Table of Contents

PART I

Item 1. Business.

     Merck & Co., Inc. (the “Company”) is a global research-driven pharmaceutical products company that discovers, develops, manufactures and markets a broad range of innovative products to improve human and animal health, directly and through its joint ventures. The Company sells its products primarily to drug wholesalers and retailers, hospitals, clinics, government agencies and managed health care providers such as health maintenance organizations and other institutions. The Company’s professional representatives communicate the effectiveness, safety and value of its products to health care professionals in private practice, group practices and managed care organizations.

     In January 2002, the Company announced plans to establish Medco Health Solutions, Inc. (“Medco Health”) as a separate, publicly-traded company. On August 19, 2003, the spin-off of Medco Health was effected by way of a pro rata dividend to Company stockholders of all the outstanding shares of common stock of Medco Health. Based on a letter ruling the Company received from the U.S. Internal Revenue Service, receipt of Medco Health shares in the distribution was tax-free for U.S. federal income tax purposes, but any cash received in lieu of fractional shares was taxable.

     Product Sales

     Sales^1,2 by category of the Company’s products were as follows:

¹Following the spin-off, the Company’s prior period Consolidated Statements of Income and Cash Flows and related discussions have been restated to present the results of Medco Health separately as discontinued operations. As a result of the spin-off, product sales now reflect sales to Medco Health as third-party sales based upon the net selling price from the Company to Medco Health. Prior year amounts have been restated to conform to the current year presentation.

²Presented net of rebates and discounts.

     The Company’s products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Among these are atherosclerosis products, of which Zocor (simvastatin) is the largest-selling; hypertension/heart failure products, the most significant of which are Cozaar (losartan potassium), Hyzaar (losartan potassium and hydrochlorothiazide), and Vasotec (enalapril maleate); anti-inflammatory/analgesics, which include Vioxx (rofecoxib) and Arcoxia (etoricoxib), agents that specifically inhibit the COX-2 enzyme, which is responsible for pain and inflammation (“coxibs”); an osteoporosis product, Fosamax (alendronate sodium), for treatment and prevention of osteoporosis; a respiratory product, Singulair (montelukast sodium), a leukotriene receptor antagonist for treatment of asthma and for relief of symptoms of seasonal allergic rhinitis; vaccines/biologicals, of which M-M-R II (measles, mumps and rubella virus vaccine live), Varivax (varicella virus vaccine live), a live virus vaccine for the prevention of chickenpox, and Recombivax HB (hepatitis B vaccine [recombinant]) are the largest-selling; anti-bacterial/anti-fungal products, which includes Primaxin (imipenem and cilastatin sodium), as well as newer products Cancidas (caspofungin acetate) and Invanz (ertapenem sodium); ophthalmologicals, of which Cosopt (dorzolamide hydrochloride and timolol maleate ophthalmic solution) and

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Trusopt (dorzolamide hydrochloride ophthalmic solution) are the largest-selling; a urology product, Proscar (finasteride), for treatment of symptomatic benign prostate enlargement; and HIV products, which include Crixivan (indinavir sulfate) and Stocrin (efavirenz), for the treatment of human immunodeficiency viral infection in adults.

     Other primarily includes Maxalt (rizatriptan benzoate), for the treatment of acute migraine headaches in adults, Propecia (finasteride), for the treatment of male pattern hair loss, and other non-promoted products and pharmaceutical and animal health supply sales to the Company’s joint ventures and revenue from the Company’s relationship with AstraZeneca LP, primarily relating to sales of Nexium (esomeprazole magnesium) and Prilosec (omeprazole).

     In January 2003, the U.S. Food and Drug Administration (“FDA”) approved Cancidas, the Company’s once-daily intravenous anti-fungal medicine for the treatment of candidemia (bloodstream infection) and the following candida infections: intra-abdominal abscesses, peritonitis (infections within the lining of the abdominal cavity) and pleural space infections (infections within the lining of the lung). Also in January 2003, the Company announced that the FDA approved Singulair for the relief of symptoms of seasonal allergic rhinitis in adults and children as young as 2 years of age.

     In March 2003, the FDA approved Emend (aprepitant), the first member in a new class of medicines, to be used in combination with other anti-vomiting medicines to help prevent the acute and delayed nausea and vomiting associated with initial and repeat courses of highly emetogenic cancer chemotherapy, including high-dose cisplatin. Also in March 2003, the FDA approved Cozaar as the first and only hypertension medicine indicated to reduce the risk of stroke in patients with hypertension and left ventricular hypertrophy (“LVH”). The new indication is based on the landmark Losartan Intervention for Endpoint Reduction in Hypertension study (“LIFE”). The LIFE study, with Cozaar, marks the first time an antihypertensive treatment regimen has demonstrated a reduction in the risk of stroke versus another antihypertensive treatment regimen in hypertensive patients with LVH. In the LIFE study, black patients with hypertension and LVH had a lower risk of stroke on atenolol than on Cozaar.

     In April 2003, the FDA approved changes to the prescribing information for Zocor to include results from the landmark Heart Protection Study with Zocor 40 mg, which is now recommended, along with diet, as the starting dose for Zocor for people with coronary heart disease or diabetes. Zocor 40 mg is the first and only cholesterol-lowering medication proven to reduce the risk of heart attack and stroke in people with heart disease or diabetes regardless of cholesterol level.

     Acquisitions — On February 23, 2004, the Company announced that it had agreed to acquire Aton Pharma, Inc., a privately held biotechnology company focusing on the development of novel treatments for cancer and other serious diseases. (See also page 10.)

     In January 2003, the Company, through its wholly owned subsidiary, MSD (Japan) Co., Ltd., launched a tender offer to acquire, for an estimated aggregate purchase price of $1.5 billion, the remaining 49% of the common shares of Banyu Pharmaceutical Co., Ltd. (“Banyu”) that it did not already own. In October 2003, the Company announced that at the close of the final count of shares in its second tender offer for all remaining shares in Banyu, the Company owned 99.4% of the outstanding shares of Banyu common stock. Japan is the world’s second largest pharmaceutical market.

     In July 2001, the Company acquired Rosetta Inpharmatics, Inc., a publicly-held Washington based informational genomics company that designs and develops unique technologies to efficiently analyze gene data to predict how medical compounds will interact with different kinds of cells in the body.

     Joint Ventures — In 1982, the Company entered into an agreement with Astra AB (“Astra”) to develop and market Astra products in the United States. In 1994, the Company and Astra formed an equally owned joint venture that developed and marketed most of Astra’s new prescription medicines in the United States including Prilosec, the first of a class of medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining.

     In 1998, the Company and Astra restructured the joint venture whereby the Company acquired Astra’s interest in the joint venture, renamed KBI Inc. (“KBI”), and contributed KBI’s operating assets to a new U.S. limited partnership named Astra Pharmaceuticals, L.P. (the “Partnership”), in which the Company maintains a limited partner interest. The Partnership, renamed AstraZeneca LP, became the exclusive distributor of the products for

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which KBI retained rights. The Company earns certain Partnership returns as well as ongoing revenue based on sales of current and future KBI products. The Partnership returns include a priority return provided for in the Partnership Agreement, variable returns based, in part, upon sales of certain former Astra USA, Inc. products, and a preferential return representing the Company’s share of undistributed Partnership GAAP earnings. In conjunction with the 1998 restructuring, for a payment of $443.0 million, Astra purchased an option to buy the Company’s interest in the KBI products, excluding the Company’s interest in the gastrointestinal medicines Nexium and Prilosec. The Company also granted Astra an option (the “Shares Option”) to buy the Company’s common stock interest in KBI, at an exercise price based on the net present value of estimated future net sales of Nexium and Prilosec.

     In April 1999, Astra merged with Zeneca Group Plc, forming AstraZeneca AB (“AstraZeneca”). As a result of the merger, in exchange for the Company’s relinquishment of rights to future Astra products with no existing or pending U.S. patents at the time of the merger, Astra paid $967.4 million, which is subject to a true-up calculation in 2008 that may require repayment of all or a portion of this amount. The merger also triggers a partial redemption of the Company’s limited partner interest in 2008. Furthermore, as a result of the merger, AstraZeneca’s option to buy the Company’s interest in the KBI products is exercisable in 2010 and the Company has the right to require AstraZeneca to purchase such interest in 2008. In addition, the Shares Option is exercisable two years after Astra’s purchase of the Company’s interest in the KBI products.

     In 1989, the Company formed a joint venture with Johnson & Johnson to develop, market and manufacture consumer health care products in the United States. This 50% owned joint venture was expanded into Europe in 1993, and into Canada in 1996. The European extension currently markets and sells over-the-counter pharmaceutical products in France, Germany, Italy, Spain and the United Kingdom. Significant joint venture products are Pepcid AC (famotidine), an over-the-counter form of the Company’s ulcer medication Pepcid (famotidine), as well as Pepcid Complete, an over-the-counter product which combines the Company’s ulcer medication with antacids (calcium carbonate and magnesium hydroxide). On February 27, 2004, the Company announced its intention to sell to Johnson & Johnson its interest in the European joint venture which is discussed on page 8 under Divestitures.

     Effective April 1992, the Company, through the Merck Vaccine Division, and Connaught Laboratories, Inc. (now Aventis Pasteur), agreed to collaborate on the development and marketing of combination pediatric vaccines and to promote selected vaccines in the United States. The research and marketing collaboration enables the companies to pool their resources to expedite the development of vaccines combining several different antigens to protect children against a variety of diseases, including Haemophilus influenzae type b, hepatitis B, diphtheria, tetanus, pertussis and poliomyelitis. While combination vaccine development efforts continue under this Agreement, no vaccines are currently being promoted.

     In 1994, the Company, through the Merck Vaccine Division, and Pasteur Mérieux Connaught (now Aventis Pasteur) formed a joint venture to market human vaccines in Europe and to collaborate in the development of combination vaccines for distribution in the then existing European Union (“EU”) and the European Free Trade Association. The Company and Aventis Pasteur contributed, among other things, their European vaccine businesses for equal shares in the joint venture, known as Pasteur Mérieux MSD, S.N.C. (now Aventis Pasteur MSD, S.N.C.). The joint venture is subject to monitoring by the EU, to which the partners made certain undertakings in return for an exemption from European Competition Law, effective until December 2006. The joint venture maintains a presence, directly or through affiliates or branches in Belgium, Italy, Germany, Spain, France, Austria, Ireland, Sweden and the United Kingdom, and through distributors in the rest of Europe.

     In 1997, the Company and Rhône-Poulenc S.A. combined their respective animal health and poultry genetics businesses to form Merial Limited (“Merial”), a fully-integrated animal health company, which is a stand-alone joint venture, equally owned by each party. Merial provides a comprehensive range of pharmaceuticals and vaccines to enhance the health, well-being and performance of a wide range of animal species. In December 1999, Rhône-Poulenc S.A.’s interest in Merial was acquired by Aventis S.A., a corporation formed by the merger of Rhône-Poulenc S.A. and Hoechst A.G.

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     In 2000, the Company and Schering-Plough Corporation (“Schering-Plough”) entered into agreements to create separate equally owned partnerships to develop and market in the United States new prescription medicines in the cholesterol-management and respiratory therapeutic areas. In December 2001, the Company and Schering-Plough announced the worldwide expansion (excluding Japan) of the cholesterol-management partnership. In October 2002, Merck/Schering-Plough Pharmaceuticals (“MSP”) announced the FDA approval of Zetia (ezetimibe). The once-daily tablet of Zetia 10 mg was approved for use either by itself or together with a statin to reduce LDL cholesterol and total cholesterol in patients with high cholesterol. Marketing approval was received in October 2002 in Germany under the brand name Ezetrol for use alone and with all marketed statins for the treatment of elevated cholesterol levels. In 2003, following the successful completion of the European Union Mutual Recognition Procedure (“MRP”), Ezetrol had been launched in five European countries – Germany, the United Kingdom, Switzerland, Sweden and the Netherlands. With the completion of the MRP process, the 15 EU member states, as well as Iceland and Norway, can grant national marketing authorization with unified labeling for Ezetrol. In the EU, Ezetrol will be indicated in co-administration with a statin as adjunctive therapy to diet for use in patients with primary hypercholesterolemia who are not appropriately controlled with a statin alone. Ezetrol as monotherapy will be indicated as adjunctive therapy to diet for use in patients with primary hypercholesterolemia in whom a statin is considered inappropriate or is not tolerated. In addition, Ezetrol as monotherapy will be indicated as adjunctive therapy to diet for use in patients with homozygous familial sitosterolemia and co-administered with a statin for use in patients with homozygous familial hypercholesterolemia. In September 2003, MSP submitted to the FDA for standard review a New Drug Application (“NDA”) for Vytorin, an investigational cholesterol lowering medicine, which contains the active ingredients of both Zetia and Zocor, as adjunctive to diet, for the reduction of hypercholesterolemia (elevated cholesterol levels). In November 2003, the filing was accepted by the FDA for standard review. Similar applications have been filed in other countries outside the United States.

     Competition — The markets in which the Company’s pharmaceutical business is conducted are highly competitive and often highly regulated. Global efforts toward health care cost containment continue to exert pressure on product pricing and access.

     Such competition involves an intensive search for technological innovations and the ability to market these innovations effectively. With its long-standing emphasis on research and development, the Company is well prepared to compete in the search for technological innovations. Additional resources to meet competition include quality control, flexibility to meet customer specifications, an efficient distribution system and a strong technical information service. The Company is active in acquiring and marketing products through joint ventures and licenses and has been refining its sales and marketing efforts to further address changing industry conditions. To enhance its product portfolio, the Company continues to pursue external alliances, from early-stage to late-stage product opportunities, including joint ventures and targeted acquisitions. However, the introduction of new products and processes by competitors may result in price reductions and product replacements, even for products protected by patents. For example, the number of compounds available to treat diseases typically increases over time and has resulted in slowing the growth in sales of certain of the Company’s products.

     In addition, particularly in the area of human pharmaceutical products, legislation enacted in all states in the U.S. allows, encourages or, in a few instances, in the absence of specific instructions from the prescribing physician, mandates the use of “generic” products (those containing the same active chemical as an innovator’s product) rather than “brand-name” products. Governmental and other pressures toward the dispensing of generic products have significantly reduced the sales of certain of the Company’s products no longer protected by patents, such as Vasotec and Vaseretic (enalapril maleate in combination with hydrochlorothiazide), the U.S. rights to which have been sold, Prinivil (lisinopril) and Prinzide (lisinopril in combination with hydrochlorothiazide), Pepcid and Mevacor (lovastatin), and slowed the growth of certain other products.

     Distribution — The Company sells its human health products primarily to drug wholesalers and retailers, hospitals, clinics, government agencies and managed health care providers such as health maintenance organizations and other institutions. Vaccines are also sold directly to physicians. The Company’s professional representatives

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communicate the effectiveness, safety and value of the Company’s products to health care professionals in private practice, group practices and managed care organizations.

     In the fourth quarter of 2003, the Company implemented a new distribution program for U.S. wholesalers to moderate the fluctuations in sales caused by wholesaler investment buying and improve efficiencies in the distribution of Company pharmaceutical products. The new program has lowered previous limits on average monthly purchases of Company pharmaceutical products by U.S. customers. Overall, implementation of the new U.S. wholesaler distribution program had an estimated $700.0 to $750.0 million unfavorable impact on consolidated revenues with an estimated $500.0 million unfavorable effect on Zocor sales.

     Raw Materials — Raw materials and supplies are normally available in quantities adequate to meet the needs of the Company’s business.

     Government Regulation and Investigation — The pharmaceutical industry is subject to global regulation by regional, country, state and local agencies. Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States. In 1997, the Food and Drug Administration Modernization Act was passed and was the culmination of a comprehensive legislative reform effort designed to streamline regulatory procedures within the FDA and to improve the regulation of drugs, medical devices and food. The legislation was principally designed to ensure the timely availability of safe and effective drugs and biologics by expediting the premarket review process for new products. A key provision of the legislation is the re-authorization of the Prescription Drug User Fee Act of 1992, which permits the continued collection of user fees from prescription drug manufacturers to augment FDA resources earmarked for the review of human drug applications. This helps provide the resources necessary to ensure the prompt approval of safe and effective new drugs.

     In the United States, the government made significant progress in expanding health care access by enacting the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which was signed into law in December 2003. This statute adds prescription drug coverage to Medicare beginning in 2006 and a voluntary drug discount card for Medicare beneficiaries effective in June 2004. Implementation of the new benefit will support the Company’s goal of improving access to medicines by expanding insurance coverage, while preserving market-based incentives for pharmaceutical innovation. At the same time, the benefit is designed to assure that prescription drug costs will be controlled by competitive pressures and by encouraging the appropriate use of medicines. The Company has taken a leadership role in contributing to the success of the new Medicare-endorsed discount cards by offering to provide its medicines free during 2004 and 2005 for low-income Medicare beneficiaries who exhaust their $600 transitional assistance allowance in Medicare-endorsed drug discount cards. This action is consistent with the Company’s longstanding Patient Assistance Program, which provides free medicines to patients in the United States who lack drug coverage and cannot afford their medicines.

     In addressing cost containment outside of Medicare, the Company has made a continuing effort to demonstrate that its medicines can help save costs in overall patient health care. In addition, pricing flexibility across the Company’s product portfolio has encouraged growing use of its medicines and mitigated the effects of increasing cost pressures.

     For many years, the pharmaceutical industry has been under federal and state oversight with the approval process for new drugs, drug safety, advertising and promotion, drug purchasing and reimbursement programs and formularies variously under review. The Company believes that it will continue to be able to conduct its operations, including the introduction of new drugs to the market, in this regulatory environment. One type of federal initiative to contain federal health care spending is the prospective or “capitated” payment system, first implemented to reduce the rate of growth in Medicare reimbursement to hospitals. Such a system establishes in advance a flat rate for reimbursement for health care for those patients for whom the payer is fiscally responsible. This type of payment system and other cost containment systems are now widely used by public and private payers and have caused hospitals, health maintenance organizations and other customers of the Company to be more cost-conscious in their

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treatment decisions, including decisions regarding the medicines to be made available to their patients. The Company continues to work with private and federal employers to slow increases in health care costs. Further, the Company’s efforts to demonstrate that its medicines can help save costs in other areas, and pricing flexibility across its product portfolio, have encouraged the use of the Company’s medicines and have helped offset the effects of increasing cost pressures.

     Also, federal and state governments have pursued methods to directly reduce the cost of drugs and vaccines for which they pay. For example, federal laws require the Company to pay specified rebates for medicines reimbursed by Medicaid, to provide discounts for outpatient medicines purchased by certain Public Health Service entities and “disproportionate share” hospitals (hospitals meeting certain criteria), and to provide minimum discounts of 24% off of a defined “non-federal average manufacturer price” for purchases by certain components of the federal government such as the Department of Veterans Affairs and the Department of Defense.

     Initiatives in some states seek rebates beyond the minimum required by Medicaid legislation, in some cases for patients beyond those who are eligible for Medicaid. Under the Federal Vaccines for Children entitlement program, the U.S. Centers for Disease Control and Prevention (“CDC”) funds and purchases recommended pediatric vaccines at a public sector price for the immunization of Medicaid-eligible, uninsured, native American and certain underinsured children. The Company was awarded CDC contracts in 2003 for the supply of $345.7 million of pediatric vaccines for this program (and a monovalent component of certain of such vaccines).

     Outside the United States, the Company encounters similar regulatory and legislative issues in most of the countries where it does business. There, too, the primary thrust of governmental inquiry and action is toward determining drug safety and effectiveness, often with mechanisms for controlling the prices of prescription drugs and the profits of prescription drug companies. The EU has adopted directives concerning the classification, labeling, advertising, wholesale distribution and approval for marketing of medicinal products for human use. The Company’s policies and procedures are already consistent with the substance of these directives; consequently, it is believed that they will not have any material effect on the Company’s business.

     The Company is subject to the jurisdiction of various regulatory agencies and is, therefore, subject to potential administrative actions. Such actions may include seizures of products and other civil and criminal sanctions. Under certain circumstances, the Company on its own may deem it advisable to initiate product recalls. The Company believes that it should be able to compete effectively within this environment.

     In addition, certain countries within the EU, recognizing the economic importance of the research-based pharmaceutical industry and the value of innovative medicines to society, are working with industry representatives and the European Commission on proposals to complete the “Single Market” in pharmaceuticals and improve the competitive climate through a variety of means including market deregulation.

     There has been an increasing amount of focus on privacy issues in countries around the world, including the United States and the EU. In the United States, federal and state governments have pursued legislative and regulatory initiatives regarding patient privacy, including federal and recently issued state privacy regulations concerning health information, which have affected the Company’s operations.

     Patents, Trademarks and Licenses — Patent protection is considered, in the aggregate, to be of material importance in the Company’s marketing of human health products in the United States and in most major foreign markets. Patents may cover products per se, pharmaceutical formulations, processes for or intermediates useful in the manufacture of products or the uses of products. Protection for individual products extends for varying periods in accordance with the date of grant and the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage.

     Patent portfolios developed for products introduced by the Company normally provide market exclusivity. Basic patents are in effect for the following major products in the United States: Arcoxia, Cancidas, Comvax (haemophilus b conjugate and hepatitis B [recombinant] vaccine), Cosopt, Cozaar, Crixivan, Emend, Fosamax,

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Hyzaar, Invanz, Maxalt, PedvaxHIB (haemophilus b conjugate vaccine), Primaxin, Propecia, Proscar, Recombivax HB, Singulair, Timoptic-XE (timolol maleate ophthalmic gel forming solution), Trusopt, Vioxx and Zocor. A basic patent is also in effect in the United States for Zetia, which was developed by the Merck/Schering-Plough Pharmaceuticals partnership. A basic patent is also in effect for Sustiva/Stocrin (efavirenz). Bristol-Myers Squibb, under an exclusive license from the Company, sells Sustiva in the United States, Canada and certain European countries. The Company markets Stocrin in other countries throughout the world. The basic patent for Aggrastat (tirofiban hydrochloride) in the United States was divested with the product in 2003. The Company retains basic patents for Aggrastat outside the United States.

     In 2003, Zocor lost its basic patent protection in Canada and certain countries in Europe, including the United Kingdom and Germany, and the Company experienced a decline in Zocor sales in those countries. In 2006, Zocor will lose its market exclusivity in the United States and the Company expects a decline in U.S. Zocor sales.

     The FDA Modernization Act of 1997 (the “Modernization Act”), includes a Pediatric Exclusivity Provision that may provide an additional six months of market exclusivity in the United States for indications of new or currently marketed drugs, if certain agreed upon pediatric studies are completed by the applicant. These exclusivity provisions were re-authorized until October 1, 2007 by the “Best Pharmaceuticals for Children Act” passed in January 2002. In 2003, the FDA granted an additional six months of market exclusivity in the United States to Fosamax until February 2008, and Fosamax Once Weekly until January 2019. In addition, in 2004, the FDA granted an additional six months of market exclusivity in the United States to Trusopt until October 2008 and to Vioxx for six months beyond its patent termination.

     While the expiration of a product patent normally results in a loss of market exclusivity for the covered pharmaceutical product, commercial benefits may continue to be derived from: (i) later-granted patents on processes and intermediates related to the most economical method of manufacture of the active ingredient of such product; (ii) patents relating to the use of such product; (iii) patents relating to novel compositions and formulations; and (iv) in the United States, market exclusivity that may be available under federal law. The effect of product patent expiration on pharmaceutical products also depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, the complexities and economics of the process for manufacture of the active ingredient of the product and the requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other countries.

     Additions to market exclusivity are sought in the United States and other countries through all relevant laws, including laws increasing patent life. Some of the benefits of increases in patent life have been partially offset by a general increase in the number of, incentives for and use of generic products. Additionally, improvements in intellectual property laws are sought in the United States and other countries through reform of patent and other relevant laws and implementation of international treaties.

     Worldwide, all of the Company’s important products are sold under trademarks that are considered in the aggregate to be of material importance. Trademark protection continues in some countries as long as used; in other countries, as long as registered. Registration is for fixed terms and can be renewed indefinitely.

     Royalties received during 2003 on patent and know-how licenses and other rights amounted to $86.5 million. The Company also paid royalties amounting to $757.7 million in 2003 under patent and know-how licenses it holds.

     Divestitures — On February 27, 2004, the Company announced that it had signed a definitive agreement with Johnson & Johnson for Johnson & Johnson to buy the Company’s 50 percent equity stake in their European non-prescription pharmaceuticals joint venture.

     In 2003, the Company sold its U.S. rights in Aggrastat (tirofiban hydrochloride injection) to Guilford Pharmaceuticals Inc. (“Guilford”), including the basic U.S. product patents (but not process patents) for the product.

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     In 2002, the Company sold its U.S. rights in Vasotec, Vaseretic, and Vasotec I.V. Injection (enalaprilat) to Biovail Laboratories Incorporated (“Biovail”), a subsidiary of Biovail Corporation. At the same time, the Company’s Canadian subsidiary, Merck Frosst Canada & Co. (“Merck Frosst”) and Biovail entered into a supply agreement under which Merck Frosst agreed to supply Biovail for a minimum of five years with bulk tablets of formulated enalapril maleate and enalapril maleate in combination with hydrochlorothiazide for distribution by Biovail in the United States as Vasotec and Vaseretic. The basic product patents on Vasotec and Vaseretic had expired in the United States prior to these transactions.

Research and Development

     The Company’s business is characterized by the introduction of new products or new uses for existing products through a strong research and development program. Approximately 12,800 people are employed in the Company’s research activities. Expenditures for the Company’s research and development programs were $3.2 billion in 2003, $2.7 billion in 2002 and $2.5 billion in 2001 and are estimated to increase at a low-teen percentage growth rate over the full-year 2003 expense in 2004. The Company maintains its ongoing commitment to research over a broad range of therapeutic areas and clinical development in support of new products. Total expenditures for the period 1994 through 2003 exceeded $20.2 billion with a compound annual growth rate of 10%.

     The Company maintains a number of long-term exploratory and fundamental research programs in biology and chemistry as well as research programs directed toward product development. Projects related to human health are being carried on in various fields such as bacterial, fungal, and viral infections, cardiovascular disease and atherosclerosis, cancer, diabetes, obesity, neurodegenerative disease, psychiatric disease, pain and inflammation, immunology, respiratory diseases, ophthalmology, respiratory diseases, osteoporosis and men/women health programs, endoparasitic and ectoparasitic diseases, companion animal diseases, and production improvement.

     In the development of human health products, industry practice and government regulations in the United States and most foreign countries provide for the determination of effectiveness and safety of new chemical compounds through preclinical tests and controlled clinical evaluation. Before a new drug may be marketed in the United States, recorded data on preclinical and clinical experience are included in the NDA or the biological Product License Application (“PLA”) to the FDA for the required approval. The development of certain other products is also subject to government regulations covering safety and efficacy in the United States and many foreign countries. There can be no assurance that a compound that is the result of any particular program will obtain the regulatory approvals necessary for it to be marketed.

     The Company’s late-stage pipeline candidates include novel vaccines for human papillomavirus (“HPV”) and the pain associated with shingles, and RotaTeq, a vaccine for rotavirus-a highly contagious virus that is the most common cause of severe gastroenteritis in infants and young children. The Company expects to file PLAs with the FDA for these three novel vaccine candidates in the second half of 2005. There are competing claims to intellectual property in the HPV field, but the Company is confident that the claims will not delay the Company’s program. The Company expects to submit a PLA to the FDA for its ProQuad vaccine, a pediatric combination vaccine for measles, mumps, rubella and chickenpox, in the second half of 2004.

     The Company is also studying a DP-IV inhibitor, a glucose-lowering mechanism, used alone and in combination for the treatment of Type II diabetes. The Company plans to enter Phase III clinical trials with this investigational compound in the second quarter of 2004 and expects to submit an NDA to the FDA in 2006.

     The Company’s early-stage pipeline includes candidates in each of the following areas: diabetes, obesity, Alzheimer’s disease, respiratory disease, coronary heart disease, rheumatoid arthritis and vaccines.

     The Company supplements its internal research with an aggressive licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as new technologies. In 2003, the Company completed 47 significant transactions, including research collaborations, preclinical and clinical compounds, and technology transactions. Transactions completed in 2003 include agreements

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with the following companies: GenPath, for cancer; Amrad, for respiratory disease; Neurogen, for pain; and Actelion, for cardiovascular disease.

     On February 10, 2004, the Company announced that it had entered into an agreement with H. Lundbeck A/S (“Lundbeck”) to develop and commercialize in the United States gaboxadol, a compound licensed to Lundbeck by a third party that is currently in Phase III development for the treatment of sleep disorders. Under the terms of the agreement, Lundbeck will receive an initial payment of $70.0 million and up to $200.0 million in additional milestone payments. The Company and Lundbeck will jointly complete the ongoing Phase III clinical program, with the Company funding the majority of the remaining development activities. The Company anticipates that it will file an NDA with the FDA between late 2006 and mid-2007. Following FDA approval, the companies plan to co-promote gaboxadol in the United States. Lundbeck will receive a share of gaboxadol sales in the United States.

     On February 23, 2004, the Company announced that it had agreed to acquire Aton Pharma, Inc. (“Aton”), a privately held biotechnology company focusing on the development of novel treatments for cancer and other serious diseases. Consideration for the acquisition will consist of upfront and contingent payments based upon the regulatory filing, and approval and sales of products. Aton’s clinical pipeline of histone deacetylase inhibitors represents a class of anti-tumor agents with potential for efficacy based on a novel mechanism of action. Aton’s lead product candidate, known as suberoylanilide hydroxamic acid, has been extensively studied in Phase I clinical trials and is currently in Phase II clinical trials for the treatment of cutaneous T-cell lymphoma. The Company expects to complete the acquisition of Aton in the first quarter of 2004.

     The chart below reflects the Company’s research pipeline as of March 1, 2004. Candidates shown in Phase III include specific products. Candidates shown in Phase I and II include the most advanced compound with a specific mechanism in a given therapeutic area. Back-up compounds, regardless of their phase of development, additional indications in the same therapeutic areas and additional line extensions or formulations for in-line products are not shown. Preclinical areas shown are those where the Company has initiated Good Laboratory Practices (“GLP”) studies in compounds with mechanisms distinct from those in Phase I and II. The Company’s programs are generally designed to focus on the development of novel medicines to address large, unmet medical needs.

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     In February 2003, the Company announced that it had discontinued Phase II clinical trials for its lead GABA-A a2/a3 agonist compound for the treatment of generalized anxiety. The Company is continuing its research in the field of anxiety through the ongoing study of other GABA agonist molecules. The timing for the development of these other molecules is not certain.

     In April 2003, the Company announced that it was discontinuing development of its lead Phosphodiesterase-4 (PDE-4) inhibitor compound in Phase II clinical trials for the treatment of asthma and chronic obstructive pulmonary disease (COPD). The Company is continuing its research in the field of asthma and COPD through the ongoing study of other PDE-4 inhibitor molecules. The timing for the development of these other molecules is not certain.

     In August 2003, the Company announced it had put the Phase I clinical trials for its lead HIV integrase inhibitor compound on hold. The Company is also continuing its research in the field of integrase inhibitors through the ongoing study of other integrase inhibitors. The timing for the development of these other molecules is not certain.

     In November 2003, the Company announced that it was discontinuing its Phase III clinical development program for its substance P antagonist investigational product, MK-0869, for the treatment of depression. The Phase III clinical program was halted because the compound failed to demonstrate efficacy for the treatment of depression. The Company remains committed to its neuroscience research programs.

     Also in November 2003, the Company announced that it was discontinuing its Phase III clinical development program for its investigational product, MK-0767, for the treatment of diabetes. The Company was

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developing MK-0767 in collaboration with Kyorin Pharmaceutical Co., Ltd. The clinical program was halted because recent findings in the Company’s long-term safety assessment program identified a rare form of malignant tumors in mice. The clinical relevance of these findings in humans is unknown. The Company is continuing its commitment to diabetes research and is currently studying a DP-IV inhibitor for diabetes. The Company plans to enter Phase III clinical trials with this investigational compound in the second quarter of 2004.

     On February 21, 2003, Banyu announced a change of timing with respect to the filing in Japan of an NDA for rofecoxib (Vioxx). In its press release, Banyu stated that after reviewing clinical data accumulated to date, and at the recommendation of the Organization of Pharmaceutical Safety and Research, Banyu has agreed to conduct additional studies in Japanese patients to further support the NDA filing. As a result of this decision, the NDA filing which was originally planned to take place by the end of March 2003 has been delayed. Banyu further stated that it will conduct the additional studies as appropriate in support of filing the product.

     On December 30, 2003, the Company submitted an NDA to the FDA for Arcoxia. The Company’s NDA seeks indications for Arcoxia for the treatment of osteoarthritis, rheumatoid arthritis, chronic low back pain, acute pain, dysmenorrhea, acute gouty arthritis and ankylosing spondylitis (a painful condition of the spine). As of January 30, 2004, Arcoxia has been launched in 41 countries worldwide in Europe, Latin America and the Asia-Pacific region. The FDA has informed the Company that the FDA considers January 13, 2004 the effective submission date for the NDA because fiscal year 2003 fees for a different medicine were not received by December 31, 2003. The FDA has informed the Company that unless the Company is otherwise notified, the NDA will be accepted for filing on March 12, 2004.

     In November 2003, the European Union’s Committee for Proprietary Medicinal Products concluded its comprehensive review of the COX-2 selective inhibitor class, which includes Vioxx and Arcoxia, and confirmed that the medicines have a positive balance of benefits and risks. The French Transparency Commission, whose responsibilities include recommending drug reimbursement levels in France, after review has retained its assessment that Vioxx provides a modest level of improvement relative to non-steroidal anti-inflammatory drugs in terms of safety.

     All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks owned by or licensed to Merck & Co., Inc., its subsidiaries or affiliates (including Zetia, a trademark owned by an entity of the Merck/Schering-Plough Pharmaceuticals partnership), except as noted. Cozaar and Hyzaar are registered trademarks of E.I. du Pont de Nemours and Company, Wilmington, DE and Prilosec and Nexium are trademarks of the AstraZeneca group. The U.S. trademarks for Vasotec and Vaseretic are owned by Biovail Laboratories Incorporated. The U.S. trademark for Aggrastat is owned by Guilford Pharmaceuticals Inc.

Employees

     At the end of 2003, the Company had 63,200 employees worldwide, with 33,200 employed in the United States, including Puerto Rico. Approximately 25% of worldwide employees of the Company are represented by various collective bargaining groups.

     In 2003, the Company accelerated its efforts to fundamentally lower its cost structure through Company-wide initiatives. In October 2003, the Company announced the reduction of 4,400 positions, which is expected to be completed in 2004. When complete, the cost reductions are expected to generate annual savings of payroll and benefits costs of $250.0 to $300.0 million starting in 2005.

Environmental Matters

     The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations. In 2003, the Company incurred capital expenditures of approximately $41.8 million for environmental protection facilities. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $31.3

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million in 2003, and are estimated at $87.0 million for the years 2004 through 2008. These amounts do not consider potential recoveries from insurers or other parties. The Company has taken an active role in identifying and providing for these costs, and in management’s opinion, the liabilities for all environmental matters which are probable and reasonably estimable have been accrued. Although it is not possible to predict with certainty the outcome of these environmental matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of those provided should result in a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources.

Cautionary Factors that May Affect Future Results

     This report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. One can identify these forward-looking statements by their use of words such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results, product approvals and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Although it is not possible to predict or identify all such factors, they may include the following:

•		Generic competition as product patents for several products have recently expired in the United States and other countries, including product patents for Mevacor (U.S. - 2001), Prinivil and Prinzide (U.S. - 2001) and Vaseretic (U.S. - - 2001). In 2003, Zocor lost its basic patent protection in Canada and certain countries in Europe, including the United Kingdom and Germany, and the Company experienced a decline in Zocor sales in those countries. In 2006, Zocor will lose its market exclusivity in the United States and the Company expects a decline in U.S. Zocor sales. In addition, the U.S. patent covering omeprazole, the active ingredient in Prilosec, which the Company supplies exclusively to AstraZeneca LP, expired in 2001, and a trial court held in October 2002 that one generic company’s omeprazole product does not infringe the Company’s formulation patents with respect to Prilosec. Under an agreement with AstraZeneca, the Company receives supply payments at predetermined rates on the U.S. sales of certain products by AstraZeneca, most notably Prilosec and Nexium.
•		Increased “brand” competition in therapeutic areas important to the Company’s long-term business performance.
•		The difficulties and uncertainties inherent in new product development. The outcome of the lengthy and complex process of new product development is inherently uncertain. A candidate can fail at any stage of the process and one or more late-stage product candidates could fail to receive regulatory approval. New product candidates may appear promising in development but fail to reach the market because of efficacy or safety concerns, the inability to obtain necessary regulatory approvals, the difficulty or excessive cost to manufacture and/or the infringement of patents or intellectual property rights of others. Furthermore, the sales of new products may prove to be disappointing and fail to reach anticipated levels.
•		Pricing pressures, both in the United States and abroad, including rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general.
•		As the Company previously announced in the fourth quarter of 2003, it has taken actions to lower its cost structure including the elimination of positions. Those actions will continue in 2004.
•		Changes in government laws and regulations and the enforcement thereof affecting the Company’s business.
•		Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales.

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•		Legal factors, including product liability claims, antitrust litigation and governmental investigations, environmental concerns and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products.
•		Lost market opportunity resulting from delays and uncertainties in the approval process of the FDA and foreign regulatory authorities.
•		Increased focus on privacy issues in countries around the world, including the United States and the EU. In the United States, federal and state governments have pursued legislative and regulatory initiatives regarding patient privacy, including federal and recently issued state privacy regulations concerning health information, which have affected the Company’s operations.
•		Changes in tax laws including changes related to the taxation of foreign earnings, as well as the impact of legislation capping and ultimately repealing Section 936 of the Internal Revenue Code (relating to earnings from the Company’s Puerto Rican operations).
•		Changes in accounting pronouncements promulgated by standard-setting or regulatory bodies, including the Financial Accounting Standards Board and the Securities and Exchange Commission, that are adverse to the Company.
•		Economic factors over which the Company has no control, including changes in inflation, interest rates and foreign currency exchange rates.

     This list should not be considered an exhaustive statement of all potential risks and uncertainties.

Geographic Area and Segment Information

     The Company’s operations are principally managed on a products basis with one reportable segment: The Merck Pharmaceutical segment which includes products marketed either directly or through joint ventures. Merck Pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the treatment and prevention of human disorders.

     The Company’s operations outside the United States are conducted primarily through subsidiaries. Sales worldwide by subsidiaries outside the United States were 41% of sales in 2003, and 39% and 37% in 2002 and 2001, respectively.

     The Company’s worldwide business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. The Company does not regard these risks as a deterrent to further expansion of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions.

     In recent years, the Company has been expanding its operations in countries located in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific where changes in government policies and economic conditions are making it possible for the Company to earn fair returns. Business in these developing areas, while sometimes less stable, offers important opportunities for growth over time.

     Financial information about geographic areas and operating segments of the Company’s business is incorporated by reference to pages 48 (beginning with the caption “Segment Reporting”) and 49 of the Company’s 2003 Annual Report to stockholders.

Available Information

     The Company’s Internet website address is www.merck.com. The Company will make available, free of charge at the “Investor Information” portion of its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section

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13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission.

     The Company's corporate governance guidelines and the charters of the Board of Directors' six standing committees are available on the Company's website at www.merck.com/about/corporategovernance and all such information is available in print to any stockholder who requests it from the Company.

Item 2. Properties.

     The Company’s corporate headquarters is located in Whitehouse Station, New Jersey. The Company’s pharmaceutical business is conducted through divisional headquarters located in Upper Gwynedd and West Point, Pennsylvania. Principal research facilities for human health products are located in Rahway, New Jersey and West Point. The Company also has production facilities for human health products at nine locations in the United States and Puerto Rico. Branch warehouses provide services throughout the country. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Australia, Canada, Japan, Singapore, South Africa, and other countries in Western Europe, Central and South America, and Asia.

     Capital expenditures for 2003 were $1,915.9 million compared with $2,128.1 million for 2002. In the United States, these amounted to $1,307.8 million for 2003 and $1,565.2 million for 2002. Abroad, such expenditures amounted to $608.1 million for 2003 and $562.9 million for 2002.

     The Company and its subsidiaries own their principal facilities and manufacturing plants under titles which they consider to be satisfactory. The Company considers that its properties are in good operating condition and that its machinery and equipment have been well maintained. Plants for the manufacture of products are suitable for their intended purposes and have capacities and projected capacities adequate for current and projected needs for existing Company products. Some capacity of the plants is being converted, with any needed modification, to the requirements of newly introduced and future products.

Item 3. Legal Proceedings.

     The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property, and commercial litigation, as well as additional matters such as antitrust actions.

     Beginning in 1993, the Company was named in a number of antitrust suits, certain of which were certified as class actions, instituted by most of the nation’s retail pharmacies and consumers in several states, alleging antitrust violations. In 1994, these actions, except for those pending in state courts, were consolidated for pre-trial purposes in the federal court in Chicago, Illinois. In 1996, the Company and several other defendants settled the federal class action, which represented the single largest group of claims. Since that time, the Company has settled substantially all of the remaining cases on satisfactory terms. The Company has not engaged in any conspiracy and no admission of wrongdoing was made nor was included in any settlement agreements. While it is not feasible to predict the final outcome of the few remaining cases, in the opinion of the Company, these proceedings should not ultimately result in any liability which would have a material adverse effect on the Company’s financial position, results of operations or liquidity.

     As previously disclosed, the Company has been advised by the U.S. Department of Justice that it is investigating marketing and selling activities of the Company and other pharmaceutical manufacturers. In connection with the investigation, as previously disclosed, the government served a subpoena on the Company for the production of documents related to Company marketing and sales activities. The subpoena seeks substantially the same information as the government has previously sought. The Company will be working with the government to respond appropriately to this subpoena and other informational requests. The Company has also received a Civil Investigative Demand (“CID”) from the Attorney General of Texas. The CID seeks the production of documents and other information regarding the Company’s marketing and selling activities relating to Texas. The Company is working with the Texas Attorney General’s office to respond appropriately to the CID.

     As previously disclosed, the Company was joined in ongoing litigation alleging manipulation by pharmaceutical manufacturers of Average Wholesale Prices (“AWP”), which are sometimes used in calculations that determine public and private sector reimbursement levels. In 2002, the Judicial Panel on Multi-District Litigation

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ordered the transfer and consolidation of all pending federal AWP cases to federal court in Boston, Massachusetts. Plaintiffs filed one consolidated class action complaint, which aggregated the claims previously filed in various federal district court actions and also expanded the number of manufacturers to include some which, like the Company, had not been defendants in any prior pending case. In May 2003, the court granted the Company’s motion to dismiss the consolidated class action and dismissed the Company from the class action case. Subsequent to the Company’s dismissal, the plaintiffs filed an amended consolidated class action complaint, which did not name the Company as a defendant. The Company and thirty other pharmaceutical manufacturers remain defendants in three similar complaints pending in federal court in Massachusetts filed by the New York Counties of Suffolk, Rockland and Westchester. The Company believes that these lawsuits are without merit and is vigorously defending against them.

     As previously disclosed, in January 2003, the U.S. Department of Justice notified the federal court in New Orleans, Louisiana that it was not going to intervene in a pending Federal False Claims Act case that was filed under seal in December 1999 against the Company. The court issued an order unsealing the complaint, which was filed by a physician in Louisiana, and ordered that the complaint be served. The complaint alleges that the Company’s discounting of Pepcid in certain Louisiana hospitals led to increases in costs to Medicaid. The Company believes that the complaint is without merit and will vigorously defend against it.

     Federal and state lawsuits involving numerous individual claims, as well as some putative class actions, have been filed against the Company with respect to Vioxx. Some of the lawsuits also name as a defendant Pfizer Inc., which markets a competing product. Certain of the lawsuits include allegations regarding gastrointestinal bleeding, cardiovascular events and kidney damage. The lawsuits have been filed in federal courts as well as in a number of state courts. While cases in other jurisdictions are proceeding separately, the actions filed in the state courts of California and New Jersey have been transferred to a single judge in each state for coordinated proceedings. The Company anticipates that one or more of the lawsuits in various jurisdictions may go to trial in the first half of 2004. Litigation is inherently subject to uncertainties and no assurance can be given on the outcome of any given trial. However, the Company believes that these lawsuits are without merit and will vigorously defend against them.

     A number of purported class action lawsuits have been filed by several individual shareholders in the United States District Court for the Eastern District of Louisiana naming as defendants the Company and several current or former officers of the Company, and alleging that the defendants made false and misleading statements regarding the Company’s drug Vioxx in violation of the federal securities laws. The plaintiffs request certification of a class of purchasers of the Company’s common stock between May 22, 1999 and October 22, 2003, and seek unspecified compensatory damages and the costs of suit, including attorney fees. The Company believes that these lawsuits are without merit and will vigorously defend against them.

     The Company is a party in claims brought under the Consumer Protection Act of 1987 in the United Kingdom, which allege that certain children suffer from a variety of conditions as a result of being vaccinated with various bivalent vaccines for measles and rubella and/or trivalent vaccines for measles, mumps and rubella, including the Company’s M-M-R II. Other pharmaceutical companies have also been sued. The claimants allege various adverse consequences, including autism, with or without inflammatory bowel disease, epilepsy, diabetes, encephalitis, encephalopathy and chronic fatigue syndrome. In connection with those claims, eight lead cases had been selected for a trial which was scheduled to commence in April 2004: two against the Company, and six against other pharmaceutical companies. The trial of the eight cases is initially limited to issues of causation and defect on the conditions of autistic spectrum disorders, with or without inflammatory bowel disease. In early September 2003, the Legal Services Commission announced its decision to withdraw public funding of the litigation brought by the claimants. This decision was confirmed on appeal by the Funding Review Committee on September 30, 2003. The April 2004 trial date has been vacated and the claims stayed pending the outcome of a February 2004 hearing on the judicial review of the funding withdrawal decision. The Company believes that these lawsuits are without merit and will vigorously defend against them.

     The Company is also a party to individual and class action product liability lawsuits and claims in the United States involving pediatric vaccines (i.e., hepatitis B vaccine and haemophilus influenza type b vaccine) that

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