U.S. In connection with the execution of the agreement, Schering-Plough incurred a charge in the second quarter of 2004 for an up front fee of $80 million to Toyama. This amount has been expensed and reported in Research and Development for the year ended December 31, 2004.

During 2004, Schering-Plough entered into a strategic agreement with Bayer intended to enhance Schering-Plough’s pharmaceutical resources. Under the terms of this agreement, Schering-Plough has exclusive rights in the U.S. and Puerto Rico to market, sell and distribute the AVELOX and CIPRO antibiotics for all uses (excluding certain topical formulations for administration to the eye or ear). Schering-Plough pays Bayer royalties generally in excess of 50 percent of these products based on sales.

Under the agreement, Schering-Plough 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 Schering-Plough’s cholesterol-absorption inhibitor ZETIA when it is approved. Schering-Plough has received and recorded deferred revenue of $120 million related to the sale of ZETIA co-promotion rights to Bayer. This deferred revenue will begin to be recognized upon regulatory approval in Japan. ZETIA is currently under regulatory review in Japan. Under certain circumstances, if ZETIA does not receive regulatory/marketing approval in Japan by a certain date, this amount will be required to be repaid to Bayer.

The agreement with Bayer potentially restricts Schering-Plough from marketing products in the U.S. that would compete with any of the products under the agreement. As a result, Schering-Plough expects that it will sublicense rights to garenoxacin, the quinolone antibacterial agent that Schering-Plough licensed from Toyama in 2004.

13.   SHORT-TERM BORROWINGS, LONG-TERM DEBT AND OTHER COMMITMENTS

Short and Long-Term Borrowings

Schering-Plough’s outstanding borrowings at December 31, 2006 and 2005 are as follows:

	2006		2005
	(Dollars in millions)
Short-term
Commercial paper	$	149	$	298
Other short-term borrowings and current portion of long-term debts		91		979
Current portion of capital leases		2		1
Total short-term borrowings	$	242	$	1,278
Long-term
10-year senior unsecured notes	$	1,247	$	1,247
30-year senior unsecured notes		1,142		1,142
Capital leases		25		10
Total long-term borrowings	$	2,414	$	2,399

Schering-Plough’s short-term borrowings consist of primarily bank loans and commercial paper issued in the U.S. The weighted average interest rate on short-term borrowings was 6.4 percent and 4.7 percent at December 31, 2006 and 2005, respectively.

84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Senior unsecured notes

On November 26, 2003, Schering-Plough 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. The net proceeds from this offering were $2.37 billion. Interest on the notes is payable semi-annually and subject to rate adjustment as follows: if the rating assigned to a particular series of notes by either Moody’s Investors Service, Inc. (Moody’s) or Standard & Poor’s Rating Services (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 by Moody’s and S&P:

Additional Interest Rate	Moody’s Rating	S&P Rating
0.25%	Baa1	BBB+
0.50%	Baa2	BBB
0.75%	Baa3	BBB–
1.00%	Ba1 or below	BB+ or below

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 either Moody’s or S&P below A3 or A−, respectively, the notes are subsequently rated above Baa1 by Moody’s and BBB+ by S&P.

Upon issuance, the notes were rated A3 by Moody’s and A+ by S&P. 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, effective December 1, 2004, resulted in a 5.55 percent the interest rate payable on the notes due 2013, and a 6.75 percent the interest rate payable on the notes due 2033 increased. At December 31, 2006, the notes were rated Baa1 by Moody’s and A− by S&P.

These senior unsecured notes are redeemable in whole or in part, at Schering-Plough’s option at any time, at a redemption price equal to the greater of (1) 100 percent of the principal amount of such notes and (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

Schering-Plough has a $1.5 billion credit facility that matures in May 2009 and requires Schering-Plough 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 Schering-Plough’s commercial paper borrowings. Borrowings under the credit facility may be drawn by the U.S. parent company or by its wholly-owned international subsidiaries when accompanied by a parent guarantee. This facility does not require compensating balances; however, a nominal commitment fee is paid. As of December 31, 2005, $325 million was drawn under this facility by a wholly-owned international subsidiary for the purposes of funding repatriations under the AJCA. During 2006, this borrowing amount was fully repaid. As of December 31, 2006, no borrowings were outstanding under this facility.

In addition to the above credit facility, Schering-Plough entered into a $575 million credit facility during the fourth quarter of 2005 for the purposes of funding repatriations under the AJCA. As of December 31, 2005, the entire amount was drawn by a wholly-owned international subsidiary to fund the repatriations. This facility was paid in full and terminated in 2006.

In addition, Schering-Plough’s international subsidiaries had approximately $219 million available in unused lines of credit from various financial institutions at December 31, 2006.

85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other Commitments

Total rent expense amounted to $118 million, $110 million and $100 million in 2006, 2005 and 2004, respectively. Future annual minimum rental commitments in the next five years on non-cancelable operating leases as of December 31, 2006, are as follows: 2007, $85 million; 2008, $65 million; 2009, $41 million; 2010, $24 million; and 2011, $14 million, with aggregate minimum lease obligations of $35 million due thereafter.

At December 31, 2006, Schering-Plough has commitments totaling $179 million and $2 million related to capital expenditures to be made in 2007 and in 2008, respectively.

14.   FINANCIAL INSTRUMENTS

SFAS 133, “Derivative Instruments and Financial Hedging Activities,” as amended, requires all derivatives to be recorded on the balance sheets at fair value. In addition, this Statement also requires: (1) the effective portion of qualifying cash flow hedges be recognized in income when the hedged item affects income; (2) changes in the fair value of derivatives that qualify as fair value hedges, along with the change in the fair value of the hedged risk, be recognized as they occur; and (3) changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of qualifying hedges, be recognized in income as they occur.

Risks, Policy and Objectives

Schering-Plough is exposed to market risk, primarily from changes in foreign currency exchange rates and, to a lesser extent, from interest rate and equity price changes. Currently, Schering-Plough has not deemed it cost effective to engage in a formula-based program of hedging the profits and cash flows of international operations using derivative financial instruments, but on a limited basis, Schering-Plough will hedge selective foreign currency risks with derivatives. Because Schering-Plough’s international subsidiaries purchase significant quantities of inventory payable in U.S. dollars, managing the level of inventory and related payables and the rate of inventory turnover can provide a natural level of protection against adverse changes in exchange rates. Furthermore, the risk of adverse exchange rate change is somewhat mitigated by the fact that Schering-Plough’s international operations are widespread.

Schering-Plough mitigates credit risk on derivative instruments by dealing only with counterparties considered to be of high credit quality. Accordingly, Schering-Plough does not anticipate loss for non-performance. Schering-Plough does not enter into derivative instruments to generate trading profits.

The table below presents the carrying values and estimated fair values for certain of Schering-Plough’s financial instruments at December 31. Estimated fair values were determined based on market prices, where available, or dealer quotes. The carrying values of all other financial instruments, including cash and cash equivalents, approximated their estimated fair values at December 31, 2006 and 2005.

	2006				2005
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
	(Dollars in millions)
ASSETS:
Short-term investments	$	3,267	$	3,267	$	818	$	818
Long-term investments		145		145		144		147
LIABILITIES:
Short-term borrowings and current portion of long-term debt	$	242	$	242	$	1,278	$	1,278
Long-term debt		2,414		2,497		2,399		2,583

86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Long-term Investments

Long-term investments, which are included in other non-current assets, primarily consist of debt and equity securities held in non-qualified trusts to fund long-term employee benefit obligations, which are included as liabilities in the Consolidated Balance Sheets. These assets can only be used to fund the related liabilities.

15.   SHAREHOLDERS’ EQUITY

Schering-Plough has authorized 50,000,000 shares of preferred stock that consists of: 12,000,000 preferred shares designated as Series A Junior Participating Preferred Stock; 28,750,000 preferred shares designated as 6 percent Mandatory Convertible Preferred Stock; and 9,250,000 preferred shares whose designations have not yet been determined.

6 percent Mandatory Convertible Preferred Stock and Shelf Registration

On August 10, 2004, Schering-Plough issued 28,750,000 shares of 6 percent Mandatory Convertible Preferred Stock (the Preferred Stock) with a face value of $1.44 billion. Net proceeds to Schering-Plough were $1.4 billion after deducting commissions, discounts and other underwriting expenses. Each share of the Preferred Stock will automatically convert into between 2.2451 and 2.7840 common shares of Schering-Plough depending on the average closing price of Schering-Plough’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 Schering-Plough’s common shares exceeds $33.41 (for at least 20 trading days within a period of 30 consecutive trading days), Schering-Plough 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 Schering-Plough is legally permitted to pay dividends and the Board of Directors declares a dividend payable, Schering-Plough will pay dividends on each dividend payment date. The dividend payment dates are March 15, June 15, September 15 and December 15, with the first dividend having been paid on December 15, 2004.

As of December 31, 2006, Schering-Plough has the ability to issue $563 million (principal amount) of securities under a currently effective Securities and Exchange Commission (SEC) shelf registration.

Treasury Stock

A summary of treasury share transactions for the years ended December 31 is as follows:

	2006			2005			2004
	(Shares in millions)
Share balance at January 1		550			555			559
Stock incentive plans activities		(3	)		(5	)		(4	)
Share balance at December 31		547			550			555

87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Included in the treasury share balance is 70.2 million shares that were acquired by a subsidiary of Schering-Plough through an open-market purchase program in 1994-1995. These shares are not considered treasury shares under New Jersey law; however, like treasury shares, they may not be voted and are not considered outstanding shares for determining the necessary votes to approve a matter submitted to a stockholder vote. The subsidiary does not receive dividends on these shares.

Preferred Share Purchase Rights

Schering-Plough has Preferred Share Purchase Rights outstanding that are attached to and presently only trade with Schering-Plough’s common shares and are not exercisable. The rights will become exercisable only if a person or group acquires 20 percent or more of Schering-Plough’s common stock or announces a tender offer that, if completed, would result in ownership by a person or group of 20 percent or more of Schering-Plough’s common stock. Should a person or group acquire 20 percent or more of Schering-Plough’s outstanding common stock through a merger or other business combination transaction, each right will entitle its holder (other than such acquirer) to purchase common shares of Schering-Plough having a market value of twice the exercise price of the right. The exercise price of the rights is $100.

Following the acquisition by a person or group of beneficial ownership of 20 percent or more but less than 50 percent of Schering-Plough’s common stock, the Board of Directors may call for the exchange of the rights (other than rights owned by such acquirer), in whole or in part, at an exchange ratio of one common share or one two-hundredth of a share of Series A Junior Participating Preferred Stock per right. Also, prior to the acquisition by a person or group of beneficial ownership of 20 percent or more of Schering-Plough’s common stock, the rights are redeemable for $.005 per right at the option of the Board of Directors. The rights will expire on July 10, 2007, unless earlier redeemed or exchanged. The Board of Directors is also authorized to reduce the 20 percent thresholds referred to above to not less than the greater of (i) the sum of .001 percent and the largest percentage of the outstanding shares of common stock then known to Schering-Plough to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10 percent, except that, following the acquisition by a person or group of beneficial ownership of 20 percent or more of Schering-Plough’s common stock, no such reduction may adversely affect the interests of the holders of the rights.

16.   INSURANCE COVERAGE

Schering-Plough maintains insurance coverage with such deductibles and self-insurance as management believes adequate for its needs under current circumstances. Such coverage reflects market conditions (including cost and availability) existing at the time it is written, and the relationship of insurance coverage to self-insurance varies accordingly. As a result of recent external events, the availability of insurance has become more restrictive. Schering-Plough considers the impact of these changes as it continually assesses the best way to provide for its insurance needs in the future. Schering-Plough self-insures a substantial proportion of risk as it relates to products’ liability.

88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17.   SEGMENT INFORMATION

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

Net Sales by Major Product and by Segment:

	2006		2005		2004
	(Dollars in millions)
PRESCRIPTION PHARMACEUTICALS	$	8,561	$	7,564	$	6,417
REMICADE		1,240		942		746
NASONEX		944		737		594
PEG-INTRON		837		751		563
CLARINEX/AERIUS		722		646		692
TEMODAR		703		588		459
CLARITIN Rx		356		371		321
INTEGRILIN		329		315		325
REBETOL		311		331		287
AVELOX		304		228		44
INTRON-A		237		287		318
CAELYX		206		181		150
SUBUTEX		203		197		185
ELOCON		141		144		168
CIPRO		111		146		43
Other Pharmaceutical		1,917		1,700		1,522
CONSUMER HEALTH CARE		1,123		1,093		1,085
OTC		558		556		578
Foot Care		343		333		331
Sun Care		222		204		176
ANIMAL HEALTH		910		851		770
CONSOLIDATED NET SALES	$	10,594	$	9,508	$	8,272

Net Sales by Geographic Area:

	2006		2005		2004
	(Dollars in millions)
United States	$	4,192	$	3,589	$	3,219
Europe and Canada		4,403		4,040		3,595
Pacific Area and Asia		1,009		995		676
Latin America		990		884		782
Total International		6,402		5,919		5,053
Consolidated net sales	$	10,594	$	9,508	$	8,272

89

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Schering-Plough has subsidiaries in more than 50 countries outside the U.S. Net sales are presented in the geographic area in which Schering-Plough’s customers are located. The following foreign countries accounted for 5 percent or more of consolidated net sales during the past three years:

	2006					2005					2004
			% of					% of					% of
			Consolidated					Consolidated					Consolidated
	Net Sales		Net Sales			Net Sales		Net Sales			Net Sales		Net Sales
	(Dollars in millions)
Total International net sales	$	6,402		60	%	$	5,919		62	%	$	5,053		61	%
France		809		8	%		771		8	%		729		9	%
Japan		669		6	%		687		7	%		385		5	%
Canada		478		5	%		418		4	%		365		4	%
Italy		441		4	%		457		5	%		443		5	%

Net sales by customer:

Sales to a single customer that accounted for 10 percent or more of Schering-Plough’s consolidated net sales during the past three years are as follows:

	2006				2005				2004
			% of				% of				% of
			Consolidated				Consolidated				Consolidated
	Net Sales		Net Sales		Net Sales		Net Sales		Net Sales		Net Sales
	(Dollars in millions)
McKesson Corporation	$	1,159		11%	$	1,073		11%	$	868		10%
Cardinal Health	$	1,019		10%	$	841		9%	$	447		5%

Profit by segment:

	Year Ended December 31,
	2006			2005			2004
	(Dollars in millions)
Prescription Pharmaceuticals	$	1,394		$	733		$	13
Consumer Health Care		228			235			234
Animal Health		120			120			88
Corporate and other (including net interest income of $125 million and $13 million in 2006 and 2005, respectively, and $88 million of net interest expense in 2004)		(259	)		(591	)		(503	)
Consolidated profit/(loss) before tax and cumulative effect on a change in accounting principle	$	1,483		$	497		$	(168	)

Schering-Plough’s net sales do not include sales of VYTORIN and ZETIA which are managed in partnership with Merck, as Schering-Plough accounts for this joint venture under the equity method of accounting (see Note 3, “Equity Income from Cholesterol Joint Venture,” for additional information). Profit from the Prescription Pharmaceuticals segment includes equity income from cholesterol joint venture.

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

In 2006, “Corporate and other” includes special charges of $102 million primarily related to changes to Schering-Plough’s manufacturing operations in the U.S. and Puerto Rico announced in June 2006, all of which related to the Prescription Pharmaceuticals segment. Included in 2006 cost of sales were charges of approximately

90

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$146 million from the manufacturing streamlining actions that were primarily related to the Prescription Pharmaceuticals segment.

In 2005, “Corporate and other” includes special charges of $294 million, including $28 million of employee termination costs, $16 million of asset impairment and other charges, and an increase in litigation reserves by $250 million resulting in a total reserve of $500 million representing Schering-Plough’s current estimate to resolve the Massachusetts Investigation as well as the investigations and the state litigation disclosed under “AWP Litigation and Investigations” in Note 19, “Legal, Environmental and Regulatory Matters.” It is estimated that the charges relate to the reportable segments as follows: Prescription Pharmaceuticals — $289 million; Consumer Health Care — $2 million; Animal Health — $1 million; and Corporate and other — $2 million.

In 2004, “Corporate and other” includes special charges of $153 million, including $119 million of employee termination costs, as well as $27 million of asset impairment charges and $7 million of closure costs primarily related to the exit from a small European research and development facility. It is estimated the charges relate to the reportable segments as follows: Prescription Pharmaceuticals — $135 million; Consumer Health Care — $3 million; Animal Health — $2 million; and Corporate and other — $13 million.

Supplemental sales information:

Sales of products comprising 10 percent or more of Schering-Plough’s U.S. or international sales for the year ended December 31, 2006, were as follows:

	Amount		Percentage
	(Dollars in millions)
U.S.
NASONEX	$	611		15%
International
REMICADE	$	1,240		19%
PEG-INTRON		636		10%

Long-lived Assets by Geographic Location

	2006		2005		2004
	(Dollars in millions)
United States	$	2,547	$	2,538	$	2,447
Singapore		824		840		884
Ireland		488		486		449
Puerto Rico		152		307		298
Other		653		602		768
Total	$	4,664	$	4,773	$	4,846

Long-lived assets shown by geographic location are primarily property.

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

18.   CONSENT DECREE

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

91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

Schering-Plough has obtained third-party certification of its completion of the Work Plan as required under the Decree. It is possible that the FDA may disagree with the expert’s certification. In such an event, it is possible that the FDA may assess additional payments as permitted under the Decree and as described in more detail below.

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

Under the terms of the Decree, provided that the FDA has not notified Schering-Plough of a significant violation of FDA law, regulations, or the Decree in any five-year period since the Decree’s entry in May of 2002, Schering-Plough may petition the court to have the Decree dissolved and the FDA will not oppose Schering-Plough’s petition. There is no assurance about any particular date when the Consent Decree will be lifted.

19.   LEGAL, ENVIRONMENTAL AND REGULATORY MATTERS

Background

Schering-Plough is involved in various claims, investigations and legal proceedings.

Schering-Plough records a liability for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. Schering-Plough 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 Schering-Plough 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 Schering-Plough 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.

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

92

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Patent Matters

As described in “Patents, Trademarks, and Other Intellectual Property Rights” under Part I, Business, intellectual property protection is critical to Schering-Plough’s ability to successfully commercialize its product innovations. The potential for litigation regarding Schering-Plough’s intellectual property rights always exists and may be initiated by third parties attempting to abridge Schering-Plough’s rights, as well as by Schering-Plough in protecting its rights. Patent matters described below have a potential material effect on Schering-Plough.

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.

Massachusetts Investigation

On August 29, 2006, Schering-Plough announced it had reached an agreement with the U.S. Attorney’s Office for the District of Massachusetts to settle an investigation involving Schering-Plough’s sales, marketing and clinical trial practices and programs along with those of Warrick Pharmaceuticals (Warrick), Schering-Plough’s generic subsidiary (the “Massachusetts Investigation”). The investigation was focused on the following alleged practices: providing remuneration to managed care organizations, physicians and others to induce the purchase of Schering pharmaceutical products; off-label marketing of drugs; and submitting false pharmaceutical pricing information to the government for purposes of calculating rebates required to be paid to the Medicaid program.

The agreement provided for an aggregate settlement amount of $435 million — a criminal fine of $180 million and $255 million to resolve civil aspects of the investigation. On January 17, 2007, Schering Sales Corporation, a subsidiary of Schering-Plough, pled guilty to one count of conspiracy to make false statements to the government. In connection with the settlement, Schering-Plough signed an addendum to an existing corporate integrity agreement with the Office of Inspector General of the U.S. Department of Health and Human Services. The addendum will not affect Schering-Plough’s ongoing business with any customers, including the federal government.

93

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In 2005, Schering-Plough had recorded a liability of $500 million related to the Massachusetts Investigation, as well as the investigations and the state litigation described below under “AWP Litigation and Investigations.” The settlement amount of $435 million relates only to the Massachusetts Investigation. The AWP litigation and investigations are ongoing.

AWP Litigation and Investigations

Schering-Plough continues to respond to existing and new litigation by certain states and private payors and investigations by the Department of Health and Human Services, the Department of Justice and several states into industry and Schering-Plough practices regarding average wholesale price (AWP). Schering-Plough is cooperating with these investigations.

These litigations and investigations relate to whether the AWP used by pharmaceutical companies for certain drugs improperly exceeds the average prices paid by providers and, as a consequence, results in unlawful inflation of certain reimbursements for drugs by state programs and private payors that are based on AWP. The complaints allege violations of federal and state law, including fraud, Medicaid fraud and consumer protection violations, among other claims. In the majority of cases, the plaintiffs are seeking class certifications. In some cases, classes have been certified. The outcome of these litigations and investigations could include substantial damages, the imposition of substantial fines, penalties and injunctive or administrative remedies.

Securities and Class Action Litigation

Federal Securities Litigation

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

Shareholder Derivative Actions

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

ERISA Litigation

On March 31, 2003, Schering-Plough was served with a putative class action complaint filed in the U.S. District Court in New Jersey alleging that Schering-Plough, retired Chairman, CEO and President Richard Jay Kogan, Schering-Plough’s Employee Savings Plan (Plan) administrator, several current and former directors, and certain corporate officers (Messrs. LaRosa and Moore) breached their fiduciary obligations to certain participants in the

94

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Plan. The complaint seeks damages in the amount of losses allegedly suffered by the Plan. The complaint was dismissed on June 29, 2004. The plaintiffs appealed. On August 19, 2005, the U.S. Court of Appeals for the Third Circuit reversed the dismissal by the District Court and the matter has been remanded back to the District Court for further proceedings.

K-DUR Antitrust Litigation

Schering-Plough had settled patent litigation with Upsher-Smith, Inc. (Upsher-Smith) and ESI Lederle, Inc. (Lederle) relating to generic versions of K-DUR., Schering-Plough’s long-acting potassium chloride product supplement used by cardiac patients., for which Lederle and Upsher Smith had filed Abbreviated New Drug Applications. Following the commencement of an FTC administrative proceeding alleging anti-competitive effects from those settlements, 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 claim violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. These suits seek unspecified damages. Discovery is ongoing.

Third-party Payor Actions

Several supported class action litigations have been filed following the announcement of the settlement of the Massachusetts Investigation. Plaintiffs in these actions seek damages on behalf of third-party payors resulting from the allegations of off-label promotion and improper payments to physicians that were at issue in the Massachusetts Investigation.

Tax Matters

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

Pending Administrative Obligations

In connection with the settlement of an investigation with the U.S. Department of Justice and the U.S. Attorney’s Office for the Eastern District of Pennsylvania, Schering-Plough entered into a five-year corporate integrity agreement (CIA). The CIA was amended in August of 2006 in connection with the settlement of the Massachusetts Investigation, commencing a new five-year term. As disclosed in Note 18, “Consent Decree,” Schering-Plough is subject to obligations under a Consent Decree with the FDA. Failure to comply with the obligations under the CIA or the Consent Decree can result in financial penalties.

Other Matters

NITRO-DUR Investigation

In August 2003, Schering-Plough 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 Schering-Plough’s classification of NITRO-DUR for Medicare rebate purposes, and Schering-Plough’s use of nominal pricing and bundling of product sales. Schering-Plough 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.

95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

French Matter

Based on a complaint to the French competition authority from a competitor in France and pursuant to a court order, the French competition authority has obtained documents from a French subsidiary of Schering-Plough relating to one of the products that the subsidiary markets and sells. Any resolution of this matter adverse to the French subsidiary could result in the imposition of civil fines and injunctive or administrative remedies.

Environmental

Schering-Plough 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), Schering-Plough is alleged to be a potentially responsible party (PRP). Schering-Plough believes that it is remote at this time that there is any material liability in relation to such sites. Schering-Plough 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. Schering-Plough 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.

96

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Schering-Plough Corporation and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Schering-Plough Corporation and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 4 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment.” Also, as discussed in Note 7 to the consolidated financial statements, effective December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/  DELOITTE & TOUCHE LLP

Parsippany, New Jersey

February 27, 2007

97

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

QUARTERLY DATA (UNAUDITED)

	Three Months Ended
	March 31						June 30						September 30						December 31
	2006			2005			2006			2005			2006			2005			2006			2005
	(Dollars in millions, except per share figures)
Net sales	$	2,551		$	2,369		$	2,818		$	2,532		$	2,574		$	2,284		$	2,650		$	2,324
Cost of sales		893			889			1,004			867			885			775			915			815
Gross margin		1,658			1,480			1,814			1,665			1,689			1,509			1,735			1,509
Selling, general and administrative		1,086			1,081			1,224			1,116			1,158			1,064			1,250			1,114
Research and development		481			384			539			442			536			566			631			474
Other (income)/expense, net		(34	)		17			(19	)		(8	)		(37	)		—			(46	)		(5	)
Special charges		—			27			80			259			10			6			12			2
Equity income from cholesterol joint venture		(311	)		(220	)		(355	)		(170	)		(390	)		(215	)		(403	)		(268	)
Income before income taxes		436			191			345			26			412			88			291			192
Income tax expense		86			64			86			74			103			23			87			66
Net income/(loss) before cumulative effect of a change in accounting principle	$	350		$	127		$	259		$	(48	)	$	309		$	65		$	204		$	126
Cumulative effect of a change in accounting principle, net of tax		(22	)		—			—			—			—			—			—			—
Net income/(loss)	$	372		$	127		$	259		$	(48	)	$	309		$	65		$	204		$	126
Dividends on preferred shares		22			22			22			22			22			22			22			22
Net income/(loss) available to common shareholders	$	350		$	105		$	237		$	(70	)	$	287		$	43		$	182		$	104
Diluted earnings/(loss) per common share:
Earning/(loss) available to common shareholders before cumulative effect of a change in accounting principle	$	0.22		$	0.07		$	0.16		$	(0.05	)	$	0.19		$	0.03		$	0.12		$	0.07
Cumulative effect of a change in accounting principle, net of tax		0.02			—			—			—			—			—			—			—
Diluted earnings per common share	$	0.24		$	0.07		$	0.16		$	(0.05	)	$	0.19		$	0.03		$	0.12		$	0.07
Basic earnings/(loss) per common share:
Earnings/(loss) available to common shareholders before cumulative effect of a change in accounting principle	$	0.22		$	0.07		$	0.16		$	(0.05	)	$	0.19		$	0.03		$	0.12		$	0.07
Cumulative effect of a change in accounting principle, net of tax		0.02			—			—			—			—			—			—			—
Basic earnings/(loss) per common share:	$	0.24		$	0.07		$	0.16		$	(0.05	)	$	0.19		$	0.03		$	0.12		$	0.07
Dividends per common share		0.055			0.055			0.055			0.055			0.055			0.055			0.055			0.055
Common share prices:
High		20.93			21.41			20.00			20.94			22.09			22.45			23.90			21.76
Low		18.00			17.68			18.25			17.89			18.60			18.48			21.25			19.05
Average shares outstanding for diluted EPS (in millions)		1,486			1,480			1,489			1,476			1,492			1,487			1,497			1,487
Average shares outstanding for basic EPS (in millions)		1,480			1,474			1,481			1,476			1,482			1,477			1,484			1,478

98

Net sales in the third quarter of 2006 included a favorable impact of approximately $47 million resulting from the reversal of previously accrued rebate amounts for the TRICARE Retail Pharmacy Program that a U.S. Federal Court of Appeals ruled pharmaceutical manufacturers are not obligated to pay.

See Note 2, “Special Charges and Manufacturing Changes” to the Consolidated Financial Statements for additional information relating to special charges and charges from Schering-Plough’s announced manufacturing changes.

Schering-Plough’s approximate number of holders of record of common shares as of January 31, 2007 was 36,360.

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.   Controls and Procedures

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

As part of the changing business environment in which Schering-Plough operates, Schering-Plough 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 Schering-Plough’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.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Management of Schering-Plough Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Schering-Plough’s internal control system is designed to provide reasonable assurance to Schering-Plough’s Management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Schering-Plough’s Management assessed the effectiveness of Schering-Plough’s internal control over financial reporting as of December 31, 2006. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on its assessment, Management believes that, as of December 31, 2006, Schering-Plough’s internal control over financial reporting is effective.

Schering-Plough’s independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on Management’s assessment of Schering-Plough’s internal control over financial reporting. The firm’s report follows.

99

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Schering-Plough Corporation and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2006 of the Company and our report dated February 27, 2007 (which report included an explanatory paragraph regarding the Company’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” and SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”) expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/  DELOITTE & TOUCHE LLP

Parsippany, New Jersey

February 27, 2007

100

Part III

Item 10.   Directors and Executive Officers of the Registrant

Information concerning Directors and nominees for Directors is incorporated by reference to “Proposal One: Elect Eleven Directors for a One-Year Term” in Schering-Plough’s Proxy Statement for the Annual Meeting of Shareholders on May 18, 2007.

Information concerning executive officers is included in Part I of this filing under the caption “Executive Officers of the Registrant.”

Information concerning compliance with Section 16(a) of the Exchange Act is incorporated by reference to “Section 16(a) Beneficial Ownership Reporting Compliance” in Schering-Plough’s Proxy Statement for the Annual Meeting of Shareholders on May 18, 2007.

Information concerning the audit committee and the audit committee financial expert is incorporated by reference to “Information About the Audit Committee of the Board of Directors and its Practices” and “Committees of the Board of Directors” in Schering-Plough’s Proxy Statement for the Annual Meeting of Shareholders on May 18, 2007.

Schering-Plough has adopted a code of business conduct and ethics, the Standards of Global Business Practices, applicable to all employees, including the chief executive officer, chief financial officer and controller. Schering-Plough’s Standards of Global Business Practices are available in the Investor Relations section of Schering-Plough’s website at www.schering-plough.com. In addition, a written copy of the materials will be provided at no charge by writing to: Office of the Corporate Secretary, Schering-Plough Corporation, 2000 Galloping Hill Road, Mail Stop: K-1-4-4525, Kenilworth, New Jersey 07033. Schering-Plough intends to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Standards of Global Business Practices by posting such information on its website at the address specified above.

Item 11.   Executive Compensation

Information concerning executive compensation is incorporated by reference to “Executive Compensation” in Schering-Plough’s Proxy Statement for the Annual Meeting of Shareholders on May 18, 2007.

Information concerning director compensation is incorporated by reference to “Director Compensation” in Schering-Plough’s Proxy Statement for the Annual Meeting of Shareholders on May 18, 2007.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning security ownership of certain beneficial owners and management is incorporated by reference to “Stock Ownership” in Schering-Plough’s Proxy Statement for the Annual Meeting of Shareholders on May 18, 2007.

101

Equity Compensation Plan Information — The following information relates to plans under which equity securities of Schering-Plough may be issued to employees or Directors. Schering-Plough has no plans under which equity securities may be issued to non-employees (except that under the stock incentive plans certain stock options may be transferable to family members of the employee-optionee or related trusts).

	Column A		Column B		Column C
					Number of
					Securities
					Remaining
					Available for
	Number of Securities				Future Issuance
	to be Issued		Weighted-Average		Under Equity
	Upon Exercise of		Exercise Price of		Compensation
	Outstanding		Outstanding		Plans (Excluding
	Options, Warrants		Options,		Securities Reflected
Plan Category	and Rights		Warrants and Rights		in Column A)
Equity compensation plans approved by security holders
1992 Stock Incentive Plan		1,671,229	$	19.56
1997 Stock Incentive Plan		29,849,243	$	41.38
2002 Stock Incentive Plan		51,188,980	$	15.77
2006 Stock Incentive Plan		15,178,400	$	11.46		76,169,800
Directors Stock Award Plan		N/A		N/A		986,952
Equity compensation plans not approved by security holders
Schering-Plough (Ireland) Approved Profit Sharing Scheme*		N/A		N/A		*
Total		97,887,852	$	22.98		77,156,752

*  The Plan permits eligible employees who work for a Schering-Plough Irish subsidiary to enjoy tax advantages by having some or all of their Christmas bonus and between 1 percent and 5 percent of their pay passed to a trustee. The trustee purchases shares of common stock in the open market and allocates the shares to the employees’ accounts. No more than Euro 12,700 may be deferred in a year by an employee. Employees may not sell or withdraw shares allocated to their accounts for two to three years.

Item 13.   Certain Relationships and Related Transactions

Information concerning certain relationships and related transactions is incorporated by reference to “Certain Transactions” and “Procedures for Related Party Transactions and Director Independence Assessments” in Schering-Plough’s Proxy Statement for the Annual Meeting of Shareholders on May 18, 2007.

Information concerning director independence is incorporated by reference to “Director Independence” in Schering-Plough’s Proxy Statement for the Annual Meeting of Shareholders on May 18, 2007.

Item 14.   Principal Accountant Fees and Services

Information concerning principal accountant fees and services is incorporated by reference to “Proposal Two: Ratify the Designation of Deloitte & Touche LLP to Audit Schering-Plough’s Books and Accounts for 2007” in Schering-Plough’s Proxy Statement for the Annual Meeting of Shareholders on May 18, 2007.

Part IV

Item 15.   Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this report

(1) Financial Statements: The financial statements are set forth under Item 8 of this 10-K

102

(2) Financial Statement Schedules:

Merck/Schering-Plough Cholesterol Partnership Combined Financial Statements

Index	Page
Combined Statements of Net Sales and Contractual Expenses for the Years Ended December 31, 2006, 2005 and 2004		110
Combined Balance Sheets at December 31, 2006 and 2005		111
Combined Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004		112
Combined Statements of Partners’ Capital for the Years Ended December 31, 2006, 2005 and 2004		113
Notes to Combined Financial Statements for the Years Ended December 31, 2006, 2005 and 2004		114
Independent Auditors’ Report		120
Schedule II — Valuation and Qualifying Accounts		121

Schedules other than those listed above have been omitted because they are not applicable or not required.

103

(3) Index to Exhibits:

Unless otherwise indicated, all exhibits are part of Commission File Number 1-6571.

Exhibit
Number	Description	Location
3(a)	Amended and Restated Certificate of Incorporation.	Incorporated by reference to Exhibit 3(a) to Schering-Plough’s 10-Q for the period ended June 30, 2006.
3(b)	Amended and Restated By-laws.	Incorporated by reference to Exhibit 3(b) to Schering-Plough’s 10-Q for the period ended June 30, 2006.
4(a)	Rights Agreement between Schering-Plough and the Bank of New York dated June 24, 1997.	Incorporated by reference to Exhibit 1 to Schering-Plough’s 8-A filed on June 30, 1997.
4(b)	Form of Participation Rights Agreement between Schering-Plough and the Chase Manhattan Bank (National Association) as Trustee.	Incorporated by reference to Exhibit 4.6 to Schering-Plough’s Registration Statement on Form S-4, Amendment No. 1, filed December 29, 1995. File No. 33-65107.
4(c)(i)	Indenture, dated November 26, 2003, between Schering-Plough and The Bank of New York as Trustee.	Incorporated by reference to Exhibit 4.1 to Schering-Plough’s 8-K filed November 28, 2003.
4(c)(ii)	First Supplemental Indenture (including Form of Note), dated November 26, 2003.	Incorporated by reference to Exhibit 4.2 to Schering-Plough’s 8-K filed November 28, 2003.
4(c)(iii)	Second Supplemental Indenture (including Form of Note), dated November 26, 2003.	Incorporated by reference to Exhibit 4.3 to Schering-Plough’s 8-K filed November 28, 2003.
4(c)(iv)	5.30% Global Senior Note, due 2013.	Incorporated by reference to Exhibit 4(c)(iv) to Schering-Plough’s 10-K for the year ended December 31, 2003.
4(c)(v)	6.50% Global Senior Note, due 2033.	Incorporated by reference to Exhibit 4(c)(v) to Schering-Plough’s 10-K for the year ended December 31, 2003.
10(a)	Directors Compensation Plan (as amended and restated effective June 1, 2006 with amendments through September 19, 2006).*	Incorporated by reference to Exhibit 10(h)(iii) to Schering-Plough’s 10-Q for the period ended September 30, 2006.
10(b)(i)	1997 Stock Incentive Plan.*	Incorporated by reference to Exhibit 10 to Schering-Plough’s 10-Q for the period ended September 30, 1997.
10(b)(ii)	Amendment to 1997 Stock Incentive Plan (effective February 22, 1999).*	Incorporated by reference to Exhibit 10(a) to Schering-Plough’s 10-Q for the period ended March 31, 1999.
10(b)(iii)	Amendment to the 1997 Stock Incentive Plan (effective February 25, 2003).*	Incorporated by reference to Exhibit 10(c) to Schering-Plough’s 10-K for the year ended December 31, 2002.
10(c)	2002 Stock Incentive Plan (as amended to February 25, 2003).*	Incorporated by reference to Exhibit 10(d) to Schering-Plough’s 10-K for the year ended December 31, 2002.
10(d)	2006 Stock Incentive Plan (as amended and restated effective May 19, 2006 with amendments through September 19, 2006).*	Incorporated by reference to Exhibit 10(d)(iii) to Schering-Plough’s 10-Q for the period ended September 30, 2006.

104

Exhibit
Number	Description	Location
10(e)(i)	Letter agreement dated November 4, 2003 between Robert Bertolini and Schering-Plough.*	Incorporated by reference to Exhibit 10(e)(iii) to Schering-Plough’s 10-K for the year ended December 31, 2003.
10(e)(ii)	Employment Agreement effective upon a change of control dated as of December 19, 2006 between Robert Bertolini and Schering-Plough Corporation.*	Incorporated by reference to Exhibit 99.1 to Schering-Plough’s 8-K filed December 21, 2006.
10(e)(iii)	Employment Agreement dated as of May 12, 2003 between Carrie Cox and Schering-Plough.*	Incorporated by reference to Exhibit 99.6 to Schering-Plough’s 8-K filed May 13, 2003.
10(e)(iv)	Employment Agreement dated as of April 20, 2003 between Fred Hassan and Schering-Plough.*	Incorporated by reference to Exhibit 99.2 to Schering-Plough’s 8-K filed April 21, 2003.
10(e)(v)	Employment Agreement dated as of December 19, 2006 between Thomas P. Koestler, Ph.D. and Schering-Plough.*	Attached.
10(e)(vi)	Employment Agreement dated as of December 19, 2006 between Raul Kohan and Schering-Plough.*	Attached.
10(e)(vii)	Letter agreement dated March 11, 2004 between Thomas J. Sabatino, Jr. and Schering-Plough.*	Incorporated by reference to Exhibit 10 to Schering-Plough’s 10-Q for the period ended March 31, 2004.
10(e)(viii)	Employment Agreement effective upon a change of control dated as of April 15, 2004 between Thomas J. Sabatino, Jr. and Schering-Plough.*	Attached.
10(e)(ix)	Form of employment agreement effective upon a change of control between Schering-Plough and certain executives for new agreements beginning December 14, 2006.*	Attached.
10(f)	Operations Management Team Incentive Plan (as amended and restated effective June 26, 2006).*	Incorporated by reference to Exhibit 10(m)(ii) to Schering-Plough’s 10-Q for the period ended September 30, 2006.
10(g)	Cash Long-Term Incentive Plan (as amended and restated effective January 24, 2005).*	Incorporated by reference to Exhibit 10(n) to Schering-Plough’s 10-K for the year ended December 31, 2004.
10(h)	Long-Term Performance Share Unit Incentive Plan (as amended and restated effective January 24, 2005).*	Incorporated by reference to Exhibit 10(o) to Schering-Plough’s 10-K for the year ended December 31, 2004.
10(i)	Transformational Performance Contingent Shares Program.*	Incorporated by reference to Exhibit 10(p) to Schering-Plough’s 10-K for the year ended December 31, 2003.
10(j)	Severance Benefit Plan (as amended and restated effective December 17, 2004 with amendments through April 18, 2005).*	Incorporated by reference to Exhibit 10(e)(xi) to Schering-Plough’s 10-Q for the period ended March 31, 2005.
10(k)	Savings Advantage Plan (as amended and restated effective June 1, 2006).*	Incorporated by reference to Exhibit 10(e)(xiii) to Schering-Plough’s 10-Q for the period ended September 30, 2006.
10(l)	Supplemental Executive Retirement Plan (amended and restated to January 1, 2005).*	Attached.

105

Exhibit
Number	Description	Location
10(m)	Retirement Benefits Equalization Plan (as amended and restated as of January 1, 2005).*	Incorporated by reference to Exhibit 10(l) to Schering-Plough’s 10-K for the year ended December 31, 2005.
10(n)	Executive Incentive Plan (as amended and restated to October 1, 2000).*	Incorporated by reference to Exhibit 10(a)(i) to Schering-Plough’s 10-K for the year ended December 31, 2000.
10(o)	Deferred Compensation Plan (as amended and restated to October 1, 2000).*	Incorporated by reference to Exhibit 10(i) to Schering-Plough’s 10-K for the year ended December 31, 2000.
10(p)	Amended and Restated Defined Contribution Trust.*	Incorporated by reference to Exhibit 10(a)(ii) to Schering-Plough’s 10-K for the year ended December 31, 2000.
10(q)	Amended and Restated SERP Rabbi Trust Agreement.*	Incorporated by reference to Exhibit 10(g) to Schering-Plough’s 10-K for the year ended December 31, 1998.
10(r)	Cholesterol Governance Agreement, dated as of May 22, 2000, by and among Schering-Plough, Merck & Co., Inc. and the other parties signatory thereto.†	Incorporated by reference to Exhibit 99.2 to Schering-Plough’s 8-K dated October 21, 2002.
10(s)	First Amendment to the Cholesterol Governance Agreement, dated as of December 18, 2001, by and among Schering-Plough, Merck & Co., Inc. and the other parties signatory thereto.†	Incorporated by reference to Exhibit 99.3 to Schering-Plough’s 8-K filed October 21, 2002.
10(t)	Master Agreement, dated as of December 18, 2001, by and among Schering-Plough, Merck & Co., Inc. and the other parties signatory thereto.†	Incorporated by reference to Exhibit 99.4 to Schering-Plough’s 8-K filed October 21, 2002.
10(u)	Letter Agreement dated April 14, 2003 relating to Consent Decree.	Incorporated by reference to Exhibit 99.3 to Schering-Plough’s 10-Q for the period ended March 31, 2003.
10(v)	Distribution agreement between Schering-Plough and Centocor, Inc., dated April 3, 1998.†	Incorporated by reference to Exhibit 10(u) to Schering-Plough’s Amended 10-K for the year ended December 31, 2003, filed May 3, 2004.
12	Computation of Ratio of Earnings to Fixed Charges.	Attached.
14	Standards of Global Business Practices (covers all employees, including Senior Financial Officers).	Incorporated by reference to Exhibit 14 to Schering-Plough’s 8-K filed September 30, 2004.
21	Subsidiaries of the registrant.	Attached.
23.1	Consent of Independent Registered Public Accounting Firm.	Attached.
23.2	Independent Auditor’s Consent.	Attached.
24	Power of attorney.	Attached.
31.1	Sarbanes-Oxley Act of 2002, Section 302 Certification for Chairman of the Board and Chief Executive Officer.	Attached.
31.2	Sarbanes-Oxley Act of 2002, Section 302 Certification for Executive Vice President and Chief Financial Officer.	Attached.

106

Exhibit
Number	Description	Location
32.1	Sarbanes-Oxley Act of 2002, Section 906 Certification for Chairman of the Board and Chief Executive Officer.	Attached.
32.2	Sarbanes-Oxley Act of 2002, Section 906 Certification for Executive Vice President and Chief Financial Officer.	Attached.

* Compensatory plan, contract or arrangement.

† Certain portions of the exhibit have been omitted pursuant to a request for confidential treatment. The non-public information has been filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 under the Securities Exchange Act of 1934, as amended.

Copies of the above exhibits will be furnished upon request.

107

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SCHERING-PLOUGH CORPORATION

(Registrant)

By  /s/  STEVEN H. KOEHLER

Steven H. Koehler

Vice President and Controller

(Duly Authorized Officer

and Chief Accounting Officer)

Date: February 27, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

/s/  FRED HASSAN Fred Hassan	Chairman of the Board and Chief Executive Officer
/s/  ROBERT J. BERTOLINI Robert J. Bertolini	Executive Vice President and Chief Financial Officer
/s/  STEVEN H. KOEHLER Steven H. Koehler	Vice President and Controller
* Hans W. Becherer	Director
* Thomas J. Colligan	Director
* C. Robert Kidder	Director
* Philip Leder, M.D.	Director
* Eugene R. McGrath	Director
* Carl E. Mundy, Jr.	Director

108

* Patricia F. Russo	Director
* Kathryn C. Turner	Director
* Robert F. W. van Oordt	Director
* Arthur F. Weinbach	Director
*By /s/  STEVEN H. KOEHLER Steven H. Koehler Attorney-in-fact

Date: February 27, 2007

109

Merck/Schering-Plough Cholesterol Partnership

Combined Statements of Net Sales and Contractual Expenses
Years Ended December 31,
(Dollars in millions)

	2006		2005		2004
Net sales	$	3,884	$	2,425	$	1,214
Cost of sales		179		93		74
Selling, general and administrative		1,056		945		634
Research and development		161		134		138
		1,396		1,172		846
Income from operations	$	2,488	$	1,253	$	368

The accompanying notes are an integral part of these combined financial statements.

110

Merck/Schering-Plough Cholesterol Partnership

Combined Balance Sheets
December 31,
(Dollars in millions)

	2006			2005
ASSETS
Cash and cash equivalents	$	36		$	40
Accounts receivable, net		293			230
Inventories		87			66
Prepaid expenses and other assets		14			13
Total assets	$	430		$	349
LIABILITIES AND PARTNERS’ DEFICIT
Payable to Schering-Plough, net	$	169		$	165
Payable to Merck, net		64			198
Rebates payable		271			120
Accrued expenses and other liabilities		7			2
Total liabilities		511			485
Commitments and Contingent Liabilities (notes 3 and 5)
Partners’ capital (deficit)		(81	)		(136	)
Total liabilities and Partners’ capital (deficit)	$	430		$	349

The accompanying notes are an integral part of these combined financial statements.

111

Merck/Schering-Plough Cholesterol Partnership

Combined Statements of Cash Flows
Years Ended December 31,
(Dollars in millions)

	2006			2005			2004
Operating Activities:
Income from operations	$	2,488		$	1,253		$	368
Adjustments to reconcile income from operations to net cash provided by operating activities:
Accounts receivable, net		(63	)		(46	)		(121	)
Inventories		(21	)		(2	)		(41	)
Prepaid expenses and other assets		(1	)		(12	)		16
Rebates payable		151			85			22
Accrued expenses and other liabilities		5			2			—
Payables to Merck and Schering-Plough, net		(130	)		36			152
Non-cash charges		52			—			—
Net cash provided by operating activities		2,481			1,316			396
Financing Activities:
Contributions from Partners		721			710			473
Distributions to Partners		(3,206	)		(2,033	)		(855	)
Net cash used for financing activities		(2,485	)		(1,323	)		(382	)
Net (decrease)/increase in cash and cash equivalents		(4	)		(7	)		14
Cash and cash equivalents, beginning of period		40			47			33
Cash and cash equivalents, end of period	$	36		$	40		$	47

The accompanying notes are an integral part of these combined financial statements.

112

Merck/Schering-Plough Cholesterol Partnership

Combined Statements of Partners’ Capital (Deficit)
(Dollars in millions)

	Schering-
	Plough			Merck			Total
Balance, January 1, 2004 (unaudited)	$	(4	)	$	(48	)	$	(52	)
Contributions from Partners		243			230			473
Income from operations		244			124			368
Distributions to Partners		(427	)		(428	)		(855	)
Balance, December 31, 2004		56			(122	)		(66	)
Contributions from Partners		330			380			710
Income from operations		689			564			1,253
Distributions to Partners		(1,042	)		(991	)		(2,033	)
Balance, December 31, 2005		33			(169	)		(136	)
Contributions from Partners		344			429			773
Income from operations		1,273			1,215			2,488
Distributions to Partners		(1,648	)		(1,558	)		(3,206	)
Balance, December 31, 2006	$	2		$	(83	)	$	(81	)

The accompanying notes are an integral part of these combined financial statements.

113

Merck/Schering-Plough Cholesterol Partnership

Notes to Combined Financial Statements

1.   Description of Business and Basis of Presentation

Description of Business

In May 2000, Merck & Co., Inc. (“Merck”) and Schering-Plough Corporation (“Schering-Plough”) (collectively “Management” or the “Partners”) entered into agreements to jointly develop and market in the United States, Schering-Plough’s then investigational cholesterol absorption inhibitor (“CAI”) ezetimibe (marketed today in the United States as ZETIA and as EZETROL in most other countries) (the “Cholesterol Agreements”) and a fixed-combination tablet containing the active ingredients montelukast and loratadine. Montelukast is sold by Merck as SINGULAIR and loratadine is sold by Schering-Plough as CLARITIN. While the montelukast and loratadine combination tablet does not have approval in any country, Phase III clinical development is ongoing. The cholesterol collaboration is formally referred to as the Merck/Schering-Plough Cholesterol Partnership (the “Partnership”). In December 2001, the Cholesterol Agreements were expanded to include all countries of the world, except Japan. The Cholesterol Agreements provide for ezetimibe to be developed and marketed in the following forms:

•  Ezetimibe, a once daily CAI, non-statin cholesterol reducing medicine used alone or co-administered with any statin drug, and

•  Ezetimibe and simvastatin (Merck’s existing ZOCOR statin cholesterol modifying medicine) combined into one tablet (marketed today in the United States as VYTORIN and as INEGY in most other countries).

VYTORIN and ZETIA were approved by the U.S. FDA in July 2004 and October 2002, respectively. Together, these products, whether marketed as VYTORIN, ZETIA or under other trademarks locally, are referred to as the “Cholesterol Products.”

Under the Cholesterol Agreements, the Partners established jointly-owned, limited purpose legal entities based in Canada, Puerto Rico, and the United States through which to carry out the contractual activities of the Partnership in these countries. An additional jointly-owned, limited purpose legal entity based in Singapore was established to own the rights to the intellectual property of the Partnership and to fund and oversee research and development and manufacturing activities of the Partnership and certain respiratory products. In all other markets except Latin America, subsidiaries of Merck or Schering-Plough perform marketing activities for Cholesterol Products under contract with the Partnership. These legal entity and subsidiary operations are collectively referred to as the “Combined Companies.” In Latin America, the Partnership sells directly to Schering-Plough and Merck’s Latin American subsidiaries and Schering-Plough and Merck compete against one another in the cholesterol market. Consequently, selling, promotion and distribution activities for the Cholesterol Products within Latin America are not included in the Combined Companies.

The Partnership is substantially reliant on the infrastructures of Merck and Schering-Plough. There are a limited number of employees of the legal entities of the Partnership and most activities are performed by employees of either Merck or Schering-Plough under service agreements with the Partnership. Profits, which are shared by the Partners under differing arrangements in countries around the world, are generally defined as net sales minus (1) agreed upon manufacturing costs and expenses incurred by the Partners and invoiced to the Partnership, (2) direct promotion expenses incurred by the Partners and invoiced to the Partnership, (3) expenses for a limited specialty sales force in the United States incurred by the Partners and invoiced to the Partnership, and certain amounts for sales force physician detailing of the Cholesterol Products in the United States, Puerto Rico, Canada and Italy (4) administration expenses based on a percentage of Cholesterol Product net sales, which are invoiced by one of the Partners, and (5) other costs and expenses incurred by the Partners that were not contemplated when the Cholesterol Agreements were entered into but that were subsequently agreed to by both Partners. Agreed upon research and development expenses incurred by the Partners and invoiced to the Partnership are shared equally by the Partners, after adjusting for special allocations in the nature of milestones due to one of the Partners.

114

Notes to Combined Financial Statements — (Continued)

Basis of Presentation

The accompanying combined balance sheets and combined statements of net sales and contractual expenses, cash flows and partners’ capital (deficit) include the cholesterol and respiratory-related activities of the Combined Companies. The respiratory-related activities primarily pertain to clinical development work and, while the montelukast and loratadine combination tablet does not have approval in any country, Phase III clinical development is ongoing. Spending on respiratory-related activities is not material to the income from operations in any of the years presented. Interpartnership balances and profits are eliminated.

Net sales include the net sales of the Cholesterol Products sold by the Combined Companies. Expenses include amounts that Merck and Schering-Plough have contractually agreed to directly invoice to the Partnership, or are shared through the contractual profit sharing arrangements between the Partners, as described above.

The accompanying combined financial statements were prepared for the purpose of complying with certain rules and regulations of the Securities and Exchange Commission, and reflect the activities of the Partnership based on the contractual agreements between the Partners. Such combined financial statements include only the expenses agreed by the Partners to be shared or included in the calculation of profits under the contractual agreements of the Partnership, and are not intended to be a complete presentation of all of the costs and expenses that would be incurred by a stand-alone pharmaceutical company for the discovery, development, manufacture, distribution and marketing of pharmaceutical products.

Under the Cholesterol Agreements, certain activities are charged to the Partnership by the Partners based on contractually agreed upon allocations of Partner-incurred expenses as described below. In the opinion of Management, any allocations of expenses described below are made on a basis that reasonably reflects the actual level of support provided. All other expenses are expenses of the Partners and accordingly, are reflected in each Partner’s respective expense line items in their separate consolidated financial statements. Future results of operations, financial position, and cash flows could differ materially from the historical results presented herein.

As described above, the profit sharing arrangements under the Cholesterol Agreements provide that only certain Partner-incurred costs and expenses be invoiced to the Partnership by the Partners and therefore become part of the profit calculation. The following paragraphs list the typical categories of costs and expenses that are generally incurred in the discovery, development, manufacture, distribution and marketing of the Cholesterol Products and provide a description of how such costs and expenses are treated in the accompanying combined statements of net sales and contractual expenses, and in determining profits under the contractual agreements.

•  Manufacturing costs and expenses — All contractually agreed upon manufacturing plant costs and expenses incurred by the Partners related to the manufacture of the Partnership products are included as “Cost of sales” in the accompanying combined statements of net sales and contractual expenses, including direct production costs, certain production variances, expenses for plant services and administration, warehousing, distribution, materials management, technical services, quality control, and asset utilization. “Cost of sales” in 2005 includes certain interpartnership adjustments totaling $14 million that relate to prior years. The adjustments, which lowered 2005 cost of sales, are not material to the results of operations in 2005 or any of the individual prior years and do not impact the Partners’ equity income amounts. All other manufacturing costs and expenses incurred by the Partners not agreed to be included in the determination of profits under the contractual agreements are not invoiced to the Partnership and therefore are excluded from the accompanying combined financial statements. These costs and expenses include but are not limited to yield gains and losses in excess of jointly agreed upon yield rates and excess/idle capacity of manufacturing plant assets.

115

Notes to Combined Financial Statements — (Continued)

•  Direct promotion expenses — Direct promotion represents direct and identifiable out-of-pocket expenses incurred by the Partners on behalf of the Partnership, including but not limited to contractually agreed upon expenses related to market research, detailing aids, agency fees, direct-to-consumer advertising, meetings and symposia, trade programs, launch meetings, special sales force incentive programs and product samples. All such contractually agreed upon expenses are included in “Selling, general and administrative” in the accompanying combined statements of net sales and contractual expenses. All other promotion expenses incurred by the Partners not agreed to be included in the determination of profits under the contractual agreements are excluded from the accompanying combined financial statements.

•  Selling expenses — In the United States, Canada, Puerto Rico and Italy, the general sales forces of the Partners provide a majority of the physician detail activity at an agreed upon amount which is included in “Selling, general and administrative” in the accompanying combined statements of net sales and contractual expenses. In addition, the agreed upon costs of a limited specialty sales force for the United States market that calls on opinion leaders in the field of cholesterol medicine are also included in “Selling, general and administrative.” All other selling expenses incurred by the Partners not agreed to be included in the determination of profits under the contractual agreements are excluded from the accompanying combined financial statements. These expenses include the total costs of the general sales forces of the Partners detailing the Cholesterol Products in most countries outside of the United States, Canada, Puerto Rico and Italy.

•  Administrative expenses — Administrative support is primarily provided by one of the Partners. The contractually agreed upon expenses for support are determined based on a percentage of Cholesterol Product sales. Such amounts are included in “Selling, general and administrative” in the accompanying combined statements of net sales and contractual expenses. Selected contractually agreed upon direct costs of employees of the Partners for support services and out-of-pocket expenses incurred by the Partners on behalf of the Partnership are also included in “Selling, general and administrative.” All other expenses incurred by the Partners not agreed to be included in the determination of profits under the contractual agreements are excluded from the accompanying combined financial statements. These expenses include, but are not limited to, certain U.S. managed care services, Partners’ subsidiary management in most international markets, and other indirect expenses such as corporate overhead and interest.

•  Research and development (“R&D”) expense — R&D activities are performed by the Partners and agreed upon costs and expenses are invoiced to the Partnership. These agreed upon expenses generally represent an allocation of each Partner’s estimate of full time equivalents devoted to the research and development of the cholesterol and respiratory products and include grants and other third-party expenses. These contractually agreed upon allocated costs are included in “Research and development” in the accompanying combined statements of net sales and contractual expenses. All other R&D costs that are incurred by the Partners but are not jointly agreed upon are excluded from the accompanying combined financial statements.

2.   Summary of Significant Accounting Policies

Principles of Combination

The accompanying combined balance sheets and combined statements of net sales and contractual expenses, cash flows and partners’ capital (deficit) include the cholesterol and respiratory-related activities of the Combined Companies. Interpartnership balances and profits are eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation.

Use of Estimates

The combined financial statements are prepared based on contractual agreements between the Partners, as described above, and include certain amounts that are based on Management’s best estimates and judgments.

116

Notes to Combined Financial Statements — (Continued)

Estimates are used in determining such items as provisions for sales discounts and returns and government and managed care rebates. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

Foreign Currency Translation

The net assets of the Partnership’s foreign operations are translated into U.S. dollars at current exchange rates. The U.S. dollar effects arising from translating the net assets of these operations are included in Partners’ capital (deficit), and are not significant.

Cash and Cash Equivalents

Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months.

Inventories

Substantially all inventories are valued at the lower of first in, first out cost or market.

Intangible Assets

Intangible assets consist of licenses, trademarks and trade names owned by the Partnership. These intangible assets were recorded at the Partners’ historical cost at the date of contribution, at a nominal value.

Revenue Recognition, Rebates, Returns and Allowances

Revenues from sales of Cholesterol Products are recognized when title and risk of loss pass to the customer. Recognition of revenue also requires reasonable assurance of collection of sales proceeds and completion of all performance obligations. In the United States, sales discounts are issued to customers as direct discounts at the point-of-sale or indirectly through an intermediary wholesale purchaser, known as chargebacks, or indirectly in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns for which reliable estimates can be made at the time of sale. Reserves for chargebacks, discounts and returns and allowances are reflected as a direct reduction to accounts receivable and amounted to $37 million and $23 million at December 31, 2006 and 2005, respectively. Accruals for rebates are reflected as “Rebates payable,” shown separately in the combined balance sheets.

Income Taxes

Generally, taxable income or losses of the Partnership are allocated to the Partners and included in each Partner’s income tax return. In some state jurisdictions, the Partnership is subject to an income tax, which is included in the combined financial statements and shared between the Partners. Except for these state income taxes, which are not significant to the combined financial statements, no provision has been made for federal, foreign or state income taxes.

Concentrations of Credit Risk

The Partnership’s concentrations of credit risk consist primarily of accounts receivable. At December 31, 2006, three customers each represented 17%, 28% and 38% of “Accounts receivable, net.” These same three customers each accounted for more than 10% of net sales in 2006. Bad debts for the years ended December 31, 2006, 2005 and 2004 have been minimal. The Partnership does not normally require collateral or other security to

117

Notes to Combined Financial Statements — (Continued)

support credit sales. In 2006, 2005 and 2004 the Partnership derived approximately 80%, 81% and 83%, respectively, of its combined net sales from the United States.

3.   Inventories

Inventories at December 31 consisted of:

	2006		2005
	(Dollars in Millions)
Finished goods	$	25	$	28
Raw materials and work in process		62		38
	$	87	$	66

The Partnership has entered into long-term agreements with the Partners for the supply of active pharmaceutical ingredients (API) and for the formulation and packaging of the Cholesterol Products at an agreed upon cost. In connection with these supply agreements, the Partnership has entered into capacity agreements under which the Partnership has committed to take a specified annual minimum supply of API and formulated tablets or pay a penalty. These capacity agreements are in effect for a period of seven years following the first full year of production by one of the Partners and expire beginning in 2011. The Partnership has met its commitments under the capacity agreements through December 31, 2006.

4.   Related Party Transactions

The Partnership receives substantially all of its goods and services, including pharmaceutical product, manufacturing services, sales force services, administrative services and R&D services, from its Partners. Summarized information about related party balances is as follows:

	December 31, 2006						December 31, 2005
	Schering-						Schering-
	Plough		Merck		Total		Plough		Merck		Total
					(Dollars in Millions)
Receivables	$	11	$	399	$	410	$	5	$	241	$	246
Payables		180		463		643		170		439		609
Payables, net	$	169	$	64	$	233	$	165	$	198	$	363

Selling, general and administrative expense includes contractually defined costs for physician detailing provided by Schering-Plough and Merck of $204 million and $203 million, respectively, in 2006, $196 million and $181 million, respectively, in 2005 and $121 million and $99 million, respectively, in 2004. These expenses are not necessarily reflective of the actual cost of the Partners’ sales efforts in the countries in which the amounts are contractually defined. Included in the 2006 amount was $52 million of contractual amounts included in the profit sharing calculation in Italy relating to physician detailing. These amounts were not paid by the Partnership to the Partners but are a component of the profit sharing calculation.

Cost of sales and selling, general and administrative expense also includes contractually defined costs for distribution and administrative services provided by Merck and Schering-Plough of $27 million, $21 million, and $3 million in 2006, 2005 and 2004, respectively. These amounts are not necessarily reflective of the actual costs for such distribution and administrative services.

The Partnership sells Cholesterol Products directly to the Partners, principally to Merck and Schering-Plough affiliates in Latin America. In Latin America, where the Partners compete with one another in the cholesterol market, Merck and Schering-Plough purchase Cholesterol Products from the Partnership and sell directly to third

118

Notes to Combined Financial Statements — (Continued)

parties. Sales to Partners are included in “Net sales” at their invoiced price in the accompanying combined statements of net sales and contractual expenses and were $61 million, $36 million, and $42 million, in 2006, 2005 and 2004, respectively.

5.   Legal and Other Matters

The Partnership may become party to claims and legal proceedings of a nature considered normal to its business, including product liability and intellectual property. The Partnership records a liability in connection with such matters when it is probable a liability has been incurred and an amount can be reasonably estimated. In February 2007, Schering-Plough received a notice from a generic company indicating that it had filed an Abbreviated New Drug Application for ZETIA and that it is challenging the U.S. patents that are listed for ZETIA. The Partners are considering the appropriate response.

The Partnership maintains insurance coverage with deductibles and self-insurance as Management believes is cost beneficial. The Partnership self-insures all of its risk as it relates to product liability and accrues an estimate of product liability claims incurred but not reported.

119

INDEPENDENT AUDITORS’ REPORT

The Partners of the Merck/Schering-Plough Cholesterol Partnership

We have audited the accompanying combined balance sheets of the Merck/Schering-Plough Cholesterol Partnership as of December 31, 2006 and 2005, as described in Note 1, and the related combined statements of net sales and contractual expenses, partners’ capital (deficit) and cash flows, as described in Note 1, for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the management of Merck & Co., Inc. and Schering-Plough Corporation, collectively “Management” or “the Partners.” Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying statements were prepared for the purpose of complying with certain rules and regulations of the Securities and Exchange Commission and, as described in Note 1, are not intended to be a complete presentation of the financial position, results of operations or cash flows of all the activities of a stand-alone pharmaceutical company involved in the discovery, development, manufacture, distribution and marketing of pharmaceutical products.

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Merck/Schering-Plough Cholesterol Partnership, as described in Note 1, as of December 31, 2006 and 2005, and the combined results of its net sales and contractual expenses and its combined cash flows, as described in Note 1, for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

/s/  DELOITTE & TOUCHE LLP

Parsippany, New Jersey

February 27, 2007

120

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2006, 2005 and 2004

Valuation and qualifying accounts deducted from assets to which they apply:

Allowances for accounts receivable:

	Reserve for			Reserve			Reserve
	Doubtful			for Cash			for Claims
	Accounts			Discounts			and Other			Total
	(Dollars in millions)
2006
Balance at beginning of year	$	54		$	31		$	126		$	211
Additions:
Charged to costs and expenses		25			150			493			668
Deductions from reserves		(29	)		(150	)		(468	)		(647	)
Effects of foreign exchange		3			1			1			5
Balance at end of year	$	53		$	32		$	152		$	237
2005
Balance at beginning of year	$	67		$	25		$	81		$	173
Additions:
Charged to costs and expenses		14			138			271			423
Deductions from reserves		(25	)		(131	)		(225	)		(381	)
Effects of foreign exchange		(2	)		(1	)		(1	)		(4	)
Balance at end of year	$	54		$	31		$	126		$	211
2004
Balance at beginning of year	$	60		$	22		$	35		$	117
Additions:
Charged to costs and expenses		16			105			159			280
Deductions from reserves		(11	)		(103	)		(114	)		(228	)
Effects of foreign exchange		2			1			1			4
Balance at end of year	$	67		$	25		$	81		$	173

121

EX-10.E.V

Exhibit 10(e)(v)

EMPLOYMENT AGREEMENT

     This Agreement is made by and between Schering-Plough Corporation, a New Jersey Corporation (the “Company”), and Thomas Koestler (the “Executive”), as of the 19^th day of December, 2006 (the “Commencement Date”). This Agreement is a restatement of and supersedes and replaces (i) the letter from the Company to Executive dated July 11, 2003 offering employment and (ii) the change of control Employment Agreement between the Company and the Executive dated as of August 18, 2003.

     Definitions applicable to capitalized terms not defined where first mentioned below are set forth in Section 7 of this Agreement.

1. Employment Period.

     Executive joined the Company on August 18, 2003. Beginning on the Commencement Date until the fifth anniversary thereof and for successive one-year periods thereafter (the “Employment Period”), the Company agrees to continue in its employ and the Executive hereby agrees to remain in the employ of the Company in accordance with the terms and conditions of this Agreement, provided, however, that either party may terminate the Employment Period by providing the other party with written notice of such termination at least one-year prior to the fifth anniversary (or any subsequent anniversary) of the Commencement Date on which such termination is to be effective. Subject to the Company’s obligation to provide severance benefits as may be specified in this Agreement and except as otherwise specifically provided in this Agreement, Executive and the Company acknowledge that this employment relationship may be terminated at any time and for any or no cause or reason, at the option of either the Company or Executive.

2. Duties and Scope of Employment.

     (a) Position. During the Employment Period, the Company shall continue to employ Executive as Executive Vice President and President, Schering-Plough Research Institute or in such other substantially equivalent position requested by the Company’s Chief Executive Officer (“CEO”) for which the Executive is qualified by education, training, and experience. Executive shall continue to serve as an officer of the Company, and be a member of the Executive Management Team (the “EMT”), and will report to the CEO.

     (b) Duties. During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities and duties assigned to the Executive hereunder, to use the Executive’s reasonable best efforts to perform faithfully and efficiently such responsibilities and duties. During the Employment Period it shall not be a violation of this Agreement for the Executive to (i) serve on civic or charitable boards or committees, or with the written approval of the CEO, on corporate boards or committees, (ii) deliver lectures, fulfill

speaking engagements or teach at educational institutions, and (iii) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement.

3. Compensation.

     During the Employment Period, the Company shall pay Executive the following as compensation for services to the Company:

     (a) Base Salary. Executive’s annualized base salary is currently $700,000 less applicable deductions payable in accordance with the Company’s normal payroll practices as in effect from time to time for its senior executives. From time to time and at least annually, Executive’s base salary shall be subject to review and increase above Executive’s then currently base salary pursuant to the Company’s normal review policy for other similarly situated senior executives of the Company. Executive’s base salary shall not be subject to any decrease without Executive’s consent.

     (b) Operations Management Team Incentive Plan. During the Employment Period, Executive shall participate in the Company’s Operations Management Team Incentive Plan or any successor or replacement plan (the “Incentive Plan”) at a level determined by the Compensation Committee of the Board of Directors or its delegate (the “Compensation Committee”) to be appropriate based on Executive’s position, job performance and Company policy. Executive’s current target annual incentive under the Incentive Plan is 70% of Executive’s annual base salary. Executive’s target annual as a percentage of base salary incentive shall not be subject to any decrease without Executive’s consent. Payment of incentive compensation, if the performance criteria determined by the Compensation Committee are met, will be made by March 15 of the year following the relevant Incentive Plan year, unless Executive elects to defer payment pursuant to an applicable deferred compensation plan of the Company.

     (c) Long Term Incentive Plans. Executive is, and shall remain, a participant at the levels determined by the Compensation Committee, in the Schering-Plough Corporation Cash Long Term Incentive Plan and the Schering-Plough Corporation Long-Term Performance Share Unit Incentive Plan for the performance period beginning January 1, 2004 and ending December 31, 2006. Executive shall participate in successor or replacement plans at a level determined by the Compensation Committee.

     (d) Incentive Equity Awards. During the Employment Period, Executive shall be eligible to participate in the Company’s 2006 Stock Incentive Plan and any successor or replacement plan, in accordance with the terms of the Stock Plan and any applicable grants (except as provided herein), at a level determined by the Compensation Committee.

4. Enhanced Benefits and Perquisites.

     (a) General Benefits. During the Employment Period, Executive shall, to the extent eligible, be entitled to participate in all employee welfare and retirement benefit plans and programs provided by the Company to its senior executives in accordance with the terms of those plans or programs as they may be modified from time to time. Executive shall be entitled

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to post-retirement welfare benefits on the same terms as such benefits are made available by the Company to its senior executives at the time of Executive’s retirement. If, however, Executive’s participation in any such plan or program could result in adverse or unintended tax consequences to any participant in such plan or program, the Company shall be entitled to pay to Executive the cost of equivalent benefits outside such plan or program or provide Executive with substantially equivalent benefits through a separate program without regard to the tax treatment applicable to such payment or separate program in lieu of permitting the Executive to participate in such program.

     (b) Supplemental Executive Retirement Plan. Executive shall participate in the Company’s SERP.

     (c) Executive Life Insurance. During the Employment Period, Executive shall be eligible for Executive Life Insurance coverage with a face amount of $2,250,000 in accordance with the terms of the Company’s Executive Life Insurance program.

     (d) Vacation. During the Employment Period, Executive shall be entitled to four weeks paid vacation per annum, subject to adjustment in accordance with the Company’s normal vacation policies applicable to senior executives.

     (e) Relocation Benefits. Executive acknowledges that the Company may, at any time during the Employment Period, relocate his place of employment to such location as may at that time constitute the Company’s principal offices. Executive shall be entitled to relocation benefits pursuant to the Company’s relocation benefit program.

     (f) Expenses. Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Executive during the Employment Period for business purposes in accordance with the policies, practices, and procedures of the Company and its Affiliated Companies provided generally to other peer executives of the Company and its Affiliated Companies.

     (g) Fringe Benefits. During the Employment Period, Executive shall be entitled to fringe benefits as in effect generally with respect to senior executives of the Company and its Affiliated Companies. As of the date of this Agreement, these fringe benefits include tax and financial planning services. Executive shall be entitled to prompt reimbursement (in no event to be made later than two and one half months after the year in which the costs were incurred) for (i) financial planning services in an amount up to $8,000 in the first year of utilization and up to $5,000 annually thereafter as needed, and (ii) tax preparation in an amount up to $2,500 annually. Executive shall first submit invoices for such services to the Company for payment and seek reimbursement if unpaid. To the extent required by applicable law, such fringe benefits shall result in imputed income which shall be subject to withholding from the Executive’s wages in the amount and manner prescribed by such law.

     (h) Office and Support Staff. During the Employment Period, Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance on the same or similar terms as those provided generally to senior executives of the Company and its Affiliated Companies.

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     (i) Directors and Officers Insurance. The Company will not diminish the amount or change the type of Directors and Officers Liability insurance coverage applicable to Executive (as an executive during the Employment Period and as a former executive thereafter), as in effect on the date of this Agreement, without his advance written consent.

5. Cause, Voluntary, Involuntary and Good Reason Terminations.

     (a) Death, Disability, Cause and Voluntary Terminations without Good Reason. If, during the Employment Period, Executive’s employment is terminated due to Executive’s death or Disability, by the Executive without Good Reason or by the Company for Cause, the Company shall have no obligation to the Executive other than the obligation to promptly pay to the Executive his unpaid accrued base salary through the Termination Date and to pay or provide, promptly when due, any Other Benefits, as well as payments or benefits required by applicable law.

     (b) Involuntary and Good Reason Terminations. If, during the Employment Period, Executive’s employment is terminated by the Company other than for Cause, Disability or by non-renewal of the Employment Period pursuant to Section 1, or if the Executive terminates employment for Good Reason, the Company shall provide the Executive with the Other Benefits promptly when due. In addition, provided that the Executive signs a Satisfactory Release within 35 days following the Termination Date and the Executive does not revoke it within the 7 days after the date he executes such Release, then Executive shall be entitled to:

          (i) payment, within 30 days following the effective date of the Satisfactory Release, of a severance benefit equal to the product of three multiplied by the sum of the Executive’s current base salary plus the highest target incentive opportunity under the Incentive Plan for any of the past three years (each as in effect immediately prior to the Executive’s Termination Date but without regard for any reduction that constituted the grounds, or part of the grounds, for Executive’s Good Reason termination);

          (ii) during the 3-year period following Executive’s employment termination, continue to participate in the Company’s health and welfare programs applicable to, and (to the extent permissible under applicable law) on the same terms as, other senior executives of the Company at the time of the termination of the Executive’s employment; provided, however that such benefits shall cease on the date that Executive becomes eligible for similar benefits from a new employer and Executive shall notify the Company in writing of such benefits eligibility within 30 days following the effective date of Executive’s benefits eligibility from the new employer; and provided further, that if Executive’s participation in any such program of the Company could result in adverse or unintended tax consequences to any participant in such program (including the Executive), the Company shall be entitled to provide Executive with substantially equivalent benefits through a separate program (including the provision of such benefits through the purchase of insurance) without regard to the tax treatment applicable to such separate program in lieu of permitting the Executive to participate in such program;

          (iii) payment, within 30 days following the effective date of the Satisfactory Release, of the Enhanced SERP Benefit; and

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          (iv) credit for three additional years of service and age for purposes of determining eligibility for coverage and rate of contribution under the Company’s retiree medical plan or any replacement or successor plan.

For purposes of this provision, “Satisfactory Release” shall mean a release of claims in a form reasonably prescribed by the Company that (1) releases, and forever discharges, all claims that Executive has or may have against the Company and its Affiliated Companies and its and their employees, directors and agents (other than claims relating to Other Benefits), and (2) becomes irrevocable if not revoked by Executive within seven (7) days after he signs it; provided that the form of release shall not contain any post-employment covenants, including those covenants to which the Executive may be subject pursuant to Subsection 5(c) below or otherwise.

     (c) Non-competition and Non-solicitation. In the event of voluntary termination of the Executive’s employment during the Employment Period by the Executive without Good Reason (i) the Executive shall not engage in Competition (as defined below) during the one-year period immediately following Executive’s termination of employment, and (ii) the Executive shall not engage in Solicitation (as defined below) during the two-year period immediately following Executive’s termination of employment. For purposes of this Section 5, the term Competition shall mean that Executive, without the written approval of the CEO, commences employment with, or provides consulting services to, any pharmaceutical enterprise that is engaged in research, development, and/or sales of human and/or pharmaceutical products (unless sales from pharmaceutical products constitute less than 20% of total sales of the company conducting the enterprise and the consolidated affiliates of that company); provided that service solely as a member of the Board of Directors of a company whose annual sales are less than $100 million on a consolidated basis with all affiliated companies shall not be considered Competition. Further, the term Competition specifically excludes (i) companies whose primary purpose is to provide consulting and/or audit services so long as those companies have revenues in excess of $100 million, and (ii) law firms whose primary purpose is to provide legal services. For purposes of this Section 5, the term Solicitation shall mean that without the written approval of the CEO or his delegate, the Executive, directly or indirectly, solicits, encourages or participates in the solicitation or hiring of, any person who is currently an employee of the Company or independent contractor doing business with the Company or who was an employee of the Company at any time during the last three (3) months of the Employment Period by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise; provided that the Executive shall not be considered to have engaged in Solicitation for purposes of this Section 5 if an employer other than the Company solicits or hires, with no participation or involvement by the Executive, any current or former employee, independent contractor or consultant of the Company who is not or was not employed in, or providing direct services to, a business area of the Company for which Executive (immediately prior to the termination of his employment) had no direct authority or responsibility; and provided further that the term Solicitation shall not preclude Executive from giving references.

6. Change of Control.

     (a) General. In the event of any Change of Control following the effective date of this Agreement and during the Employment Period, Subsection 6(b) shall supersede Section 2; Subsection 6(d) shall supersede Subsection 3(a); Subsection 6(e) shall supersede Subsections

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3(b); Subsections 6(f) through (i) shall supersede Section 5; and the other provisions of this Section 6 shall supplement the other provisions of Sections 3 and 4; in each case until the expiration of the COC Employment Period triggered by such Change of Control. If the Executive’s employment is not terminated before the end of the applicable COC Employment Period, immediately following such COC Employment Period, the provisions of this Section 6 shall cease to apply unless and until another Change of Control occurs during the Employment Period and the provisions of Sections 2, 3(a), 3(b) and 5 shall again apply if the Employment Period has not yet expired. Effective upon the termination of Executive’s employment for any reason during a COC Employment Period, any previous restrictions imposed under this Agreement or any other agreement upon the Executive regarding engaging in post-termination competitive activity against the Company or soliciting current or former employees or independent contractors of the Company shall immediately cease to be applicable.

     For purposes of this Section 6, if (i) the Executive’s employment with the Company is terminated prior to a Change of Control, (ii) the Executive reasonably demonstrates that such termination of employment either (A) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or a Section 409A Change in Control Event or (B) otherwise arose in connection with or in anticipation of a Change of Control or a Section 409A Change in Control Event and (iii) a Section 409A Change in Control Event is actually consummated, then such termination shall be deemed to have occurred during a COC Employment Period.

     (b) Position and Duties. During a COC Employment Period, (i) the Executive’s position (including status, offices, titles and reporting relationships and requirements), authority, duties and areas and scope of responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the COC Employment Period; and (ii) the Executive’s services shall be performed at the location where the Executive was employed immediately preceding any such Change of Control or any office or location less than 35 miles from such location and that is not in a different state than such location. It is expressly understood and agreed that to the extent that any activities have been conducted by the Executive during the three years immediately prior to a Change of Control, the reinstatement or continued conduct of such activities (or the reinstatement or conduct of activities similar in nature and scope thereto) subsequent to any related Change of Control shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company and its subsidiaries.

     (c) Incentive Compensation, Employee Benefits and Fringe Benefits. Except as otherwise set forth in this Agreement, during a COC Employment Period, the Executive (and eligible family members or dependents, as applicable) shall be entitled to participate in all incentive, profit-sharing, stock option, stock award, savings and retirement, and health and welfare benefit plans (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) practices, policies and programs and to receive paid vacation, fringe benefits, and expense reimbursement, all as applicable generally to other peer executives of the Company and its Affiliated Companies, but in no event shall such plans, practices, policies, programs and benefits provide the Executive with incentive opportunities (cash or equity), savings opportunities, retirement benefit opportunities, health and welfare benefits, vacation pay, fringe benefits, and

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expense reimbursement, which are, in each case, less favorable in the aggregate, than the most favorable of those provided by the Company and its Affiliated Companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Change of Control, or if more favorable to the Executive, those provided generally at any time thereafter to other senior executives of the Company and its Affiliated Companies.

     (d) Annual Base Salary. During a COC Employment Period, the Executive shall receive, in accordance with the Company’s normal payroll practices in effect from time to time for its senior executives, an Annual Base Salary which shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the beginning of the COC Employment Period and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after such an increase and the term Annual Base Salary as used in this Section 6 shall refer to Annual Base Salary as so increased.

     (e) Annual Bonus. In addition to Annual Base Salary, for each fiscal year ending during a COC Employment Period, Executive shall be awarded an annual bonus in cash at least equal to the Executive’s highest target incentive opportunity under the Incentive Plan for any of the past three years (the “Annual Bonus”). Each such Annual Bonus shall be paid no later than the 15^th day of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall have elected to defer the receipt of such Annual Bonus in accordance with an applicable deferred compensation plan of the Company.

     (f) Death. The Executive’s employment shall terminate automatically upon the Executive’s death during a COC Employment Period without further obligation to the Executive’s legal representative’s under this Agreement other than for payment of any Unpaid Accrued Obligations and any Other Benefits which shall be at least equal to the most favorable benefits provided by the Company and Affiliated Companies to the estates and beneficiaries of senior executives of the Company and such affiliated companies under such plans, programs, and policies relating to death benefits and survivor benefits as in effect at any time during the 120-day period immediately prior to the COC Employment Period, or if more favorable to the Executive’s estate and/or beneficiaries, as in effect on the date of the Executive’s death with respect to other peer executives of the Company and their beneficiaries. Unpaid Accrued Obligations shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Termination Date, and the Other Benefits shall be provided promptly when due.

     (g) Disability. If the Company determines in good faith that the Disability of the Executive has occurred during a COC Employment Period, it may give the Executive Notice of Termination. In such event, the Executive’s employment with the Company shall terminate effective on the Termination Date, provided that, within the 30 days after Executive’s receipt of the Notice of Termination, the Executive shall not have returned to full-time performance of the Executive’s duties. In the event of Executive’s termination of employment due to Disability, Unpaid Accrued Obligations shall be paid in cash to the Executive within 30 days following the Termination Date, and the Other Benefits shall be provided promptly when due.

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     (h) Termination for Cause or Voluntary Termination without Good Reason. If the Executive’s employment shall be terminated by the Company for Cause or voluntarily by the Executive without Good Reason during the COC Employment Period, the Employment Period shall terminate and the Company shall have no further obligations to the Executive other than the obligation to pay the Executive (i) his unpaid Annual Base Salary through the Termination Date, and (ii) any unpaid Other Benefits. In such case, all Unpaid Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days following the Termination Date, and the Other Benefits shall be provided promptly when due.

     (i) Termination for Good Reason or without Cause. If, during the COC Employment Period, the Executive’s employment shall be terminated by the Company other than for Cause or Disability or by the Executive for Good Reason, the Company shall:

          (1) within 30 days following the Executive’s Termination Date, pay the Executive a single sum cash amount equal to the sum of (i) the Unpaid Accrued Obligations; (ii) the product of three (or the number of whole and partial years from the Executive’s Termination Date until his 65^th birthday, if less) multiplied by the sum of the Executive’s Annual Base Salary, plus the Executive’s Annual Bonus, plus the greater of the Highest Profit Sharing Contribution or the highest aggregate Company contribution to the Executive’s account under the Company’s qualified and nonqualified defined contribution retirement plans for any of the three years immediately preceding the Executive’s Termination Date; and (iii) the Executive’s Enhanced SERP Benefit; and

          (2) for the lesser of (x) three years after the Executive’s Termination Date and (y) the period through the Executive’s 65^th birthday, continue health and welfare benefits to the Executive (and the Executive’s family, if applicable) at least equal to those which would have been provided in accordance with Subsection 6(c) hereof had the Executive not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other senior executives of the Company and its Affiliated Companies and their families; provided that such benefits coverage shall be secondary to any health and welfare benefits coverage for which the Executive becomes eligible under any plan or arrangement sponsored by a subsequent employer of the Executive; and provided further, that if Executive’s participation in any such program could result in adverse or unintended tax consequences to any participant in such program (including the Executive), the Company shall be entitled to provide Executive with substantially equivalent benefits through a separate program (including the provision of such benefits through the purchase of insurance) without regard to the tax treatment applicable to such separate program in lieu of permitting the Executive to participate in such program;

          (3) to the extent not theretofore paid or provided, pay or provide to the Executive all Other Benefits promptly when due;

          (4) waive any and all “reduction factors” imposed as a result of Executive’s age with respect to the Executive’s nonqualified supplemental or excess employee pension benefit plan if the Executive is at least age 50 as of the Termination Date; and

          (5) if the Executive is age 50 or greater as of the Termination Date, provide the Executive with coverage under the terms of the Company’s retiree medical plan (effective at the

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end of the post-employment period of extended health coverage) without regard to years of service for eligibility purposes but assuming the maximum Company-provided subsidy (if any) applies and applying 3 additional years of service credit for purposes of rate of contribution under such plan or any replacement or successor plan; provided, however that if the Executive is age 45 or older at the end of the post-employment period of extended health coverage, provide the Executive, upon reaching age 55 and upon reaching the end of the period of extended health coverage following Executive’s Termination Date pursuant to Subsection 6(i)(2) hereof, with eligibility for the Company’s retiree medical plan or any replacement or successor plan (including, without limitation, any supplemental coverage applicable to executives) as if the Executive had, as of the Termination Date, satisfied the age and service conditions for such plans and assuming the maximum Company-provided subsidy (if any) applies.

7. Definitions.

     (a) “Affiliated Company” shall mean any corporation or other entity controlled by, controlling or under common control with the Company.

     (b) “Annual Base Salary” shall mean an annual base salary at least equal to 24 times the highest semi-monthly base salary paid or payable, including (without limitation) any base salary which has been earned but deferred, to Executive by the Company and its Affiliated Companies in respect of any month in the 12-month period immediately preceding the month in which a Change of Control occurs.

     (c) “Annual Bonus” shall have the meaning set forth in Subsection 6(e) of this Agreement.

     (d) “Cause” shall mean termination initiated by the Company (with advance approval by the Compensation Committee of the Board of Directors) or by the Executive incident to or connected with (i) Executive’s conviction relating to charges that Executive engaged in misappropriation, theft, embezzlement, kick-backs, or bribery whether in connection with Executive’s employment with the Company or otherwise, or (ii) the Company’s reasonable determination that Executive has engaged in other deliberate, gross or willful misconduct or dishonest acts or omissions (including, but not limited to, commission of a felony) resulting in significant harm to the Company.

     (e) “Change of Control” shall mean the happening of any of the following events:

          (1) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d 3 promulgated under the Exchange Act) of securities of the Company where such acquisition causes such Person to own 20% or more of either (x) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (1), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or

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maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (3) of this Section 7(e); and provided, further, that if any Person’s beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Company Voting Securities; or

          (2) individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

          (3) consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, or a sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

          (4) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

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     (f) “COC Employment Period” shall mean the period from the date on which a Change of Control occurs until the earlier of the third anniversary of such date or the Executive’s 65^th birthday.

     (g) “Confidential Information” shall mean information in any form whose unauthorized or unintended publication or disclosure will adversely affect the interests of the Company. It includes, but is not limited to, the following:

• Third party information provided under a confidentiality agreement;

• Long-range strategic plans;

• Critical formulas and trade secrets;

• Merger and acquisition plans;

• Operational plans;

• Research — Information relating to Company sponsored research and development projects, including a product’s regulatory status;

• Technical — Product or process specifications, manufacturing processes, test results, performance characteristics, special formulations, unique designs, unique software and identity of vendors and suppliers of unique materials;

• Marketing — Customer lists, schedules of new product availability and delivery periods, pending price changes, strategic plans, in-house marketing forecasts and other marketing plans;

• Financial — Budgets, product costs and profit margins on specific products; and other non-public financial audit and accounting information;

• Organization — Information regarding opening, closing, expanding, or modifying of Company facilities until the time and date specifically authorized for public disclosure; transfer of responsibilities or transfer of key employees until formal announcements; policy manuals; telephone directories; organization charts;

• Human Resources — Sensitive personal data pertaining to employees, such as salaries and compensation, medical records, performance appraisals or reviews, personal history statements and personnel files, letters of a personal and/or professional nature;

• Other information not generally known and relating to any phase of Company business which provides an opportunity to obtain an advantage over competitors who do not have or know the information.

     (h) “Disability” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected

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by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.

     (i) “Enhanced SERP Benefit” shall mean an amount equal to the excess of (i) the sum of (A) the lump-sum actuarial equivalent (as of the date that the Enhanced SERP Benefit is paid to the Executive or his beneficiaries (the “SERP Payout Date”)) of the normal retirement benefit under the Company’s Retirement Plan (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Retirement Plan immediately prior to the Executive’s Termination Date) and (B) the lump-sum actuarial equivalent of the normal retirement benefit under the SERP (as of the SERP Payout Date and utilizing actuarial assumptions no less favorable to the Executive than those in effect under the SERP immediately prior to the Executive’s Termination Date) which the Executive would have received if the Executive’s employment had continued for three years after the Executive’s Termination Date or through age 65, if sooner, assuming for this purpose that all accrued benefits were fully vested, and, if the Termination Date occurs during a COC Employment Period, assuming that the Executive’s compensation in each of the three years (or the shorter period to age 65, if applicable) would have been that required by Subsections 6(d) and 6(e) of this Agreement, over (ii) the lump-sum actuarial equivalent (as of the SERP Payout Date) of the Executive’s actual normal retirement benefit (paid or payable), if any, under the Retirement Plan and the SERP based on actual age, service and compensation as of the Executive’s Termination Date.

     (j) “Good Reason” shall mean any of the events described in (1)-(4) below if the Company fails to cure such events within 20 business days after receiving notice thereof from the Executive:

          (1) the assignment to the Executive of any duties that are materially inconsistent with the Executive’s education, training and experience, or a significant diminution in the Executive’s authorities, responsibilities, status or title (as described in Section 2 or Subsection 6(b) of this Agreement, as applicable), it being understood that (x) a change in the person to whom the Executive reports or (y) modifications to organizational responsibilities resulting in changes to Executive’s functional areas of responsibility that do not significantly diminish Executive’s core role in the Company would not constitute “Good Reason”;

          (2) any significant reduction by the Company of the Executive’s total compensation in the aggregate, unless such reduction was part of a reduction approved by the Company’s Board of Directors (or a Committee thereof) for a group of senior executives of the Company in addition to the Executive;

          (3) during a COC Employment Period, the Executive ceases to be subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 with respect to a continuing or successor company; or

          (4) during a COC Employment Period, any failure by the Company to comply with any of the provisions of Subsections 6(b) through 6(e) of this Agreement.

     (k) “Highest Profit Sharing Contribution” shall mean the annual aggregate of the highest contributions made under the Company’s Profit Sharing Incentive Plan and the highest

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hypothetical contributions made under the Company’s Profit Sharing Benefits Equalization Plan or any successor or replacement plans thereto, for any of the three calendar years preceding the Executive’s Termination Date.

     (l) “Invention(s)” shall mean any design, discovery, idea, process, product, device, substance, compound, biological or chemical entity, machine or article or process of manufacture, or any improvement of the foregoing, whether patentable or not, which is:

          (1) Conceived, discovered or made by a Company employee either solely or jointly with others either (A) during the term of his/her employment or (B) after the term of his/her employment, based on Confidential Information; and

          (2) Related to the Company’s actual or anticipated business or activities, or is related to the Company’s actual or anticipated research and development efforts, or is suggested by, or results from any tasks assigned to any employee and/or temporary worker or from work performed by an employee for, or on behalf of, the Company, whether or not such conception, discovery or making occurs during regularly scheduled work hours or results from the use of the Company’s facilities, materials, resources or personnel.

     (m) “Notice of Termination” shall mean a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if the Termination Date (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

     (n) “Other Benefits” shall mean all amounts or benefits other than Unpaid Accrued Obligations required to be paid or provided or which the Executive (or his beneficiaries) is eligible to receive under the applicable terms of any plan, program, agreement, corporate governance document, or other arrangement of the Company or any Affiliated Company.

     (o) “Retirement Plan” shall mean the Company’s defined benefit retirement plan.

     (p) “Section 409A Change in Control Event” shall mean the happening of any of the following events:

          (1) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of securities of the Company where such acquisition causes such Person to own more than 50% of either (x) the then outstanding Shares of the Company (the “Outstanding Shares”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Voting Securities”); provided, however, that for purposes of this

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subsection (1) the following acquisitions will not constitute a Section 409A Change in Control Event: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (3) below; and provided, further, that if any Person’s beneficial ownership of the Outstanding Shares or Outstanding Voting Securities reaches or exceeds 50% as a result of a prior transaction, and such Person subsequently acquires beneficial ownership of additional Shares or additional voting securities of the Company, such subsequent acquisition will not be treated as an acquisition that causes such Person to own more than 50% of the Outstanding Shares or Outstanding Voting Securities;

          (2) during any 12-month period, individuals who, as of the first day of such period, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the beginning of such 12-month period whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though such individual were a member of the Incumbent Board;

          (3) consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company, or the acquisition of assets or stock of another entity by the Company (each a “Business Combination”), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were beneficial owners, respectively, of the Outstanding Shares or Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectfully, the then outstanding shares of the common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Shares and Outstanding Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, more than 50% of, respectfully, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board on the later of (x) the time of the execution of the initial agreement, (y) the action of the Board providing for such Business Combination or (z) the beginning of the 12-month period ending on the effective date of the Business Combination;

          (4) any one Person acquires (or has acquired during any 12-month period ending on the date of the most recent acquisition by such Person) assets of the Company having a fair

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market value equal to or more than 40% of the total gross fair market value of all of the assets of the Company immediately prior to such sale, other than an acquisition by (A) a Person who was a shareholder of the Company immediately before the asset acquisition in exchange for or with respect to such Person’s Shares, (B) an entity whose total or voting power immediately after the transfer is at least 50% owned, directly or indirectly, by the Company, (C) a person or group that, immediately after the transfer, directly or indirectly owns at least 50% of the total value or voting power of the outstanding stock of the Company or (D) an entity whose total value or voting power immediately after the transfer is at least 50% owned, directly or indirectly, by a person described in clause (C) above; or

          (5) the complete liquidation of the Company.

     The definition of Section 409A Change in Control Event for purposes of this Agreement is intended to conform to the description of “Change in Control Events” in Treas. Prop. Reg. 1.409A-3(g)(5), or in subsequent IRS guidance describing what constitutes a Change in Control Event for purposes of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, no Section 409A Change in Control Event will be deemed to occur with respect to a transaction or event described in paragraphs (1) through (5) above unless the transaction or event would constitute a “Change in Control Event” as described in Treas. Prop. Reg. 1.409A-3(g)(5), or in subsequent IRS guidance under Code section 409A.

     (q) “SERP” shall mean the Company’s Supplemental Executive Retirement Plan or any successor plan thereto.

     (r) “Termination Date” shall mean (i) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of the other party’s receipt of the Notice of Termination or any later date specified therein, (ii) if the Executive’s employment is terminated by the Company other than for Cause or Disability, or by the Executive other than for Good Reason, the Termination Date shall be the date on which the Notice of Termination is delivered or any later date as may be mutually agreed upon; (iii) if the Executive’s employment is terminated by reason of death, the Termination Date shall be the date of the death; and (iv) if the Executive’s employment is terminated by reason of Disability of the Executive, the Termination Date shall be the 30^th day after Executive’s receipt of the Notice of Termination from the Company.

     (s) “Unpaid Accrued Obligations” shall mean unpaid Annual Base Salary accrued through the termination date, any unpaid accrued vacation pay, and the Executive’s Annual Bonus multiplied by a fraction, the numerator of which is the number of days in the current fiscal year through the Termination Date, and the denominator of which is 365.

8. Certain Additional Payments.

     (a) Except as set forth below, in the event it shall be determined that any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the “Code”)) made or provided to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (each, a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code (together with any interest or penalties imposed with respect to such

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excise tax, the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (“Gross-Up Payment”), at or before the time the Excise Tax is due (whether by withholding or otherwise) in an amount such that after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. The Company’s obligation to make Gross-Up Payments under this Section 8 shall not be conditioned upon the Executive’s termination of employment.

     (b) Subject to the provisions of Subsection 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by such nationally recognized certified public accounting firm that the Company may designate (the “Accounting Firm”). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting a Change of Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within ten days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event the Company exhausts or does not seek to pursue its remedies pursuant to Subsection 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

     (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

          (i) give the Company any information reasonably requested by the Company relating to such claim,

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          (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

          (iii) cooperate with the Company in good faith in order effectively to contest such claim, and

          (iv) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax, income tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Subsection 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company directs the Executive to pay such claim and sue for a refund, the Company shall pay the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such payment or with respect to any imputed income in connection with such payment; and further provided, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

     (d) If, after the receipt by the Executive of a Gross-Up Payment or an amount paid by the Company pursuant to Subsection 8(c), the Executive becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Subsection 8(c), if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount paid by the Company pursuant to Subsection 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such payment shall be forgiven and shall not be required to be repaid and the amount of such payment shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

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     (e) Notwithstanding any other provision of this Agreement, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of any Gross-Up Payment, and the Executive hereby consents to such withholding.

9. Code Section 409A Provisions.

     Notwithstanding anything in this Agreement or elsewhere to the contrary, if, based on Internal Revenue Service guidance available as of the date the payment or provision of any amount or other benefit is specified to be made under this Agreement or elsewhere, the Company reasonably determines that the payment or provision of such amount or other benefit at such specified time may potentially subject the Executive to “additional tax” under Section 409A(a)(1)(B) of the Code (together with any interest or penalties imposed with respect to, or in connection with, such tax, a “409A Tax”) with respect to the payment of such amount or the provision of such benefit, and if payment or provision thereof at a later date would likely avoid any such 409A Tax, then the payment or provision thereof shall be postponed to the earliest business day on which the Company reasonably determines such amount or benefit can be paid or provided without incurring any such 409A Tax, but in no event later than the first business day after the six-month anniversary of the Termination Date (the “Delayed Payment Date”). In addition, if the Company reasonably determines that such 409A Tax with respect to the provision of a benefit can likely be avoided by replacing the benefit with the payment of an amount in cash equal to the cost of a substantially equivalent benefit then, in lieu providing such benefit, the Company may make such cash payment, subject to the preceding sentence. In the event a benefit is to be provided during the period commencing on the Executive’s separation from service and ending on the Delayed Payment Date and the provision of such benefit during that period would be treated as a payment of nonqualified deferred compensation in violation of Section 409A(a)(2)(B)(i) of the Code, then continuation of such benefit during that period shall be conditioned on payment by the Executive of the full premium or other cost of coverage and as of the Delayed Payment Date the Company shall reimburse the Executive for the premiums or other cost of coverage paid by the Executive, which but for this paragraph would have been paid by the Company. Any such reimbursement shall include interest at the rate set out in the last sentence of this paragraph. The Company and the Executive may agree to take other actions to avoid the imposition of 409A Tax at such time and in such manner as permitted under Section 409A. In the event that this Section 9 requires a delay of any payment, such payment shall be accumulated and paid in a single lump sum on the Delayed Payment Date together with interest for the period of delay, compounded monthly, equal to the prime or base lending rate then used by CitiBank, N.A., in New York City and in effect as of the date the payment would otherwise have been provided.

10. Directorships, Other Offices.

     In the event of termination of employment, Executive shall immediately, unless otherwise requested by the Company’s Board of Directors, resign from all directorships,

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trusteeships, other offices and employment held at that time with the Company or any of its Affiliated Companies.

11. Confidentiality and Inventions.

     The Company’s most valuable assets include its Confidential Information and Inventions (which are defined in Section 7). As a condition of employment, and in exchange for payment of the Executive’s salary, wages, and other compensation, the Executive (including the Executive’s heirs, executors, administrators and assigns) and the Company agree that:

     (a) Obligation to Others. The Executive has no obligation to any former employer or third party which is inconsistent with this Agreement or which restricts the Executive’s activities with the Company in any way. Also, the Executive shall not at any time disclose to the Company or cause the Company to use any confidential information belonging to others, including the Executive’s former employers.

     (b) Obligations to Company During Employment.

          (1) Company’s Confidential Information. Unauthorized disclosure of the Company’s Confidential Information, either to outsiders, including temporary workers or to co-employees who do not have a legitimate need to know of it, could irreparably harm the Company and subject it to significant competitive disadvantage. To protect the Company’s Confidential Information, the Executive will not:

(A)	disclose it to any co-worker, unless he/she has a business need to know of it;
(B)	disclose it to any non-employee for any reason; and
(C)	use it for the Executive’s own benefit or profit.

This restriction shall not apply to Confidential Information that:

(A)	a Company officer authorizes the Executive, in writing, to release;
(B)	is or becomes public knowledge through no fault of the Executive;
(C)	is made lawfully available to the Executive by an independent third party (provided there is no agreement between the Company and that third party which obligates the Company’s employees to keep it in confidence);
(D)	the Executive lawfully already knew of when the Executive received it from the Company and the Executive can demonstrate such prior knowledge; or
(E)	the Executive is required by law, regulation, rule, act or order of any governmental authority or agency to disclose, provided however, that the Executive gives the Company sufficient advance written notice to permit it to take appropriate lawful recourse to protect its interests.

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          (2) Confidential Information of Third Parties. On occasion, a third party may share its confidential information with the Company for their mutual benefit (e.g., in connection with a licensing arrangement or potential merger or acquisition). Should such information be entrusted to the Executive, the Executive shall not disclose it, either to co-workers (unless they have a business need to know of it) or to outsiders.

          (3) Ownership of Inventions, Patents, Trademarks, Trade Secrets, and Tangible Work Product. Since the Company is paying a salary, wages and other compensation to the Executive, the Company owns all of the rights to the inventions and work product that the Executive creates or conceives during the Employment Period. To ensure that the Company’s rights to its property are protected, the Executive shall promptly disclose to the Company and keep adequate records on any invention that the Executive conceives, discovers or makes during the Employment Period. Without further payment from or charge to the Company, the Executive agrees that the following, if created or conceived during the Employment Period, shall be the Company’s exclusive property and the Executive shall assign to the Company all of the following:

(A)	any Invention conceived, discovered or made by the Executive;
(B)	any patent, patent application or record relating to any Invention that the Executive makes;
(C)	any trade secrets developed by or disclosed to the Executive during the course of the Executive’s employment;
(D)	any trademarks created or developed by the Executive in the course of the Executive’s employment; and
(E)	any tangible work product prepared by the Executive in the course and scope of the Executive’s employment, including but not limited to, any copyrightable subject matter, research, research and/or business data.

          (4) Ownership of Copyrights. All works made for hire shall vest in the Company. All other works, whether copyrightable or not, that the Executive creates in the course of the Executive’s employment, are deemed, upon their creation, to be assigned to the Company. This includes, but is not limited to, all rights in and to the copyright throughout the world, all of its renewals and extensions, the right to make and distribute copies of it, the right to translate it, and the right to all derivative works from it. The Executive will execute all documents which are necessary or desirable to record any assignment of copyright or other transfer of ownership in any work that the Executive creates in the course of the Executive’s employment, without further charge to the Company.

          (5) Obtaining and Enforcement of Patents, Trademarks and Copyrights. At the Company’s request, and without charge, the Executive shall execute any patent applications, assignments, or other instruments which the Company considers necessary to apply for and obtain Letters Patent in the United States and any foreign country and take all necessary action to protect the Company’s interest in them. The Executive shall execute any documents or instruments which the Company considers necessary to vest title in the Company to any

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invention, patents, patent applications or records relating to any invention and/or tangible work product.

          (6) Removal of Company Property. The Executive shall not remove any of the Company’s property from its premises, unless the Executive needs it to perform the Executive’s duties for the Company or the Executive is specifically authorized to do so.

     (c) Obligations to Company When Your Employment Terminates.

          (1) Continuing Obligations. The Executive’s obligations described in Section 11(b) above survive the termination of the Executive’s employment.

          (2) Return of Company Property. The Executive will turn over all of the Company’s property to a designated Company representative prior to the Executive’s separation. The Executive will not retain any copies or reproductions of correspondence, memoranda, reports, notebooks, drawings, data, photographs or other documents relating in any way to the Company’s business.

12. Remedies; Injunction.

     (a) Executive acknowledges and agrees that the restrictions contained in Sections 5 and 11 of this Agreement are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company and its Affiliated Companies, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those sections. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult legal counsel with respect to this Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with counsel.

     (b) Executive further acknowledges and agrees that a breach of any of the restrictions in Sections 5 or 11 cannot be adequately compensated by monetary damages. Executive agrees that the Company will be entitled to a return of the cash consideration set forth in this Agreement as being conditioned on the covenants contained in Sections 5 and 11 and that all remaining stock options will be forfeited if Executive breaches the provisions of either of those sections and that, in any event, the Company will be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as provable damages and an equitable accounting of all earnings, profits and other benefits arising from any violation of Sections 5 or 11, which rights will be cumulative and in addition to any other rights or remedies to which the Company and/or its Affiliated Companies may be entitled. In the event that any of the provisions of Sections 5 or 11 should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision will be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment will apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law.

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     (c) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of Sections 5 or 11, including without limitation, any action commenced by the Company and/or its Affiliated Companies for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of New Jersey, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of competent jurisdiction, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court.

13. Intellectual Property.

     To the fullest extent permitted by applicable law, all intellectual property (including patents, trademarks, and copyrights) which are made, developed or acquired by Executive in the course of Executive’s employment with the Company will be and remain the absolute property of the Company, and Executive shall assist the Company in perfecting and defending its rights to such intellectual property.

14. Non-Exclusivity.

     Except as specifically expressed herein, nothing contained herein is intended to alter the terms of any benefit plan or program. Notwithstanding anything in this Agreement, the Company or its Affiliated Companies, as applicable, reserves the right to amend or terminate any of its or their employee benefit plans at any time. In the event that an amendment to an employee benefit plan adopted after the effective date of this Agreement specifically conflicts with an express promise made in this Agreement, the Company shall have the right to honor the promise through comparable means outside the affected employee benefit plan without regard to any differences in the tax impact to the Executive. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any benefit plan provided by the Company or any of its affiliates for which the Executive may qualify.

15. Full Settlement.

     In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts and benefits (other than as required pursuant to Section 5(b)(ii)) payable to the Executive under any of the provisions of this Agreement and such amounts and benefits (other than as required pursuant to Section 5(b)(ii)) shall not be reduced whether or not the Executive obtains other employment. In the event of a Change of Control, the Company agrees to pay, to the full extent permitted by law and with respect to disputes that arise out of events occurring during the applicable COC Employment Period, all legal fees and expenses up to $25,000 which the Executive may reasonably incur as a result of any contest by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement); provided, however, that if the Company ultimately prevails in a court of competent jurisdiction with regard to any such contest, the Executive agrees to reimburse the Company for any and all legal fees and expenses paid by the Company in accordance with this

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sentence. Such reimbursement shall become payable within 30 days after the expiration of the applicable period to appeal such outcome or, if an appeal is taken, 30 days after final resolution of such appeal. Interest shall accrue on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code.

16. Governing Law.

     This Agreement will be governed by and construed in accordance with the laws of the State of New Jersey.

17. Assignments; Transfers; Effect of Merger.

     (a) No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or pursuant to the sale or transfer of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company.

     (b) This Agreement will not be terminated by any merger, consolidation or transfer of assets of the Company referred to above. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement will be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

     (c) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to above, it will cause any successor or transferee unconditionally to assume, either contractually or as a matter of law, all of the obligations of the Company hereunder.

     (d) This Agreement will inure to the benefit of, and be enforceable by or against, Executive or Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributes, designees and legatees. None of Executive’s rights or obligations under this Agreement may be assigned or transferred by Executive other than Executive’s rights to compensation and benefits, which may be transferred only by will or operation of law. If Executive should die while any amounts or benefits have been accrued by Executive but not yet paid as of the date of Executive’s death and which would be payable to Executive hereunder had Executive continued to live, all such amounts and benefits unless otherwise provided herein will be paid or provided in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no such person is so appointed, to Executive’s estate. In the event of Executive’s death or a judicial determination of his incompetence, references in this Agreement to “Executive” shall be deemed to refer, as appropriate, to his heirs, beneficiaries, estate, executor, or other legal representative.

18. Modification.

     No provisions of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by both Executive and the CEO. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other

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party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

19. Notices.

     All notices and other communications hereunder shall be writing and shall be given delivery to the other party in person or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Thomas Koestler
[Address]

If to the Company:

Schering-Plough Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attention: Corporate Secretary

20. Entire Agreement.

     This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein. There shall be no contractual or similar restrictions on Executive’s right to terminate his employment with the Company, or on his post-employment activities, other than those expressly set forth in this Agreement or in the terms of grant of any Schering-Plough equity compensation award held by the Executive. Except as otherwise set forth in this Agreement, the respective rights and obligations of the parties under this Agreement shall survive any termination of Executive’s employment. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall be deemed to be one and the same document. Signatures delivered by facsimile shall be effective for all purposes.

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     The undersigned hereby execute this Agreement as of the date first above written.

	SCHERING—PLOUGH CORPORATION
Dated: 12/20/06	By:
		C. Ron Cheeley
		Senior Vice President, Global Human Resources
Dated:12/21/06
	Thomas Koestler

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EX-10.E.VI

Exhibit 10(e)(vi)

EMPLOYMENT AGREEMENT

     This Agreement is made by and between Schering-Plough Corporation, a New Jersey Corporation (the “Company”), and Raul Kohan (the “Executive”), as of the 19^th day of December, 2006 (the “Commencement Date”). This Agreement is a restatement of and supersedes and replaces (i) the letter from the Company to Executive dated October 31, 1990 describing the terms of your transfer of employment to Kenilworth, New Jersey, and (ii) the change of control Employment Agreement between the Company and the Executive dated as of September 27, 1994 (as amended).

     Definitions applicable to capitalized terms not defined where first mentioned below are set forth in Section 7 of this Agreement.

1. Employment Period.

     Executive joined the Company on June 15, 1984. Beginning on the Commencement Date until the fifth anniversary thereof and for successive one-year periods thereafter (the “Employment Period”), the Company agrees to continue in its employ and the Executive hereby agrees to remain in the employ of the Company in accordance with the terms and conditions of this Agreement, provided, however, that either party may terminate the Employment Period by providing the other party with written notice of such termination at least one-year prior to the fifth anniversary (or any subsequent anniversary) of the Commencement Date on which such termination is to be effective. Subject to the Company’s obligation to provide severance benefits as may be specified in this Agreement and except as otherwise specifically provided in this Agreement, Executive and the Company acknowledge that this employment relationship may be terminated at any time and for any or no cause or reason, at the option of either the Company or Executive.

2. Duties and Scope of Employment.

     (a) Position. During the Employment Period, the Company shall continue to employ Executive as President, Animal Health and Group Head GSO of the Company or in such other substantially equivalent position requested by the Company’s Chief Executive Officer (“CEO”) for which the Executive is qualified by education, training, and experience. Executive shall continue to serve as an officer of the Company, and be a member of the Executive Management Team (the “EMT”).

     (b) Duties. During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities and duties assigned to the Executive hereunder, to use the Executive’s reasonable best efforts to perform faithfully and efficiently such responsibilities and duties. During the Employment Period it shall not be a violation of this Agreement for the Executive to (i) serve on civic or charitable boards or committees, or with the

written approval of the CEO, on corporate boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, and (iii) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement.

3. Compensation.

     During the Employment Period, the Company shall pay Executive the following as compensation for services to the Company:

     (a) Base Salary. Executive’s annualized base salary is currently $485,000 less applicable deductions payable in accordance with the Company’s normal payroll practices as in effect from time to time for its senior executives. From time to time and at least annually, Executive’s base salary shall be subject to review and increase above Executive’s then current base salary pursuant to the Company’s normal review policy for other similarly situated senior executives of the Company. Executive’s base salary shall not be subject to any decrease without Executive’s consent.

     (b) Operations Management Team Incentive Plan. During the Employment Period, Executive shall be eligible to participate in the Company’s Operations Management Team Incentive Plan or any successor or replacement plan (the “Incentive Plan”) at a level determined by the Compensation Committee of the Board of Directors or its delegate (the “Compensation Committee”) to be appropriate based on Executive’s position, job performance and Company policy. Executive’s current target annual incentive under the Incentive Plan is 60% of Executive’s annual base salary. Executive’s target annual incentive as a percentage of base salary shall not be subject to any decrease without Executive’s consent. Payment of incentive compensation, if the performance criteria determined by the Compensation Committee are met, will be made by March 15 of the year following the relevant Incentive Plan year, unless Executive elects to defer payment pursuant to an applicable deferred compensation plan of the Company.

     (c) Long Term Incentive Plans. Executive is, and shall remain, a participant at the levels determined by the Compensation Committee, in the (i) Schering-Plough Corporation Cash Long Term Incentive Plan and the Schering-Plough Corporation Long-Term Performance Share Unit Incentive Plan for the performance period beginning January 1, 2004 and ending December 31, 2006, and (ii) Schering-Plough Corporation Transformational Performance Contingent Shares Program for the performance period beginning January 1, 2004 and ending December 31, 2008. Executive shall participate in successor or replacement plans at a level determined by the Compensation Committee.

     (d) Incentive Equity Awards. During the Employment Period, Executive shall be eligible to participate in the Company’s 2006 Stock Incentive Plan and any successor or replacement plan, in accordance with the terms of the Stock Plan and any applicable grants (except as provided herein), at a level determined by the Compensation Committee.

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4. Enhanced Benefits and Perquisites.

     (a) General Benefits. During the Employment Period, Executive shall, to the extent eligible, be entitled to participate in all employee welfare and retirement benefit plans and programs provided by the Company to its senior executives in accordance with the terms of those plans or programs as they may be modified from time to time. Executive shall be entitled to post-retirement welfare benefits on the same terms as such benefits are made available by the Company to its senior executives at the time of Executive’s retirement. If, however, Executive’s participation in any such plan or program could result in adverse or unintended tax consequences to any participant in such plan or program, the Company shall be entitled to pay to Executive the cost of equivalent benefits outside such plan or program or provide Executive with substantially equivalent benefits through a separate program without regard to the tax treatment applicable to such payment or separate program in lieu of permitting the Executive to participate in such program.

     (b) Supplemental Executive Retirement Plan. Executive shall participate in the Company’s SERP.

     (c) Executive Life Insurance. During the Employment Period, Executive shall be eligible for Executive Life Insurance coverage with a face amount of $1,750,000 in accordance with the terms of the Company’s Executive Life Insurance program.

     (d) Vacation. During the Employment Period, Executive shall be entitled to four weeks paid vacation per annum, subject to adjustment in accordance with the Company’s normal vacation policies applicable to senior executives.

     (e) Relocation Benefits. Executive acknowledges that the Company may, at any time during the Employment Period, relocate his place of employment to such location as may at that time constitute the Company’s principal offices. Executive shall be entitled to relocation benefits pursuant to the Company’s relocation benefit program.

     (f) Expenses. Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Executive during the Employment Period for business purposes in accordance with the policies, practices, and procedures of the Company and its Affiliated Companies provided generally to other peer executives of the Company and its Affiliated Companies.

     (g) Fringe Benefits. During the Employment Period, Executive shall be entitled to fringe benefits as in effect generally with respect to senior executives of the Company and its Affiliated Companies. As of the date of this Agreement, these fringe benefits include tax and financial planning services. Executive shall be entitled to prompt reimbursement (in no event to be made later than two and one half months after the year in which the costs were incurred) for (i) financial planning services in an amount up to $8,000 in the first year of utilization and up to $5,000 annually thereafter as needed, and (ii) tax preparation in an amount up to $2,500 annually. Executive shall first submit invoices for such services to the Company for payment and seek reimbursement if unpaid. To the extent required by applicable law, such fringe benefits

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shall result in imputed income which shall be subject to withholding from the Executive’s wages in the amount and manner prescribed by such law.

     (h) Office and Support Staff. During the Employment Period, Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance on the same or similar terms as those provided generally to senior executives of the Company and its Affiliated Companies.

     (i) Directors and Officers Insurance. The Company will not diminish the amount or change the type of Directors and Officers Liability insurance coverage applicable to Executive (as an executive during the Employment Period and as a former executive thereafter), as in effect on the date of this Agreement, without his advance written consent.

5. Cause, Voluntary, Involuntary and Good Reason Terminations.

     (a) Death, Disability, Cause and Voluntary Terminations without Good Reason. If, during the Employment Period, Executive’s employment is terminated due to Executive’s death or Disability, by the Executive without Good Reason or by the Company for Cause, the Company shall have no obligation to the Executive other than the obligation to promptly pay to the Executive his unpaid accrued base salary through the Termination Date and to pay or provide, promptly when due, any Other Benefits, as well as payments or benefits required by applicable law.

     (b) Involuntary and Good Reason Terminations. If, during the Employment Period, Executive’s employment is terminated by the Company other than for Cause, Disability or by non-renewal of the Employment Period pursuant to Section 1, or if the Executive terminates employment for Good Reason, the Company shall provide the Executive with the Other Benefits promptly when due. In addition, provided that the Executive signs a Satisfactory Release within 35 days following the Termination Date and the Executive and does not revoke it within 7 days after the date he executes such Release, then Executive shall be entitled to:

          (i) payment, within 30 days following the effective date of the Satisfactory Release, of a severance benefit equal to the product of two multiplied by the sum of the Executive’s current base salary plus the highest target incentive opportunity under the Incentive Plan for any of the past three years (each as in effect immediately prior to the Executive’s Termination Date but without regard for any reduction that constituted the grounds, or part of the grounds, for Executive’s Good Reason termination);

          (ii) during the 2-year period following Executive’s employment termination, continue to participate in the Company’s health and welfare programs applicable to, and (to the extent permissible under applicable law) on the same terms as, other senior executives of the Company at the time of the termination of the Executive’s employment; provided, however that such benefits shall cease on the date that Executive becomes eligible for similar benefits from a new employer and Executive shall notify the Company in writing of such benefits eligibility within 30 days following the effective date of Executive’s benefits eligibility from the new employer; and provided further, that if Executive’s participation in any such program of the Company could result in adverse or unintended tax consequences to any participant in such

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program (including the Executive), the Company shall be entitled to provide Executive with substantially equivalent benefits through a separate program (including the provision of such benefits through the purchase of insurance) without regard to the tax treatment applicable to such separate program in lieu of permitting the Executive to participate in such program;

          (iii) payment, within 30 days following the effective date of the Satisfactory Release, of the Enhanced SERP Benefit; and

          (iv) credit for two additional years of service and age for purposes of determining eligibility for coverage and rate of contribution under the Company’s retiree medical plan or any replacement or successor plan.

For purposes of this provision, “Satisfactory Release” shall mean a release of claims in a form reasonably prescribed by the Company that (1) releases, and forever discharges, all claims that Executive has or may have against the Company and its Affiliated Companies and its and their employees, directors and agents (other than claims relating to Other Benefits), and (2) becomes irrevocable if not revoked by Executive within seven (7) days after he signs it; provided that the form of release shall not contain any post-employment covenants, including those covenants to which the Executive may be subject pursuant to Subsection 5(c) below or otherwise.

     (c) Non-competition and Non-solicitation. In the event of voluntary termination of the Executive’s employment during the Employment Period by the Executive without Good Reason (i) the Executive shall not engage in Competition (as defined below) during the one-year period immediately following Executive’s termination of employment, and (ii) the Executive shall not engage in Solicitation (as defined below) during the two-year period immediately following Executive’s termination of employment. For purposes of this Section 5, the term Competition shall mean that Executive, without the written approval of the CEO, commences employment with, or provides consulting services to, any pharmaceutical enterprise that is engaged in research, development, and/or sales of human and/or pharmaceutical products (unless sales from pharmaceutical products constitute less than 20% of total sales of the company conducting the enterprise and the consolidated affiliates of that company); provided that service solely as a member of the Board of Directors of a company whose annual sales are less than $100 million on a consolidated basis with all affiliated companies shall not be considered Competition. Further, the term Competition specifically excludes (i) companies whose primary purpose is to provide consulting and/or audit services so long as those companies have revenues in excess of $100 million, and (ii) law firms whose primary purpose is to provide legal services. For purposes of this Section 5, the term Solicitation shall mean that without the written approval of the CEO or his delegate, the Executive, directly or indirectly, solicits, encourages or participates in the solicitation or hiring of, any person who is currently an employee of the Company or independent contractor doing business with the Company or who was an employee of the Company at any time during the last three (3) months of the Employment Period by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise; provided that the Executive shall not be considered to have engaged in Solicitation for purposes of this Section 5 if an employer other than the Company solicits or hires, with no participation or involvement by the Executive, any current or former employee, independent contractor or consultant of the Company who is not or was not employed in, or providing direct services to, a business area of the Company for which Executive (immediately

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prior to the termination of his employment) had no direct authority or responsibility; and provided further that the term Solicitation shall not preclude Executive from giving references.

6. Change of Control.

     (a) General. In the event of any Change of Control following the effective date of this Agreement and during the Employment Period, Subsection 6(b) shall supersede Section 2; Subsection 6(d) shall supersede Subsection 3(a); Subsection 6(e) shall supersede Subsections 3(b); Subsections 6(f) through (i) shall supersede Section 5; and the other provisions of this Section 6 shall supplement the other provisions of Sections 3 and 4; in each case until the expiration of the COC Employment Period triggered by such Change of Control. If the Executive’s employment is not terminated before the end of the applicable COC Employment Period, immediately following such COC Employment Period, the provisions of this Section 6 shall cease to apply unless and until another Change of Control occurs during the Employment Period and the provisions of Sections 2, 3(a), 3(b) and 5 shall again apply if the Employment Period has not yet expired. Effective upon the termination of Executive’s employment for any reason during a COC Employment Period, any previous restrictions imposed under this Agreement or any other agreement upon the Executive regarding engaging in post-termination competitive activity against the Company or soliciting current or former employees or independent contractors of the Company shall immediately cease to be applicable.

     For purposes of this Section 6, if (i) the Executive’s employment with the Company is terminated prior to a Change of Control, (ii) the Executive reasonably demonstrates that such termination of employment either (A) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or a Section 409A Change in Control Event or (B) otherwise arose in connection with or in anticipation of a Change of Control or a Section 409A Change in Control Event and (iii) a Section 409A Change in Control Event is actually consummated, then such termination shall be deemed to have occurred during a COC Employment Period.

     (b) Position and Duties. During a COC Employment Period, (i) the Executive’s position (including status, offices, titles and reporting relationships and requirements), authority, duties and areas and scope responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the COC Employment Period; and (ii) the Executive’s services shall be performed at the location where the Executive was employed immediately preceding any such Change of Control or any office or location less than 35 miles from such location and that is not in a different state than such location. It is expressly understood and agreed that to the extent that any activities have been conducted by the Executive during the three years immediately prior to a Change of Control, the reinstatement or continued conduct of such activities (or the reinstatement or conduct of activities similar in nature and scope thereto) subsequent to any related Change of Control shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company and its subsidiaries.

     (c) Incentive Compensation, Employee Benefits and Fringe Benefits. Except as otherwise set forth in this Agreement, during a COC Employment Period, the Executive (and eligible family members or dependents, as applicable) shall be entitled to participate in all

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incentive, profit-sharing, stock option, stock award, savings and retirement, and health and welfare benefit plans (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) practices, policies and programs and to receive paid vacation, fringe benefits, and expense reimbursement, all as applicable generally to other peer executives of the Company and its Affiliated Companies, but in no event shall such plans, practices, policies, programs and benefits provide the Executive with incentive opportunities (cash or equity), savings opportunities, retirement benefit opportunities, health and welfare benefits, vacation pay, fringe benefits, and expense reimbursement, which are, in each case, less favorable in the aggregate, than the most favorable of those provided by the Company and its Affiliated Companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Change of Control, or if more favorable to the Executive, those provided generally at any time thereafter to other senior executives of the Company and its Affiliated Companies.

     (d) Annual Base Salary. During a COC Employment Period, the Executive shall receive, in accordance with the Company’s normal payroll practices in effect from time to time for its senior executives, an Annual Base Salary which shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the beginning of the COC Employment Period and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after such an increase and the term Annual Base Salary as used in this Section 6 shall refer to Annual Base Salary as so increased.

     (e) Annual Bonus. In addition to Annual Base Salary, for each fiscal year ending during a COC Employment Period, Executive shall be awarded an annual bonus in cash at least equal to the Executive’s highest target incentive opportunity under the Incentive Plan for any of the past three years (the “Annual Bonus”). Each such Annual Bonus shall be paid no later than the 15^th day of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall have elected to defer the receipt of such Annual Bonus in accordance with an applicable deferred compensation plan of the Company.

     (f) Death. The Executive’s employment shall terminate automatically upon the Executive’s death during a COC Employment Period without further obligation to the Executive’s legal representative’s under this Agreement other than for payment of any Unpaid Accrued Obligations and any Other Benefits which shall be at least equal to the most favorable benefits provided by the Company and Affiliated Companies to the estates and beneficiaries of senior executives of the Company and such affiliated companies under such plans, programs, and policies relating to death benefits and survivor benefits as in effect at any time during the 120-day period immediately prior to the COC Employment Period, or if more favorable to the Executive’s estate and/or beneficiaries, as in effect on the date of the Executive’s death with respect to other peer executives of the Company and their beneficiaries. Unpaid Accrued Obligations shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Termination Date, and the Other Benefits shall be provided promptly when due.

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     (g) Disability. If the Company determines in good faith that the Disability of the Executive has occurred during a COC Employment Period, it may give the Executive Notice of Termination. In such event, the Executive’s employment with the Company shall terminate effective on the Termination Date, provided that, within the 30 days after Executive’s receipt of the Notice of Termination, the Executive shall not have returned to full-time performance of the Executive’s duties. In the event of Executive’s termination of employment due to Disability, Unpaid Accrued Obligations shall be paid in cash to the Executive within 30 days following the Termination Date, and the Other Benefits shall be provided promptly when due.

     (h) Termination for Cause or Voluntary Termination without Good Reason. If the Executive’s employment shall be terminated by the Company for Cause or voluntarily by the Executive without Good Reason during the COC Employment Period, the Employment Period shall terminate and the Company shall have no further obligations to the Executive other than the obligation to pay the Executive (i) his unpaid Annual Base Salary through the Termination Date, and (ii) any unpaid Other Benefits. In such case, all Unpaid Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days following the Termination Date, and the Other Benefits shall be provided promptly when due.

     (i) Termination for Good Reason or without Cause. If, during the COC Employment Period, the Executive’s employment shall be terminated by the Company other than for Cause or Disability or by the Executive for Good Reason, the Company shall:

          (1) within 30 days following the Executive’s Termination Date, pay the Executive a single sum cash amount equal to the sum of (i) the Unpaid Accrued Obligations; (ii) the product of three (or the number of whole and partial years from the Executive’s Termination Date until his 65^th birthday, if less) multiplied by the sum of the Executive’s Annual Base Salary, plus the Executive’s Annual Bonus, plus the greater of the Highest Profit Sharing Contribution or the highest aggregate Company contribution to the Executive’s account under the Company’s qualified and nonqualified defined contribution retirement plans for any of the three years immediately preceding the Executive’s Termination Date; and (iii) the Executive’s Enhanced SERP Benefit; and

          (2) for the lesser of (x) three years after the Executive’s Termination Date and (y) the period through the Executive’s 65^th birthday, continue health and welfare benefits to the Executive (and the Executive’s family, if applicable) at least equal to those which would have been provided in accordance with Subsection 6(c) hereof had the Executive not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other senior executives of the Company and its Affiliated Companies and their families; provided that such benefits coverage shall be secondary to any health and welfare benefits coverage for which the Executive becomes eligible under any plan or arrangement sponsored by a subsequent employer of the Executive; and provided further, that if Executive’s participation in any such program could result in adverse or unintended tax consequences to any participant in such program (including the Executive), the Company shall be entitled to provide Executive with substantially equivalent benefits through a separate program (including the provision of such benefits through the purchase of insurance) without regard to the tax treatment applicable to such separate program in lieu of permitting the Executive to participate in such program;

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          (3) to the extent not theretofore paid or provided, pay or provide to the Executive all Other Benefits promptly when due;

          (4) waive any and all “reduction factors” imposed as a result of Executive’s age with respect to the Executive’s nonqualified supplemental or excess employee pension benefit plan if the Executive is at least age 50 as of the Termination Date; and

          (5) if the Executive is age 50 or greater as of the Termination Date, provide the Executive with coverage under the terms of the Company’s retiree medical plan (effective at the end of the post-employment period of extended health coverage) without regard to years of service for eligibility purposes but assuming the maximum Company-provided subsidy (if any) applies and applying 3 additional years of service credit for purposes of rate of contribution under such plan or any replacement or successor plan; provided, however that if the Executive is age 45 or older at the end of the post-employment period of extended health coverage, provide the Executive, upon reaching age 55 and upon reaching the end of the period of extended health coverage following Executive’s Termination Date pursuant to Subsection 6(i)(2) hereof, with eligibility for the Company’s retiree medical plan or any replacement or successor plan (including, without limitation, any supplemental coverage applicable to executives) as if the Executive had, as of the Termination Date, satisfied the age and service conditions for such plans and assuming the maximum Company-provided subsidy (if any) applies.

7. Definitions.

     (a) “Affiliated Company” shall mean any corporation or other entity controlled by, controlling or under common control with the Company.

     (b) “Annual Base Salary” shall mean an annual base salary at least equal to 24 times the highest semi-monthly base salary paid or payable, including (without limitation) any base salary which has been earned but deferred, to Executive by the Company and its Affiliated Companies in respect of any month in the 12-month period immediately preceding the month in which a Change of Control occurs.

     (c) “Annual Bonus” shall have the meaning set forth in Subsection 6(e) of this Agreement.

     (d) “Cause” shall mean termination initiated by the Company (with advance approval by the Compensation Committee of the Board of Directors) or by the Executive incident to or connected with (i) Executive’s conviction relating to charges that the Executive engaged in misappropriation, theft, embezzlement, kick-backs, or bribery whether in connection with Executive’s employment with the Company or otherwise, or (ii) the Company’s reasonable determination that Executive has engaged in other deliberate, gross or willful misconduct or dishonest acts or omissions (including, but not limited to, commission of a felony) resulting in significant harm to the Company.

     (e) “Change of Control” shall mean the happening of any of the following events:

          (1) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d 3

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promulgated under the Exchange Act) of securities of the Company where such acquisition causes such Person to own 20% or more of either (x) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (1), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (3) of this Section 7(e); and provided, further, that if any Person’s beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Company Voting Securities; or

          (2) individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

          (3) consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, or a sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting

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power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

          (4) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

     (f) “COC Employment Period” shall mean the period from the date on which a Change of Control occurs until the earlier of the third anniversary of such date or the Executive’s 65^th birthday.

     (g) “Confidential Information” shall mean information disclosed to the Executive or known to the Executive as a result of employment by the Company, not generally known to the trade of industry in which the Company is engaged, concerning the Company’s products, processes, machines, services, and operations, including research, development, manufacturing, purchasing, finance, data processing, engineering, marketing, merchandising and selling, and corresponding information about the product, processes, machines, services and operations of any third party with which the Company is in a technical or commercial cooperation, acquired by the Executive during employment by the Company. Included in the foregoing by way of illustration and not limitation are such items as research products, findings or reports, business plans, formulae, processes, methods of manufacture, sales, costs, pricing data, new drug, cosmetic or device data, and lists of suppliers and customers.

     (h) “Disability” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.

     (i) “Enhanced SERP Benefit” shall mean an amount equal to the excess of (i) the sum of (A) the lump-sum actuarial equivalent (as of the date that the Enhanced SERP Benefit is paid to the Executive or his beneficiaries (the “SERP Payout Date”)) of the normal retirement benefit under the Company’s Retirement Plan (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Retirement Plan immediately prior to the Executive’s Termination Date) and (B) the lump-sum actuarial equivalent of the normal retirement benefit under the SERP (as of the SERP Payout Date and utilizing actuarial assumptions no less favorable to the Executive than those in effect under the SERP immediately prior to the Executive’s Termination Date) which the Executive would have received if the Executive’s employment had continued for two years (or three years if the Date of Termination occurs during a COC Employment Period) after the Executive’s Termination Date or through age 65, if sooner, assuming for this purpose that all accrued benefits were fully vested, and, if the Termination Date occurs during a COC Employment Period, assuming that the Executive’s compensation in each of the three years (or the shorter period to age 65, if applicable) would have been that required by Subsections 6(d) and 6(e) of this Agreement, over (ii) the lump-sum actuarial equivalent (as of the SERP Payout Date) of the Executive’s actual normal retirement

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benefit (paid or payable), if any, under the Retirement Plan and the SERP based on actual age, service and compensation as of the Executive’s Termination Date.

     (j) “Good Reason” shall mean any of the events described in (1)-(4) below if the Company fails to cure such events within 20 business days after receiving notice thereof from the Executive:

          (1) the assignment to the Executive of any duties that are materially inconsistent with the Executive’s education, training and experience, or a significant diminution in the Executive’s authorities, responsibilities, status or title (as described in Section 2 or Subsection 6(b) of this Agreement, as applicable), it being understood that (x) a change in the person to whom the Executive reports or (y) modifications to organizational responsibilities resulting in changes to Executive’s functional areas of responsibility that do not significantly diminish Executive’s core role in the Company would not constitute “Good Reason”;

          (2) any significant reduction by the Company of the Executive’s total compensation in the aggregate, unless such reduction was part of a reduction approved by the Company’s Board of Directors (or a Committee thereof) for a group of senior executives in addition to the Executive;

          (3) during a COC Employment Period, the Executive ceases to be subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 with respect to a continuing or successor company; or

          (4) during a COC Employment Period, any failure by the Company to comply with any of the provisions of Subsections 6(b) through 6(e) of this Agreement.

     (k) “Highest Profit Sharing Contribution” shall mean the annual aggregate of the highest contributions made under the Company’s Profit Sharing Incentive Plan and the highest hypothetical contributions made under the Company’s Profit Sharing Benefits Equalization Plan or any successor or replacement plans thereto, for any of the three calendar years preceding the Executive’s Termination Date.

     (l) “Invention(s)” shall mean any discovery, improvement, process, product, or device conceived, discovered or made by the Executive during the Employment Term, or after the Employment Term based on Confidential Information, either solely or jointly with others, whether patentable or not, which is related to the actual or anticipated business or activities of the Company, or related to its actual or anticipated research development, or suggested by or resulting from any tasks assigned to the Executive or work performed by the Executive for or on behalf of the Company, or with the use of Company facilities, materials or personnel.

     (m) “Notice of Termination” shall mean a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if the Termination Date (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance

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which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

     (n) “Other Benefits” shall mean all amounts or benefits other than Unpaid Accrued Obligations required to be paid or provided or which the Executive (or his beneficiaries) is eligible to receive under the applicable terms of any plan, program, agreement, corporate governance document, or other arrangement of the Company or any Affiliated Company.

     (o) “Retirement Plan” shall mean the Company’s defined benefit retirement plan.

     (p) “Section 409A Change in Control Event” shall mean the happening of any of the following events:

          (1) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of securities of the Company where such acquisition causes such Person to own more than 50% of either (x) the then outstanding Shares of the Company (the “Outstanding Shares”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Voting Securities”); provided, however, that for purposes of this subsection (1) the following acquisitions will not constitute a Section 409A Change in Control Event: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (3) below; and provided, further, that if any Person’s beneficial ownership of the Outstanding Shares or Outstanding Voting Securities reaches or exceeds 50% as a result of a prior transaction, and such Person subsequently acquires beneficial ownership of additional Shares or additional voting securities of the Company, such subsequent acquisition will not be treated as an acquisition that causes such Person to own more than 50% of the Outstanding Shares or Outstanding Voting Securities;

          (2) during any 12-month period, individuals who, as of the first day of such period, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the beginning of such 12-month period whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though such individual were a member of the Incumbent Board;

          (3) consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company, or the acquisition of assets or stock of another entity by the Company (each a “Business Combination”), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were beneficial owners, respectively, of the Outstanding Shares or Outstanding

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Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectfully, the then outstanding shares of the common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Shares and Outstanding Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, more than 50% of, respectfully, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board on the later of (x) the time of the execution of the initial agreement, (y) the action of the Board providing for such Business Combination or (z) the beginning of the 12-month period ending on the effective date of the Business Combination;

          (4) any one Person acquires (or has acquired during any 12-month period ending on the date of the most recent acquisition by such Person) assets of the Company having a fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the Company immediately prior to such sale, other than an acquisition by (A) a Person who was a shareholder of the Company immediately before the asset acquisition in exchange for or with respect to such Person’s Shares, (B) an entity whose total or voting power immediately after the transfer is at least 50% owned, directly or indirectly, by the Company, (C) a person or group that, immediately after the transfer, directly or indirectly owns at least 50% of the total value or voting power of the outstanding stock of the Company or (D) an entity whose total value or voting power immediately after the transfer is at least 50% owned, directly or indirectly, by a person described in clause (C) above; or

          (5) the complete liquidation of the Company.

     The definition of Section 409A Change in Control Event for purposes of this Agreement is intended to conform to the description of “Change in Control Events” in Treas. Prop. Reg. 1.409A-3(g)(5), or in subsequent IRS guidance describing what constitutes a Change in Control Event for purposes of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, no Section 409A Change in Control Event will be deemed to occur with respect to a transaction or event described in paragraphs (1) through (5) above unless the transaction or event would constitute a “Change in Control Event” as described in Treas. Prop. Reg. 1.409A-3(g)(5), or in subsequent IRS guidance under Code section 409A.

     (q) “SERP” shall mean the Company’s Supplemental Executive Retirement Plan or any successor thereto.

     (r) “Termination Date” shall mean (i) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of the other party’s

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receipt of the Notice of Termination or any later date specified therein, (ii) if the Executive’s employment is terminated by the Company other than for Cause or Disability, or by the Executive other than for Good Reason, the Termination Date shall be the date on which the Notice of Termination is delivered or any later date as may be mutually agreed upon; (iii) if the Executive’s employment is terminated by reason of death, the Termination Date shall be the date of the death; and (iv) if the Executive’s employment is terminated by reason of Disability of the Executive, the Termination Date shall be the 30^th day after Executive’s receipt of the Notice of Termination from the Company.

     (s) “Unpaid Accrued Obligations” shall mean unpaid Annual Base Salary accrued through the termination date, any unpaid accrued vacation pay, and the Executive’s Annual Bonus multiplied by a fraction, the numerator of which is the number of days in the current fiscal year through the Termination Date, and the denominator of which is 365.

8. Certain Additional Payments.

     (a) Except as set forth below, in the event it shall be determined that any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the “Code”)) made or provided to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (each, a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code (together with any interest or penalties imposed with respect to such excise tax, the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (“Gross-Up Payment”), at or before the time the Excise Tax is due (whether by withholding or otherwise) in an amount such that after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. The Company’s obligation to make Gross-Up Payments under this Section 8 shall not be conditioned upon the Executive’s termination of employment.

     (b) Subject to the provisions of Subsection 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by such nationally recognized certified public accounting firm that the Company may designate (the “Accounting Firm”). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting a Change of Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within ten days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive.

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As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event the Company exhausts or does not seek to pursue its remedies pursuant to Subsection 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

     (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

          (i) give the Company any information reasonably requested by the Company relating to such claim,

          (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

          (iii) cooperate with the Company in good faith in order effectively to contest such claim, and

          (iv) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax, income tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Subsection 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company directs the Executive to pay such claim and sue for a refund, the

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Company shall pay the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such payment or with respect to any imputed income in connection with such payment; and further provided, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

     (d) If, after the receipt by the Executive of a Gross-Up Payment or an amount paid by the Company pursuant to Subsection 8(c), the Executive becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Subsection 8(c), if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount paid by the Company pursuant to Subsection 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such payment shall be forgiven and shall not be required to be repaid and the amount of such payment shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

     (e) Notwithstanding any other provision of this Agreement, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of any Gross-Up Payment, and the Executive hereby consents to such withholding.

9. Code Section 409A Provisions.

     Notwithstanding anything in this Agreement or elsewhere to the contrary, if, based on Internal Revenue Service guidance available as of the date the payment or provision of any amount or other benefit is specified to be made under this Agreement or elsewhere, the Company reasonably determines that the payment or provision of such amount or other benefit at such specified time may potentially subject the Executive to “additional tax” under Section 409A(a)(1)(B) of the Code (together with any interest or penalties imposed with respect to, or in connection with, such tax, a “409A Tax”) with respect to the payment of such amount or the provision of such benefit, and if payment or provision thereof at a later date would likely avoid any such 409A Tax, then the payment or provision thereof shall be postponed to the earliest business day on which the Company reasonably determines such amount or benefit can be paid or provided without incurring any such 409A Tax, but in no event later than the first business day after the six-month anniversary of the Termination Date (the “Delayed Payment Date”). In addition, if the Company reasonably determines that such 409A Tax with respect to the provision of a benefit can likely be avoided by replacing the benefit with the payment of an amount in cash equal to the cost of a substantially equivalent benefit then, in lieu providing such benefit, the

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Company may make such cash payment, subject to the preceding sentence. In the event a benefit is to be provided during the period commencing on the Executive’s separation from service and ending on the Delayed Payment Date and the provision of such benefit during that period would be treated as a payment of nonqualified deferred compensation in violation of Section 409A(a)(2)(B)(i) of the Code, then continuation of such benefit during that period shall be conditioned on payment by the Executive of the full premium or other cost of coverage and as of the Delayed Payment Date the Company shall reimburse the Executive for the premiums or other cost of coverage paid by the Executive, which but for this paragraph would have been paid by the Company. Any such reimbursement shall include interest at the rate set out in the last sentence of this paragraph. The Company and the Executive may agree to take other actions to avoid the imposition of 409A Tax at such time and in such manner as permitted under Section 409A. In the event that this Section 9 requires a delay of any payment, such payment shall be accumulated and paid in a single lump sum on the Delayed Payment Date together with interest for the period of delay, compounded monthly, equal to the prime or base lending rate then used by CitiBank, N.A., in New York City and in effect as of the date the payment would otherwise have been provided.

10. Directorships, Other Offices.

     In the event of termination of employment, Executive shall immediately, unless otherwise requested by the Company’s Board of Directors, resign from all directorships, trusteeships, other offices and employment held at that time with the Company or any of its Affiliated Companies.

11. Confidentiality and Inventions.

     (a) Disclosure of Confidential Information. The Executive acknowledges that Confidential Information is a valuable asset of the Company and that unauthorized disclosure or utilization thereof could be detrimental to the Company. Therefore, the Executive shall not, either during of after the term of his employment by the Company, disclose to any person or organization other than the Company, or utilize for the benefit or profit of himself or any other person or organization other than the Company, any Confidential Information, except as may be authorized in writing by the Company.

     (b) Ownership of Inventions. The following shall be property of the Company exclusively:

          (i) Any Invention conceived, discovered or made by the Executive;

          (ii) Any patent, patent application or record relating to any Invention.

     (c) Disclosure of Inventions. The Executive shall disclose to the Company and keep adequate records of any Invention of the Executive.

     (d) Obtaining and Enforcement of Patents. Without further consideration from, or charge to the Company, whenever requested to do so by the Company, the Executive shall

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execute any patent applications, assignments, or other instruments which the Company shall consider necessary to apply for and obtain Letters Patent in the United States and any foreign country and take all necessary action to protect the Company’s interests therein. These obligations shall continue beyond the termination of the Executive’s employment with the Company. Necessary expenses in connection with the foregoing, including a fee not to exceed $100 per day for testifying if Executive is no longer employed by the Company, shall be borne by the Company.

     (e) Disclaimer. The Executive represents that the Executive is under no obligation to any former employer or third party which is in any way inconsistent with this Agreement or which imposes any restrictions on the Executive’s activities with the Company, except as described in any attachment to this Agreement.

     (f) Confidential Information of Prior Employers. The Executive shall not disclose to the Company or induce the Company to use any secret or confidential information or material belonging to others, including former employers, if any. In case of doubt with respect to the Executive’s obligations towards a prior employer, the Executive shall consult with appropriate Associate General Counsel or designee.

     (g) Removal and Return of Company Property. The Executive shall keep elsewhere than on Company property, nor remove therefrom, any Company property, except and only so long as may be required for the performance of duties for the Company. Upon termination of employment with the Company, the Executive shall turn over to a designated individual employed by the Company, all property then in the Executive’s possession or custody and belonging to the Company. The Executive shall not retain any copies or reproductions of correspondence, memoranda, reports, notebooks, drawings, photographs, or other documents relating in any way to the affairs of the Company which are entrusted to the Executive at any time during employment with the Company.

12. Remedies; Injunction.

     (a) Executive acknowledges and agrees that the restrictions contained in Sections 5 and 11 of this Agreement are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company and its Affiliated Companies, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those sections. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult legal counsel with respect to this Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with counsel.

     (b) Executive further acknowledges and agrees that a breach of any of the restrictions in Sections 5 or 11 cannot be adequately compensated by monetary damages. Executive agrees that the Company will be entitled to a return of the cash consideration set forth in this Agreement as being conditioned on the covenants contained in Sections 5 and 11 and that all remaining stock options will be forfeited if Executive breaches the provisions of either of those sections and that, in any event, the Company will be entitled to preliminary and permanent injunctive relief,

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without the necessity of proving actual damages, as well as provable damages and an equitable accounting of all earnings, profits and other benefits arising from any violation of Sections 5 or 11, which rights will be cumulative and in addition to any other rights or remedies to which the Company and/or its Affiliated Companies may be entitled. In the event that any of the provisions of Sections 5 or 11 should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision will be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment will apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law.

     (c) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of Sections 5 or 11, including without limitation, any action commenced by the Company and/or its Affiliated Companies for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of New Jersey, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of competent jurisdiction, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court.

13. Intellectual Property.

     To the fullest extent permitted by applicable law, all intellectual property (including patents, trademarks, and copyrights) which are made, developed or acquired by Executive in the course of Executive’s employment with the Company will be and remain the absolute property of the Company, and Executive shall assist the Company in perfecting and defending its rights to such intellectual property.

14. Non-Exclusivity.

     Except as specifically expressed herein, nothing contained herein is intended to alter the terms of any benefit plan or program. Notwithstanding anything in this Agreement, the Company or its Affiliated Companies, as applicable, reserves the right to amend or terminate any of its or their employee benefit plans at any time. In the event that an amendment to an employee benefit plan adopted after the effective date of this Agreement specifically conflicts with an express promise made in this Agreement, the Company shall have the right to honor the promise through comparable means outside the affected employee benefit plan without regard to any differences in the tax impact to the Executive. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any benefit plan provided by the Company or any of its affiliates for which the Executive may qualify.

15. Full Settlement.

     In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts and benefits (other than as required pursuant to Section 5(b)(ii)) payable to the Executive under any of the provisions of this Agreement and

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such amounts and benefits (other than as required pursuant to Section 5(b)(ii)) shall not be reduced whether or not the Executive obtains other employment. In the event of a Change of Control, the Company agrees to pay, to the full extent permitted by law and with respect to disputes that arise out of events occurring during the applicable COC Employment Period, all legal fees and expenses up to $25,000 which the Executive may reasonably incur as a result of any contest by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement); provided, however, that if the Company ultimately prevails in a court of competent jurisdiction with regard to any such contest, the Executive agrees to reimburse the Company for any and all legal fees and expenses paid by the Company in accordance with this sentence. Such reimbursement shall become payable within 30 days after the expiration of the applicable period to appeal such outcome or, if an appeal is taken, 30 days after final resolution of such appeal. Interest shall accrue on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code.

16. Governing Law.

     This Agreement will be governed by and construed in accordance with the laws of the State of New Jersey.

17. Assignments; Transfers; Effect of Merger.

     (a) No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or pursuant to the sale or transfer of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company.

     (b) This Agreement will not be terminated by any merger, consolidation or transfer of assets of the Company referred to above. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement will be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

     (c) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to above, it will cause any successor or transferee unconditionally to assume, either contractually or as a matter of law, all of the obligations of the Company hereunder.

     (d) This Agreement will inure to the benefit of, and be enforceable by or against, Executive or Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributes, designees and legatees. None of Executive’s rights or obligations under this Agreement may be assigned or transferred by Executive other than Executive’s rights to compensation and benefits, which may be transferred only by will or operation of law. If Executive should die while any amounts or benefits have been accrued by Executive but not yet paid as of the date of Executive’s death and which would be payable to Executive hereunder had Executive continued to live, all such amounts and benefits unless otherwise provided herein will

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be paid or provided in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no such person is so appointed, to Executive’s estate. In the event of Executive’s death or a judicial determination of his incompetence, references in this Agreement to “Executive” shall be deemed to refer, as appropriate, to his heirs, beneficiaries, estate, executor, or other legal representative.

18. Modification.

     No provisions of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by both Executive and the CEO. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

19. Notices.

     All notices and other communications hereunder shall be writing and shall be given delivery to the other party in person or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Raul Kohan
[Address]

If to the Company:

Schering-Plough Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attention: Corporate Secretary

20. Entire Agreement.

     This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein. There shall be no contractual or similar restrictions on Executive’s right to terminate his employment with the Company, or on his post-employment activities, other than those expressly set forth in this Agreement or in the terms of grant of any Schering-Plough equity compensation award held by the Executive. Except as otherwise set forth in this Agreement, the respective rights and obligations of the parties under this Agreement shall survive any termination of Executive’s employment. This Agreement may be executed in counterparts, each of which shall

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be deemed an original and all of which together shall be deemed to be one and the same document. Signatures delivered by facsimile shall be effective for all purposes.

     The undersigned hereby execute this Agreement as of the date first above written.

	SCHERING—PLOUGH CORPORATION
Dated: 12/20/06	By
		C. Ron Cheeley
		Senior Vice President, Global Human Resources
Dated: 12/20/06
	Raul Kohan

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EX-10.E.VIII

Exhibit 10(e)(viii)

EMPLOYMENT AGREEMENT

          AGREEMENT by and between Schering-Plough Corporation, a New Jersey corporation (the “Company”) and Thomas J. Sabatino, Jr., (the “Executive”), dated as of the 15th day of April, 2004.

          The Board of Directors of the Company (the “Board”), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.

          NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

          1. Certain Definitions.

          (a) The “Effective Date” shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive’s employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the “Effective Date” shall mean the date immediately prior to the date of such termination of employment.

          (b) The “Change of Control Period” shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be

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hereinafter referred to as the “Renewal Date”), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended.

          2. Change of Control. For the purpose of this Agreement, a “Change of Control” shall mean:

          (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of securities of the Company where such acquisition causes such Person to own 20% or more of either (i) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; and provided, further, that if any Person’s beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (i) or (ii) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Company Voting Securities; or

          (b) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

          (c) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction

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involving the Company or any of its subsidiaries, or a sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

          (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

          3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the earlier of (x) the third anniversary of such date and (y) the Executive’s 65th birthday (the “Employment Period”).

          4. Terms of Employment.

          (a) Position and Duties.

               (i) During the Employment Period, (A) the Executive’s position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the

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Executive’s services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location.

               (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive’s reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company.

          (b) Compensation.

               (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”), which shall be paid at a semi-monthly rate, at least equal to twenty-four times the highest semi-monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term “affiliated companies” shall include any company controlled by, controlling or under common control with the Company.

               (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the “Annual Bonus”) in cash at least equal to the Executive’s highest bonus under the Company’s Executive Incentive Plan, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years

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prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the “Recent Annual Bonus”). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus.

               (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, profit-sharing, stock option, stock award, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.

               (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.

               (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

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               (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses and use of Company aircraft, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

               (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

               (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

          5. Termination of Employment.

               (a) Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its

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insurers and acceptable to the Executive or the Executive’s legal representative.

               (b) Cause. The Company may terminate the Executive’s employment during the Employment Period for Cause. For purposes of this Agreement, “Cause” shall mean:

               (i) the willful and continued failure of the Executive to perform substantially the Executive’s duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive’s duties, or

               (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.

For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.

          (c) Good Reason. The Executive’s employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, “Good Reason” shall mean:

               (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated,

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insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;

               (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;

               (iii) the Company’s requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company’s requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date;

               (iv) any purported termination by the Company of the Executive’s employment otherwise than as expressly permitted by this Agreement; or

               (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement.

For purposes of this Section 5(c), any good faith determination of “Good Reason” made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement.

          (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

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          (e) Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive’s employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be.

          6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive’s employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason:

               (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:

               A. the sum of (1) the Executive’s Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the “Highest Annual Bonus”) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the “Accrued Obligations”); and

               B. the amount equal to the product of (1) the lesser of (x) three and (y) the number of days after the Date of Termination and on or before the Executive’s 65th birthday, divided by 365, times (2) the sum of (A) the Executive’s Annual Base Salary, (B) the Highest Annual Bonus and (C) the highest contributions made under the Company’s Employees’ Profit Sharing Incentive Plan and the Company’s Profit Sharing Benefits Equalization Plan or any successor or replacement plans thereto, for any of the three calendar years preceding the Date of Termination; and

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               C. an amount equal to the excess of (a) the actuarial equivalent of the benefit under the Company’s qualified defined benefit retirement plan (the “Retirement Plan”) (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Company’s Retirement Plan immediately prior to the Effective Date), and any excess or supplemental retirement plans in which the Executive participates (together, the “SERP”) which the Executive would have received if the Executive’s employment had continued for three years after the Date of Termination or through age 65, if sooner, assuming for this purpose that all accrued benefits were fully vested, and, assuming that the Executive’s compensation in each of the three years (or the shorter period to age 65, if applicable) would have been that required by Section 4(b)(i) and Section 4(b)(ii), over (b) the actuarial equivalent of the Executive’s actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination;

          (ii) for the lesser of (x) three years after the Executive’s Date of Termination and (y) the period through the Executive’s 65th birthday, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive’s family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive’s employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period;

          (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”);

          (iv) notwithstanding anything to the contrary in any employee pension benefit plan or any supplemental or excess employee pension benefit plan of the Company (including without limitation the Retirement Plan, the SERP, the Company’s Retirement Benefits

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Equalization Plan (the “BEP”) or any successor or replacement plan thereto), all benefits payable to the Executive under any supplemental or excess employee pension benefit plan of the Company (including without limitation the SERP, the BEP or any successor or replacement plan thereto) following a Change of Control (as defined therein) if, on the Date of Termination, the Executive is then age 50 or over shall not be reduced by any “reduction factors” or similar formulae or otherwise because such benefits are payable prior to a specified age or because the Executive has not yet reached a specified age (including, without limitation, the Executive’s earliest or normal retirement age under the terms of the relevant plan); and

          (v) in addition to the benefits provided in subparagraph (a)(ii) of this Section 6, if the Executive is age 45 or over on the Date of Termination, the Executive shall, upon attainment of age 55 and upon termination of the three year period after the Executive’s Date of Termination, become eligible for all benefits under medical plans, practices, policies and programs made available immediately prior to the Date of Termination (or, if greater, immediately prior to the Effective Date) to retired peer executives of the Company (including without limitation any supplemental coverage under the Executive Medical Benefits Plan) as if the Executive had at the Date of Termination satisfied the age and service conditions for coverage under the applicable provisions of such plans, practices, policies and programs. If the Company is unable to provide the Executive with coverage under such plans, practices, policies and programs, the Company shall provide the Executive with separate comparable coverage but in no event less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for retirees immediately prior to the Effective Date.

          (b) Death. If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Period, this Agreement shall terminate without further obligations to the Executive’s legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive’s estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits and survivor benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive’s estate and/or the Executive’s beneficiaries, as in effect on the date of the Executive’s death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries.

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          (c) Disability. If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, without limitation, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive’s family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families.

          (d) Cause; Other than for Good Reason. If the Executive’s employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.

          7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.

          8. Full Settlement. The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its

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obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”).

          9. Certain Additional Payments.

          (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (each, a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code (together with any interest or penalties imposed with respect to such excise tax, the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (“Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. The Company’s obligation to make Gross-Up Payments under this Section 9 shall not be conditioned upon the Executive’s termination of employment.

          (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche or such other certified public accounting firm that is serving as the Company’s primary independent auditors at the time (the “Accounting Firm”). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the

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Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event the Company exhausts or does not seek to pursue its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

          (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

               (i) give the Company any information reasonably requested by the Company relating to such claim,

               (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

               (iii) cooperate with the Company in good faith in order effectively to contest such claim, and

               (iv) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties)

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incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax, income tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income in connection with such advance; and further provided, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

          (d) If, after the receipt by the Executive of a Gross-Up Payment or an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 9(c), if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

          (e) Notwithstanding any other provision of this Agreement, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of any Gross-Up Payment, and the Executive hereby consents to such withholding.

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          10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.

          11. Successors.

               (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.

               (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

               (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

          12. Miscellaneous.

               (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

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               (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Thomas J. Sabatino, Jr.
[Address]

If to the Company:

Schering-Plough Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attention: Chief Executive Officer

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

          (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

          (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.

          (e) The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c) (i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

          (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is “at will” and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive’s employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any prior agreement between the parties with respect to the subject matter hereof.

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          IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.

Thomas J. Sabatino, Jr.
SCHERING-PLOUGH CORPORATION
By
	Fred Hassan Chairman of the Board and Chief Executive Officer

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EX-10.E.IX

Exhibit 10(e)(ix)

FORM OF

CHANGE OF CONTROL EMPLOYMENT AGREEMENT

     AGREEMENT by and between Schering-Plough Corporation, a New Jersey corporation (the “Company”) and ___, (the “Executive”), is dated as of the ___day of ___, 200.

     The Board of Directors of the Company (the “Board”), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.

     NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

     1. Certain Definitions.

     (a) The “Effective Date” shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Section 409A Change in Control Event (as defined in Appendix A) occurs and if the Executive’s employment with the Company is terminated prior to the date on which such Section 409A Change in Control Event occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or a Section 409A Change in Control Event or (ii) otherwise arose in connection with or in anticipation of a Change of Control or Section 409A Change in Control Event, then for all purposes of this Agreement the “Effective Date” shall mean the date immediately prior to the date of such termination of employment.

     (b) The “Change of Control Period” shall mean the period commencing on the date hereof and ending on the earlier of (i) the third anniversary of the date hereof and (ii) except as otherwise provided in Section 1(a), the date the Executive’s employment terminates for any reason prior to the Effective Date; provided, however, that commencing on the third anniversary of the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the “Renewal Date”), the Change of Control Period shall be automatically extended so as to terminate on the earlier of (x) the first anniversary of such Renewal Date and (y) except as otherwise provided in Section 1(a), the date the Executive’s employment terminates for any reason prior to the Effective Date, unless at least three months prior to such Renewal Date the Company shall have given notice to the Executive that the Change of Control Period shall not be so extended.

     2. Change of Control. For the purpose of this Agreement, a “Change of Control” shall mean the happening of any of the following events:

     (a) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d 3 promulgated under the Exchange Act) of securities of the Company where such acquisition causes such Person to own 20% or more of either (i) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; and provided, further, that if any Person’s beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (i) or (ii) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Company Voting Securities; or

     (b) individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

     (c) consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, or a sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

     (d) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

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     3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the earlier of (x) the [third] [second] [first] anniversary of such date and (y) the Executive’s 65th birthday (the “Employment Period”).

     4. Terms of Employment.

     (a) Position and Duties.

               (i) During the Employment Period, (A) the Executive’s position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive’s services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from, and in the same state as, such location.

               (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote appropriate attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive’s best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not materially interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date without materially interfering with the performance of the Executive’s responsibilities to the Company, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company.

     (b) Compensation.

               (i) Base Salary. During the Employment Period, the Executive shall receive, in accordance with the Company’s normal payroll practices in effect from time to time for its other similarly situated peer executives, an annual base salary (“Annual Base Salary”) at least equal to the highest annualized rate of base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies during the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term “affiliated companies” shall include any company controlled by, controlling or under common control with the Company.

               (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus in cash at least equal to the Executive’s highest annual target incentive opportunity under the Company’s annual incentive plan applicable to the Executive (the “Incentive Plan”), or any comparable bonus under any predecessor or successor plan, for any of the immediately preceding three full fiscal years prior to the Effective Date (the “Annual Bonus”). Each such Annual Bonus shall be paid no later than March 15 of the fiscal year next

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following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus, in accordance with Code section 409A, pursuant to an applicable deferred compensation plan of the Company.

               (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, profit-sharing, stock option, stock award, savings and retirement plans, practices, policies, programs and arrangements applicable generally to other similarly situated peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies, programs and arrangements provide the Executive with incentive opportunities (cash or equity, and measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies, programs and arrangements as in effect at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other similarly situated peer executives of the Company and its affiliated companies.

               (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies, programs and arrangements provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans, practices, policies, programs and arrangements) to the extent applicable generally to other similarly situated peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies, programs and arrangements provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies, programs and arrangements in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other similarly situated peer executives of the Company and its affiliated companies. If, however, Executive’s participation in any such plan, practice, policy, program or arrangement could result in adverse or unintended tax consequences to any participant (including the Executive), the Company shall be entitled to pay to Executive the cost of equivalent benefits outside such plan, practice policy, program or arrangement, or provide Executive with substantially equivalent benefits through a separate program (including the provision of such benefits through the purchase of insurance), without regard to the tax treatment applicable to such payment or separate program, in lieu of permitting the Executive to participate in such plan, practice, policy, program or arrangement.

               (v) Expenses. The Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by the Executive during the Employment Period in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other similarly situated peer executives of the Company and its affiliated companies. Such reimbursement shall be made no later than March 15 of the year following the year in which such expense was incurred.

               (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, reimbursement for tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses and use of Company aircraft, in accordance with the most favorable plans, practices and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other similarly situated peer executives of the Company and its affiliated companies. Any reimbursements to the Executive in connection with fringe benefit costs shall be made no later than March 15 of the year following the year in which such costs were incurred. To the extent

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required by applicable law, such fringe benefits shall result in imputed income that shall be subject to withholding from the Executive’s wages in the amount and manner prescribed by such law.

               (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance, at least substantially equivalent to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as those provided generally at any time thereafter with respect to other similarly situated peer executives of the Company and its affiliated companies.

               (viii) Vacation. During the Employment Period, the Executive shall be entitled to an amount of paid vacation determined in accordance with the most favorable plans and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other similarly situated peer executives of the Company and its affiliated companies.

     5. Termination of Employment.

     (a) Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 14(b) of this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.

     (b) Cause. The Company may terminate the Executive’s employment during the Employment Period for Cause. For purposes of this Agreement, “Cause” shall mean termination initiated by the Company or by the Executive incident to or connected with a finding that the Executive has engaged, whether in connection with Executive’s employment with the Company or otherwise, in misappropriation, theft, embezzlement, kick-backs, bribery, or other deliberate, gross or willful misconduct or dishonest acts or omissions, including, but not limited to, commission of a felony.

     (c) Good Reason. The Executive’s employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, “Good Reason” shall mean any of the events described in (i)- (iii) below, that occur without the Executive’s express written consent, if the Company fails to cure such events within 20 business days after receiving notice thereof from the Executive:

               (i) the assignment to the Executive of any duties that are materially inconsistent with the Executive’s education, training and experience, or a significant diminution in the Executive’s authorities, responsibilities, status or title (as described in this Agreement), it being understood that (A) a change in the person to whom the Executive reports or (B) modifications to organizational responsibilities resulting in changes to the Executive’s functional areas of responsibility that do not significantly diminish Executive’s core role in the Company, do not constitute “Good Reason”;

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               (ii) any significant reduction by the Company of the Executive’s total compensation in the aggregate, unless such reduction was part of a reduction approved by the Company’s Board of Directors (or a Committee thereof) for one or more similarly situated peer executives in addition to the Executive;

               (iii) any failure by the Company to comply with any of the provisions of Section 4 of this Agreement.

     (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 14(b) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

     (e) Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive’s employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. Notwithstanding the foregoing, the Date of Termination shall in no event be earlier than the date on which the Executive has incurred a “separation from service” within the meaning of Treas. Prop. Reg. 1.409A-1(h), or in subsequent IRS guidance under Code section 409A.

     6. Obligations of the Company upon Termination.

     (a) Involuntary and Good Reason Terminations. If, during the Employment Period, the Company shall terminate the Executive’s employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason, then provided that the Executive signs a Satisfactory Release (as defined below) within 21 days following later of the Date of Termination and the date such Release is presented to the Executive, and does not revoke it within 7 days after the date he executes such Release, the Company shall:

               (i) pay to the Executive, within 30 days after the effective date of the Satisfactory Release, a lump-sum cash payment equal to the aggregate of the following amounts:

               A. the sum of (1) the Executive’s Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Executive’s Annual Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the “Accrued Obligations”); and

               B. the amount equal to the product of (1) the lesser of (x) [three] [two] [one] and (y) the number of days after the Date of Termination and on or before the Executive’s 65th birthday, divided by 365, times (2) the sum of (A) the Executive’s Annual Base Salary, (B) the

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Executive’s Annual Bonus and (C) the greater of the highest contributions made under the Company’s Employees’ Profit Sharing Incentive Plan and the Company’s Profit Sharing Benefits Equalization Plan or the highest aggregate Company contribution to the Executive’s account under the Company’s qualified and nonqualified defined contribution retirement plans, for any of the three calendar years immediately preceding the Date of Termination; and

               C. an amount equal to the excess of (1) the sum of (x) the lump-sum actuarial equivalent (as of the date that this enhanced SERP benefit is paid to the Executive or his beneficiaries (the “SERP Payout Date)) of the normal retirement benefit under the Company’s qualified defined benefit retirement plan (the “Retirement Plan”) (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Company’s Retirement Plan immediately prior to the Effective Date) and (y) the lump sum actuarial equivalent of the normal retirement benefit under any excess or supplemental retirement plans in which the Executive participates (together, the “SERP”) as of the SERP Payout Date (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the SERP immediately prior to the Effective Date) that the Executive would have received if the Executive’s employment had continued for [three] [two] [one] years after the Date of Termination or through age 65, if sooner, assuming for this purpose that all accrued benefits were fully vested, and, assuming that the Executive’s compensation in each of the [three] [two] [one] years (or the shorter period to age 65, if applicable) would have been that required by Section 4(b)(i) and Section 4(b)(ii), over (2) the lump sum actuarial equivalent of the Executive’s actual normal retirement benefit (paid or payable), if any, under the Retirement Plan and the SERP based on the Executive’s actual age, service and compensation as of the Date of Termination;

               (ii) for the lesser of (x) [three] [two] [one] years after the Executive’s Date of Termination and (y) the period through the Executive’s 65th birthday, or such longer period as may be provided by the terms of the appropriate plan, program, practice, policy or arrangement, continue health and welfare benefits to the Executive (and the Executive’s family, if applicable) at least equal to those that would have been provided in accordance with the plans, programs, practices, policies and arrangements described in Section 4(b)(iv) of this Agreement had the Executive’s employment not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other similarly situated peer executives of the Company and its affiliated companies and their families; provided, however, that such benefits coverage shall be secondary to any health and welfare benefits coverage for which the Executive becomes eligible under any plan or arrangement sponsored by a subsequent employer of the Executive; and provided further, that if Executive’s participation in any such program could result in adverse or unintended tax consequences to any participant in such program (including the Executive), the Company shall be entitled pay such Executive the cost of equivalent benefits outside such program or provide Executive with substantially equivalent benefits through a separate program (including the provision of such benefits through the purchase of insurance) without regard to the tax treatment applicable to such separate program in lieu of permitting the Executive to participate in such program;

               (iii) to the extent not theretofore paid or provided, timely pay or provide to the Executive, in accordance with the terms of any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies, any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under such plan, program, policy or practice or contract or agreement, including without limitation, any compensation previously deferred by the Executive under an applicable deferred compensation plan of the Company, together with any accrued interest or earnings thereon, (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”);

               (iv) waive any and all “reduction factors” imposed as a result of Executive’s age with respect to the Executive’s nonqualified supplemental or excess employee pension benefit plan if the Executive is at least age 50 as of the Date of Termination;

               (v) in addition to the benefits provided in subparagraph (a)(ii) of this Section 6, if the Executive is age 50 or older as of the Date of Termination, the Executive shall become immediately eligible for coverage under the Company’s retiree medical plan or any replacement or successor plan

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(including, without limitation, any supplemental coverage applicable to executives); provided, however, that, if the Company is unable to provide the Executive with coverage under such plan, the Company shall provide the Executive with separate comparable coverage but in no event less favorable, in the aggregate, than the most favorable of such plans, policies, programs, practices or arrangements in effect for retirees immediately prior to the Effective Date.

     For purposes of this Section 6(a), “Satisfactory Release” shall mean a release of claims in a form reasonably prescribed by the Company that (1) releases, and forever discharges, all claims that Executive has or may have against the Company and its affiliated companies and its and their employees, directors and agents (other than claims relating to Other Benefits), and (2) becomes irrevocable if not revoked by Executive within seven (7) days after he signs it; provided that the form of release shall not contain any post-employment covenants.

     (b) Death. If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Period, this Agreement shall terminate without further obligations to the Executive’s legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive’s estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of similarly situated peer executives of the Company and such affiliated companies under such plans, programs, practices, policies and arrangements relating to death benefits and survivor benefits, if any, as in effect with respect to other similarly situated peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive’s estate and/or the Executive’s beneficiaries, as in effect on the date of the Executive’s death with respect to other similarly situated peer executives of the Company and its affiliated companies and their beneficiaries.

     (c) Disability. If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, without limitation, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices, policies and arrangement relating to disability, if any, as in effect generally with respect to other similarly situated peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive’s family, as in effect at any time thereafter generally with respect to other similarly situated peer executives of the Company and its affiliated companies and their families.

     (d) Termination for Cause; or Voluntary Termination Without Good Reason. If the Executive’s employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination and (y) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days after the Date of Termination.

     7. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, program, practice, policy or arrangement provided by the

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Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 14(g), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. Except as specifically expressed herein, nothing contained herein is intended to alter the terms of any benefit plan or program. Notwithstanding anything in this Agreement, the Company or its affiliated companies, as applicable, reserves the right to amend or terminate any of its or their employee benefit plans at any time. In the event that an amendment to an employee benefit plan adopted after the Effective Date specifically conflicts with an express promise made in this Agreement, the Company shall have the right to honor the promise through comparable means outside the affected employee benefit plan without regard to any differences in the tax impact to the Executive.

     8. Full Settlement. Except as otherwise provided in Sections 6, the Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. The Company’s obligation to make payments or provide benefits under this Agreement and otherwise to perform its obligations hereunder shall be in lieu and in full settlement of all severance or termination benefits or payments that the Executive has received or is entitled to receive under any other any other plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies in connection with the Executive’s termination of employment. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses up to $25,000 which the Executive may reasonably incur as a result of any contest by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement); provided, however, that if the Company ultimately prevails in a court of competent jurisdiction with regard to any such contest, the Executive agrees to reimburse the Company for any and all legal fees and expenses paid by the Company in accordance with this sentence. Such amounts shall become payable within 30 days after the expiration of the applicable period to appeal such outcome or, if an appeal is taken, 30 days after final resolution of such appeal. Interest shall accrue on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code.

     9. Certain Additional Payments.

     (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or benefit in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) made or provided to or for the benefit of the Executive, whether under the terms of this Agreement or otherwise (each, a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code (together with any interest or penalties imposed with respect to such excise tax, the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (“Gross-Up Payment”), at or before the time the Excise Tax is due (whether by withholding or otherwise) in an amount such that after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. The Company’s obligation to make Gross-Up Payments under this Section 9 shall not be conditioned upon the Executive’s termination of employment.

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     (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by such nationally recognized certified public accounting firm that the Company’s may designate (the “Accounting Firm”). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting a Change of Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within ten days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event the Company exhausts or does not seek to pursue its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

     (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

               (i) give the Company any information reasonably requested by the Company relating to such claim,

               (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

               (iii) cooperate with the Company in good faith in order effectively to contest such claim, and

               (iv) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax, income tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company directs the

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Executive to pay such claim and sue for a refund, the Company shall pay the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such payment or with respect to any imputed income in connection with such payment; and further provided, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

     (d) If, after the receipt by the Executive of a Gross-Up Payment or an amount paid by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 9(c), if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount paid by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such payment shall be forgiven and shall not be required to be repaid and the amount of such payment shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

     (e) Notwithstanding any other provision of this Agreement, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of any Gross-Up Payment, and the Executive hereby consents to such withholding.

     10. Code Section 409A Provisions. Notwithstanding anything in this Agreement or elsewhere to the contrary, if, based on Internal Revenue Service guidance available as of the date the payment or provision of any amount or other benefit is specified to be made under this Agreement or elsewhere, the Company reasonably determines that the payment or provision of such amount or other benefit at such specified time may potentially subject the Executive to “additional tax” under Section 409A(a)(1)(B) of the Code (together with any interest or penalties imposed with respect to, or in connection with, such tax, a “409A Tax”) with respect to the payment of such amount or the provision of such benefit, and if payment or provision thereof at a later date would likely avoid any such 409A Tax, then the payment or provision thereof shall be postponed to the earliest business day on which the Company reasonably determines such amount or benefit can be paid or provided without incurring any such 409A Tax (the “Delayed Payment Date”). In addition, if the Company reasonably determines that such 409A Tax with respect to the provision of a benefit can likely be avoided by replacing the benefit with the payment of an amount in cash equal to the cost of a substantially equivalent benefit then, in lieu of providing such benefit, the Company may make such cash payment, subject to the preceding sentence. In the event a benefit is to be provided during the period commencing on the Executive’s separation from service and ending on the Delayed Payment Date and the provision of such benefit during that period would be treated as a payment of nonqualified deferred compensation in violation of Section 409A(a)(2)(B)(i) of the Code, then continuation of such benefit during that period shall be conditioned on payment by the Executive of the full premium or other cost of coverage and as of the Delayed Payment Date the Company shall reimburse the Executive for the premiums or other cost of coverage paid by the Executive, which but for this paragraph would have been paid by the Company. Any such reimbursement shall include interest at the rate set out in the last sentence of this Section. The Company and the Executive may agree to take other actions to avoid the imposition of 409A Tax at such time and in such manner as permitted under Section 409A. In the event that this Section 10 requires a delay of any payment, such payment shall be accumulated and paid in a single lump sum on the Delayed Payment Date together with interest for the period of delay, compounded monthly, equal to the prime or base lending rate then used by CitiBank, N.A., in New York City and in effect as of the date the payment would otherwise have been provided.

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     11. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.

     12. Intellectual Property. To the fullest extent permitted by applicable law, all intellectual property (including patents, trademarks, and copyrights) which are made, developed or acquired by Executive in the course of Executive’s employment with the Company will be and remain the absolute property of the Company, and Executive shall, upon the Company’s reasonable request, assist the Company in perfecting and defending its rights to such intellectual property.

     13. Successors.

     (a) This Agreement is personal to the Executive and, without the prior written consent of the Company shall not be assignable by the Executive other than by will or the laws of descent and distribution. Except as otherwise required by law, no right to receive payments hereunder shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect; except, however, that this Agreement shall inure to the benefit of and be enforceable by the executors, administrators or other legal representatives of the Executive or the Executive’s estate.

     (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

     (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

     14. Miscellaneous.

     (a) This Agreement shall be governed by and construed in accordance with the internal substantive laws of the State of New Jersey, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

     (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

     If to the Executive:

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[Name and Address]

     If to the Company:

Schering-Plough Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attention: Corporate Secretary

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

     (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

     (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.

     (e) No provisions of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by both Executive and the Chief Executive Officer of the Company. The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

     (f) Except as herein otherwise specifically provided, references in this Agreement to employment by the Company shall include employment by affiliates of the Company, and the obligation of the company to make any payment or provide any benefit to the Executive hereunder shall be deemed satisfied to the extent that such benefit is made or such payment is provided by an affiliate of the Company.

     (g) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is “at will” and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive’s employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any prior agreement between the parties with respect to the subject matter hereof.

     15. Disputes. All disputes arising out of or relating to this Agreement, or to the Executive’s employment by the Company, will be determined by arbitration conducted before a single arbitrator selected by the parties, in accordance with the labor and employment rules of the American Arbitration Association then in effect, and at the office of the Association located closest to the Company’s headquarters. The costs of arbitration will be borne by the losing party. The arbitrator shall be empowered by the parties to enter all relief that a court could enter.

     16. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein. There shall be no contractual or similar restrictions on Executive’s right to terminate his employment with the Company, or on his post-employment activities, other than those expressly set forth in this Agreement. Except as otherwise set forth in this Agreement, the respective rights and obligations of the parties under this Agreement shall survive any termination of Executive’s employment. This Agreement may be

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executed in counterparts, each of which shall be deemed an original and all of which together shall be deemed to be one and the same document. Signatures delivered by facsimile shall be effective for all purposes.

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     IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.

EXECUTIVE

 

[Name of Executive]

SCHERING-PLOUGH CORPORATION

By

Fred Hassan
Chairman of the Board and
Chief Executive Officer

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Appendix A

Section 409A Change in Control Event

     For purposes of Section 1(a), the term “Section 409A Change in Control Event” shall mean any of the following events:

     (a) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of securities of the Company where such acquisition causes such Person to own more than 50% of either (x) the then outstanding Shares of the Company (the “Outstanding Shares”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Voting Securities”); provided, however, that for purposes of this subsection (a) the following acquisitions will not constitute a Section 409A Change in Control Event: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) below; and provided, further, that if any Person’s beneficial ownership of the Outstanding Shares or Outstanding Voting Securities reaches or exceeds 50% as a result of a prior transaction, and such Person subsequently acquires beneficial ownership of additional Shares or additional voting securities of the Company, such subsequent acquisition will not be treated as an acquisition that causes such Person to own more than 50% of the Outstanding Shares or Outstanding Voting Securities;

     (b) during any 12-month period, individuals who, as of the first day of such period, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the beginning of such 12-month period whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though such individual were a member of the Incumbent Board;

     (c) consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company, or the acquisition of assets or stock of another entity by the Company (each a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were beneficial owners, respectively, of the Outstanding Shares or Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectfully, the then outstanding shares of the common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Shares and Outstanding Voting Securities, as the case may be, (ii no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, more than 50% of, respectfully, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board on the later of (x) the time of the execution of the initial agreement, (y) the action of the Board providing for such Business Combination or (z) the beginning of the 12-month period ending on the effective date of the Business Combination;

     (d) any one Person acquires (or has acquired during any 12-month period ending on the date of the most recent acquisition by such Person) assets of the Company having a fair market value equal to or

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more than 40% of the total gross fair market value of all of the assets of the Company immediately prior to such sale, other than an acquisition by (i) a Person who was a shareholder of the Company immediately before the asset acquisition in exchange for or with respect to such Person’s Shares, (ii) an entity whose total or voting power immediately after the transfer is at least 50% owned, directly or indirectly, by the Company, (iii) a person or group that, immediately after the transfer, directly or indirectly owns at least 50% of the total value or voting power of the outstanding stock of the Company or (iv) an entity whose total value or voting power immediately after the transfer is at least 50% owned, directly or indirectly, by a person described in clause (C) above; or

     (e) the complete liquidation of the Company.

     The definition of Section 409A Change in Control Event for purposes of Section 1(a) of this Agreement is intended to conform to the description of “Change in Control Events” in Treas. Prop. Reg. 1.409A-3(g)(5), or in subsequent IRS guidance describing what constitutes a Change in Control Event for purposes of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, no Section 409A Change in Control Event will be deemed to occur with respect to a transaction or event described in paragraphs (a) through (e) above unless the transaction or event would constitute a “Change in Control Event” as described in Treas. Prop. Reg. 1.409A-3(g)(5), or in subsequent IRS guidance under Code section 409A.

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EX-10.L

Exhibit 10(l)

SCHERING-PLOUGH CORPORATION

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(AMENDED AND RESTATED JANUARY 1, 2005)

PREAMBLE

Schering Corporation has adopted the Schering-Plough Corporation Supplemental Executive Retirement Plan to ensure the payment of a competitive level of retirement income to attract, retain, and motivate selected executives of the Corporation and its Affiliates. The Plan is intended to be a non-qualified, supplemental retirement plan that is unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees of the Corporation or its Affiliates pursuant to Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA and, as such, to be exempt from the provisions of Parts 2, 3, and 4 of Subtitle B of Title I of ERISA. The Plan was originally effective as of January 1, 1983, however, this amendment and restatement is effective as of January 1, 2005 and only applies to employees of the Corporation or an Affiliate on or after that date. Except as otherwise defined herein, all capitalized terms shall have the meaning given to them in the Retirement Plan.

ARTICLE 1
DEFINITIONS

1.1	“Affiliate” means any corporation, partnership, or other organization controlled by or under common control with the Corporation.
1.2	“Average Final Earnings” means a Participant’s or Former Participant’s average annual Earnings during the sixty consecutive months for which his or her Earnings were highest during the last one hundred twenty consecutive months prior to his or her Separation from Executive Service.
1.3	“Board” means the Board of Directors of Schering-Plough Corporation.
1.4	“Change of Control” means Change of Control as defined in the Corporation’s 2002 Stock Incentive Plan or any successor stock incentive plan.
1.5	“Change of Control Termination Date” means the date, following a Change of Control, as of which a Participant or Former Participant has a Separation from Service.
1.6	“Code” means the Internal Revenue Code of 1986, as amended.
1.7	“Committee” means the Committee provided for in Section 6 of the Plan.
1.8	“Corporation” means Schering-Plough Corporation, a New Jersey Corporation, and any successor or assigns thereto.
1.9	“Deferral Rate” means, for each calendar quarter, a rate equal to the actual yield on three-month U.S. Treasury bills as reported in the Wall Street Journal on the first business day of such calendar quarter.

1.10 “Early Retirement Date” means:

(a)	with respect to any person who, prior to March 1, 2006, both attained age 55 and became a Participant of the Plan, the later of the Participant’s attainment of age 55 and his or her Separation from Service; and
(b)	with respect to any other person, the latest of his or her attainment of age 55, Separation from Service, and the date he or she completes five years of Eligibility Service under the Retirement Plan.

1.11	“Earnings” means Compensation under the Retirement Plan prior to the Participant’s Separation from Executive Service plus, for periods prior to January 1, 2004, bonuses awarded for such periods under any executive or management incentive plan of the Corporation or an Affiliate; provided, however, that the amount of Earnings credited for any bonus earned in the calendar year in which the Participant’s Separation from Executive Service occurs but not paid until after the Participant’s Separation from Service shall be the estimated bonus as determined by the Committee.
1.12	“Effective Date” means January 1, 2005.
1.13	“Equivalent Actuarial Value” means the equivalent value when computed on the basis of the interest rate determined as of such date under the regulations of the Pension Benefit Guaranty Corporation for determining the present value of a lump sum distribution on plan termination that were in effect on September 1, 1993 and the 1994 Group Annuity Reserving mortality table. Notwithstanding the foregoing, effective January 1, 2006, Equivalent Actuarial Value shall be determined by using the market yield on U.S. Treasury securities at 10-year constant maturities (non-inflation issues adjusted to constant maturities), as set forth in Federal Reserve Statistical Release H.15 for the first business day of the month in which the Participant’s Separation from Service occurs and the mortality table used to determine automatic lump sum cash outs under the Retirement Plan.
1.14	“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
1.15	“Executive Status” means:

(a)	prior to January 1, 2004, employment in E-Grade pay status; and
(b)	on or after January 1, 2004:

(i)	employment as a member of the Corporation’s Executive Management Team or Operations Management Team; or
(ii)	effective on and after January 1, 2005, solely with respect to an individual who did not become a Participant of the Plan prior to January 1, 2005, designation as a Participant of the Plan by the Chief Executive Officer of the Corporation.

Once a person attains Executive Status, he or she shall remain in Executive Status until his or her Separation from Executive Service.

1.16 “Former Participant” means a former employee or an employee who has been removed from Executive Status and on whose behalf a benefit is payable under the Plan.

1.17 “Other Retirement Income” means the employer-provided retirement income payable to a Participant, Former Participant or Beneficiary (as defined in the Retirement Plan) from the following sources:

(a)	the Schering-Plough Retirement Benefits Equalization Plan, as amended from time to time;
(b)	any other contract, agreement, or other arrangement with the Corporation or an Affiliate (excluding the Retirement Plan) to the extent, as solely determined by the Committee, it provides defined-benefit-type retirement or pension benefits; and
(c)	any contract, agreement, or other arrangement with the Corporation or an Affiliate to the extent it provides defined-contribution-type retirement or pension benefits which are the Participant’s or Former Participant’s primary source of retirement or pension benefits, as solely determined by the Committee.

1.18	“Participant” means an executive employee of the Corporation or an Affiliate who becomes a participant in the Plan pursuant to Section 2.
1.19	“Plan” means the Schering-Plough Corporation Supplemental Executive Retirement Plan, as amended from time to time.
1.20	“Retirement” means the Separation from Service of a Participant on or after his or her Normal Retirement Age, Early Retirement Date, or Change of Control Termination Date, or the deemed retirement of a Participant pursuant to an employment agreement between him or her and the Corporation or an Affiliate.
1.21	“Retirement Plan” means the Schering-Plough Corporation Retirement Plan, as amended from time to time.
1.22	“Retirement Plan Benefit” means the amount of benefit payable from the Retirement Plan to a Participant, Former Participant or Beneficiary.
1.23	“Separation from Executive Service” means the earlier of (i) the Participant’s Separation from Service or (ii) the date the Chief Executive Officer of the Corporation determines that the individual is no longer entitled to participate in the Plan.
1.24	“Separation from Service” means “separation from service” as defined under Section 409A(a)(2)(A)(i) of the Code.
1.25	“Service” means an individual’s period of employment with the Corporation or an Affiliate as a Participant prior to his or her Separation from Executive Service for which benefits are accrued under the Retirement Plan; provided, however, that if the individual has completed at least 10 years of Benefit Service under the Retirement Plan, Service shall also include the individual’s period of employment with the Corporation or an Affiliate for which benefits are accrued under the Retirement Plan prior to the date he or she became a Participant of this Plan; and provided further, that if the individual first becomes a Participant of this Plan on or after January 1, 2005, Service shall also include the individual’s Eligibility Service under the Retirement Plan prior to membership in the Retirement Plan, up to one year, if not otherwise included in his or her Service pursuant to the prior provisions of this Section 1.25.

1.26	“Supplemental Benefit” means a supplemental retirement benefit or survivor benefit as determined under Article 4 or Article 5, respectively, as of any date of reference.
1.27	“Surviving Spouse” means a person of the opposite sex of the Participant or Former Participant who is the Participant’s or Former Participant’s husband or wife as provided in the Defense of Marriage Act of 1996, who has been married to the Participant throughout the one-year period ending on the Participant’s date of death.

ARTICLE 2
ELIGIBILITY AND PARTICIPATION

2.1	Any person who was a Participant in the Plan immediately prior to the Effective Date shall continue to be a Participant as of the Effective Date, provided the person is in active employment with the Corporation or an Affiliate on the Effective Date.
2.2	Any person who does not become a Participant of the Plan pursuant to Section 2.1 shall become a Participant of the Plan on the later of:

(a)	the first date he or she is in Executive Status; and
(b)	the earlier of (i) the date he or she is credited with one (1) year of Eligibility Service under the Retirement Plan and (ii) the date he or she has attained age 40;

provided the person is in active employment with the Corporation or an Affiliate at that time.

2.3 A person who is on a leave of absence on the date he or she would otherwise become a Participant pursuant to Section 2.2 shall become a Participant on the date his or her leave of absence terminates and he or she resumes active employment.

ARTICLE 3
ELIGIBILITY FOR BENEFITS

3.1 Each Participant or Former Participant is eligible to commence receiving benefits under this Plan on the first day of the month coincident with or next following his or her Separation from Service.

ARTICLE 4
AMOUNT AND FORM OF RETIREMENT BENEFIT

4.1 Normal Retirement Date or Postponed Retirement Date. The Supplemental Benefit of a Participant or Former Participant whose Separation from Service occurs on or after his or her Normal Retirement Age shall be calculated as an annual benefit payable monthly commencing on the first day of the calendar month coincident with or next following his or her Retirement equal to:

(a) the sum of:

(i)	2% of his or her Average Final Earnings multiplied by his or her years of Service up to twenty years, plus
(ii)	1% of his or her Average Final Earnings for each year of Service in excess of twenty years;

up to a maximum of 55% of Final Average Earnings, reduced by:

(b) his or her Other Retirement Income and Retirement Plan Benefit.

The annual benefit calculated under this Section 4.1 of a Participant or Former Participant who was in Executive Status prior to the Effective Date and who has completed 10 years of Service in Executive Status and reached age 60 on or prior to his or her Separation from Service shall not be less than an annual benefit payable monthly commencing on the first day of the calendar month coincident with or next following his or her Retirement equal to 35% of his or her Average Final Earnings reduced by his or her Other Retirement Income and Retirement Plan Benefit.

4.2 Early Retirement Date or Change of Control. The Supplemental Benefit of a Participant or Former Participant whose Separation from Service occurs prior to his or her Normal Retirement Date but on or after his or her Early Retirement Date or after a Change in Control shall be calculated as described in Section 4.1 above, but with reference to the Participant’s Early Retirement Date or Change of Control Termination Date rather than his or her Normal Retirement Age and reduced by (i) the reduction factor set forth in the following chart that corresponds to the Participant’s age at his or her Early Retirement Date or Change of Control Termination Date, as applicable:

Age at Early Retirement Date or Change of Control Termination Date	Reduction Factor
64		0	%
63		0	%
62		0	%
61		0	%
60		0	%
59		4	%
58		8	%
57		12	%
56		16	%
55		20	%

Age at Change of Control Termination Date	Reduction Factor
54		25.5	%
53		31	%
52		36	%
51		40	%
50		44	%
49		48	%
48		51	%
47		54	%
46		57	%
45		59.5	%
44		62	%

Age at Change of Control Termination Date	Reduction Factor
43		64	%
42		66	%
41		68	%
40		70	%
39		71.5	%
38		73	%
37		74	%
36		75	%
35		76	%

The annual benefit calculated under this Section 4.2 of a Participant or Former Participant who was in Executive Status prior to the Effective Date and who has completed 10 years of Service in Executive Status and reached age 60 on or prior to his or her Separation from Service shall not be less than an annual benefit payable monthly commencing on the first day of the calendar month coincident with or next following his or her Retirement equal to 35% of his or her Average Final Earnings reduced by his or her Other Retirement Income and Retirement Plan Benefit.

4.3	Other Termination. The Supplemental Benefit of a Participant or Former Participant whose Separation of Service occurs for a reason other than Retirement, disability, death, or following a Change of Control, shall be calculated as an annual benefit payable monthly commencing on the first day of the calendar month coincident with his or her Normal Retirement Date.
4.4	Disability. In the event that a Participant or Former Participant has become totally and permanently disabled for the purposes of the Corporation’s long-term disability program, disability retirement benefits shall be payable under this Plan, and shall be determined pursuant to Section 4 hereof, with Earnings (as defined herein) and Service deemed to have continued for such period, if any, as shall be applicable under the disability retirement benefit provisions of the Retirement Plan.
4.5	Pre-March 1, 1987 Provisions. For the purpose of determining Supplemental Benefits under the foregoing paragraphs of this Section 4:

(a)	Service prior to March 1, 1987, for all executives who were Participants in the Plan on January 1, 1983, shall be deemed to be in an E-grade pay status; and
(b)	in no event shall the Supplemental Benefit of an actively employed executive participating in the Plan on March 1, 1987, be less than the Supplemental Benefit that would be payable if such Supplemental Benefit were determined under the provisions of the Plan as in effect immediately prior to such date and the executive’s earnings and service as of February 28, 1987.

4.6 Form of Payment. Supplemental Benefits shall be payable in a lump sum as soon as administratively practicable following the Participant’s Separation from Service. Such lump sum shall be of Equivalent Actuarial Value to the benefit calculated under Sections 4.1, 4.2, 4.3, 4.4, and 4.5 above that would have been provided commencing as of the Participant’s Normal Retirement Date, or the first day of the month following the Participant’s Separation from Service, if later. Notwithstanding the preceding sentence, in the case of a Participant whose Separation from Service is on or after his or her Early

	Retirement Date, the lump sum shall be of Equivalent Actuarial Value to the benefit that would have been calculated under Sections 4.1, 4.2, 4.4, and 4.5 above that would have provided commencing on the first day of the month following the Participant’s Separation from Service. Notwithstanding the foregoing, the portion of the Supplemental Benefit that is accrued after December 31, 2004, for any Participant who is a specified employee as defined in Section 409A of the Code, shall be delayed for a period of six (6) months following such Participant’s Separation from Service. If a Participant or a Former Participant has a Separation from Service by Retirement and dies before receiving full payment of his or her Supplemental Benefit, payment of the Supplemental Benefit shall be made to his or her Beneficiary, subject to Section 5. Payment made in accordance with this Section 4.6 shall constitute full and complete satisfaction of the Corporation’s obligation in respect thereof. A Participant may elect to defer receipt of his or her Supplemental Benefit in accordance with the terms of the Savings Advantage Plan to the extent that such plan complies with Section 409A of the Code in a manner that will not result in the incurrence of Section 409A excise taxes to the Participant.
4.7	Section 162(m) of the Code. The Committee may, in its sole discretion, defer the payment of any lump sum to a Participant or a Former Participant who is a “covered employee” as defined in Section 162(m) of the Code, if such payment would be subject to such Section’s limitation on deductibility; provided, however, that such payment shall not be deferred to a date later than the earliest date in the year in which such payment would not be subject to such limitation; and further provided that the Corporation shall, at the time of payment of any amount so deferred, pay interest thereon from the due date thereof at the Deferral Rate, compounded quarterly.
4.8	Delayed Payment. If a lump sum payment to a Participant or Former Participant, or the Beneficiary thereof, including a payment delayed pursuant to Section 4.6, commences later than the 15th day of the month following the month in which the Participant’s Separation from Service occurs, the Corporation shall, at the time of payment of such lump sum, pay interest thereon from the 15th day of the month following the month in which the Participant’s Separation from Service occurs to the date payment is issued at the Deferral Rate, compounded quarterly.
4.9	Forfeitability. Except as otherwise provided herein, the Supplemental Benefit of each Participant and Former Participant under the Plan shall at all times be 100 percent vested and nonforfeitable.
4.10	Offset. If any Retirement Plan Benefit or Other Retirement Income is payable to a Participant, Former Participant or Beneficary, and the form of such Retirement Plan Benefit or Other Retirement Income is other than a lump sum or such Retirement Income or Other Retirement Benefit is paid at a time other than when the Supplemental Benefit is paid under this Plan, such Retirement Plan Benefit or Other Retirement Income shall be converted to a lump sum of Equivalent Actuarial Value for purposes of determining the offset applied under this Plan. The Committee shall be empowered to make such additional equitable adjustments to accomplish the purposes of the foregoing as the Committee in its sole discretion shall determine.
4.11	Enhanced or Reduced Benefits. Notwithstanding the forgoing and subject to the approval of the Corporation’s Chief Executive Officer, an employment or similar agreement between a Participant and the Corporation may enhance or reduce the benefit provided to or on behalf of such Participant under this Plan. In no event will an enhanced benefit be separately paid under both an employment or similar agreement and this Plan in a manner that results in a duplicative benefit.

ARTICLE 5
SURVIVING SPOUSE BENEFIT

5.1 Upon the death of a Participant or Former Participant while employed by the Corporation or an Affiliate who has at least 5 years of Eligibility Service under the Retirement Plan, his or her Surviving Spouse shall be entitled to a survivor benefit under this Plan based upon the Participant’s or Former Participant’s Supplemental Benefit immediately prior to his or her death, but without any reduction factor, in accordance with the following schedule:

Age and Service at Time of Death		Survivor Benefit
a.	Age 55 or more with 5 or more years of Eligibility Service.	50% of the Participant’s or Former Participant’s Supplemental Benefit.
b.	Ages 50 through 54 with 5 or more years of Eligibility Service, and age plus years of Eligibility Service equal 65.	50% of the Participant’s or Former Participant’s Supplemental Benefit multiplied by 80.0%.
c.	Below age 50 with 5 or more years of Eligibility Service, and age plus years of Eligibility Service equal 65.	50% of the Participant’s or Former Participant’s Supplemental Benefit multiplied by 53.1%.

less any Retirement Plan Benefit or Other Retirement Income payable to the Surviving Spouse whether or not the Participant or Former Participant has elected or has been deemed to have elected to have such benefit or retirement income paid to his or her Surviving Spouse.

5.2

Upon the death of any Participant or Former Participant who does not have at least 5 years of Eligibility Service, his or her Surviving Spouse shall be entitled to a survivor benefit under this Plan based upon his or her Supplemental Benefit immediately prior to his or her death and computed as if he or she had retired on the day before his or her death and had elected a 50% Qualified Joint and Survivor Annuity (as defined in the Retirement Plan) for the benefit of his or her Surviving Spouse. Such survivor benefit under this Plan shall be reduced by any Retirement Plan Benefit and Other Retirement Income payable to the Surviving Spouse whether or not the Participant or Former Participant has elected or has been deemed to have elected to have such benefit or retirement income paid to his or her Surviving Spouse.

5.3

A Surviving Spouse’s benefits provided under Section 5.1 or 5.2 shall be paid in a lump sum as of the first day of the month following the month in which the Participant or Former Participant dies. Such lump sum shall be of Equivalent Actuarial Value to the benefit calculated under Section 5.1 or 5.2 that would have been provided commencing as of the Participant’s Normal Retirement Date, or the first day of the month following the Participant’s date or death, if later. Notwithstanding the preceding sentence:

(a)	in the case of a Participant whose date of death is on or after his or her attainment of age 55 and who, prior to March 1, 2006, both became a Participant of the Plan and attained age 55, or
(b)	in the case of a Participant whose date of death is on or after the later of his or her attainment age 55 and completion of five years of Eligibility Service:

the lump sum shall be of Equivalent Actuarial Value to the benefit that would have been provided commencing on the first day of the month following the Participant’s date of death.

ARTICLE 6
COMMITTEE

6.1	Committee. The Plan shall be administrated by the Committee, which shall consist of such persons as may be appointed by the Chief Executive Officer of the Corporation. The Committee shall have (a) complete discretion to supervise the administration and operation of the Plan, (b) complete discretion to adopt rules and procedures governing the Plan from time to time, and (c) sole authority to give interpretive rulings with respect to the Plan.
6.2	Binding Effect of Decisions. Any decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation, or application of the Plan shall be final and binding upon all persons having any interest in the Plan.
6.3	Indemnification of Committee. The Corporation shall indemnify and hold harmless the members of the Committee against any and all claims, loss, damage, expense, or liability arising from any action or failure to act with respect to the Plan, except in the case of gross negligence or willful misconduct by any such member.

ARTICLE 7
AMENDMENT AND TERMINATION OF PLAN

7.1

Amendment. The Board, or the Board’s delegate, on behalf of itself and of each Affiliate, may at any time amend, suspend, or reinstate any or all of the provisions of the Plan, except that no such amendment, suspension, or reinstatement may adversely affect any Participant’s or Former Participant’s vested Supplemental Benefit, as it existed immediately before the effective date of such amendment, suspension, or reinstatement, without such Participant’s or Former Participant’s prior written consent. Written notice of any amendment or other action with respect to the Plan shall be given to each Participant.

7.2

Termination. The Board, or the Corporation’s delegate on behalf of itself and of each Affiliate, in its sole discretion, may terminate this Plan at any time and for any reason whatsoever. On and after Plan termination, the Committee shall take those actions necessary to administer any Supplemental Benefits existing prior to the effective date of such termination; provided, however, that a termination of the Plan shall not adversely affect the value of a Participant’s or Former Participant’s Supplemental Benefit, or the timing or method of distribution of a Participant’s or Former Participant’s Supplemental Benefit, without the Participant’s or Former Participant’s prior written consent.

ARTICLE 8
MISCELLANEOUS

8.1 Funding. Participants, their Beneficiaries, and their heirs, successors, and assigns shall have no secured interest or claim in any property or assets of the Corporation. The Corporation’s obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Corporation to pay money in the future.

8.2	Expenses. All expenses of administering the Plan shall be borne by the Corporation, to the extent they are not paid from any trust fund established by the Corporation to help defray the costs of providing Plan benefits.
8.3	Nonassignability. No right or interest under the Plan of a Participant, Former Participant, or his or her Beneficiary (or any person claiming through or under any of them) shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance, or other legal process or in any manner be liable for or subject to the debts or liabilities of any such Participant, Former Participant or Beneficiary.
8.4	Claims Procedure.

(a)	Claim. A person who believes that he or she is being denied a Supplemental Benefit to which he or she is entitled under the Plan (hereinafter referred to as a “Claimant”) may file a written request for such benefit with the Committee, setting forth the claim.
(b)	Claim Decision. Upon receipt of a claim, the Committee shall advise the Claimant that a reply will be forthcoming within 90 days and shall, in fact, deliver such reply within such period. If special circumstances require that the 90-day time period be extended, the Committee shall so notify the Claimant and shall render the decision as soon as possible, but no later than 180 days after receipt of the request for review.
(c)	Information. If the claim is denied in whole or in part, the Claimant shall be provided an opinion, using language calculated to be understood by the Claimant, setting forth:

(i)	The specific reason or reasons for such denial;
(ii)	The specific reference to pertinent provisions of this Plan on which such denial is based;
(iii)	A description of any additional material or information necessary for the Claimant to perfect his claim and an explanation why such material or such information is necessary;
(iv)	Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review;
(v)	The time limits for requesting a review under subsection (c) and for review under subsection (d) hereof; and
(vi)	A statement of the Claimant’s right to bring an action under Section 502 of ERISA upon a claim denial on review.

(d) Request for Review. Within 60 days after the receipt by the Claimant of the opinion described above, the Claimant may request in writing that the Committee review its determination. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comment in writing for consideration by the Committee. If the Claimant does not request a review of the initial determination within such 60-day period, the Claimant shall be barred and estopped from challenging the determination.

(e) Review of Decision. Within 60 days after the Committee’s receipt of a request for review, it will review the initial determination. After considering all materials presented by the Claimant, the Committee shall render an opinion, drafted in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Plan upon which the decision is based and a statement of the Claimant’s right to bring an action under Section 502 of ERISA. If special circumstances require that the 60-day time period be extended, the Committee shall so notify the Claimant and shall render the decision as soon as possible, but no later than 120 days after receipt of the request for review.

8.5	Limitation of Rights of Participants and Former Participants. Nothing in this Plan shall be construed as conferring upon any Participant or Former Participant any right to continue in the employment of the Corporation or an Affiliate, nor shall it interfere with the rights of the Corporation or an Affiliate to terminate the employment of any Participant or Former Participant and/or to take any personnel action affecting any Participant or Former Participant without regard to the effect which such action may have upon such Participant or Former Participant as a recipient or prospective recipient of Supplemental Benefits under the Plan. Any amounts payable hereunder shall not be deemed salary or other compensation to a Participant or Former Participant for the purposes of computing benefits to which the Participant or Former Participant may be entitled under any other arrangement established by the Corporation or Affiliate for the benefit of its employees.
8.6	No Limitation on Actions of Corporation or Affiliates. Nothing contained in the Plan shall be construed to prevent the Corporation or an Affiliate from taking any action that is deemed by it to be appropriate or in its best interest. No Participant or other person shall have any claim against the Corporation or an Affiliate as a result of such action.
8.7	Obligations to Corporation. If a Participant or Former Participant becomes entitled to a distribution of a Supplemental Benefit under the Plan, and if at such time the Participant or Former Participant has outstanding any debt, obligation, or other liability representing an amount owing to the Corporation or an Affiliate, the Corporation or Affiliate may offset such amount owed to it against the amount of benefits otherwise distributable. Such determination shall be made by the Committee.
8.8	Captions. The captions contained herein are for convenience only and shall not control or affect the meaning or construction hereof.
8.9	Governing Law. The Plan is intended to constitute an unfunded plan providing retirement or deferred compensation benefits for officers and highly compensated employees exempt from the requirements of parts 2, 3, and 4 of Subtitle B of Title I of ERISA. Except to the extent otherwise provided in ERISA and the Code, this Plan shall be construed, regulated, and administered under the laws of the State of New Jersey.
8.10	Successors. The provisions of the Plan shall bind and inure to the benefit of Schering Corporation, the Corporation, and the Affiliates, and their respective successors and assigns. The term successors as used herein shall include any corporate or other business entity that, whether by merger, consolidation, purchase, or otherwise, acquires all or substantially all of the business and assets of Schering Corporation, the Corporation, or an Affiliate and successors of any such Corporation or other business entity.
8.11	Illegal or Invalid Provision. In case any provision of the Plan shall be held illegal or invalid for any reason, such illegal or invalid provision shall not affect the remaining

	parts of the Plan, and the Plan shall be construed and enforced without regard to such illegal or invalid provision.
8.12	Protective Provisions. Each Participant shall cooperate with the Corporation or an Affiliate by furnishing any and all information requested by the Corporation or Affiliate to facilitate the payment of benefits hereunder.
8.13	Withholding Taxes. The Corporation may make such provisions and take such action as it may deem necessary or appropriate for the withholding of any taxes which the Corporation is required by any law or regulation of any governmental authority, whether Federal, state, or local, to withhold in connection with any benefits under the Plan, including, but not limited to, the withholding of appropriate sums from any amount otherwise payable to, or on behalf of, the Participant. Each Participant, Former Participant and Beneficiary, however, shall be responsible for the payment of all individual tax liabilities relating to any such benefits.
8.14	Inability to Locate Participant, Former Participant, or Beneficiary. In the event that the Committee is unable to locate a Participant, Former Participant or Beneficiary within two years following the date he or she was to commence receiving payment, the entire Supplemental Benefit payable shall be forfeited. If, after such forfeiture, the Participant, Former Participant or Beneficiary later claims such Supplemental Benefit, such Supplemental Benefit shall be reinstated without interest or earnings thereon and paid pursuant to the terms of the Plan.
8.15	Facility of Payment. If, in the opinion of the Committee, a person to whom a benefit is payable under the Plan is unable to care for his or her affairs because of illness, accident, or any other reason, any payment due the person, unless prior claim therefore shall have been made by a duly qualified guardian or other duly appointed and qualified representative of such person, may be paid to some member of the person’s family, or to some other party who, in the opinion of the Committee, has incurred expenses for such person. Any such payment shall be a payment for the account of such person and shall be a complete discharge of liability under the Plan.
8.16	Notice. Any notice or filing required or permitted to be given to the Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the Corporation’s Senior Vice President of Human Resources, or to such other entity as the Committee may designate from time to time. Such notice shall be deemed given as to the date of delivery, or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

PHLLIB-888551.8

EX-12

Exhibit 12

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

	2006		2005			2004			2003			2002
	(Dollars in millions)
Income/(Loss) Before Income Taxes	$	1,483	$	497		$	(168	)	$	(46	)	$	2,563
Less: Equity Income		1,459		873			347			54			—
(Loss)/Income Before Income Taxes and Equity Income		24		(376	)		(515	)		(100	)		2,563
Add Fixed Charges:
Preference Dividends		86		86			34			—			—
Interest Expense		172		163			168			81			28
One-third of Rental Expense		39		37			30			30			27
Capitalized Interest		13		14			20			11			24
Total Fixed Charges		310		300			252			122			79
Less: Capitalized Interest		13		14			20			11			24
Less: Preference Dividends		86		86			34			—			—
Add: Amortization of Capitalized Interest		10		10			9			9			8
Add: Distributed Income of Equity Investees		1,332		647			228			32			—
Earnings/(Loss) Before Income Taxes and Fixed Charges (other than Capitalized Interest)	$	1,577	$	481		$	(80	)	$	52		$	2,626
Ratio of Earnings to Fixed Charges		5.1		1.6			(0.3	)*		0.4	**		33.2

*	For the year ended December 31, 2004, earnings were insufficient to cover fixed charges by $332 million.
**	For the year ended December 31, 2003, earnings were insufficient to cover fixed charges by $70 million.

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

EX-21

Exhibit 21

Schering-Plough Corporation and Subsidiaries

Subsidiaries of the Registrant As of
December 31, 2006

	State or Country of
	Incorporation or
Subsidiaries of Registrant	Organization
AESCA Pharma GmbH	Austria
Beneficiadora e Industrializadora S.A. de C.V.	Mexico
Brazil Holdings Ltd.	Bermuda
DNAX Research Institute of Molecular & Cellular Biology, Inc.	California
Douglas Industries, Inc.	Delaware
Essex Asia Limited	Hong Kong
Essex Chemie A.G	Switzerland
Essex Italia S.p.A.	Italy
Essex Pharma GmbH	Germany
Garden Insurance Co., Ltd.	Bermuda
Integrated Therapeutics Group, Inc.	Delaware
Scherico, Ltd.	Switzerland
Schering Bermuda Ltd	Bermuda
Schering Canada Inc.	Canada
Schering Corporation	New Jersey
Schering-Plough Korea	Korea
Schering-Plough (Ireland) Company	Ireland
Schering-Plough (Proprietary) Limited	South Africa
Schering-Plough A/S	Denmark
Schering-Plough AB	Sweden
Schering-Plough Animal Health Kabushiki Kaisha	Japan
Schering-Plough Animal-Health Corporation	Delaware
Schering-Plough B.V.	Netherlands
Schering-Plough C.A.	Venezuela
Schering-Plough Central East A.G.	Switzerland
Schering-Plough del Caribe, Inc.	New Jersey
Schering-Plough Farma Lda.	Portugal
Schering-Plough Farmaceutica Ltda.	Brazil
Schering-Plough HealthCare Products, Inc.	Delaware
Schering-Plough Holdings (Ireland) Company	Ireland
Schering-Plough Holdings France, SAS	France
Schering-Plough Holdings Ltd.	United Kingdom
Schering-Plough International, Inc.	Delaware
Schering-Plough Investments Company GmbH	Switzerland
Schering-Plough Kabushiki Kaisha	Japan
Schering-Plough Labo N.V.	Belgium
Schering-Plough Limited	Thailand
Schering-Plough Limited	United Kingdom
Schering-Plough Ltd.	Switzerland
Schering-Plough N.V./S.A.	Belgium

	State or Country of
	Incorporation or
Subsidiaries of Registrant	Organization
Schering-Plough Pharmaceutical Industrial and Commercial S.A.	Greece
Schering-Plough Products Caribe, Inc.	Cayman Islands
Schering-Plough Products LLC	Delaware
Schering-Plough Products, Inc.	Delaware
Schering-Plough Pty. Limited	Australia
Schering-Plough S.A.	Argentina
Schering-Plough S.A.	Colombia
Schering-Plough S.A.	France
Schering-Plough S.A.	Spain
Schering-Plough S.A. de C.V.	Mexico
Schering-Plough S.p.A.	Italy
Schering-Plough Saúde Animal Indústria E Comércio Ltda.	Brazil
Schering-Plough Singapore Pte. Ltd.	Singapore
Schering-Plough Singapore Research Pte. Ltd.	Singapore
Schering-Plough Tibbi Urunler Ticaret, A.S.	Turkey
Schering-Plough Veterinaire	France
Sentipharm A.G	Switzerland
Shanghai Schering-Plough Pharmaceutical Company, Ltd.	China
SOL Limited	Bermuda
SP HealthCare Products Corp.	Delaware
S-P Holding GmbH	Austria
The Summit Property Company LLC	Delaware
Warrick Pharmaceuticals Corporation	Delaware

In accordance with Item 601(b)(21) of Regulation S-K, the Registrant has omitted the names of particular subsidiaries because the unnamed subsidiaries, considered in the aggregate as a single subsidiary, would not have constituted a significant subsidiary as of December 31, 2006.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 2-83963, No. 33-50606, No. 333-30331, No. 333-87077, No. 333-91440, No. 333-104714, No. 333-105567, No. 333-105568, No. 333-112421, No. 333-121089 and No. 333-134281 on Form S-8, Post Effective Amendment No. 1 to Registration Statement No. 2-84723 on Form S-8, Post Effective Amendment No. 1 to Registration Statement No. 333-105567 on Form S-8, and Registration Statements No. 333-12909, No. 333-30355 and No. 333-113222 on Form S-3, of our reports dated February 27, 2007, (which report on the consolidated financial statements and financial statement schedule expressed an unqualified opinion and included an explanatory paragraph regarding the Company’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment”, and SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”) relating to the consolidated financial statements and financial statement schedule of Schering-Plough Corporation and subsidiaries and management’s report of the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Schering-Plough Corporation for the year ended December 31, 2006.

/s/  DELOITTE & TOUCHE LLP

Parsippany, New Jersey

February 27, 2007

EX-23.2

Exhibit 23.2

INDEPENDENT AUDITOR’S CONSENT

We consent to the incorporation by reference in Registration Statements No. 2-83963, No. 33-50606, No. 333-30331, No. 333-87077, No. 333-91440, No. 333-104714, No. 333-105567, No. 333-105568, No. 333-112421, No. 333-121089 and No. 333-134281 on Form S-8, Post Effective Amendment No. 1 to Registration Statement No. 2-84723 on Form S-8, Post Effective Amendment No. 1 to Registration Statement No. 333-105567 on Form S-8 and Registration Statements No. 333-12909, No. 333-30355 and No. 333-113222 on Form S-3, of our report dated February 27, 2007, relating to the combined financial statements of the Merck/Schering-Plough Cholesterol Partnership, appearing in this Annual Report on Form 10-K of Schering-Plough Corporation for the year ended December 31, 2006.

/s/  DELOITTE & TOUCHE LLP

Parsippany, New Jersey

February 27, 2007

EX-24

Exhibit 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and/or directors of Schering-Plough Corporation, a New Jersey corporation (herein called the “Corporation”), does hereby constitute and appoint Robert Bertolini, Steven H. Koehler and Susan Ellen Wolf, or any of them, his or her true and lawful attorney or attorneys and agent or agents, to do any and all acts and things and to execute any and all instruments which said attorney or attorneys and agent or agents may deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, requirements or requests of the Securities and Exchange Commission thereunder or in respect thereof in connection with the filing under said Act of the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2006 (herein called the “Form 10-K”); including specifically, but without limiting the generality of the foregoing, the power and authority to sign the respective names of the undersigned officers and/or directors as indicated below to the Form 10-K and/or to any amendment of the Form 10-K and each of the undersigned does hereby ratify and confirm all that said attorney or attorneys and agent or agents, or any of them, shall do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, each of the undersigned has subscribed these presents this 27th day of February, 2007.

/s/  FRED HASSAN Fred Hassan, Chairman of the Board and Chief Executive Officer	/s/  ROBERT J. BERTOLINI Robert J. Bertolini, Executive Vice President and Chief Financial Officer
/s/  STEVEN H. KOEHLER Steven H. Koehler, Vice President and Controller; Principal Accounting Officer	/s/  CARL E. MUNDY JR. Carl E. Mundy, Jr., Director
/s/  HANS W. BECHERER Hans W. Becherer, Director	/s/  PATRICIA F. RUSSO Patricia F. Russo, Director
/s/  THOMAS J. COLLIGAN Thomas J. Colligan, Director	/s/  KATHRYN C. TURNER Kathryn C. Turner, Director
/s/  C. ROBERT KIDDER C. Robert Kidder, Director	/s/  ROBERT F. W. VAN OORDT Robert F. W. van Oordt, Director
/s/  PHILIP LEDER, M.D. Philip Leder, M.D., Director	/s/  ARTHUR F. WEINBACH Arthur F. Weinbach, Director
/s/  EUGENE R. MCGRATH Eugene R. McGrath, Director

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Fred Hassan, certify that:

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

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

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

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

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles;

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

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

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

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

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

/s/  FRED HASSAN

Fred Hassan

Chairman of the Board and Chief Executive Officer

Date: February 27, 2007

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Robert J. Bertolini, certify that:

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

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

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

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

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles;

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

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

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

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

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

/s/  ROBERT J. BERTOLINI

Robert J. Bertolini

Executive Vice President and Chief Financial Officer

Date: February 27, 2007

EX-32.1

Exhibit 32.1

CERTIFICATION

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

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

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

/s/  FRED HASSAN

Fred Hassan

Chairman of the Board and Chief Executive Officer

Dated: February 27, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION

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

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

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

/s/  ROBERT J. BERTOLINI

Robert J. Bertolini

Executive Vice President and Chief Financial Officer

Dated: February 27, 2007