FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

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

For the quarterly period ended September 30, 2002

COMMISSION FILE NUMBER 1-6571

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Common Shares Outstanding as of October 31, 2002: 1,466,629,959

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

See notes to consolidated financial statements.

(UNAUDITED)

(Amounts in millions, except per share figures)

See notes to consolidated financial statements.

(UNAUDITED)

(Amounts in millions)

See notes to consolidated financial statements.

(UNAUDITED)

The unaudited financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Certain prior year amounts have been reclassified to conform to the current year presentation. The statements should be read in conjunction with the accounting policies and notes to consolidated financial statements included in the Company's 2001 Annual Report on Form 10-K.

In the opinion of management, the financial statements reflect all adjustments necessary for a fair statement of the operations for the interim periods presented.

On December 21, 2001, the Company announced that it was in negotiations with the Food and Drug Administration (FDA) to enter a consent decree to resolve issues involving the Company's compliance with current Good Manufacturing Practices (GMPs) at certain manufacturing facilities in New Jersey and Puerto Rico. On May 17, 2002, the Company announced that it reached an agreement with the FDA for a consent decree to resolve these issues. The U.S. District Court for the District of New Jersey has approved the consent decree.

Under terms of the consent decree, the Company will pay a total of $500 million to the U.S. government in two equal installments of $250 million; the first installment was paid in May 2002 and the second installment will be paid in the second quarter of 2003. As previously reported, the Company accrued a $500 million provision for this consent decree in the fourth quarter of 2001.

In the event certain actions agreed-upon in the consent decree are not completed on time, the agreement provides for daily payments of $15,000 for each deadline missed. These payments cannot exceed $50 million incurred in any calendar year and have an overall cap of $175 million incurred through 2005. A royalty payment of 24.6 percent of net U.S. sales can be assessed for each product for which revalidation has not been successfully completed within the timelines of the consent decree. The Company is scheduled to complete its revalidation plans by December 31, 2005. The Company would expense any such payments if and when incurred.

The Company has temporarily suspended production of certain products at its Manati, Puerto Rico site, principally the animal health products BANAMINE (flunixin meglumine) and NUFLOR (florfenicol), while it implements GMP programs agreed to under the final terms of the consent decree. The aggregate sales in 2001 of these products manufactured in Puerto Rico were $50 million.

In connection with the agreement, the Company has decided to discontinue manufacturing and marketing certain older products. The consent decree also includes a recall, initiated in early May 2002 and directed to U.S. trade accounts, of all lots of theophylline, USP tablets and PROVENTIL (albuterol sulfate, USP) REPETABS. PROVENTIL inhalers are not affected by the recall. The Company had discontinued marketing its U.S. theophylline products in June 2001 and PROVENTIL REPETABS have not been available since July 2001. In total, these products represent annual sales of approximately $44 million. In November 2002, the Company initiated a voluntary recall down to the retail level of all unexpired, non-medically necessary, human and veterinary drug products manufactured at the Company's sterile facility in Manati prior to the consent decree. The financial impact of the recalls was immaterial.

The consent decree is included in the Company's 8-K filed May 20, 2002. The 8-K is available on the World Wide Web, either from the SEC's EDGAR database on the SEC Web site at SEC.gov or Company's Web site at schering-plough.com.

In May 2000, the Company and Merck & Co., Inc. (Merck) entered into agreements to jointly develop and market, in the United States, new prescription medicines in the cholesterol-management and respiratory therapeutic areas. The agreements cover the development and marketing of:

• ZETIA, the Company's novel cholesterol absorption inhibitor, as a once-daily fixed-combination tablet with Zocor, Merck's cholesterol-modifying medicine;

• ZETIA as a once-daily monotherapy;

• Co-administration of ZETIA with statins; and

• A once-daily fixed-combination tablet containing CLARITIN and Singulair for the treatment of allergic rhinitis and asthma. Singulair is Merck's once-daily leukotriene receptor antagonist for the treatment of asthma.

In December 2001, the cholesterol-management agreements were expanded to include all countries of the world except Japan.

In January 2002, Schering-Plough/Merck Pharmaceuticals reported on results of Phase III clinical trials of a fixed-combination tablet containing CLARITIN and Singulair, which did not demonstrate statistically significant improvement in the treatment of seasonal allergic rhinitis compared to each product administered separately. The partnership also reported that it intends to further evaluate those results and may conduct additional studies.

On October 17, 2002, ZETIA was approved for sale in Germany. On October 21, 2002, the Company filed an 8-K announcing the German approval. The contracts between the Company and Merck which contain the significant governance terms of the collaboration were filed as part of this 8-K. On October 25, 2002, the FDA approved ZETIA for use either by itself or together with statins in patients with high cholesterol to reduce LDL "bad" cholesterol and total cholesterol.

The agreements between the companies generally provide for equal sharing of development costs and for co-promotion of approved products by each company in the U.S. and in most other countries of the world, except Japan. In Japan, no agreement exists. In general, co-promotion provides that each company will provide equal physician detailing efforts and bear the cost of its own sales force in marketing the products. The companies will share other costs (manufacturing, promotion, administration, etc.) and also share profits. The agreements do not provide for any jointly-owned facilities and, as such, products resulting from the collaboration will be manufactured in facilities owned by either Merck or the Company. In addition, under certain conditions, if all sales goals are achieved, Merck could make milestone payments to the Company totaling $152 million. The agreements do not have a specific expiration date.

The Company will report its share of profits as "Alliance Revenue" and will report its sales force costs as selling, general and administrative expenses. The Company's share of development expenses has been reported as research and development expenses.

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." Effective January 1, 2002, SFAS No. 142 eliminates the requirement to amortize goodwill, and instead requires the periodic testing of goodwill for impairment. If goodwill is impaired, it will be written down to its estimated fair value. The Company has performed its initial test for goodwill impairment as of January 1, 2002 and found no impairment of goodwill upon adoption of SFAS No. 142. Accordingly, the adoption of SFAS No. 142 did not result in an adjustment to recorded goodwill.

Goodwill amortization expense for the full year 2001 was $5 million. Diluted and basic earnings per common share for the quarter and nine months ended September 30, 2001 would have been unchanged if goodwill amortization were excluded from net income on a pro forma basis.

The balance sheet caption 'other intangible assets, net' principally includes licenses, patents and trademarks. Intangible assets are being amortized on the straight-line method over their respective useful lives. Amortization expense was $50 million and $47 million for the nine months ended September 30, 2002 and 2001, respectively.

During the nine months ended September 30, 2002, the Company paid $17 million for patent and licensing rights. These costs will be amortized over approximately 10 years. The residual value for these intangible assets is estimated to be zero.

The components of other intangible assets are as follows ($ in millions):

September 30, 2002 December 31, 2001

Projected annual amortization expense for each of the next five years is estimated to be approximately $50 million per year based on other intangible assets recorded as of September 30, 2002.

In April 2001, the Emerging Issues Task Force (EITF) issued EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products," which addresses the income statement classification of certain credits, allowances, adjustments and payments given to customers for the services or benefits provided. The Company adopted EITF No. 00-25 in the first quarter of 2002 and, therefore, has classified the cost of these sales incentives as a reduction of Net Sales. Net Sales for the nine months ended September 30, 2001 have been restated by $29 million to be on a comparable basis. EITF No. 00-25 has no effect on net income.

The Company has two committed, unsecured revolving credit facilities from a syndicate of financial institutions. Under one facility, up to $500 million can be drawn down through May 2003, with repayment due by May 2004. Under a second multi-currency facility, an additional $500 million can be drawn down through the maturity date of May 2006. These facilities are available for general corporate purposes and are considered as support for the Company's commercial paper borrowings. These facilities do not require compensating balances; however, a nominal commitment fee is paid. As of September 30, 2002, no funds had been drawn down under these facilities.

On July 25, 2002, Standard & Poor's lowered the Company's long-term credit rating from "AA" to "AA-" while maintaining its negative outlook. At the same time, Standard & Poor's reaffirmed the Company's short-term credit rating of "A-1+". On October 8, 2002, Moody's Investors Service (Moody's) placed the Company's "Aa2" long-term debt rating under review for possible downgrade. At the same time, Moody's confirmed the Company's "Prime-1" short-term rating. Subsequent to the Company's press release on October 3, 2002, Standard & Poor's issued a statement maintaining the Company's long-term rating of "AA-" and short-term rating of "A-1+" while maintaining its negative outlook.

Inventories consisted of ($ in millions):

The shares used to calculate basic and diluted earnings per common share are reconciled as follows (number of shares in millions):

As of September 30, 2002, the equivalent of 49 million common shares issuable under the Company's stock incentive plans were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

Total comprehensive income for the three months ended September 30, 2002 and 2001 was $399 million and $596 million, respectively. Total comprehensive income for the nine months ended September 30, 2002 and 2001 was $1,568 million and $1,739 million, respectively.

CLARITIN (loratadine) sales in the United States, in all formulations, accounted for 28 percent of the Company's consolidated worldwide sales in the year ended December 31, 2001, and a larger percentage of the Company's consolidated earnings. As noted in the "Legal and Environmental Matters" footnote included in the financial statements to this report, the Company has sued 16 drug manufacturers that are seeking to market certain forms of generic prescription or OTC loratadine prior to the expiration of certain of the Company's U.S. patents, including the compound patent for desloratadine. In each case, the Company has filed suit in federal court seeking a ruling that the applicable Abbreviated New Drug Application (ANDA) or "paper" New Drug Application submission and proposed marketing of a generic prescription or OTC product constitute willful infringement of the Company's patents and that the challenge to the patents is without merit. The compound patent for loratadine expired on Jun e 19, 2002. U.S. market exclusivity for CLARITIN was extended by the Food and Drug Administration (FDA) to December 19, 2002, because the Company conducted pediatric clinical trials at the request of the FDA. A patent covering the compound desloratadine, formulations thereof, and methods of treatment with desloratadine is set to expire on April 21, 2004. U.S. market exclusivity was extended by the FDA to October 21, 2004, because the Company conducted pediatric clinical trials at the request of the FDA. On August 8, 2002, a federal district court in New Jersey ruled on motions for summary judgment, finding that the desloratadine compound claims of that patent, which the Company believes protects CLARITIN, were anticipated by a prior patent and thus invalid. The district court's ruling does not affect other claims of that patent covering methods of treatment with desloratadine, and formulations of desloratadine. On September 18, 2002, the district court denied a request for reconsideration. The Company is in the process of appealing the rulings, and anticipates that the appeal will be decided in late 2003 or early 2004. With these rulings, actions against the defendants for infringement of this patent will not proceed unless the Company's appeal is successful. While the outcome of the litigation is uncertain, the Company's earnings projections assume that generic prescription or OTC forms of loratadine will enter the market as early as December 20, 2002. Pursuant to a Court order agreed to by the Company and one generic manufacturer, that manufacturer withdrew its ANDA and the Company's action against it was dismissed. Two generic manufacturers, which had been the only defendants to assert that the loratadine compound patent is invalid and/or unenforceable, have withdrawn their challenges to this patent. Thus, there are no defendants currently challenging the loratadine compound patent.

The Company 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. Management considers the impact of these changes as it continually assesses the best way to provide for its insurance needs in the future. At the current time, management believes that any losses which may arise due to self insurance will not have a material effect on the Company's liquidity or financial position.

The Company has responsibilities for environmental cleanup under various state, local and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. At several Superfund sites (or equivalent sites under state law), the Company is alleged to be a potentially responsible party (PRP). The Company estimates its obligations for cleanup costs for Superfund sites based on information obtained from the federal Environmental Protection Agency, an equivalent state agency and/or studies prepared by independent engineers, and on the probable costs to be paid by other PRPs. The Company records a liability for environmental assessments and/or cleanup when it is probable a loss has been incurred and the amount can be reasonably estimated. The Company has fully accrued for estimated losses for these matters without considering the effect of insurance available. The amounts accrued are immaterial.

The Company is also involved in various other claims and legal proceedings of a nature currently considered normal to its business, including product liability cases. The estimated costs the Company expects to pay in these cases are accrued when the liability is considered probable and the amount can be reasonably estimated.

The recorded liabilities for the above matters at September 30, 2002 and the related expenses incurred during the three and nine months ended September 30, 2002 were not material. Expected insurance recoveries have not been considered in determining the costs for environmental-related liabilities.

Management believes that, except for the matters discussed in the following paragraphs, it is remote that any material liability in excess of the amounts accrued will be incurred. With respect to the matters discussed in the following paragraphs, except where noted, it is not practicable to estimate a range of reasonably possible loss.

Residents in the vicinity of a publicly owned waste-water treatment plant in Barceloneta, Puerto Rico, have filed two lawsuits against the plant owner and operator, and numerous companies that discharge into the plant, including a subsidiary of the Company, for damages and injunctive relief relating to odors allegedly coming from the plant and connecting sewers. One of these lawsuits is a class action claiming damages of $600 million. Both lawsuits are in the very early stages of discovery and it is not possible to predict the outcome.

The Company is a defendant in numerous antitrust actions commenced (starting in 1993) in state and federal courts by independent retail pharmacies, chain retail pharmacies and consumers. The plaintiffs allege price discrimination and/or conspiracy between the Company and other defendants to restrain trade by jointly refusing to sell prescription drugs at discounted prices to the plaintiffs.

One of the federal cases was a class action on behalf of approximately two-thirds of all retail pharmacies in the United States and alleged a price-fixing conspiracy. The Company, in February 1996, agreed to settle the federal class action for a total of $22 million, which has been paid in full. The United States District Court in Illinois approved the settlement of the federal class action in June 1996. In June 1997, the Seventh Circuit Court of Appeals dismissed all appeals from that settlement, and it is not subject to further review. The defendants that did not settle the class action proceeded to trial in September 1998. The trial ended in November 1998 with a directed verdict in the defendants' favor.

In April 1997, certain of the plaintiffs in the federal class action commenced another purported class action in the United States District Court in Illinois against the Company and the other defendants who settled the previous federal class action. The complaint alleges that the defendants conspired not to implement the settlement commitments following the settlement discussed above. The District Court has denied the plaintiffs' motion for a preliminary injunction hearing.

The Federal Court in Illinois remanded the conspiracy portion of the cases of those retailers that opted out of the class action back to the District Courts where they were filed. The Federal Court in Illinois has jurisdiction over the Robinson-Patman portion of these cases.

Plaintiffs in these antitrust actions generally seek treble damages in an unspecified amount and an injunction against the allegedly unlawful conduct.

The Company believes it has substantial defenses to these actions and is defending itself vigorously. However, as with any litigation, there can be no assurance that the Company will prevail.

In October 1999, the Company received a subpoena from the U.S. Attorney's Office for the Eastern District of Pennsylvania, pursuant to the Health Insurance Portability and Accountability Act of 1996, concerning the Company's contracts with pharmacy benefit managers (PBMs) and managed care organizations to provide disease management services in connection with the marketing of its pharmaceutical products. It appears that the subpoena was one of a number addressed to industry participants as part of an inquiry into, among other things, pharmaceutical marketing practices. The government's inquiry has focused on, among other things, whether the Company's disease management and other marketing programs and arrangements comply with federal health care laws and whether the value of its disease management programs and other marketing programs and arrangements should have been included in the calculation of rebates to the government. The Company has been cooperating with the investigation. In M arch 2002, the U.S. Attorney's Office began issuing grand jury subpoenas. The grand jury investigation appears to be focused on one or more transactions with managed care organizations where the government believes the Company offered or provided deeply discounted pharmaceutical products (known as "nominally priced" products which are generally excluded from Medicaid rebate calculations), free or discounted disease management services, and other marketing programs and arrangements that delivered value, in order to place or retain one or more of the Company's major pharmaceutical products on the managed care organization's formulary. The grand jury appears to be investigating, among other things, (i) whether the transactions described above and conduct relating thereto violated federal anti-kickback statutes; and (ii) whether the value of the items and services described above should have been included in the Company's calculation of Medicaid rebates. It is not possible to predict the outcome of the investigations, which could include the commencement of civil or criminal proceedings involving fines, penalties and injunctive or administrative remedies, including exclusion from government reimbursement programs, nor can the Company predict whether the investigations will affect its marketing practices or sales.

As discussed in the following two paragraphs, various patent actions are pending regarding patents that protect CLARITIN against generic versions. On August 8, 2002, a federal district court in New Jersey ruled on motions for summary judgment, finding that certain claims of the desloratadine compound patent the Company believes protects CLARITIN, and which expires in 2004, were anticipated by a prior patent and, thus, were not valid. On September 18, 2002, the district court denied a request for reconsideration. The Company is in the process of appealing the rulings, and anticipates that the appeal will be decided in late 2003 or early 2004. With these rulings, consolidated actions against the defendants for infringement of the patents will not proceed unless the Company's appeal is successful. While the outcome of the litigation is uncertain, the Company's earnings projections assume that generic prescription or OTC forms of loratadine will enter the market as early as December 20, 2 002. The Company will continue to vigorously defend its position. As with any litigation, there can be no assurance that the Company will prevail.

The Company is responding to investigations by the Department of Health and Human Services, the Department of Justice and certain states into certain industry and Company practices regarding average wholesale price (AWP). These investigations include a Department of Justice review of the merits of a federal action filed by a private entity on behalf of the United States in the United States District Court for the Southern District of Florida, as well as an investigation by the United States Attorney's Office for the District of Massachusetts, regarding, inter alia, whether the AWP set by pharmaceutical companies for certain drugs improperly exceeds the average prices paid by dispensers and, as a consequence, results in unlawful inflation of certain government drug reimbursements that are based on AWP. The United States Attorney's Office for the District of Massachusetts is also investigating whether the Company's sales of a product that was repackaged for sale by a managed care organizat ion should have been included in the Company's Medicaid best price calculations. In March 2001, the Company received a subpoena from the Massachusetts Attorney General's office seeking documents concerning the use of AWP and other pricing and/or marketing practices. The Company is cooperating with these investigations. It is not possible to predict the outcome of these investigations, which could include the imposition of fines, penalties and injunctive or administrative remedies.

In early November 2002, the Company was served with two additional grand jury subpoenas by the United States Attorney for the District of Massachusetts which has been investigating certain sales and marketing practices of the Company as previously disclosed in the Company's SEC filings. Among other information, the subpoenas seek a broad range of information concerning the Company's sales, marketing and clinical trial practices and programs with respect to INTRON A, REBETRON and TEMODAR, the Company's sales and marketing contacts with managed care organizations and doctors and the Company's offering or provision of grants, honorariums or other items or services of value to managed care organizations, physician groups, doctors and educational institutions. It is not possible to predict the outcome of the investigation, which could include the commencement of civil or criminal proceedings involving the imposition of fines, penalties and injunctive or administrative remedies, including excl usion from government reimbursement programs. Nor can the Company predict whether the investigation will affect its marketing, sales or clinical trial practices. The Company is cooperating with the investigation.

During the third quarter of 2000, the Company's generic subsidiary, Warrick Pharmaceuticals (Warrick), was sued by the state of Texas. In June 2002, the Company and its subsidiary, Schering Corporation, were added as defendants. The lawsuit alleges that Warrick supplied the state with false reports of wholesale prices, which caused the state to pay Medicaid claims on prescriptions of Warrick's albuterol sulfate solution and inhaler at a higher than justified level. The state seeks damages of approximately $106 million against Warrick, including treble damages and penalties. It is not possible to predict the outcome of the litigation, which could result in the imposition of fines, penalties and injunctive remedies.

In October 2001, the West Virginia Attorney General filed a lawsuit against Warrick alleging that Warrick falsely "inflated" the AWP for albuterol sulfate solution knowing that the state Medicaid programs and other state programs relied on AWP to pay providers for the drugs. The complaint alleges that Warrick caused the state to pay excessive reimbursement to the distributors of the drug. The complaint demands unspecified damages, including treble damages and attorneys' fees. The Company believes it has substantial defenses to these claims and will defend itself vigorously. However, as with any litigation, there can be no assurance that the Company will prevail.

In January 2002, the Nevada Attorney General filed a lawsuit against Warrick alleging that Warrick engaged in a scheme to fraudulently report "fictitious" AWPs for prescription pharmaceuticals that were covered by Medicare and Medicaid, thus inflating those reimbursements and patients' co-payments. The lawsuit also alleges that Warrick failed to report accurate prices under the Medicaid Rebate Program and thereby underpaid the Medicaid rebates that it was required to pay to Nevada. The lawsuit seeks injunctive relief and unspecified damages, including treble and punitive damages. In March 2002, the Nevada Attorney General filed a similar lawsuit against the Company. In June 2002, both cases were conditionally transferred to federal court in Boston, Massachusetts as part of the coordination of all federal court AWP cases from throughout the country. The Company believes that it has substantial defenses to these claims and will defend itself vigorously. However, as with any litigation, there can be no assurance that the Company will prevail.

In February 2002, the Montana Attorney General filed a lawsuit against the Company and Warrick. The lawsuit alleges that the defendants reported "inflated" AWPs which were supplied to Medicare, Medicaid and Montana State agencies. The "inflated" AWPs allegedly caused the state and patients who made co-payments to overpay for certain drugs. The complaint also alleges that the defendants failed to report accurate prices under the Medicaid Rebate Program and thereby deprived the state of its proper rebates. The complaint seeks injunctive relief and unspecified damages, including double damages. In May 2002, this case was conditionally transferred to federal court in Boston, Massachusetts as part of the coordination of all federal court AWP cases from throughout the country. The Company believes that it has substantial defenses to these claims and will defend itself vigorously. However, as with any litigation, there can be no assurance that the Company will prevail.

On January 25, 2002, Warrick was served with a lawsuit filed in the United States District Court for the District of Nevada by the Twin Cities Bakery Workers Health and Welfare Fund, and another plaintiff. The case alleges to be a class action on behalf of all direct and indirect "end-payers" for Medicare-covered pharmaceuticals sold by Warrick. The case alleges violations of Section 2 of The Sherman Act, and Federal Rico, Statutory Fraud and Unjust Enrichment laws for alleged overpayments as a result of "inflated" AWPs and alleged giving of free samples and expecting that the samples would be billed to Medicare and the "end-payers." The complaint seeks treble and punitive damages and injunctive relief. In April 2002, the Company filed a motion to dismiss the complaint. In June 2002, this case was conditionally transferred to federal court in Boston, Massachusetts as part of the coordination of all federal court AWP cases from throughout the country. The Company believes it has substa ntial defenses to these claims and will defend itself vigorously. However, as with any litigation, there can be no assurance that the Company will prevail.

Through October 2002, four private plaintiffs and a non-profit organization filed five separate lawsuits in California state court against the Company and Warrick. These complaints, which are alleged to be suitable for class action status, and/or as representative actions, allege that the Company conspired with other drug companies to defraud consumers by reporting fraudulently high AWPs for prescription drugs covered by Medicare. The complaints seek injunctive relief, disgorgement of profits, and unspecified damages, including punitive damages. The Company believes that it has substantial defenses to these claims and will defend itself vigorously. However, as with any litigation, there can be no assurance that the Company will prevail.

On April 2, 2001, the FTC started an administrative proceeding against the Company, Upsher-Smith, Inc. (Upsher-Smith) and Lederle. The complaint alleges anti-competitive effects from the settlement of patent lawsuits between the Company and Lederle, and the Company and Upsher-Smith. The lawsuits that were settled related to generic versions of K-DUR, the Company's long-acting potassium chloride product, which was the subject of ANDAs filed by Lederle and Upsher-Smith. In June 2002, the Administrative Law Judge overseeing the case issued a decision that the patent litigation settlements complied with the law in all respects and dismissed all claims against the Company. An appeal of this decision to the full Commission filed by the FTC staff is currently pending. The Company believes that its actions have been lawful and proper, and intends to defend itself vigorously. However, it is not possible to predict the outcome of the proceeding, which could result in the imposition of injuncti ve or administrative remedies.

Following the commencement of the FTC administrative proceeding, alleged class action suits were filed on behalf of direct and indirect purchasers of K-DUR against the Company, Upsher-Smith and Lederle in federal and state courts. These suits all allege essentially the same facts and claim violations of federal and state antitrust laws, as well as other state statutory and/or common law causes of action. The Company believes that it has substantial defenses to these claims and intends to defend itself vigorously. As with any litigation, there can be no assurance that the Company will prevail.

In January 2000, a jury found that the Company's PRIME PACâ PRRS (Porcine Respiratory and Reproductive Syndrome) vaccine infringed a patent owned by Boehringer Ingelheim Vetmedica, Inc. An injunction was issued in August 2000 barring further sales of the Company's vaccine. The Company's post-trial motions for either a reversal of the jury's verdict or a new trial were denied in September 2001. The Company has appealed. As with any litigation, there can be no assurance that the Company will prevail. Discovery in the damages phase of the case is ongoing.

On February 15, 2001, the Company stated in a press release that the FDA had been conducting inspections of the Company's manufacturing facilities in New Jersey and Puerto Rico and had issued reports citing deficiencies concerning compliance with current Good Manufacturing Practices, primarily relating to production processes, controls and procedures. The next day, February 16, 2001, a lawsuit was filed in the United States District Court for the District of New Jersey against the Company and certain named officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Additional lawsuits of the same tenor followed. The plaintiffs in the suits purport to represent classes of shareholders who purchased shares of Company stock between dates as early as March 2, 2000, and February 15, 2001, the date of the press release. In April 2001, a lawsuit was filed in the United States District Court for the District of New Jersey against the Company and certain named officers alleging substantially the same violations of the Securities Exchange Act of 1934 as alleged in the putative class actions described above in this paragraph, as well as alleging violations of Section 11 of the Securities Act of 1933 and failure to disclose information which is the subject matter of the FTC administrative proceeding described above and purporting to represent a class of shareholders who purchased shares of Company stock between July 25, 2000, and March 30, 2001, the last business day before the Company issued a press release relating to the FTC administrative proceeding. This complaint and all of the previously filed complaints were consolidated into one action in the United States District Court for the District of New Jersey, and a lead plaintiff, the Florida State Board of Administration, was appointed by the Court on July 2, 2001. On October 11, 2001, a consolidated amended complaint was filed, alleging the same violations described in the second sentence of this paragraph (but not a Section 11 claim) and purporting to represent a class of shareholders who purchased shares of Company stock from May 9, 2000, through February 15, 2001. The Company's motion to dismiss the consolidated amended complaint was denied on May 24, 2002. Discovery is ongoing. The Company believes that it has substantial defenses and intends to defend the consolidated action vigorously. As with any litigation, there can be no assurance that the Company will prevail.

In addition to the lawsuits described in the immediately preceding paragraph, two lawsuits were filed in the United States District Court for the District of New Jersey and two lawsuits were filed in New Jersey state court against the Company (as a nominal defendant) and certain officers, directors and a former director seeking damages on behalf of the Company including disgorgement of trading profits made by defendants allegedly obtained on the basis of material non-public information. The complaints in each of those four lawsuits relate to the issues described in the Company's February 15, 2001, press release, and allege a failure to disclose material information and breach of fiduciary duty by the directors. One of the federal court lawsuits also includes allegations related to the investigations by the U.S. Attorney's Offices for the Eastern District of Pennsylvania and the District of Massachusetts, the FTC's administrative proceeding against the Company, and the lawsuit by the stat e of Texas against Warrick, all of which are described above. Each of these lawsuits is a shareholder derivative action that purports to assert claims on behalf of the Company, but as to which no demand was made on the Board of Directors and no decision has been made on whether the Company can or should pursue such claims. In August 2001, the plaintiffs in each of the New Jersey state court shareholder derivative actions moved to dismiss voluntarily the complaints in those actions, which motions were granted. The two shareholder derivative actions pending in the United States District Court for the District of New Jersey have been consolidated into one action, which is in its very early stages. This consolidated action is being coordinated for most pre-trial purposes with the consolidated action described in the immediately preceding paragraph. On January 2, 2002, the Corporation received a demand letter dated December 26, 2001, from a law firm not involved in the derivative actions described above, on be half of a shareholder who also is not involved in the derivative actions, demanding that the Board of Directors bring claims on behalf of the Company based on allegations substantially similar to those alleged in the derivative actions. On January 22, 2002, the Board of Directors adopted a board resolution establishing an Evaluation Committee, consisting of three directors, to investigate, review and analyze the facts and circumstances surrounding the allegations made in the demand letter and the consolidated amended derivative action complaint described above, but reserving to the full Board authority and discretion to exercise its business judgment in respect of the proper disposition of the demand. The Committee has engaged independent outside counsel to advise it. The Committee issued a report on the findings of its investigation to the independent directors of the Board in late October 2002. That report is under review.

As previously reported. the Company has been informed that the United States Attorney's Office in New Jersey along with the FDA's Office of Criminal Investigation is conducting an investigation which may focus on one or more Company products manufactured in Puerto Rico. The Company believes that its actions were lawful and proper and is cooperating with the Government in the investigation.

The Company was a party to an arbitration commenced in July 2001 by Biogen, Inc. (Biogen) relating to, among other things, Biogen's claims that the Company owed U.S. alpha interferon royalty payments to Biogen for a period of time that the Company does not believe such royalties were owed. Biogen's claims related to the Company's sale of INTRON A and PEG-INTRON. A second arbitration was commenced by Biogen against the Company in August 2001 relating to Biogen's claim that the Company owed royalties on INTRON A provided without charge or at a reduced charge to indigent patients participating in SCHERING'S Commitment to Care program. In October, 2002, the Company settled these two arbitrations with Biogen. As part of the settlement, the Company will make a one-time payment to Biogen in the fourth quarter, 2002 in the range of $45 to $50 million. The Company had previously recorded a provision for this settlement payment. In addition, the Company will commence paying Biogen royalties on U.S. sales of Schering-Plough's alpha interferon products, based on a 1998 agreement between the companies.

In October 2001, ICN Pharmaceuticals, Inc. (ICN) notified the Company of its intention to begin an alternative resolution dispute proceeding against the Company seeking the payment of royalties on REBETOL provided by the Company without charge or at a reduced charge to indigent patients participating in SCHERING'S COMMITMENT TO CARE program. The Company believes that it has substantial defenses to ICN's claims and will defend itself vigorously. However, as with any arbitration or alternative dispute proceeding, there can be no assurance that the Company will prevail.

On August 9, 2001, the Prescription Access Litigation (PAL) project, a Boston-based group formed in 2001 to litigate against drug companies, issued a press release stating that PAL members filed a lawsuit in New Jersey state court against the Company. In December 2001, the Company was served with an amended complaint in the case. The suit, which PAL purports to be a class action, alleges, among other things, that the Company's direct-to-consumer advertising falsely depicts the benefits of CLARITIN in violation of the New Jersey Consumer Fraud Act. In February 2002, the Company filed a motion to dismiss this case. In May 2002, the court dismissed the complaint in its entirety for failure to state a claim. The plaintiffs have appealed. The Company believes that it has substantial defenses to these claims and will defend itself vigorously. However, as with any litigation, there can be no assurance that the Company will prevail.

The Company received notice that, in August 2001, Geneva Pharmaceuticals Technology Corp. (Geneva Pharmaceuticals) and Three Rivers Pharmaceuticals, L.L.C. (Three Rivers), and in January 2002, Teva Pharmaceuticals USA, Inc. (Teva), submitted separate ANDAs with the FDA seeking to market generic forms of 200 mg REBETOL (ribavirin) capsules in the United States before the expiration of the Company's patents covering ribavirin formulations. Geneva Pharmaceuticals, Three Rivers and Teva have asserted that they do not infringe the Company's REBETOL patents and/or the patents are invalid. The REBETOL patents are material to the Company's business. In September 2001, October 2001 and March 2002, the Company filed suits in federal court seeking rulings that the ANDA submissions by Geneva Pharmaceuticals, Three Rivers and Teva, respectively, constitute infringement of the Company's patents and that the challenges to the Company's patents are without merit. Three Rivers has filed a counterclaim for unfair competition asserting that there was not a reasonable basis for bringing an action for infringement against Three Rivers, and that the lawsuit was brought for the sole purpose of delaying FDA approval of Three Rivers' generic product. The court has granted the Company's motion to dismiss this counterclaim. The Company continues to pursue its arguments as to why it should prevail before the federal courts. As with any litigation, there can be no assurance that the Company will prevail and, as a result, generic forms of ribavirin could enter the U.S. market in 2003.

In October 2001, United States Internal Revenue Service (IRS) auditors have asserted, in reports, that the Company is liable for additional tax for the 1990 through 1992 tax years. The reports allege that two interest rate swaps that the Company entered into with an unrelated party should be recharacterized as loans from affiliated companies resulting in additional tax on income. The tax sought by the IRS auditors relating to recharacterization is approximately $195 million, plus penalties and interest for the period stated above. The Company has not accrued the $195 million because the Company and its tax advisors do not believe it is probable that the IRS will prevail in this matter. The Company intends to defend its position vigorously; however, there can be no assurance that the Company will prevail.

The Company has become aware of an investigation by the United States Department of Justice, Antitrust Division, into whether the Company's Consumer Products Division entered into an agreement with another company to lower the commission rate of one of its consumer products' brokers. The Company is fully cooperating with the investigation. The Company has been informed that the investigation is at an early stage and thus it is not possible to predict its outcome.

The Company is providing information to the Securities and Exchange Commission in connection with the Commission's inquiry relating to the Company's meetings with investors and other communications. The Company believes that it has complied with all applicable securities laws in this matter.

In October 2002, the Company was served with a purported Federal class action lawsuit alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as SEC Regulation FD relating to the alleged disclosures made during meetings with investors referred to in the preceding paragraph. The Company is also aware of press releases indicating that other such suits have been filed against it. The Company believes that it has defenses to these claims and intends to defend the actions vigorously. As with any litigation, there can be no assurances that the Company will prevail.

INDEPENDENT ACCOUNTANTS' REPORT

To the Shareholders and Board of Directors of

Schering-Plough Corporation:

We have reviewed the accompanying condensed consolidated balance sheet of Schering-Plough Corporation and subsidiaries (the "Corporation") as of September 30, 2002, and the related statements of consolidated income for the three-month and nine-month periods ended September 30, 2002 and 2001 and the statements of consolidated cash flows for the nine-month periods ended September 30, 2002 and 2001. These financial statements are the responsibility of the Corporation's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Schering-Plough Corporation and subsidiaries as of December 31, 2001, and the related statements of consolidated income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 15, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/Deloitte & Touche LLP

Parsippany, New Jersey

November 12, 2002

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

Consolidated net sales for the third quarter totaled $2.4 billion, an increase of $44 million or 2 percent compared with the same period in 2001. For the nine months, net sales increased $509 million or 7 percent versus 2001. Excluding the effect of foreign currency exchange rate fluctuations, consolidated net sales decreased 1 percent in the quarter. Foreign exchange had no impact in the first nine months. Volumes declined 2 percent in the third quarter and grew 4 percent for the nine-month period. Net sales in the United States decreased 10 percent versus the third quarter of 2001 and increased 1 percent for the nine-month period. International sales advanced 21 percent (up 15 percent excluding exchange) versus the third quarter of 2001 and advanced 17 percent (no impact due to exchange) for the nine-month period.

Net sales by major therapeutic category for the third quarter and nine months were as follows ($ in millions):

Certain amounts in prior periods have been reclassified from Selling, General and Administrative expenses to Net Sales to comply with EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products."

Worldwide net sales of allergy and respiratory products decreased 28 percent in the quarter and 10 percent versus the nine-month period of 2001. Worldwide net sales of CLARINEX tablets, the Company's next-generation non-sedating antihistamine for the treatment of seasonal outdoor allergies and year-round indoor allergies, were $164 million for the quarter and $422 million for the first nine months. CLARINEX was launched in the United States in January 2002. Sales of the CLARITIN family of nonsedating antihistamines totaled $402 million for the quarter, down 51 percent, as compared with $828 million for the corresponding period in 2001. CLARITIN family sales totaled $1,853 million for the first nine months, down 25 percent as compared with $2,471 million in 2001. This decrease was due to a significant reduction in trade inventory levels, the conversion of patients to CLARINEX and a decline in market share.

On October 24, 2002, the Company provided an update on its previously reported anticipated reduction by U.S. wholesalers of trade inventories of prescription CLARITIN products in anticipation of the launch of CLARITIN as an OTC product. The estimated net negative impact on pretax profits for 2002 of reducing CLARITIN inventories held by U.S. wholesalers and chain pharmacies is expected to be, as previously estimated, approximately $250 million.

The applications filed with the FDA to switch CLARITIN to OTC status have a targeted action date of November 28, 2002. Upon the expected approval of OTC CLARITIN, the Company now anticipates that there will be a market transition period during which prescription activity at the patient level will continue. During this transition period, the Company will seek to ensure that prescription CLARITIN will be available at the U.S. wholesaler, chain and retail pharmacy levels in order to satisfy the remaining demand. This is a different situation than the Company had anticipated earlier in the year. Previously, the Company had anticipated that wholesaler and chain pharmacy inventories of prescription CLARITIN would be fully depleted by the time OTC CLARITIN was approved.

The estimated net negative impact on pretax profits for 2002 of reducing CLARITIN inventories held by U.S. wholesalers and chain pharmacies remains as previously estimated at approximately $250 million. The estimate of the annual impact is unchanged from previous estimates because the positive effect of not having to fully deplete wholesaler and chain pharmacy inventories by the time of OTC approval has been offset by higher than previously estimated CLARITIN inventory levels being held by wholesalers and chain pharmacies. The majority of the negative pretax profit impact was realized in the third quarter (approximately $200 million).

Sales of NASONEX, a once-daily corticosteroid for seasonal allergic rhinitis, increased 17 percent to $160 million for the third quarter and decreased 3 percent to $398 million for the first nine months. The third quarter increase was primarily due to the timing of product shipments, changes in trade inventory levels and growth in international markets. The decrease for the nine-month period was due to market share declines and changes in trade inventory levels.

Sales of PROVENTIL, including generic and other albuterol products declined 75 percent to $22 million in the third quarter and 43 percent to $111 million for the first nine months, due to changes in trade inventory levels versus the comparable 2001 periods.

Net sales of worldwide anti-infective and anticancer products increased 93 percent in the third quarter of 2002 and 73 percent year-to-date. Growth was led by combined worldwide sales of the INTRON franchise [consisting of INTRON A, PEG-INTRON, a longer-acting form of INTRON A (as monotherapy for treating hepatitis C and in combination with REBETOL Capsules), and REBETRON Combination Therapy, containing REBETOL Capsules and INTRON A Injection]. INTRON franchise sales totaled $703 million for the quarter and $1,919 million year-to-date, benefiting from the October 2001 market introduction of PEG-INTRON in combination with REBETOL for hepatitis C in the United States, as well as the launch of this combination therapy in European markets. Also contributing to the sales growth is the December 2001 launch of INTRON A in combination with REBETOL in Japan.

Sales in the anti-infective and anticancer category also benefited from international sales of REMICADE, marketed for Crohn's disease and rheumatoid arthritis and worldwide sales of TEMODAR, a chemotherapy agent for treating certain types of brain tumors. Sales of REMICADE were up $50 million to $92 million for the third quarter and up $123 million to $228 million year-to-date. Sales of TEMODAR were up $31 million or 70 percent to $76 million for the quarter and up $77 million or 59 percent to $209 million year-to-date. Sales increases for both REMICADE and TEMODAR were due to increased market penetration.

Worldwide net sales of cardiovascular products decreased 38 percent in the quarter and 28 percent year-to-date. Sales of K-DUR, a sustained-release potassium chloride supplement, declined $61 million for the quarter and $130 million or 85 percent year-to-date due to continued generic competition. The decrease in the category was tempered by higher sales of INTEGRILIN, a platelet receptor glycoprotein IIb/IIIa inhibitor for the treatment of patients with acute coronary syndromes, due to patient market share gains. Sales of INTEGRILIN increased $18 million or 31 percent in the quarter and increased $59 million or 36 percent year-to-date.

Dermatological products' worldwide net sales decreased 19 percent in the third quarter and 25 percent year-to-date primarily due to manufacturing issues as described in "Additional Factors Influencing Operations" below and generic competition.

Worldwide sales of animal health products decreased 4 percent in the third quarter and 2 percent for the year-to-date period due to market conditions for swine products in the United States coupled with weakness in certain international markets.

Net sales of foot care products decreased 16 percent for the third quarter and 9 percent year-to-date due to increasing competition, tempered by the launch of LOTRIMIN ULTRA.

OTC product sales decreased 5 percent in the third quarter and 12 percent year-to-date due to manufacturing issues, described in "Additional Factors Influencing Operations" below.

Third quarter sales of sun care products increased 17 percent and sales for the first nine months decreased 8 percent. The year-to-date decline was primarily due to lower sales of BAIN DE SOLEIL products.

Cost of sales as a percentage of sales increased to 26.6 percent in the quarter and 24.3 percent in the first nine months from 20.4 percent for both periods in 2001. The increase was primarily due to a shift in sales towards products on which royalties are paid and higher costs associated with manufacturing issues.

Selling, general and administrative expenses represented 35.9 percent of sales in the third quarter of 2002 compared with 34.9 percent last year. For the nine-month period the ratio decreased to 35.6 percent from 35.9 percent last year. The increase in this ratio in the quarter was primarily due to increased spending to support the continued rollout of new and recently introduced products.

Research and development spending increased 14 percent in the third quarter representing 14.6 percent of sales in 2002 versus 13.1 percent in 2001. For the first nine months of 2002, spending increased 9 percent and represented 13.0 percent of sales versus 12.8 percent in 2001. R&D spending reflects the timing of the Company's funding of both internal research efforts and research collaborations with various partners to discover and develop a steady flow of innovative products.

Income before income taxes decreased 29 percent for the quarter compared with 2001, and represented 23.0 percent of sales versus 32.8 percent last year. For the first nine months, income before income taxes decreased 8 percent and represented 27.6 percent of sales versus 32.0 percent in 2001.

The effective tax rate was 23.0 percent in the third quarter and first nine months of 2002 and 2001.

Diluted earnings per common share decreased 29 percent in the third quarter to $0.29 from $0.41 in 2001 and decreased 7 percent for the first nine months to $1.13 from $1.22 in 2001. Basic earnings per common share declined 29 percent to $0.29 from $0.41 in the third quarter and decreased 8 percent to $1.13 from $1.23 for the first nine months.

In the United States, many of the Company's pharmaceutical products are subject to increasingly competitive pricing as managed care groups, institutions, government agencies and other groups seek price discounts. In most international markets, the Company operates in an environment of government-mandated cost-containment programs. In the U.S. market, the Company and other pharmaceutical manufacturers are required to provide statutorily defined rebates to various government agencies in order to participate in Medicaid, the veterans health care program and other government-funded programs. Several governments have placed restrictions on physician prescription levels and patient reimbursements, emphasized greater use of generic drugs and enacted across-the-board price cuts as methods to control costs.

Since the Company is unable to predict the final form and timing of any future domestic or international governmental or other health care initiatives, 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, pharmaceutical reimbursement policies and availability of the Company's pharmaceutical products cannot be reasonably estimated.

A significant portion of net sales is made to major pharmaceutical and health care products distributors and major retail chains in the United States. 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.

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

As noted in the "Legal and Environmental Matters" footnote included in the financial statements to this report, the Company has sued 16 drug manufacturers that are seeking to market certain forms of generic prescription or OTC loratadine prior to the expiration of certain of the Company's U.S. patents, including the compound patent for desloratadine. In each case, the Company has filed suit in federal court seeking a ruling that the applicable Abbreviated New Drug Application (ANDA) or "paper" New Drug Application submission and proposed marketing of a generic prescription or OTC product constitute willful infringement of the Company's patents and that the challenge to the patents is without merit. The compound patent for loratadine expired on June 19, 2002. U.S. market exclusivity for CLARITIN was extended by the Food and Drug Administration (FDA) to December 19, 2002, because the Company conducted pediatric clinical trials at the request of the FDA. A patent covering the compound des loratadine, formulations thereof, and methods of treatment with desloratadine is set to expire on April 21, 2004. U.S. market exclusivity was extended by the FDA to October 21, 2004, because the Company conducted pediatric clinical trials at the request of the FDA. On August 8, 2002, a federal district court in New Jersey ruled on motions for summary judgment, finding that the desloratadine compound claims of that patent, which the company believes protects CLARITIN, were anticipated by a prior patent and thus invalid. The district court's ruling does not affect other claims of that patent covering methods of treatment with desloratadine, and formulations of desloratadine. On September 18, 2002, the district court denied a request for reconsideration. The Company is in the process of appealing the rulings, and anticipates that the appeal will be decided in late 2003 or early 2004. With these rulings, actions against the defendants for infringement of this patent will not proceed unless the Company's ap peal is successful. While the outcome of the litigation is uncertain, the Company's earnings projections assume that generic prescription or OTC forms of loratadine will enter the market as early as December 20, 2002. Pursuant to a Court order agreed to by the Company and one generic manufacturer, that manufacturer withdrew its ANDA and the Company's action against it was dismissed. Two generic manufacturers, which had been the only defendants to assert that the loratadine compound patent is invalid and/or unenforceable, have withdrawn their challenges to this patent. Thus, there are no defendants currently challenging the loratadine compound patent.

On March 8, 2002, the Company announced that the FDA has accepted for filing supplemental New Drug Applications (sNDAs) to switch all indications and market all formulations of CLARITIN as OTC products. The applications have been assigned a "standard review" by FDA, with a targeted action date of November 28, 2002. On April 22, 2002, the Nonprescription Drugs Advisory Committee unanimously recommended OTC treatment for three formulations of CLARITIN (CLARITIN tablets, CLARITIN REDITABS and CLARITIN Syrup) in chronic idiopathic urticaria (CIU), or chronic hives of unknown cause. These formulations are currently indicated as prescription products for the treatment of seasonal allergic rhinitis and CIU. The Nonprescription Drugs Advisory Committee is an independent committee established by FDA to provide advice to the Agency on the safety and effectiveness of having drug products in an over-the-counter setting. FDA is not obligated to follow the recommendations of the advisory committee. CLARITIN-D 24 Hour Extended Release Tablets and CLARITIN-D 12 Hour Extended Release Tablets, are indicated solely for the treatment of seasonal allergies and, therefore, were not within the scope of the Committee's discussions. In May 2001, at a joint meeting of the Pulmonary Allergy Drugs Advisory Committee and the Nonprescription Drugs Advisory Committee, the committees recommended that all formulations of loratadine were appropriate for the OTC treatment of allergic rhinitis.

In December 2001, the Company received marketing clearance from the FDA for CLARINEX (desloratadine) 5 mg tablets for the treatment of seasonal allergic rhinitis in adults and children 12 years of age and older. In February 2002, the FDA broadened the labeling of CLARINEX to include the treatment of allergic rhinitis, which combines the product's initial indication of seasonal allergic rhinitis with the indication of perennial allergic rhinitis, as well as the treatment of CIU, in both cases for the same age group. The ability of the Company to capture and maintain market share for its nonsedating antihistamine products in the U.S. market will depend on a number of factors, including: additional entrants in the market for allergy treatments; clinical differentiation of CLARINEX from other allergy treatments and the perception of the extent of such differentiation in the marketplace; the pricing differentials that may exist among CLARITIN, CLARINEX, other allergy treatments and generic pre scription or OTC loratadine or OTC CLARITIN upon their introduction in the market, which could be substantial; the date of launch of generic prescription or OTC loratadine or OTC CLARITIN; the erosion rate of CLARITIN and CLARINEX sales upon the entry of generic prescription or OTC loratadine or OTC CLARITIN; and whether or not CLARITIN and one or both of the other branded second-generation antihistamines are switched from prescription to OTC status.

Management believes that the introduction of generic prescription or OTC loratadine and/or the switch of CLARITIN to OTC status would likely result in a rapid, sharp and material decline in CLARITIN sales in the United States. In 2001, U.S. sales of CLARITIN products were $2.7 billion, or 28 percent of the Company's consolidated worldwide sales. Management believes that the magnitude of the sales erosion of CLARITIN upon the introduction of generic prescription or OTC loratadine or OTC CLARITIN could be similar to the sales erosion of Eli Lilly and Company's drug Prozac® when it became subject to generic competition in August 2001. According to published reports, Prozac prescriptions eroded approximately 80 percent in the first two months following generic entrants. This was an unprecedented level of sales erosion for a category-leading drug, which management believes illustrates the strength of managed care, mail order pharmacies and other market forces to drive utilization to gene rics. The category of drug may also affect the rate of erosion, and there are no assurances that the erosion rate for CLARITIN, which is labeled for the treatment of seasonal allergies and CIU, will be greater or less than the erosion rate of Prozac, which is labeled for the treatment of depression, among other things. Further, management believes that sales of CLARINEX could also be materially adversely affected by the presence of generic prescription or OTC loratadine or OTC CLARITIN in the market, although the extent of that adverse effect cannot be predicted accurately. In light of the factors described above, management believes that either the introduction of generic prescription or OTC loratadine or OTC CLARITIN in the U.S. market would likely have a rapid, sharp and material adverse effect on the Company's results of operations beginning at the occurrence of such an event and extending for an indeterminate period of time thereafter.

As disclosed in other SEC filings and as noted in the "Legal and Environmental Matters" footnote included in the financial statements to this report, three drug manufacturers have submitted ANDAs to the FDA seeking to market generic forms of 200 mg REBETOL (ribavirin) capsules in the United States before the expiration of the Company's patents covering ribavirin formulations. The Company has sued those manufacturers in federal court for infringement, and one of the manufacturers has filed a counterclaim for unfair competition. The Company continues to vigorously pursue its arguments as to why it should prevail before the federal courts. As with any litigation, there can be no assurance that the Company will prevail and, as a result, generic forms of ribavirin could enter the U.S. market in 2003. The REBETOL patents are material to the Company's business. U.S. sales of REBETOL in the first nine months of 2002 were $601 million.

As a result of the expected loss of CLARITIN prescription sales in the United States, the possible introduction of generic ribavirin competition in the United States, an expected increase in manufacturing costs, as well as other factors, management projects 2003 earnings to be in the range of approximately $1.00 to $1.15. See "Cautionary Factors That May Affect Future Results" below for a discussion of factors that may cause actual results to differ from our current projection.

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

The Company is subject to the jurisdiction of various national, state and local regulatory agencies and is therefore subject to potential administrative actions. Of particular importance is the FDA in the United States. It has jurisdiction over all the Company's businesses and administers requirements covering the testing, safety, effectiveness, approval, manufacturing, labeling and marketing of the Company's products. From time to time, agencies, including the FDA, may require the Company to address various manufacturing, advertising, labeling or other regulatory issues, such as those noted below relating to the Company's current manufacturing issues. Failure to comply with governmental regulations can result in delays in the release of products, seizure or recall of products, suspension or revocation of the authority necessary for the production and sale of products, discontinuance of products, fines and other civil or criminal sanctions. Any such result could have a material advers e effect on the Company's financial position and its results of operations. Additional information regarding government regulation and cautionary factors that may affect future results is provided in Part I, Item I, "Business," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, which is incorporated by reference herein.

Due to the overwhelming response to PEG-INTRON and REBETOL combination therapy since its U.S. launch in October 2001, the Company has implemented an Access Assurance program. Under this program, a temporary wait list for newly enrolling patients has been established in order to assure uninterrupted access for those patients already on PEG-INTRON therapy. Under the program, all patients initiating therapy will have access to a full, uninterrupted course of PEG-INTRON. As of October 2, 2002, all patients were cleared from the temporary wait list because a sufficient quantity of products had been made available to the marketplace. PEG-INTRON was granted EU marketing approval in May 2000 and REBETOL received EU approval in 1999. These products subsequently received marketing approval in several additional international markets. The Company believes that there is an adequate supply of PEG-INTRON to meet current demand for the product in the international markets.

As noted in the "Consent Decree" footnote included in the financial statements to this report, on May 17, 2002 the Company announced that it reached an agreement with the FDA for a consent decree to resolve issues involving the Company's compliance with current Good Manufacturing Practices at certain manufacturing facilities in New Jersey and Puerto Rico. The U.S. District Court for the District of New Jersey has approved the consent decree.

Under terms of the consent decree, the Company will pay a total of $500 million to the U.S. government in two equal installments of $250 million; the first installment was paid in May 2002 and the second installment will be paid in the second quarter of 2003. As previously reported, the Company accrued a $500 million provision for this consent decree in the fourth quarter of 2001.

In the event certain actions agreed-upon in the consent decree are not completed on time, the agreement provides for daily payments of $15,000 for each deadline missed. These payments cannot exceed $50 million incurred in any calendar year and have an overall cap of $175 million incurred through 2005. A royalty payment of 24.6 percent of net U.S. sales can be assessed for each product for which revalidation has not been successfully completed within the timelines of the consent decree. The Company is scheduled to complete its revalidation plans by December 31, 2005. The Company would expense any such payments if and when incurred.

In addition, the failure to meet the terms of the consent decree could result in delays in approval of new products, seizure or recall of products, suspension or revocation of the authority necessary for the production and sale of products, fines and other civil or criminal sanctions.

Under certain circumstances, the Company may deem it advisable to initiate product recalls. In 2001 and 2002, the Company initiated voluntary recalls of batches of several human products. Also in 2001, the Company recalled certain batches of animal health products. In November 2002, the Company initiated a voluntary recall down to the retail level of all unexpired, non-medically necessary, human and veterinary drug products manufactured at the Company's sterile facility in Manati prior to the consent decree. The cost of the recalls did not have a significant impact on the financial results of the Company.

Refer to "Management's Discussion and Analysis of Operations and Financial Condition" in Exhibit 13 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 for disclosures regarding the Company's critical accounting policies.

A combination of cash from operations and borrowings represent the primary sources of funds to finance working capital, capital expenditures and shareholder dividends. Management believes that these sources of funds will continue to be sufficient to finance future operations.

Cash provided by operating activities totaled $1,484 million in the first nine months of 2002, versus $1,753 million for the same period in 2001. This decrease was due to the payment of the first $250 million installment under the terms of the consent decree as described in "Additional Factors Influencing Operations" above and a decrease in net earnings for 2002. The Company has experienced a trend of increasing accounts receivable. This trend is due to the growth of our International business where payment terms are generally longer than in the U.S. The Company does not believe that this trend will adversely affect its results of operations or liquidity. Cash was used to fund capital expenditures of $523 million in the first nine months of 2002. It is expected that capital expenditures will exceed $775 million in 2002. Dividend payments of $736 million were made in the first nine months of 2002. In April 2002, the Board of Directors increased the quarterly dividend 6 percent, to $. 17 per common share.

As disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 the Company employs a number of strategies to balance the cash requirements of its subsidiaries. One of these strategies utilizes two long-term interest rate swap contracts, one between a foreign-based subsidiary and a bank and the other between the Company and the same bank. The two contracts have equal and offsetting terms and are covered by a master netting arrangement.

The contract involving the foreign-based subsidiary permits the subsidiary to prepay a portion of its future obligation to the bank and the contract involving the Company permits the bank to prepay a portion of its future obligation to the Company. Prepayments totaling $1.4 billion have been made under both contracts. The prepaid amounts have been netted in the preparation of the consolidated balance sheet in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts". The FASB is considering changing the accounting for prepaid swaps and similar arrangements to disallow netting and instead require the prepayment under one contract to be reported as a long-term investment and the prepayment under the other contract to be reported as a long-term liability.

Management does not believe that this potential change in financial reporting for prepaid swaps will have a material impact on the Company's liquidity or financial position. The addition to the balance sheet of a long-term investment and long-term debt in equal amounts has no impact on net cash, which is the customary measure of liquidity for a multinational pharmaceutical company.

On October 8, 2002, Moody's Investors Service (Moody's) placed the Company's "Aa2" long-term debt rating under review for possible downgrade. At the same time, Moody's confirmed the Company's "Prime-1" short-term rating. Subsequent to the Company's press release on October 3, 2002 in which, among other things, the Company updated its earnings guidance for 2002 and provided earnings projections for 2003 through 2005, Standard & Poor's issued a statement maintaining the Company's long-term rating of "AA-" and short-term rating of "A-1+" while maintaining its negative outlook.

In February 2000, the Board of Directors authorized the repurchase of $1.5 billion of the Company's common shares. This program was approximately 36 percent complete when the Company suspended its repurchase activity in the first quarter of 2001.

Management's discussion and analysis set forth above contains certain forward-looking statements, including statements regarding the Company's financial position and results of operations. These forward-looking statements are based on current expectations. Certain factors have been identified by the Company in Item 1 of the Company's December 31, 2001, Form 10-K filed with the Securities and Exchange Commission, which could cause the Company's actual results to differ materially from expected and historical results. Item 1 from the Form 10-K is incorporated by reference herein. The Company has issued cautionary statements in the Disclosure Notices attached to its press releases discussing matters described in this report. The Company's press releases for 2001 and 2002 to date are available on the Company's Web site on the World Wide Web at schering-plough.com. The reader of this report is urged to read those cautionary statements, which are incorporated by reference herein.

The Company is exposed to market risk primarily from changes in foreign currency exchange rates and, to a lesser extent, from interest rates and equity prices. Refer to "Management's Discussion and Analysis of Operations and Financial Condition" in Exhibit 13 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 for additional information.

Management, including the chief executive officer and the chief financial officer, has evaluated the Company's disclosure controls and procedures within a period of 90 days prior to the filing date of this Form 10-Q and has concluded that the Company's disclosure controls and procedures are effective in ensuring that material information relating to the Company and its consolidated subsidiaries is made known to them. They also concluded that there were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Legal proceedings involving the Company are described in the 2001 Report on Form 10-K and the Reports on Form 10-Q for the first and second quarter 2002 (all three reports together are referred to as the "Reports" in this Legal Proceedings Item). Unless specifically indicated below, matters described in the Reports are still pending. The following description should be read together with the Reports and covers material developments to previously reported proceedings and new material legal proceedings involving the Company that arose since the August 13, 2002 filing date of the second quarter 2002 10-Q.

As previously disclosed in the Reports, there are ongoing legal proceedings relating to compounds that the Company believes protects CLARITIN. A patent covering the compound desloratadine, formulations thereof, and methods of treatment with desloratadine is set to expire on April 21, 2004. U.S. market exclusivity was extended by the FDA to October 21, 2004, because the Company conducted pediatric clinical trials at the request of the FDA. On August 8, 2002, a federal district court in New Jersey ruled on motions for summary judgment, finding that the desloratadine compound claims of that patent, which the Company believes protects CLARITIN, were anticipated by a prior patent and thus invalid. The district court's ruling does not affect other claims of that patent covering methods of treatment with desloratadine, and formulations of desloratadine. On September 18, 2002, the district court denied a request for reconsideration. The Company is in the process of appeali ng the rulings, and anticipates that the appeal will be decided in late 2003 or early 2004. With these rulings, actions against the defendants for infringement of this patent will not proceed unless the Company's appeal is successful. While the outcome of the litigation is uncertain, the Company's earnings projections assume that generic prescription or OTC forms of loratadine will enter the market as early as December 20, 2002.

The Company previously disclosed an AWP case filed in July 2002 in California State Court against the Company and Warrick. There are now four private plaintiffs and a non-profit organization which have filed five separate lawsuits. These complaints, which are alleged to be suitable for class action status, and/or as representative actions, allege that the Company conspired with other drug companies to defraud consumers by reporting fraudulently high AWPs for prescription drugs covered by Medicare. The complaints seek injunctive relief, disgorgement of profits, and unspecified damages, including punitive damages.

Regarding the previously disclosed New Jersey State Court shareholder derivative actions, the Board is currently reviewing a report issued by the Evaluation Committee in October 2002.

As previously disclosed, the Company was a party to two arbitrations commenced by Biogen, Inc. (Biogen). In October, 2002, the Company settled these two arbitrations. As part of the settlement, the Company will make a one-time payment to Biogen in the fourth quarter, 2002 in the range of $45 to $50 million. The Company had previously recorded a provision for this settlement payment. In addition, the Company will commence paying Biogen royalties on U.S. sales of Schering-Plough's alpha interferon products, based on a 1998 agreement between the companies.

In September 2002, a consolidated complaint was filed in this court as a result of the coordination by the Multi-District Litigation Panel of all federal court AWP cases from throughout the country. The consolidated complaint alleges that the Company and Warrick conspired with providers to defraud consumers by reporting fraudulently high AWPs for prescription medications reimbursed by Medicare or third party payers. The complaint seeks a declaratory judgment and unspecified damages, including treble damages.

Regarding the previously disclosed litigation involving REBETOL, the Company noted that it continues to pursue its arguments as to why it should prevail before the federal courts. As with any litigation, there can be no assurance that the Company will prevail, and, as a result, generic forms of ribavirin could enter the U.S. market in 2003.

Regarding the previously disclosed purported nationwide or state class action lawsuits in which plaintiffs are seeking refunds of the purchase price of certain of the Company's products, in October 2002 the court approved the settlement of a California state court class action case involving inhalers.

The Company has become aware of an investigation by the United States Department of Justice, Antitrust Division, into whether the Company's Consumer Products Division entered into an agreement with another company to lower the commission rate of one of its consumer products' brokers. The Company is fully cooperating with the investigation. The Company has been informed that the investigation is at an early stage and thus it is not possible to predict its outcome.

The Company is providing information to the Securities and Exchange Commission in connection with the Commission's inquiry relating to the Company's meetings with investors and other communications. The Company believes that it has complied with all applicable securities laws in this matter.

In October 2002 the Company was served with a purported Federal class action lawsuit alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as SEC Regulation FD relating to the alleged disclosures made during meetings with investors referred to in the preceding paragraph. The Company is also aware of press releases indicating that other such suits have been filed against it. The Company believes that it has defenses to these claims and intends to defend the actions vigorously. As with any litigation, there can be no assurances that the Company will prevail.

As previously disclosed in the Reports, the United States Attorney for the District of Massachusetts has been investigating certain sales and marketing practices of the Company. In early November 2002, the Company was served with two additional grand jury subpoenas by the United States Attorney for the District of Massachusetts which, among other information, the subpoenas seek a broad range of information concerning the Company's sales, marketing and clinical trial practices and programs with respect to INTRON A, REBETRON and TEMODAR, the Company's sales and marketing contacts with managed care organizations and doctors and the Company's offering or provision of grants, honorariums or other items or services of value to managed care organizations, physician groups, doctors and educational institutions. It is not possible to predict the outcome of the investigation, which could include the commencement of civil or criminal proceedings involving the imposition of fines, penalties and inju nctive or administrative remedies, including exclusion from government reimbursement programs. Nor can the Company predict whether the investigation will affect its marketing, sales or clinical trial practices. The Company is cooperating with the investigation.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

I, Jack L. Wyszomierski, Executive Vice President and Chief Financial Officer, certify that:

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

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

Jack L. Wyszomierski

Executive Vice President and Chief Financial Officer

I, Richard Jay Kogan, Chairman, Chief Executive Officer and President, certify that:

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

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

Richard Jay Kogan

Chairman, Chief Executive Officer and President

(1) the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the

"Periodic 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 Periodic Report fairly presents, in all material respects,

the financial condition and results of operations of Schering-Plough Corporation.

This certificate is being furnished solely for purposes of Section 906 and is not being filed as part of the Periodic Report.

Dated: November 12, 2002

(1) the Quarterly Report on Form 10-Q for the quarterly period ended September 30,

2002 (the "Periodic 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 Periodic Report fairly presents, in all material respects,

the financial condition and results of operations of Schering-Plough Corporation.

This certificate is being furnished solely for purposes of Section 906 and is not being filed as part of the Periodic Report.

Dated: November 12, 2002