BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT

Transcription

1 BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008

2 COVER PICTURE Bayer chemists Dr. Susanne Roehrig and Dr. Alexander Straub examine the molecular contours of rivaroxaban the active ingredient of the new anticoagulant Xarelto using a computer simulation. One of Bayer s aims in developing this innovative drug is to minimize the risk of thrombosis following orthopedic surgery. This drug is currently the most thoroughly investigated anticoagulant in clinical development. Over 60,000 patients are to be enrolled in the study program. Xarelto has been approved in the European Union for the prevention of venous thromboembolism in adults following elective hip or knee replacement surgery. It has also been registered in over ten other countries, and further applications are currently being reviewed by regulatory authorities worldwide, including the u.s. Food and Drug Administration.

3 CONTENTS 1 Contents MANAGEMENT REPORT FINANCIAL STATEMENTS Corporate Structure 2 Restructuring 2 Earnings Performance 3 Proposal for Distribution of the Profit 6 Asset and Capital Structure 6 Employees 7 Information Required Under Takeover Law 8 Corporate Governance Report 10 Compensation Report 15 Risk Report 19 Outlook 30 Subsequent Events 30 Auditor s Report 31 Statements of Income 32 Balance Sheets 33 Notes to the Financial Statements of Bayer AG 34 Changes in Corporate Structure 34 Accounting Policies 34 Recognition and Valuation Principles 35 Notes to the Statements of Income 36 Notes to the Balance Sheets 42 Other Information 49 Proposal for Distribution of the Profit 67 FURTHER INFORMATION Report of the Supervisory Board 68 Governance Bodies 72 COVER Masthead, Disclaimer 74

4 2 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Management Report of Bayer AG Corporate Structure Bayer AG is the parent corporation of the Bayer Group and functions as a management holding company. The roles of the Bayer AG Board of Management (the Group Management Board) include deciding on the strategy of the Bayer Group, defining its business portfolio, conducting executive management and allocating resources. It is also responsible for financial management of the Bayer Group. It is supported in these tasks by the Corporate Center departments. Bayer AG also owns the real estate at the five German sites in Leverkusen, Dormagen, Krefeld-Uerdingen, Wuppertal-Elberfeld and Brunsbüttel. Facilities at these sites are leased to individual Group companies via Bayer Real Estate GmbH (until July 31, 2008 via Currenta GmbH & Co. OHG). The three subgroups Bayer HealthCare, Bayer CropScience and Bayer MaterialScience operate as independent entities within the Bayer Group. They have global responsibility for their business activities within the framework of the strategies, goals and directives defined by the Group Management Board. The Board of Management of each subgroup management company is responsible for the operational management of the respective subgroup. The subgroups are supported in their business operations by three service companies Currenta, Bayer Business Services and Bayer Technology Services which offer their services primarily to companies in the Bayer Group, but also to external customers. The report on business developments given in the following refers to the annual financial statements of Bayer AG prepared in accordance with German commercial accounting law. Restructuring The squeeze-out of the remaining minority stockholders of Bayer Schering Pharma AG, Berlin, Germany, which was resolved at that company s Extraordinary Stockholders Meeting on January 17, 2007, was entered in the Commercial Register on September 25, Bayer Schering GmbH, Leverkusen, Germany, a wholly owned subsidiary of Bayer AG, thus acquired all remaining shares in Bayer Schering Pharma AG. The cash compensation payment to the remaining minority stockholders totaled 695 million. Bayer Schering GmbH, in turn, was merged into Bayer AG retroactively as of July 1, The merger was entered in the Commercial Register of Bayer AG on December 2, As a consequence of the merger, Bayer Schering Pharma AG is now a direct subsidiary of Bayer AG. Effective December 30, 2008, Bayer HealthCare AG was merged into Bayer Schering Pharma AG as part of the realignment of the legal-entity structure of the healthcare activities in Germany. This merger also took place retroactively as of July 1, Prior to this, the veterinary medicines and animal grooming products business was carved out of Bayer HealthCare AG and placed into a separate legal entity. Following the merger of Bayer Schering Pharma AG and Bayer HealthCare AG, Bayer s pharmaceuticals business in Germany is now operated by a single company. The management functions of the Bayer HealthCare subgroup, which were transferred to Bayer Schering Pharma AG through the merger of Bayer HealthCare AG with this company, were subsequently transferred to a new company established for this purpose. This company, which is responsible for the management of the global healthcare business, has since been renamed Bayer HealthCare AG.

5 MANAGEMENT REPORT Earnings Performance 3 Earnings Performance The structure of the income statement has been altered compared with the previous year to enhance clarity. The items included in the non-operating result income from investments in affiliated companies, net interest income and other non-operating income and expenses are presented first. This better reflects Bayer AG s role as a holding company. Operational items general administration expenses and other operating income and expenses are presented below the non-operating result. Revenues previously recognized as net sales are now included in other operating income as they do not constitute the principal business activity of Bayer AG. Similarly, the cost of goods sold and the selling expenses are now included in other operating expenses. In 2008 income from affiliated companies was 2,711 million, a reduction of 319 million compared with 2007 ( 3,030 million). Income from investments in affiliated companies principally comprises the transfer of profits and losses from subsidiaries in Germany under profit and loss transfer agreements. It declined by 1,763 million in 2008 to 1,078 million (2007: 2,841 million). The decrease was mainly due to the remeasurement of pension obligations and other long-term personnel-related commitments at the companies with which Bayer AG has profit and loss transfer agreements. This diminished earnings at almost all of these companies compared with the previous year and reduced Bayer AG s income from profit and loss transfer agreements by 1,097 million. This item was also influenced by a number of other company-specific factors at these subsidiaries. The earnings of the principal subsidiaries with profit and loss transfer agreements are outlined below. Bayer CropScience AG improved its earnings. It transferred a profit of 725 million to Bayer AG in 2008 whereas in 2007 a loss of 1,098 million had to be offset. The principal reason for the 1,823 million improvement in earnings was the much lower level of write-downs of investments in affiliated companies compared with the previous year (only 40 million in 2008 compared with 2,445 million in 2007). Moreover, a decrease in this company s financial debt improved its net interest position by 235 million. Dividend income declined by 674 million. The operating result also slipped by 25 million, but without the change in the remeasurement of pension obligations it would have risen by 134 million. A loss of 80 million had to be offset at Bayer MaterialScience AG in 2008, this company having reported a 437 million profit in the previous year. The 517 million drop in earnings was attributable to the operating business. Even after factoring out the additional expense of 125 million resulting from the remeasurement of pension obligations, the operating result was 392 million lower than in Earnings of Bayer MaterialScience AG were hampered by the repercussions of the global financial market crisis, particularly toward the end of the fiscal year. Within this company s non-operating result, the deterioration in the balance of miscellaneous non-operating income and expense was offset by a 121 million improvement in income from investments in affiliated companies. The profit of 564 million transferred by Bayer Schering Pharma AG is not comparable to the previous year s results because it contains the earnings of Bayer HealthCare AG for the second half of the year, following the merger with this company effective July 1, In the previous year, Bayer Schering Pharma AG did not transfer its profits to Bayer AG directly but via Bayer Schering GmbH, which was merged into Bayer AG effective July 1, Combining the earnings of Bayer Schering Pharma AG and Bayer HealthCare AG and including the earnings of Bayer HealthCare AG in the first half of 2008 (short fiscal year) and the earnings of Bayer Animal Health GmbH, which was carved out of Bayer HealthCare AG in 2008, earnings were 1,726 million lower than in the previous year. Earnings for 2007 included gains of 810 million from the sale of investments in affiliated companies, compared with only 33 million in Moreover, earnings for 2008 were reduced by 743 million due to expense relating to the remeasurement of pension obligations. After adjusting for these effects, earnings showed a 206 million decline, of which 48 million was attributable to the operating business, 162 million to a variety of items in the non-operating result and 4 million to taxes.

6 4 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Bayer Gesellschaft für Beteiligungen mbh transferred a profit of 274 million to Bayer AG. In the previous year it had transferred 1,624 million, principally due to a gain of 1,175 million on an intragroup share transaction. A loss of 300 million was assumed from Bayer Schering GmbH for the first six months, prior to its merger into Bayer AG effective July 1, This comprised financing costs relating to the acquisition of Bayer Schering Pharma AG. In the second half of the year, such expense was reflected directly in the interest result of Bayer AG. In 2008 a loss of 131 million (2007: 47 million) was assumed from Bayer Chemicals AG, which is no longer operational. The increase in this company s loss was due to the remeasurement of pension obligations, since this company bears pension obligations to ex-employees of the former Chemicals subgroup, which was spun off to Lanxess in The losses of 146 million and 82 million, respectively, reported by the two service companies Bayer Business Services GmbH (2007: 2 million) and Bayer Technology Services GmbH (2007: 27 million) were also due principally to onetime expenses relating to the remeasurement of pension obligations. Other consolidated companies reported total earnings of 76 million (2007: 56 million) comprising profits of 108 million (2007: 80 million) and losses of 32 million (2007: 24 million). Income from investments in affiliated companies, comprising dividend income and profits transferred from partnerships, increased by 46 million to 291 million (2007: 245 million). Of this amount, 280 million was received from foreign subsidiaries. The largest individual amounts were 204 million from Bayer S.A.S., France, 32 million from Bayer de Mexico, S.A. de C.V., and 24 million from Bayer Australia Ltd. Gains from the sale of investments in affiliated companies / capital decreases resulted entirely from a capital reduction at Bayer MaterialScience AG. This company reduced its capital stock from 3,822 million to 100 million and repaid the difference to Bayer AG. In connection with this, the acquisition cost of shares in Bayer MaterialScience was reduced by 2,374 million to 110 million, corresponding to the remaining stockholders equity of this company. The difference of 1,348 million remaining after the reduction in the carrying amount of this interest was recognized in income as a gain. In 2007, gains from the sale of investments in affiliated companies comprised 13 million from the spin-off of the diagnostics operations of Bayer Sp.z.o.o., Poland, and their subsequent sale to Siemens. The other items reported under investments in affiliated companies yielded an aggregate loss of 6 million, which was not material to the company as a whole. The previous year s result was also diminished by 69 million in write-downs of investments in affiliated companies. Bayer AG s net interest expense increased by 204 million year on year, to 948 million (2007: 744 million). This increase was mainly due to the merger of Bayer Schering GmbH into Bayer AG effective July 1, As the acquirer of Bayer Schering Pharma AG, Bayer Schering GmbH bore the main interest expense from the financing of this acquisition. This has now been transferred directly to Bayer AG. From the date of the merger, i.e. in the second half of 2008, the impact was around 300 million. This interest expense did not further diminish the earnings of Bayer AG but simply represents a shift between income / expenses from investments in subsidiaries and the interest result, since the interest expense prior to the merger was already borne indirectly by Bayer AG through a profit and loss transfer agreement. Adjusted for this merger-related interest impact, net interest expense was some 100 million less, principally because net debt was reduced by 5.4 billion to 23.7 billion (2007: 29.1 billion). Both interest income and interest expense were lower than in the previous year. While interest expense dropped by 161 million to 1,823 million compared with 1,984 million in 2007, interest income declined more sharply, by 365 million, to 875 million (2007: 1,240 million). This was because Bayer AG no longer received interest income from Bayer Schering GmbH following the merger. Total interest income from intragroup loans declined by 355 million, with loans to Bayer Schering GmbH accounting for 257 million of this amount. While interest income from banks declined by 67 million, interest income from interest-rate swaps in particular increased by 57 million. Of the decline in interest expense, 130 million was attributable to intragroup payables, 62 million to bank loans and 22 million to bonds. Interest expense for interest-rate swaps increased by 53 million.

7 MANAGEMENT REPORT Earnings Performance 5 Other non-operating income and expenses yielded a negative balance of 228 million, which was 246 million below the previous year s positive balance of 18 million. The net exchange position, in particular, deteriorated. The translation of foreign currency receivables and payables and amounts relating to currency derivatives resulted in net expense of 136 million, especially because of shifts in exchange rates in the fourth quarter. Compared with the net exchange gain of 33 million in the previous year, this represented a negative change of 169 million. Additional expense was also recorded as a result of the remeasurement of pension obligations. Apart from the interest portions of pensions and other longer-term personnel provisions, other non-operating expenses also reflect other allocations to these obligations relating to former employees of Bayer who left the Company before the hive-down of the business and service areas in 2002 and These expenses in the gross amount of 753 million resulted in net expenses of 131 million in 2008 after pro-rata reimbursement by the subgroups and service companies hived down in 2002 and This was 125 million more than the previous year s figure of 6 million. Earnings were boosted by a payment of 11 million received on a 29 million loan with a debtor warrant clause granted to Bayer AB, Sweden, which had been fully written down in Miscellaneous income amounted to 28 million (2007: 20 million). Income from the rental of the real estate of Bayer AG decreased by 15 million in 2008 to 42 million (2007: 57 million). This was attributable to a change in rental terms in connection with the switch from Currenta GmbH & Co. OHG to Bayer Real Estate GmbH as the real estate service company for the Bayer Group. Rental income and the associated expenses are reflected in the income statement under other operating income and expenses. Income and expenses from other services, which contributed 17 million to the operating result in 2008 (2007: operating expense of 10 million), are also included in other operating income and expenses. 10 million (2007: 27 million) relating to corporate advertising is included in other operating expenses. A one-time charge of 108 million resulting from the remeasurement of pension obligations is included in other operating expenses. This relates to pension obligations to present employees and those who have left the company since the hive-down of the subgroups and service companies from Bayer AG. Administration expenses incurred by Bayer AG in the performance of its functions as a holding company for the Bayer Group amounted to 194 million in 2008 and were thus virtually unchanged from the previous year (2007: 197 million). Overall, the operating activities of Bayer AG resulted in a loss of 251 million in 2008 (2007: 179 million). Pre-tax income, the sum of the operating and non-operating results, declined by 841 million to 1,284 million (2007: 2,125 million). Income taxes also decreased, from 197 million in 2007 to 123 million in After deducting taxes, net income of 1,161 million remained (2007: 1,928 million). Of this amount, 91 million was allocated to other retained earnings and 1,070 million was recognized as the balance sheet profit.

8 6 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Proposal for Distribution of the Profit The Board of Management and Supervisory Board will propose to the Annual Stockholders Meeting on May 12, 2009 that the balance sheet profit of 1,070 million be used to pay a dividend of 1.40 (2007: 1.35) per share (764,343,225 shares) on the capital stock of 1,957 million entitled to the dividend for Asset and Capital Structure The development of the asset and capital structure of Bayer AG in 2008 was dominated by two events: firstly, by the realignment of the legal-entity structure of the healthcare business following the squeeze-out of the former minority stockholders of Bayer Schering Pharma AG in September; and secondly, by the repatriation of profits and reserves from subsidiaries of Bayer AG, partly in order to avoid tax disadvantages under the interest ceiling introduced in Total assets of Bayer AG decreased by 3.3 billion, or 7.9%, in 2008 to 38.5 million (2007: 41.9 billion). Noncurrent assets increased by 9.3 billion, while current assets declined by 12.6 billion. The significant increase in noncurrent assets to 34.9 billion (2007: 25.6 billion) is attributable to the increase in investments in affiliated companies. This item increased by 10.1 billion compared with the start of the year, to 34.1 billion (2007: 24.0 billion). Since total assets decreased, interests in affiliated companies now account for 88% (2007: 57%) of total assets. The main addition to investments in subsidiaries was 16,974 million for Bayer Schering Pharma AG. The shares in this company were previously held by Bayer Schering GmbH, which was a wholly owned subsidiary of Bayer AG. The interest in Bayer Schering Pharma AG became part of the direct assets of Bayer AG in December 2008 following the merger of Bayer Schering GmbH into Bayer AG. At the same time, the 3,001 million carrying amount of Bayer Schering GmbH was eliminated by the merger. Retirements also included 2,374 million resulting from the capital decrease at Bayer MaterialScience AG and a total of 1,601 million relating to several capital repayments by Bayer Corporation, u.s.a. The remaining total changes of 78 million in investments in affiliated companies mainly related to smaller intragroup share acquisitions, including 52 million at Bayer Hispania, S.L., Spain and 13 million at Bayer Türk Kimya Sanayi Ltd., Sirketi, Turkey. Other financial assets were impacted by the early repayment by Bayer CropScience AG of a 1,050 million loan which originally matured in Further, Bayer AG disbursed a first tranche of 310 million of a total repayable retroactive contribution of 800 million to the effective initial fund of Bayer-Pensionskasse VVaG, Leverkusen, Germany. This was due to the increase in the present and future life expectancy of people insured with the pension fund and the resulting capital requirements. Intangible assets and property, plant and equipment were level with the previous year at 26 million (2007: 28 million) and 355 million (2007: 356 million), respectively. Current assets declined by 12.6 billion to 3.6 billion (2007: 16.3 billion). The main reason for the sharp decrease was the merger of Bayer Schering GmbH into Bayer AG, which eliminated a receivable from Bayer Schering GmbH recognized in the balance sheet of Bayer AG prior to the merger. This comprised financing provided by Bayer AG to Bayer Schering GmbH to finance the acquisition of Bayer Schering Pharma AG, which amounted to 13.8 billion at the start of Other receivables from subsidiaries were 0.7 billion higher than in the previous year. Receivables from subsidiaries totaled 1.7 billion on December 31, 2008 (2007: 14.8 billion). Other assets increased by 160 million compared with 2007, the main items being an advance payment of 92 million against additional taxes expected to result from tax audits for the years 1999 to 2003, and a claim for the refund of 75 million in deductible capital gains tax. Securities and cash and cash equivalents increased by a total of 335 million to 1,306 million (2007: 971 million). This amount mainly comprised balances with banks totaling 1,302 million (2007: 968 million). This includes 57 million (2007: 60 million) earmarked for the settlement of civil-law compensation claims in the United States and Canada, which is held in an escrow account in the United States. The securities of 4 million (2007: 3 million) comprise investment fund units held in trust for Bayer AG by Bayer Pension Trust to guarantee pension entitlements of Bayer AG employees and credit balances on their long-term accounts.

9 MANAGEMENT REPORT Employees 7 Of the total assets of 38.5 billion (2007: 41.9 billion) recorded in the balance sheet, 27.8 billion (2007: 31.2 billion) or 72% (2007: 75%), was debt-financed. Of the latter amount, provisions accounted for 3.6 billion (2007: 3.0 billion) and other liabilities for 24.2 billion (2007: 28.2 billion). Provisions grew by 518 million, entirely because of an increase in those for pensions and other post-employment benefits. These provisions were 657 million higher than a year earlier at 3,158 million (2007: 2,501 million), due almost exclusively due to the remeasurement of pension obligations. Details of the remeasurement are given in the Notes. By contrast, the other provisions declined from 528 million in 2007 to 389 million in Provisions for taxes accounted for 82 million of the 139 million reduction in other provisions. Of the provisions for commitments for civil compensation claims in the United States and Canada relating to antitrust violations in the fields of rubber, polyester polyols and urethanes, 16 million were utilized in The total amount now stands at 62 million. The provisions of 22 million set up in connection with antitrust proceedings instituted by the e.u. Commission in the same matter were utilized in full. Other liabilities decreased by 4.0 billion during the year and amounted to 24.2 billion on December 31, 2008 (2007: 28.2 billion). The decrease resulted mainly from a reduction in intragroup debt from 19.3 billion to 15.1 billion, partly because foreign companies in particular called off financing deposited with Bayer AG in order to pay dividends. This was necessary to avoid or minimize possible tax disadvantages under the interest ceiling introduced in There was a slight increase of 0.3 billion in external financial debt to 8.5 billion (2007: 8.2 billion). On the one hand, a bond with a face value of 200 million and a coupon of 4% was issued under the multi-currency Euro Medium Term Note (emtn) program shortly before year-end. This matures in In addition, 110 million was drawn under the commercial paper program reflected in other liabilities. A private placement of 20 million issued under the emtn program in 2004 was repaid. Miscellaneous liabilities declined by 0.1 billion. As of December 31, 2008, Bayer AG had financial debt of 25.0 billion (2007: 30.1 billion), comprising 16.5 billion payable to Group companies and 8.5 billion payable to third parties. After deduction of liquid assets of 1.3 billion (2007: 1.0 billion) net debt was 23.7 billion (2007: 29.1 billion). It should be noted that out of liquid assets, 57 million is set aside in an escrow account administered in the u.s. to settle civil-law compensation claims in the u.s. and Canada relating to unlawful collusion on prices in the fields of rubber, polyester polyols and urethanes. Stockholders equity was 0.1 billion higher than at the end of Net income boosted stockholders equity by 1,161 million (2007: 1,928 million), while 1,032 million (2007: 764 million) was disbursed to pay the dividend for As a result of the increase in stockholders equity and the concurrent shrinkage of the balance sheet, the equity ratio increased by 2.5 percentage points to 28.0% (2007: 25.5%). Employees Bayer AG had 673 employees on December 31, 2008, compared with 659 at the end of 2007, an increase of 14. Personnel expenses increased significantly as a result of one-time expenses related to the remeasurement of pension obligations. They amounted to 213 million in 2008, compared with 113 million in 2007.

10 8 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Information Required Under Takeover Law REPORT PURSUANT TO SECTION 289, PARAGRAPH 4 OF THE GERMAN COMMERCIAL CODE IN CONJUNCTION WITH SECTION 120, PARAGRAPH 3, SENTENCE 2 OF THE GERMAN STOCK CORPORATION ACT The capital stock of Bayer AG amounted as of December 31, 2008 to 1,956,718,656 (2007: 1,956,715,315.20), divided into 764,343,225 (2007: 764,341,920) no-par bearer shares. Each share confers one voting right. We received no notifications in 2008 or 2007 of direct or indirect holdings of shares in Bayer AG that exceed 10% of the capital stock. The Capital Research and Management Company, u.s.a., notified us that the proportion of voting rights it holds in our company exceeded the 10% threshold on November 8, 2006, and that since that date it has held % of the voting rights. Pursuant to Section 84, Paragraph 1 of the German Stock Corporation Act (AktG), the members of the Board of Management are appointed and dismissed by the Supervisory Board. Since Bayer AG falls within the scope of the German Codetermination Act, the appointment or dismissal of members of the Board of Management requires a majority of two thirds of the votes of the members of the Supervisory Board on the first ballot. If no such majority is achieved, the appointment may be approved pursuant to Section 31, Paragraph 3 of the Codetermination Act on a second ballot by a simple majority of the votes of the members of the Supervisory Board. If the required majority is still not achieved, a third ballot is held. Here again, a simple majority of the votes suffices, but in this ballot the Chairman of the Supervisory Board has two votes pursuant to Section 31, Paragraph 4 of the Codetermination Act. Under Section 6, Paragraph 1 of the Articles of Incorporation of Bayer AG, the Board of Management must comprise at least two members. The Supervisory Board may appoint one member to be Chairman of the Board of Management pursuant to Section 84, Paragraph 2 of the German Stock Corporation Act or Section 6, Paragraph 1 of the Articles of Incorporation. Under Section 179, Paragraph 1 of the German Stock Corporation Act, amendments to the Articles of Incorporation require a resolution of the Stockholders Meeting. Pursuant to Section 179, Paragraph 2 of the German Stock Corporation Act, this resolution must be passed by a majority of three quarters of the voting capital represented at the meeting, unless the Articles of Incorporation provide for a different majority. However, where an amendment relates to a change in the object of the company, the Articles of Incorporation may only specify a larger majority. Section 17, Paragraph 2 of the Articles of Incorporation of Bayer AG utilizes the scope for deviation pursuant to Section 179, Paragraph 2 of the German Stock Corporation Act and provides that resolutions may be passed by a simple majority of the votes or, where a capital majority is required, by a simple majority of the capital. Provisions of the Articles of Incorporation concerning Authorized Capital I and Authorized Capital ii are entered in the commercial register of Bayer AG. With the approval of the Supervisory Board and until April 27, 2011, the Board of Management may use the Authorized Capital I to increase the capital stock by up to a total of 465 million. The issue of new shares may take place in exchange for cash and / or contributions in kind, but capital increases in exchange for contributions in kind may not exceed a total of 370 million. If the Authorized Capital I is used to issue shares in return for cash contributions, stockholders must be granted subscription rights. With the approval of the Supervisory Board and until April 26, 2012, the Board of Management is also authorized to increase the capital by up to 195 million in one or more installments by issuing shares out of the Authorized Capital ii in exchange for cash contributions. The stockholders must be granted subscription rights. However, the Board of Management is authorized, with the approval of the Supervisory Board, to exclude subscription rights for stockholders provided the capital increase out of the Authorized Capital ii does not exceed 10% of the capital stock existing at the time this authorization becomes effective or the time this authorization is exercised. Conditional capital of million, corresponding to 73,000,000 shares, exists to service the conversion rights under a mandatory convertible bond issued by Bayer Capital Corporation B.V., Netherlands, on April 6, 2006 and maturing on June 1, The Annual Stockholders Meeting on April 25, 2008 adopted two resolutions creating conditional capital of 195,584,000 each in

11 MANAGEMENT REPORT Information Required Under Takeover Law 9 connection with two authorizations for the issuance of bonds with warrants or convertible bonds, profit-sharing rights or profit participation bonds (collectively referred to as bonds ) with a total face value of 6 billion. The Board of Management may, with the consent of the Supervisory Board, exclude the subscription rights that in principle are granted to stockholders for such bonds provided, among other things, that the proportionate amount of the shares covered by such subscription rights does not exceed 10% of the capital stock. Any other shares issued without granting subscription rights to the stockholders in direct or analogous application of Section 186, Paragraph 3, Sentence 4 of the Stock Corporations Act shall be credited against this 10% limit. Further, the Annual Stockholders Meeting on April 25, 2008 authorized the Board of Management to purchase and sell company shares representing up to 10% of the capital stock. This authorization expires on October 24, A material agreement entered into by Bayer AG that is subject to the condition precedent of a change of control pertains to the 7 billion syndicated loan granted to Bayer AG on March 23, This agreement contains provisions entitling the banks participating in the syndication to terminate the agreement in the event of a change of control and demand repayment of any outstanding sums. The loan was valued at 1.25 billion as of December 31, 2008, unchanged from the previous year. There is also an undrawn 3.5 billion syndicated credit facility, arranged by Bayer AG and its u.s. subsidiary Bayer Corporation on March 31, 2005, that is available until The participating banks are entitled to terminate the credit facility in the event of a change in control at Bayer and demand repayment of any loans that may have been granted under this facility up to that time. Similarly, the aforementioned 2.3 billion mandatory convertible bond issued by Bayer Capital Corporation B.V., Netherlands, on April 6, 2006, which is secured by a subordinated guarantee from Bayer AG, also contains a change of control clause. Under Section 6.5 of the conditions of issue, in the event of a takeover offer pursuant to Section 29, Paragraph 1 of the German Securities Acquisition and Takeover Act (WpÜG) or a mandatory offer, pursuant to Section 35, Paragraph 1 of that Act, bondholders shall be entitled to exercise their conversion rights. If they do so, they will receive Bayer AG shares in accordance with the applicable conversion ratio. Finally, the terms of the 3.8 billion (as of December 31, 2008) in notes issued by Bayer in the years 2006 to 2008 under its multicurrency European Medium Term Note program also contain a change-of-control clause. Holders of these notes have the right to demand the redemption of their notes by Bayer AG in the event of a change of control if Bayer AG s credit rating is downgraded within 120 days after such change of control becomes effective. In the event of a takeover offer for Bayer AG, the following agreements exist for members of the Board of Management whose service contracts were concluded prior to the entry into force of the amendments to the German Corporate Governance Code in June 2008: The severance indemnity clause for the members of the Group Management Board described in the Compensation Report is currently supplemented by a change-of-control clause which, like the severance indemnity clause, only takes effect if a change of control results in the termination of a Group Management Board member s service contract and his leaving the Bayer Group prior to his 60th birthday. The potential benefits are the same as under the severance indemnity clause. This clause is now obsolescent and of only limited significance. The Supervisory Board has decided to follow the recommendation of the German Corporate Governance Code, as amended in June 2008, and limit severance payments under new service contracts. In the case of the only Board of Management member to have his contract renewed since then, it was contractually agreed during the second half of 2008 that payment claims can only arise in the event of premature contract termination by the company without cause and that their amount is limited. Such payments, including ancillary benefits, are limited to the value of two years compensation (severance payment cap) and may not compensate more than the remaining term of the contract. The severance payment cap is to be calculated on the basis of the total compensation (fixed salary plus target value of the short-term incentive) for the previous year and, if appropriate, also the expected total compensation for the current year. Payments in the event of premature contract termination due to a change of control may not exceed 150% of the severance payment cap.

12 10 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Corporate Governance Report* * This Corporate Governance Report also constitutes the report pursuant to Section 3.10 of the German Corporate Governance Code; it does not form part of the audited Management Report. DECLARATION BY THE BOARD OF MANAGEMENT AND THE SUPERVISORY BOARD OF BAYER AG concerning the German Corporate Governance Code (June 6, 2008 version) pursuant to Section 161 of the German Stock Corporation Act * Under Section 161 of the German Stock Corporation Act, the Board of Management and the Supervisory Board of Bayer AG are required to issue an annual declaration that the company has been, and is, in compliance with the recommendations of the Government Commission on the German Corporate Governance Code as published by the Federal Ministry of Justice in the official section of the electronic Federal Gazette (Bundesanzeiger), or to advise of any recommendations that have not been, or are not being, applied. The declaration pursuant to Section 161 of the Stock Corporation Act shall be available to shareholders at all times. An annual declaration was last issued in December With respect to the past, the following declaration refers to the June 14, 2007 version of the Code. With respect to present and future corporate governance practices at Bayer AG, the following declaration refers to the recommendations in the June 6, 2008 version of the Code. The Board of Management and the Supervisory Board of Bayer AG hereby declare that the company is in compliance with the recommendations of the Government Commission on the German Corporate Governance Code as published by the Federal Ministry of Justice in the official section of the electronic Federal Gazette and has been in compliance since issuance of the last declaration of conformity in December Leverkusen, December 2008 For the Board of Management For the Supervisory Board WENNING KÜHN DR. SCHNEIDER * This is an English translation of a German document. The German document is the official and controlling version, and this English translation in no event modifies, interprets or limits the official German version. BAYER AGAIN IN COMPLIANCE WITH ALL RECOMMENDATIONS OF THE CORPORATE GOVERNANCE CODE Bayer has always placed great importance on responsible corporate governance and will continue to do so. Last year the company was again able to renew its declaration that it is in full compliance with the recommendations of the German Corporate Governance Code. In 2008 the Board of Management and Supervisory Board again addressed the question of compliance with the Corporate Governance Code, particularly in light of the new recommendations included in the amended version of the Code published on June 6, The resulting declaration of conformity, reproduced above was published in December 2008 and posted on Bayer s website along with previous declarations.

13 MANAGEMENT REPORT Corporate Governance Report 11 DUTIES AND ACTIVITIES OF THE BOARD OF MANAGEMENT Bayer AG is a strategic management holding company, run by its Board of Management on the Board s own responsibility with the goal of sustainably increasing the company s enterprise value and achieving defined corporate objectives. The Board of Management performs its tasks according to the law, the articles of incorporation and the Board s rules of procedure, and works with the company s other governance bodies in a spirit of trust. The Board of Management defines the long-term goals and the strategies for the Group, its subgroups and its service companies, and sets forth the principles and directives for the resulting corporate policies. It coordinates and monitors the most important activities, defines the portfolio, develops and deploys managerial staff, allocates resources and decides on the Group s financial steering and reporting. The members of the Board of Management bear joint responsibility for running the business as a whole. However, the individual members manage the areas assigned to them on their own responsibility within the framework of the decisions made by the entire Board. The allocation of duties among the four members of the Board of Management is defined in a written schedule. The entire Board of Management makes decisions on all matters of fundamental importance and in cases where a decision of the entire Board is prescribed by law or otherwise mandatory. The rules of procedure of the Board of Management contain a list of topics that must be dealt with and resolved by the entire Board. Meetings of the Board of Management are held regularly. They are convened by the Chairman of the Board of Management. Any member of the Board of Management may also demand that a meeting be held. The Board of Management makes decisions by a simple majority of the votes cast, except where unanimity is required by law. In the event of a tie vote, the Chairman has the deciding vote. According to the Board of Management s rules of procedure and schedule of duties, the Chairman bears particular responsibility for leading and coordinating the Board s work. He represents the company and the Group in dealings with third parties and the workforce on matters relating to more than one part of the company or the Group. He also bears special responsibility for certain departments of the Corporate Center and their fields of activity. The schedule of duties also assigns particular areas of specialist responsibility to the other three members of the Board of Management, who are respectively responsible for Strategy and Human Resources; Finance; and Innovation, Technology and Environment. Each of these members also represents certain geographical regions. No committees of the Board of Management have been set up in view of the small number of members and the role of Bayer AG as a strategic management holding company. SUPERVISORY BOARD: OVERSIGHT AND CONTROL FUNCTIONS The role of the 20-member Supervisory Board is to oversee and advise the Board of Management. Under the German Codetermination Act, half the members of the Supervisory Board are elected by the stockholders, and half by the company s employees. The Supervisory Board is directly involved in decisions on matters of fundamental importance to the company, regularly conferring with the Board of Management on the company s strategic alignment and the implementation status of the business strategy. The Chairman of the Supervisory Board coordinates its work and presides over the meetings. Through regular discussions with the Board of Management, the Supervisory Board is kept constantly informed of business policy, corporate planning and strategy. The Supervisory Board approves the annual budget and financial framework. It also approves the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group, taking into account the reports by the auditor.

14 12 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 COMMITTEES OF THE SUPERVISORY BOARD The Supervisory Board currently has the following committees: Presidial Committee: This comprises two stockholder representatives and two employee representatives. The Presidial Committee serves primarily as the mediation committee pursuant to the German Codetermination Act. It has the task of submitting proposals to the Supervisory Board on the appointment of members of the Board of Management if the necessary two-thirds majority is not achieved in the first vote at a plenary meeting. Certain decision-making powers relating to capital measures have also been delegated to this committee. Audit Committee: The Audit Committee, comprising three stockholder representatives and three employee representatives, meets regularly four times a year. Its tasks include examining the company s financial reporting along with the financial statements of Bayer AG, the consolidated financial statements of the Bayer Group and the management reports of Bayer AG and the Bayer Group, all of which are prepared by the Board of Management. It also examines the proposal for distribution of the balance sheet profit of Bayer AG and the interim financial statements and management reports of the Bayer Group. On the basis of the auditor s report on the audit of the financial statements of Bayer AG, the consolidated financial statements of the Bayer Group and the management reports of Bayer AG and the Bayer Group, the Audit Committee develops proposals concerning the approval of the statements by the full Supervisory Board. The Audit Committee is also responsible for the company s relationship with the external auditor. The Audit Committee prepares the awarding of the audit contract to the audit firm appointed by the Annual Stockholders Meeting, suggests areas of focus for the audit and determines the auditor s remuneration. It also monitors the independence, qualifications, rotation and efficiency of the auditor. In addition, the Audit Committee oversees the company s internal control system along with the procedures used to identify, track and manage risk. It also bears responsibility for corporate compliance issues and discusses developments in this area at each of its meetings. The internal Corporate Auditing department reports regularly to the Audit Committee. Human Resources Committee: On this committee, too, there is parity of representation between stockholders and employees. It consists of the Chairman of the Supervisory Board, one other stockholder representative and two employee representatives. The Human Resources Committee prepares the personnel decisions of the full Supervisory Board, which resolves on appointments or dismissals of members of the Board of Management. The Human Resources Committee resolves on behalf of the Supervisory Board on the service contracts of the members of the Board of Management. However, in accordance with a recommendation of the Corporate Governance Code issued in 2008, the compensation system for the Board of Management and the principal provisions of their contracts are the responsibility of the full Supervisory Board. The Human Resources Committee also discusses the long-term succession planning for the Board of Management. Nominations Committee: This committee carries out preparatory work when an election of stockholder representatives to the Supervisory Board is to be held. It suggests suitable candidates for the Supervisory Board to propose to the Annual Stockholders Meeting for election. The Nominations Committee comprises the Chairman of the Supervisory Board and the other stockholder representative on the Presidial Committee. Detailed information on the work of the Supervisory Board and its committees is provided in the Report of the Supervisory Board. INFORMATION ON THE REMUNERATION OF THE BOARD OF MANAGEMENT AND THE SUPERVISORY BOARD (COMPENSATION REPORT) To avoid dual presentation of the data, this Corporate Governance Report explicitly adopts, and makes reference to, the information given in the Compensation Report beginning on page 15. This also applies to the description of the stock-based compensation for the Board of Management (see page 16) and employees (see Note [10] to the financial statements).

15 MANAGEMENT REPORT Corporate Governance Report 13 PERSONAL LIABILITY IN PLACE OF A DEDUCTIBLE The company meets the recommendation in the German Corporate Governance Code regarding deductibles for any Directors & Officers (d&o) liability insurance by obtaining personal declarations from each member of the Board of Management and Supervisory Board to the effect that, should they cause damage to the company or third parties through gross negligence (as defined by German law) in the performance of their duties, they undertake to pay for such damage up to the equivalent of half their total annual remuneration for the year in which such damage occurs. The members of the Supervisory Board undertake to pay for such damage, if caused by them, up to the equivalent of the variable portion of their respective annual remuneration as Supervisory Board members for the relevant year. There is no insurance coverage for intentional breach of duty. DISCLOSURE OF SECURITIES TRANSACTIONS BY MEMBERS OF THE SUPERVISORY BOARD AND BOARD OF MANAGEMENT To comply with Section 15 A of the German Securities Trading Act, members of the Board of Management and Supervisory Board and their close relatives are required to disclose all transactions involving the purchase or sale of Bayer stock where such transactions total 5,000 or more in a calendar year. Bayer publishes details of such transactions immediately on its website and also notifies the German Financial Supervisory Authority accordingly. This information is provided to the company register for archiving. The following transactions were reported to Bayer AG in 2008: Willy Beumann, Supervisory Board Date / Place Security / Right ISIN Transaction Price / Currency Quantity Total transaction volume May 13, 2008 / Xetra Shares DE Purchase , Dec. 22, 2008 / Over-the-counter Shares DE Purchase , Information filed with the company by members of the Board of Management and Supervisory Board shows that, on the closing date for the financial statements, their total holdings of Bayer AG stock or related financial instruments were equivalent to less than 1% of the issued stock. SYSTEMATIC MONITORING OF ALL BUSINESS ACTIVITIES Bayer has a control system in place enabling it to identify any business or financial risks at an early stage and take appropriate action to manage them. This control system is designed to ensure timely and accurate accounting for all business processes and the constant availability of reliable data on the company s financial position. When acquisitions are made, we aim to bring the acquired units internal control systems into line with those of the Bayer Group as quickly as possible. However, the control and risk management system cannot provide absolute protection against losses arising from business risks or fraudulent actions. CORPORATE COMPLIANCE Our corporate activity is governed by national and local laws and statutes that place a range of obligations on the Bayer Group and its employees throughout the world. Bayer manages its business responsibly in compliance with the statutory and regulatory requirements of the countries in which it operates.

16 14 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 The Board of Management has also issued internal directives to achieve this goal. These are summarized in the Corporate Compliance Policy the revised version of the former Corporate Compliance Program which contains binding rules for fair competition, integrity in business dealings and adherence to the principle of sustainable development. To avoid conflicts of interest, every employee is required to separate corporate and private interests. The Corporate Compliance Policy also lays down clear rules for the establishment of fair and respectful working conditions and the responsible handling of insider information. Compliance Committees have been established for Bayer AG, the HealthCare, CropScience and MaterialScience subgroups and the service companies Bayer Business Services, Bayer Technology Services and Currenta. The role of these committees is to initiate systematic, business-specific training programs and oversee their implementation in line with the Corporate Compliance Policy. They are also responsible for investigating any suspected violations of the Corporate Compliance Policy and, if necessary, taking remedial action. All Compliance Committees report at least once a year to a coordination committee chaired by the Chief Financial Officer. The Group Compliance Officer and the Head of Corporate Auditing regularly report to the Audit Committee of the Supervisory Board on any compliance violations. All Bayer employees are required to immediately report any violations of the Corporate Compliance Policy. Special telephone hotlines have been set up in all countries to allow this to be done anonymously. By far the majority of these hotlines connect callers to specialist law firms retained by us. Starting in the fall of 2008, the revised Corporate Compliance Policy was introduced worldwide using the slogan Compliance w.i.n.s. (Worldwide Integrity is Necessary for Success). A global communications campaign was launched to illustrate how compliance contributes to long-term success for the company as a whole and for each employee. The message to employees is: Compliance makes everyone a winner. COMMON VALUES AND LEADERSHIP PRINCIPLES To supplement the Corporate Compliance Policy, Bayer has drawn up a Group mission statement setting out the principles underlying Bayer s corporate strategy. It outlines our corporate philosophy and the framework for our business activity to stockholders, customers, employees and the general public. Common values and leadership principles are considered essential for all employees in their daily work. The values include a will to succeed; a passion for our stakeholders; integrity, openness and honesty; respect for people and nature; and the sustainability of our actions. The assessment of managers performance on the basis of defined leadership principles helps to ensure adherence to these values throughout the enterprise. DETAILED REPORTING To maximize transparency, we provide regular and timely information on the company s position and significant changes in business activities for stockholders, financial analysts, stockholders associations, the media and the general public. Bayer complies with the recommendations of the Corporate Governance Code by publishing reports on business trends, financial position, results of operations and related risks four times a year. In line with statutory requirements, the members of the company s Board of Management provide an assurance that, to the best of their knowledge, the annual financial statements and management report of Bayer AG and the consolidated financial statements and management report of the Bayer Group provide a true and fair view.

17 MANAGEMENT REPORT Compensation Report 15 The annual financial statements of Bayer AG and the consolidated financial statements of the Bayer Group are published within 90 days following the end of each fiscal year. During the fiscal year, stockholders and other interested parties are kept informed about the company s performance through the half-year financial report and additional interim reports as of the end of the first and third quarters. The half-year financial report is voluntarily subjected to an audit review by the auditor, whose appointment by the Annual Stockholders Meeting also relates specifically to this audit review. Bayer also provides information at news conferences and analysts meetings. In addition, the company uses the Internet as a platform for timely disclosure of information, including details of the dates of major publications and events, such as the annual and interim reports or the Annual Stockholders Meeting. In line with the principle of fair disclosure, we provide the same information to all stockholders and other principal target groups. All significant new facts are disclosed immediately to the general public. Stockholders also have immediate access to the information that Bayer publishes locally in compliance with the stock market regulations of various countries. In addition to our regular reporting, we issue ad-hoc statements on developments that otherwise might not become publicly known but have the potential to materially affect the price of Bayer stock. Compensation Report COMPENSATION OF THE BOARD OF MANAGEMENT The compensation of the Board of Management basically comprises four components: a fixed annual salary, a short-term incentive award on a yearly basis in relation to a target amount, a long-term incentive award for a three-year period in relation to a target amount, and a company pension plan conferring pension entitlements that increase with years of service. Remuneration in kind and other benefits are also provided, such as the use of a company car for private purposes or reimbursement of the cost of health screening examinations. The fixed salary consists of two parts: a base salary and a fixed supplement. The short-term incentive award for 2008 is calculated partly according to the Group s ebitda margin before special items, and partly according to the weighted average target attainment of the HealthCare, CropScience and MaterialScience subgroups. The latter is based mainly on the subgroups target attainment measured by ebitda before special items as well as on a qualitative appraisal in relation to the market and competitors. The short-term incentive award for 2007 also contained a one-time special individual performance bonus granted in connection with the structural changes in the Bayer Group. The directly effected remuneration (non-performance-related remuneration and short-term incentive) of members of the Board of Management in 2008 amounted to 8,813 thousand (2007: 8,883 thousand), comprising 2,105 thousand (2007: 1,986 thousand) in base salaries, 1,042 thousand (2007: 983 thousand) in fixed supplements and 5,498 thousand (2007: 5,769 thousand) in short-term incentive awards to be paid out in 2009 as well as 168 thousand (2007: 145 thousand) in remuneration in kind and other benefits. Remuneration in kind mainly consists of values assigned to remuneration in kind and other benefits in accordance with German taxation guidelines.

18 16 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 The members of the Board of Management participate in the long-term stock-based compensation program Aspire I (annual tranches 2005 through 2008). Under this program, awards are paid out provided that the performance of Bayer stock (both in absolute terms and relative to the euro stoxx 50 sm benchmark index) meets defined criteria over a three-year period. Further details of this program are provided in Note [10] ( Stock-based compensation ) to the financial statements. The fair value of the stock-based compensation newly granted in 2008 as of its grant date is included in the calculation of total remuneration (see table below), although the award entitlement was only partially vested as of the balance sheet date. The following table shows the remuneration components of the individual members of the Board of Management in Werner Wenning Klaus Kühn Wolfgang Plischke Richard Pott Total thousand thousand thousand thousand thousand Base salary , ,986 Fixed supplement , Remuneration in kind and other benefits Non-performance-related remuneration , , , ,114 Short-term incentive ,105 1,305 1,044 1,044 5, ,169 1,380 1,110 1,110 5,769 Directly effected remuneration ,304 2,114 1,700 1,695 8, ,294 2,145 1,718 1,726 8,883 Fair value of newly granted stock-based compensation as of grant date Aggregate benefits ,656 2,354 1,891 1,886 9, ,593 2,348 1,880 1,888 9,709 The award entitlements earned in 2008 both from the 2008 tranche and from previous years tranches on which the entitlements were only partially vested are shown separately in the following table along with the changes in the value of entitlements from previous years tranches based on the performance of Bayer stock in The fair value of the award entitlement already earned in 2008 from the 2008 tranche is included under Stock-based compensation entitlements earned in the respective year. Since certain components of the award entitlements are included in both tables, the figures in the following and the preceding table should not be added together. Werner Wenning Klaus Kühn Wolfgang Plischke Richard Pott Total thousand thousand thousand thousand thousand Long-term incentive (stock-based compensation ,509 entitlements earned in the respective year) , ,839 Change in value of existing entitlements 2008 (195) (135) (97) (106) (533) ,993

19 MANAGEMENT REPORT Compensation Report 17 The current members of the Board of Management are generally entitled to receive a pension from the age of 60 in an annual amount equal to at least 30% of the last yearly fixed salary. No such pensions are currently being paid. This percentage increases depending on years of service as a Board of Management member and, according to the inception of the respective service contract, is capped between 60 and 80%. We refer to the maximum such percentage a member of the Board of Management can reach as his final target pension level. Pension provisions for the current members of the Board of Management amounted to 34,339 thousand (2007: 25,836 thousand). The current service cost for the pension entitlements of the members of the Board of Management was as follows: Werner Wenning Klaus Kühn Wolfgang Plischke Richard Pott Gesamt thousand thousand thousand thousand thousand Current service cost for pension entitlements earned in the respective year , , ,690 For active Board of Management members whose service contracts were concluded prior to the entry into force of the amendments to the German Corporate Governance Code in June 2008, a general severance indemnity clause applies if the service contract is terminated at the company s instigation prior to a member s 60th birthday. The basic principles according to this clause are as follows: If a member of the Board of Management is not offered a new service contract upon expiration of his existing service contract because he is not reappointed to the Board of Management, or if the member is removed from the Board of Management prematurely during the term of his contract in the absence of grounds for termination without notice, he will receive a monthly bridging allowance amounting to 80% of his last monthly fixed salary for a period of 60 months from the date of expiration of his service contract less the period for which he was released from his duties on full pay or otherwise compensated. (If he were removed during the term of his contract, he would also receive the payment due for the rest of the term, though this would be reduced to the amount of his annual fixed salary plus the target amount for the short-term incentive payment for at least twelve months). His earnings from any new employment elsewhere would be offset against the bridging allowance. In the case of premature termination at the instigation of the company, further years of service might be credited under certain circumstances for the purpose of computing his Board of Management pension entitlement, though not beyond his 60th birthday. This clause is now obsolescent and of only limited significance. The Supervisory Board has decided to follow the recommendation of the German Corporate Governance Code, as amended in June 2008, and limit severance payments under new service contracts. In the case of the only Board of Management member to have his contract renewed since then, it was contractually agreed during the second half of 2008 that payment claims can only arise in the event of premature contract termination by the company without cause and that their amount is limited. Such payments, including ancillary benefits, are limited to the value of two years compensation (severance payment cap) and may not compensate more than the remaining term of the contract. The severance payment cap is to be calculated on the basis of the total compensation (fixed salary plus target value of the short-term incentive) for the previous year and, if appropriate, also the expected total compensation for the current year. Special supplementary arrangements apply in the event of a change of control, see page 10. There were no loans to members of the Board of Management outstanding as of December 31, 2008, nor any repayments of such loans during the year.

20 18 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 We currently pay former and retired members of the Board of Management a monthly pension equal to 80% of the last monthly base salary received while in service. The pensions paid to former members of the Board of Management or their widows are reassessed annually as of January 1, 2009 and adjusted taking into account the development of consumer prices. These benefits are in addition to any amounts they receive under previous employee pension arrangements. Pension payments to retired members of the Board of Management and their surviving dependents totaled 11,697 thousand (2007: 10,997 thousand). Pension provisions for former members of the Board of Management and their surviving dependents amounted to 121,557 thousand (2007: 101,144 thousand). COMPENSATION OF THE SUPERVISORY BOARD The compensation of the Supervisory Board is determined according to the relevant provisions of the Articles of Incorporation, which provisions were approved by the Annual Stockholders Meeting on April 29, This provides that, in addition to reimbursement of their expenses, each member of the Supervisory Board receives fixed annual remuneration of 60,000 and a variable annual remuneration component. The variable remuneration component is based on corporate performance in terms of the gross cash flow reported in the consolidated financial statements of the Bayer Group for the respective fiscal year. The members of the Supervisory Board receive 2,000 for every 50 million or part thereof by which the gross cash flow exceeds 3.1 billion, but the variable component for each member may not exceed 30,000. In accordance with the provisions of the German Corporate Governance Code, additional remuneration is paid to the Chairman and Vice Chairman of the Supervisory Board and for chairing and membership of committees. The Chairman of the Supervisory Board receives three times the basic remuneration, while the Vice Chairman receives one-and-a-half times the basic remuneration. Members of the Supervisory Board who are also members of a committee receive an additional one quarter of the amount, with those chairing a committee receiving a further quarter. However, no member of the Supervisory Board may receive total remuneration exceeding three times the basic remuneration. It has been agreed that no additional remuneration shall be paid for membership of the Nominations Committee. If changes are made to the Supervisory Board and its committees during the fiscal year, members receive remuneration on a pro-rated basis. No member of the Supervisory Board received compensation or any other benefits for personally performed services such as consultancy or agency services. The company has purchased insurance for the members of the Supervisory Board to cover their personal liability arising from their service on the Supervisory Board. Remuneration of the Members of the Supervisory Board Fixed Remuneration Variable Remuneration Total thousand thousand thousand Dr. Paul Achleitner Willy Beumann Dr. Clemens Börsig Karl-Josef Ellrich Dr.-Ing. Thomas Fischer Peter Hausmann Prof. Dr.-Ing. e.h. Hans-Olaf Henkel Reiner Hoffmann Dr. rer. pol. Klaus Kleinfeld André Krejcik Petra Kronen Dr. rer. nat. Helmut Panke Hubertus Schmoldt Dr. Manfred Schneider (Chairman) Dr.-Ing. Ekkehard D. Schulz Dr. Klaus Sturany Dipl.-Ing. Dr.-Ing. e.h. Jürgen Weber Thomas de Win (Vice Chairman) Prof. Dr. Dr. h.c. Ernst-Ludwig Winnacker Oliver Zühlke

21 MANAGEMENT REPORT Risk Report 19 In addition to their remuneration as members of the Supervisory Board, those employee representatives who are employees of Bayer Group companies receive compensation unrelated to their service on the Supervisory Board. The total amount of such compensation was 591 thousand (2007: 687 thousand). There were no loans to members of the Supervisory Board outstanding as of December 31, 2008, nor any repayments of such loans during the year. Risk Report RISK MANAGEMENT Business operations necessarily involve opportunities and risks. Effective risk management is therefore a key factor in sustainably safeguarding a company s value. The management of opportunities and risks in the Bayer Group, and thus at Bayer AG as the holding company, is an integral part of the Group-wide corporate governance system, not the task of one particular organizational unit. Key elements of the risk management system are the planning and controlling process, Group regulations and the reporting system. In regular conferences the company s results and its potential opportunities and risks are discussed, and targets and necessary actions are agreed upon. The principles of the Bayer Group s risk management system are set forth in a Group directive. The units of the holding company have nominated persons responsible for risk management at the upper managerial level and risk management coordinators to ensure that an effective system for early identification of risks is implemented and maintained. Corporate Auditing is responsible for coordinating the identification and documentation of risk areas throughout the Group, enhancing the risk management system and monitoring its effectiveness at regular intervals. In addition, during the year-end audit the external auditor issues an opinion on the risk management system and informs the Group Management Board and the Supervisory Board of the outcomes of these evaluations. These outcomes are taken into account in the continuing enhancement of our risk management system. RISK EXPOSURE As the parent of a global group of companies with a diverse business portfolio, Bayer AG is exposed to numerous risks. We have purchased insurance coverage where it is available on economically acceptable terms in order to minimize related financial impacts. The level of this coverage is continuously re-examined. Significant risks for Bayer AG are outlined in the following sections. The order in which the risks are listed is not intended to imply any assessment as to the likelihood of their materialization or the extent of any resulting damages. LEGAL RISKS We are exposed to numerous legal risks from legal disputes or proceedings to which we are currently a party or which could arise in the future, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax assessments and environmental matters. The outcome of any current or future proceedings cannot be predicted with certainty. It is therefore possible that legal or regulatory judgments could give rise to expenses that are not covered, or not fully covered, by insurers compensation payments and could significantly affect our revenues and earnings. Legal proceedings currently considered to involve material risks are outlined below. The legal proceedings referred to do not necessarily represent an exhaustive list. The risks described are those to which Bayer AG is exposed either directly, or indirectly through subsidiaries with which it has profit and loss transfer agreements. Further legal risks existing in the Bayer Group are described in the notes to the consolidated financial statements of the Bayer Group.

22 20 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 BAYER HEALTHCARE PRODUCT-RELATED LITIGATION Lipobay / Baycol: As of February 2, 2009, approximately 236 Lipobay / Baycol cases, 200 of them in the United States, remain pending against Bayer worldwide, claiming economic loss, medical monitoring, and personal injury. We are currently aware of fewer than five pending cases in the United States that in our opinion meet our criteria for potential settlement. The class-action lawsuit which had been filed by shareholders in connection with Lipobay / Baycol has been resolved for a payment by Bayer of a total of us$ 18.5 million. Magnevist : As of February 2, 2009, Bayer has been served in a total of 241 lawsuits in the United States involving the gadolinium-based contrast agent Magnevist. Three other manufacturers of gadolinium-based contrast agents in the United States also have been named party to the same or similar lawsuits. Additional cases are anticipated. In the lawsuits, plaintiffs allege that patients developed nephrogenic systemic fibrosis (nsf) as a result of the use of Magnevist during medical imaging procedures. nsf is a rare, severe condition that can be debilitating and in some cases fatal. Plaintiffs seek compensatory and punitive damages under theories of strict liability and negligence and / or breach of warranty, claiming that the product is defective and unreasonably dangerous, that Bayer knew or should have known of the risks associated with Magnevist, and has failed to disclose or adequately warn its users. All cases pending in federal courts have been consolidated in a multi-district litigation (mdl) proceeding for common pre-trial management. Bayer believes that it has meritorious defenses and intends to defend itself vigorously. Based on the information currently available, Bayer has taken accounting measures for anticipated defense costs. Trasylol (aprotinin) is a drug approved for use in managing bleeding in patients undergoing coronary artery bypass graft surgery. As of February 2, 2009, there were 470 lawsuits pending in the United States served upon Bayer on behalf of persons alleging personal injuries, including renal failure and death, and economic loss from the use of Trasylol. Bayer also has been served with a class action in Canada. Plaintiffs in both the u.s. and Canadian cases seek compensatory and punitive damages, claiming that Bayer knew or should have known of these risks and is liable for having failed to disclose or adequately warn users of Trasylol. All cases pending in u.s. federal court have been consolidated in a multi-district litigation (mdl) proceeding for common pre-trial management. Additional cases are anticipated. In 2006 and 2007 observational studies reported on a possible correlation between the administration of Trasylol and severe renal dysfunction, myocardial infarction, stroke and an increase in mortality. In November 2007, Bayer temporarily suspended worldwide marketing of Trasylol after preliminary results from an independent clinical study in Canada raised concerns about a possible increased risk of mortality in patients who had received Trasylol. The marketing suspension will remain in effect until the final results from the Canadian study have been analyzed and the benefit-risk assessment for Trasylol can be re-evaluated together with the health authorities. In some countries, including the United States, Trasylol continues to be available to certain surgical patients with an established medical need. We are closely cooperating with health authorities to resolve the questions that have arisen. Bayer believes it has meritorious defenses and intends to defend itself vigorously. Based on the information currently available, Bayer has taken accounting measures for anticipated defense costs.

23 MANAGEMENT REPORT Risk Report 21 COMPETITION LAW PROCEEDINGS Cipro : 39 putative class action lawsuits and one individual lawsuit against Bayer involving the medication Cipro have been pending in the United States since The plaintiffs are suing Bayer and other companies also named as defendants, alleging that a settlement to end patent litigation reached in 1997 between Bayer and Barr Laboratories, Inc. violated antitrust regulations. The plaintiffs claim the alleged violation prevented the marketing of generic ciprofloxacin as of In particular, they are seeking triple damages under u.s. law. After the settlement with Barr the patent was the subject of a successful re-examination by the u.s. Patent and Trademark Office and of successful defenses in u.s. federal courts. It has since expired. All the actions pending in federal court were consolidated in federal district court in New York in a multidistrict litigation (mdl) proceeding. In October 2008, the Court of Appeals for the Federal Circuit in Washington d.c. affirmed the 2005 ruling of the United States District Court in New York dismissing all lawsuits filed in federal court. The recent appellate decision affirmed the dismissal of various lawsuits brought by indirect purchaser plaintiffs in federal courts. Another appeal remains pending concerning the claims brought by direct purchasers of Cipro. These claims also were dismissed by the federal district court, but the appellate court in New York has jurisdiction for the appeal of these lawsuits. Further cases are pending before various state courts. Bayer believes that it has meritorious defenses and intends to defend itself vigorously. PATENT DISPUTES Yasmin : In April 2005, Bayer filed suit against Barr Pharmaceuticals Inc. and Barr Laboratories Inc. in u.s. federal court alleging patent infringement by Barr for the intended generic version of Bayer s Yasmin oral contraceptive product in the United States. In June 2005, Barr filed its counterclaim seeking to invalidate Bayer s patent. In March 2008, the u.s. federal court invalidated Bayer s 531 patent for Yasmin. Bayer has appealed this ruling. In June 2008, Bayer and Barr Laboratories Inc. signed a supply and licensing agreement for Yasmin covering the United States. Bayer supplies Barr with a generic version of Yasmin which Barr markets solely in the United States. Barr pays Bayer a fixed percentage of the revenues from the product sold by Barr. Bayer continues to pursue its appeal of the court decision that invalidated Bayer s u.s. patent 531 for Yasmin. If Bayer prevails in its appeal, Bayer will receive a larger share of Barr s revenues from sales of its generic version of Yasmin in the United States. In March 2008 Bayer received two notices of an Abbreviated New Drug Application with a Paragraph iv certification (an anda iv ) pursuant to which Watson Laboratories Inc. and Sandoz Inc. each seek approval to market a generic version of Bayer s oral contraceptive Yasmin in the United States. Bayer has filed suit against Watson and Sandoz in u.s. federal court alleging patent infringement by Watson and Sandoz for the intended generic version of Yasmin. In reply, Sandoz has filed its answer and counterclaim alleging, among other things, the invalidity of various Bayer patents and that the agreement reached with Barr is anticompetitive and violates the Sherman Act antitrust law. yaz : In January 2007, Bayer received notice from Barr Laboratories Inc. that it has filed an anda paragraph IV application with the u.s. fda seeking approval of a generic version of Bayer s yaz oral contraceptive. In October 2007 Bayer also received notice from Watson Laboratories Inc. that it has filed an anda iv with the u.s. fda seeking approval of a generic version of yaz. In June / July 2008 Bayer further received notice from Sandoz Inc. that it has filed an anda iv with the u.s. fda seeking approval of a generic version of yaz. All three applications claim that Bayer s patents are invalid and / or that the respective generic product does not infringe them. Bayer has filed patent infringement suits against Watson and Sandoz claiming that certain of Bayer s patents have been infringed. Originally, Bayer included the 531 patent in its first suit against Watson. After the court decision in the suit against Barr regarding Yasmin, Bayer had to exclude the 531 patent from the suit against Watson. If Bayer prevails in its appeal against the court decision regarding Yasmin, Bayer will evaluate its options to use the 531 patent. However, regardless of these patent disputes, Bayer retains data exclusivity for yaz as an oral contraceptive in the u.s. until March 16, No generic manufacturer can lawfully market a generic version of yaz for an oral contraceptive indication in the United States until after March 16, 2009.

24 22 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 In June 2008, Bayer and Barr agreed that Bayer will grant Barr a license to market a generic version of yaz in the United States starting July Bayer will supply Barr with the product for this purpose. Should Bayer lose patent lawsuits in the United States against other companies concerning yaz, at that time Bayer will begin supplying the product to Barr and Barr will begin marketing generic yaz in the United States. Barr will pay Bayer a fixed percentage of the revenues from the product sold by Barr. Bayer believes it has meritorious defenses in these patent disputes and intends to defend itself vigorously. FURTHER LEGAL PROCEEDINGS Bayer Schering Pharma AG former shareholder litigation: In September 2008, the squeeze-out of the former minority shareholders of Bayer Schering Pharma AG became effective. As usual in such cases, several shareholders have initiated special court proceedings to review the adequacy of the compensation payments made by Bayer for the transfer of the shares in the squeeze-out. The adequacy of the compensation and the guaranteed dividend paid by Bayer in connection with the Bayer Schering Pharma AG profit and loss transfer agreement made in 2006 is also being reviewed by the courts. BAYER CROPSCIENCE Proceedings involving genetically modified rice: Since August 2006, Bayer CropScience has been party to multiple lawsuits, including putative class actions, filed in u.s. federal and state courts by rice farmers and resellers. Plaintiffs allege that they have suffered economic losses after traces of genetically modified rice were identified in samples of conventional long-grain rice grown in the u.s. This is alleged to have led to various commercial damages, including a decline in the commodity price for long-grain rice, costs associated with restrictions on imports and exports, and costs to secure alternative supplies. All the actions pending in federal court were consolidated in December 2006 in federal district court in Missouri in a multidistrict litigation (mdl) proceeding. In 2008, this court denied plaintiffs request to certify a class action. Plaintiffs subsequent request for interim appeal was denied by the appellate court. In development of the genetically modified rice, field testing was conducted in cooperation with third parties, including a breeding research institute in the u.s. The genetically modified rice was never commercialized. The usda and the fda have stated that the genetically modified rice does not present a health risk and is safe for use in food and feed and for the environment. Additionally, in October 2007, the usda released its report concerning its investigation into how the genetically modified rice entered the commercial rice supply. The usda was unable to determine a cause and indicated it would not pursue any enforcement actions against Bayer CropScience or any other party. Bayer believes it has meritorious defenses in these actions and intends to continue to defend itself vigorously. Bayer has taken accounting measures for anticipated defense costs based on the information currently available.

25 MANAGEMENT REPORT Risk Report 23 BAYER MATERIALSCIENCE Antitrust proceedings in connection with polymers: All proceedings by authorities reported in the past relating to rubber, polyester polyols, polyether polyols, urethanes, urethane chemicals and other primary products for urethane end products in which fines were expected have since been terminated. In addition, subject to few exceptions, all civil law suits for damages relating to proceedings by authorities in North America have been settled. Bayer no longer considers the remaining risks to be material. In Europe, the European Commission imposed fines upon Bayer or granted Bayer full amnesty in antitrust investigations concerning the products rubber chemicals, butadiene rubber, emulsion styrene butadiene rubber, polychloroprene rubber and nitrile butadiene rubber. However, civil law lawsuits for damages have been filed. In February 2008, a group of plaintiffs who are primarily producers of tires brought an action for damages before the High Court of Justice in the United Kingdom against Bayer and other producers of butadiene rubber and emulsion styrene butadiene rubber based on alleged violations of antitrust law. In June 2008, Bayer filed its defense with the High Court. Due to a parallel proceeding initiated before a court in Milan, to which Bayer joined as intervenient, the question arises as to which jurisdiction is competent to judge the case. In August 2008, The Goodyear Tire & Rubber Company filed an amended complaint in a u.s. federal court alleging that Bayer and other producers of butadiene rubber and styrene butadiene rubber violated antitrust law. The complaint seeks, among other things, treble damages. In September 2008, Bayer filed a motion asking the court to dismiss Goodyear s complaint for failure to state a cause of action. A class action alleging antitrust violations in connection with certain rubber products was filed in Australia in While the Australian action was struck out in October 2008, the plaintiffs filed an amended claim in November This proceeding is still at a very early stage. Bayer is defending itself in the European, u.s. and Australian litigation. The financial risk from these proceedings cannot currently be quantified. Therefore, Bayer is unable to take any accounting measures in this regard. It remains possible that further civil antitrust lawsuits for damages may be filed concerning these products. LIABILITY CONSIDERATIONS FOLLOWING THE LANXESS SPIN-OFF The liability situation following the spin-off of the Lanxess subgroup is governed by both statutory and contractual provisions. Under the German Transformation Act, all entities that are parties to a spin-off are jointly and severally liable for obligations of the transferor entity that are established prior to the spin-off date. Bayer AG and Lanxess AG are thus jointly and severally liable for a time period of five years for all obligations of Bayer AG that existed on January 28, OVERALL BUSINESS RISKS Pharmaceutical product prices are subject to regulatory controls in many markets. Some governments intervene directly in setting prices. In addition, in some markets major purchasers of pharmaceutical products have the economic power to exert substantial pressure on prices. Price controls, as well as price pressure from generic manufacturers as a result of government reimbursement systems favoring less expensive generic pharmaceuticals over brand-name products, diminish earnings from our pharmaceutical products and could potentially render the market introduction of a new product unprofitable. We expect the current extent of regulatory controls and market pressures on pricing to persist or increase. Regulatory changes are continuously monitored, especially in our key markets. If necessary, we adjust our business plans according to the significance of governmental intervention.

26 24 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Some of our products, particularly medicines, are marketed by third parties. The success of such products therefore depends on the quality of these partners marketing and sales efforts. Sales of the Bayer Group are subject to seasonal fluctuations. This applies particularly in the CropScience business, which is affected by factors such as weather conditions. The performance of our MaterialScience subgroup is affected by cyclicality in customer industries. A downturn in the business cycle, characterized by weak demand especially from key customers and overcapacities, may lead to price pressure and more intense competition. Expectations of growth, especially in Asian economies, encourage producers to increase their production capacities. Future growth in demand may not be sufficient to absorb those capacity additions without significant downward pressure on prices. The early identification of trends in the economical or regulatory environment and active portfolio management are important elements of our business management. Our analyses of the global economy and forecasts of medium-term economic development are documented in detail on a quarterly basis and used to support operational business planning. Where it appears strategically advantageous we may acquire a company or part of a company and combine it with our existing business. The amount of goodwill and other intangible assets reflected in the consolidated balance sheet of the Bayer Group has increased significantly in recent years. Failure to successfully integrate a newly acquired business or unexpectedly high integration costs could jeopardize the achievement of quantitative or qualitative targets, such as synergies, and adversely impact earnings. The integration processes associated with our acquisitions are steered by integration teams. Appropriate resources are provided to support the integration processes. PRODUCT DEVELOPMENT RISKS The Bayer Group s competitive position, sales and earnings depend significantly on the development of commercially viable new products and production technologies. We therefore devote substantial resources to research and development. Because of the lengthy development processes, technological challenges, regulatory requirements and intense competition, we cannot assure that all of the products we will develop in the future or are currently developing will actually reach the market and achieve commercial success as scheduled or at all. Furthermore, adverse effects of our products that may be discovered after regulatory approval or registration despite thorough prior testing may lead to a partial or complete withdrawal from the market, due either to regulatory actions or our voluntary decision to stop marketing a product. Also litigations and associated claims for damages due to negative effects of our products may materially diminish our net income. To ensure an effective and efficient use of resources, the Bayer Group has implemented an organizational structure and process organization comprising functional departments, working groups and reporting systems to monitor internal research and development projects. REGULATORY RISKS Our life science businesses, in particular, are subject to strict regulatory regimes relating to the testing, manufacturing and marketing of many of our products. In some countries regulatory controls have become increasingly demanding. We expect this trend to continue, particularly in the United States and the European Union. Increasing regulatory requirements, such as those governing clinical or (eco-)toxicological studies, may increase product development costs and / or delay product (re-)registration. To counter risks arising from legal or other requirements, we make our decisions and engineer our business processes on the basis of comprehensive legal advice provided both by our own experts and by acknowledged external specialists. Projects have been initiated to coordinate the implementation of new regulatory controls and mitigate any negative implications for the business.

27 MANAGEMENT REPORT Risk Report 25 PATENT RISKS A large proportion of our products, mainly in our life sciences businesses, is protected by patents. We are currently involved in lawsuits to enforce patent rights in our products. Generic manufacturers and others attempt to contest patents prior to their expiration. When a patent defense is unsuccessful, or if one of our patents expires, our prices are likely to come under pressure because of increased competition from generic products entering the market. Details of related litigation are provided as part of the description of legal risks. In some areas of activity we may also be required to defend ourselves against charges that products infringe patent or proprietary rights of third parties. This could impede or even halt the development or manufacturing of certain products or require us to pay monetary damages or royalties to third parties. Our life science businesses, in particular, have a comprehensive product life cycle management in place. In addition, our legal department, in conjunction with the relevant functional departments, regularly reviews the patent situation. Potential infringements of our patents by other companies are carefully monitored so that legal action can be taken if necessary. PRODUCTION, PROCUREMENT MARKET AND ENVIRONMENTAL RISKS Production capacities at some of our manufacturing facilities could be adversely affected by, for instance, technical failures, natural disasters, regulatory rulings or disruptions to supplies of key raw materials or intermediates, as in the case of dependence on a single source for critical materials. This applies particularly to our biotech products because of the highly complex manufacturing process. If in such cases we are unable to meet demand by shifting sufficient production to other plants or drawing on our inventories, we may suffer declines in sales revenues. The supply of strategically important raw materials is ensured on the basis of long-term contracts with multiple suppliers wherever possible. Furthermore, all stages of our production processes and our material inputs are continuously monitored by the respective expert function within the company. Moreover, the manufacturing of chemical products is subject to risks associated with the production, filling, storage and transportation of raw materials, products and wastes. These risks may result in personal injury, property damage, environmental contamination or business interruptions and liability for compensation payments. Furthermore, the possibility of accidental cross-contamination among our crop protection products or the presence of unintended trace amounts of genetically modified organisms in agricultural products and / or foodstuffs cannot be completely excluded. We address product and environmental risks by way of suitable quality assurance measures. An integrated quality, health, environmental and safety management system ensures process stability. In addition, we are committed to the international Responsible Care initiative of the chemical industry, have initiated a special Bayer Climate Program and report regularly on our own safety and environmental management system. IT RISKS Business and production processes and the internal and external communications of the Bayer Group are increasingly dependent on information technology systems. Major disruptions or failure of global or regional business systems may result in loss of data and / or impairment of business and production processes. The foundations for a continuous and sustainable IT risk management system have been laid by establishing a comprehensive organization, enacting rules and regulations that define the relevant roles and responsibilities, and implementing a periodic reporting system. Technical precautions such as data recovery and continuity plans have been established together with our internal IT service provider to address this risk.

28 26 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 RISK TO PENSION OBLIGATIONS FROM CAPITAL MARKET DEVELOPMENTS Bayer AG and its subsidiaries have obligations to current and former employees related to pensions and other post-employment benefits. Changes in relevant valuation parameters such as interest rates, mortality and rates of increases in compensation may raise the present value of our pension obligations. This may lead to increased pension costs. A large proportion of our pension and other post-employment benefit obligations are covered by plan assets including fixed-income securities, shares, real estate and other investments. Declining or even negative returns on these investments may negatively impact the future fair value of plan assets. This may necessitate additional contributions by the company. We address the risk of market-related fluctuations in the fair value of our plan assets through prudent strategic investment, and we constantly monitor investment risks in regard to our global pension obligations. FINANCIAL RISKS MANAGEMENT OF FINANCIAL AND COMMODITY PRICE RISKS As a global enterprise, Bayer is exposed in the normal course of business to credit risk, liquidity risk and various market risks that could materially affect its net assets, financial position and results of operations. It is company policy to use derivative financial instruments to minimize or eliminate the risks associated with operating activities and the resulting financing requirements. Derivative financial instruments are used almost exclusively to hedge realized or forecasted transactions. The use of derivative financial instruments is subject to strict internal controls based on centrally defined mechanisms and uniform guidelines. The derivatives used are mainly over-the-counter instruments, particularly forward exchange contracts, foreign currency options, interest rate swaps, cross-currency interest-rate swaps, commodity swaps and commodity option contracts concluded with banks. We set counterparty limits for such banks depending on their creditworthiness. The various risks associated with financial instruments are outlined below together with the relevant risk management systems. CREDIT RISK Credit risk arises from the possibility of the value of receivables or other financial assets being impaired because counterparties cannot meet their payment or other performance obligations. Since the Bayer Group does not conclude master netting arrangements with its customers, the total amounts recognized in assets plus the total potential contribution to the effective initial fund of Bayer-Pensionskasse represent the maximum exposure to credit risk. Thanks to comprehensive credit management, Bayer AG or its subsidiaries so far have not registered an increase in defaults on trade receivables despite the current situation on the capital markets. To effectively manage the credit risk from trade receivables, Bayer has put in place a standardized risk management system, which is the subject of a Group directive. Regular creditworthiness analysis takes place in relation to exposures; these receivables are partly secured. Credit limits are set for all customers. All credit limits for debtors where total exposure is 10 million or more are evaluated by operational credit management and submitted to the Group s Central Financial Risk Committee. To minimize credit risk, financial instrument transactions are only conducted with banks and other partners of first-class credit standing in line with predefined exposure limits. All risk limits are based on methodical models and are continuously monitored. Country risks relating to trade receivables and intra-group loans are continuously monitored, systematically evaluated and centrally managed.

29 MANAGEMENT REPORT Risk Report 27 LIQUIDITY RISK Liquidity risk, i.e. the risk of not being able to fulfill current or future payment obligations because insufficient cash is available, is centrally managed in the Bayer Group. Sufficient liquid assets are held to meet all of the Group s payment obligations when they fall due, thereby ensuring solvency at all times. Payment obligations result both from operating cash flows and from changes in current financial liabilities and are included in liquidity planning. In addition, a reserve is maintained for unbudgeted shortfalls in cash receipts or unexpected disbursements. For this purpose, budget deviation analyses are performed on the basis of historical time series, adjusted for variations in business structure. The liquidity reserve is then determined which, with a defined probability, will cover a negative deviation from budgeted cash flows. The size of this reserve is regularly reviewed and adjusted as necessary to current conditions. Liquid assets are kept mainly in the form of overnight and term deposits. Credit facilities also exist with banks. These include, in particular, a 3.5 billion syndicated credit facility, which is undrawn. We intend to service the 1.6 billion bond that matures in May 2009 out of Bayer AG s existing liquidity and the free operating cash flow generated by our subsidiaries and made available to us by way of intragroup loans. The mandatory convertible bond of Bayer Capital Corporation B.V., Netherlands, that matures in June 2009 is not repayable but will lead to a corresponding increase in the capital stock of Bayer AG. Bayer Capital Corporation B.V. made the proceeds of this bond issue available to Bayer AG by way of an intragroup loan, which will lapse upon maturation of the mandatory convertible bond. MARKET RISK Market risk is the risk that the fair value or future cash flows of a financial instrument could fluctuate due to variations in market prices. Market risks include currency risk, interest-rate risk and other price risks, especially commodity price risk. Sensitivity analysis is a widely used risk measurement tool that allows our management to make judgments regarding the potential loss in future earnings, fair values or cash flows of marketrisk-sensitive instruments resulting from one or more selected hypothetical changes in interest rates, foreign currency exchange rates, commodity prices or other relevant market rates or prices over a selected period of time. We use sensitivity analysis because it provides reasonable risk estimates using straightforward assumptions (for example, an increase in interest rates). We use market information and additional analytics to manage our risk exposure and mitigate the limitations of our sensitivity analysis. We have found sensitivity analysis to be a useful tool in achieving some of our specific risk management objectives. Sensitivity analysis offers an easy-to-understand risk exposure estimate that allows an approximation of the effect changing market conditions could have on our business. Additionally, it allows our management to take the necessary steps to address such risks. We continually refine our risk measurement and reporting procedures. This includes periodically re-examining the underlying assumptions and parameters utilized. CURRENCY RISK Since Bayer conducts a significant portion of its operations outside the euro currency zone, fluctuations in currency exchange rates can materially affect earnings. Currency risk from financial instruments exists with respect to receivables, payables, cash and cash equivalents that are not denominated in a company s functional currency. At Bayer this risk is particularly significant for the u.s. dollar, the Japanese yen and the Canadian dollar. Currency risks are identified, analyzed and managed centrally and systematically. The scope of hedging is evaluated regularly and defined in a corporate directive. Recorded foreign currency operating items, receivables and payables are normally fully hedged.

30 28 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 The anticipated foreign currency exposure from forecasted transactions in the next 24 months is hedged on a basis agreed between the Group Management Board, the central finance department and the operating units. A significant proportion of contractual and foreseeable currency risks is hedged, mainly through forward exchange contracts and currency options. Our Board of Management has provided clear guidance on how to limit and monitor cash flow risks that result from this approach. INTEREST-RATE RISK Interest-rate risk arises primarily from financial assets and liabilities with maturities exceeding one year. In the case of fixed-rate financial instruments, such as fixed-rate bonds, the risk of fluctuations in capital-market interest rates results in a fair-value risk because the fair values fluctuate as a function of interest rates. In the case of floating-rate instruments, a cash flow risk exists because interest payments could increase in the future. Interest rate risk is analyzed centrally in the Bayer Group and managed by the central finance department. This is done in line with the duration set by the Board of Management, which implicitly also includes the ratio of fixed-rate to floating-rate debt. The duration is subject to regular review. Derivatives mainly interest-rate swaps, cross-currency interest-rate swaps and interest options are employed to preserve the target structure of the portfolio. OTHER PRICE RISKS (ESPECIALLY COMMODITY PRICE RISKS) The Bayer Group requires significant quantities of petrochemical feedstocks and energy for its various production processes. The prices of these inputs may fluctuate considerably depending on market conditions. As in the past, there will be times when it is not possible for us to pass on increased raw material costs to customers through price adjustments. This applies particularly to our MaterialScience business. We have addressed this risk by concluding long-term contracts with multiple suppliers. In addition, derivatives are employed where possible to hedge against commodity price risks by smoothing variations in income-statement items due to changes in commodity prices and the resulting changes in stockholders equity over the long term. The procurement departments of the subgroups are responsible for managing these price risks on the basis of internal directives and centrally determined limits, which are subject to constant review. Commodity swaps and commodity options, in particular, are employed to hedge changes in the prices of utilities, especially gas, and of crude oil, naphtha and benzene feedstocks. These instruments are also used in the case of long-term, fixed-price supply contracts. The derivative financial instruments used by Bayer AG to mitigate the risk of changes in exchange rates, interest rates and commodity prices are described in Note [33] (Derivatives) to the financial statements. ASSESSMENT OF THE OVERALL RISK SITUATION Compared to the previous year, there was no significant change in the overall risk situation of Bayer AG and the subsidiaries with which it has profit and loss transfer agreements. The overall risk assessment is based on a consolidated view of all significant individual risks. At present, no potential risks have been identified that either individually or in combination could endanger the continued existence of the company.

31 MANAGEMENT REPORT Risk Report 29 FINANCIAL STRATEGY The financial management of the Bayer Group is conducted by the strategic management holding company Bayer AG. Finance is a global resource, generally procured centrally and distributed within the Group. The foremost objectives of our financial management are to help bring about a sustained increase in corporate value and ensure the Group s liquidity and creditworthiness. This involves reducing our cost of capital, improving our financing cash flow, optimizing our capital structure and effectively managing risk. The management of currency, interest rate, raw material price and default risks helps to reduce the volatility of our earnings. The rating agencies contracted by Bayer assess us as follows: Long-term rating Outlook Short-term rating Standard & Poor s A- stable A-2 Moody s A3 stable P-2 These credit ratings reflect the company s high solvency and ensure access to a broad investor base for financing purposes. Particularly in these days of turbulent credit markets, our strategy remains geared toward achieving a single-a rating in order to maintain our financial flexibility. We therefore plan to use part of our operating cash flows to reduce net debt. We pursue a prudent debt management strategy aimed at ensuring flexibility, drawing on a balanced financing portfolio. Chief among these resources are a multi-currency European Medium Term Note program, syndicated acquisition financing, a syndicated credit facility, bilateral credit agreements and a global commercial paper program. We use financial derivatives to hedge against risks arising from business operations or financial transactions, but do not employ contracts in the absence of an underlying transaction. It is our policy to diminish the default risk by selecting trading partners with a high credit standing. We closely monitor the execution of all transactions, which are conducted according to Group-wide guidelines. Further details of our risk management objectives and the ways in which we hedge all the major types of transaction to which hedge accounting is applied along with procurement market, credit and liquidity risks as they relate to our use of financial instruments are given on page 26 ff. ANTICIPATED DEVELOPMENT OPPORTUNITIES As an international enterprise, Bayer is subject to a wide variety of developments in the various national and international markets in which it operates in its three areas of business. The following forecasts are based on the business performance described in this report, taking into account the potential risks and opportunities. We aim to take maximum advantage of the opportunities that present themselves in our various fields of activity. We continuously evaluate potential additional opportunities in all areas. Through our research and development activities in particular, we constantly strive to discover new products and improve existing ones. Various risks described in our Risk Report particularly financial risks are counterbalanced by corresponding opportunities that could result from positive trends. In addition, our initiated cost and structural measures are aimed at further improving our earnings performance. We also attempt to realize business opportunities through suitable portfolio measures.

32 30 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Outlook The prospects for global economic development in 2009 are very uncertain. Business confidence indicators have fallen worldwide, in some cases reaching all-time lows. In view of the many negative factors, we expect the global economy to remain fragile for some time. The sharp downturn in the United States and western Europe is likely to have a substantial impact. While growth is expected to continue in the emerging markets, it will be distinctly weaker than in previous years. It is currently impossible to predict what effects the extensive government measures aimed at stabilizing the financial markets and bolstering the business environment will have on the global economy. We anticipate a significant weakening of global economic growth in 2009, with only very slow expansion at best. The strategic alignment of the Bayer Group allows us to look forward to 2009 with relative confidence despite the current financial and economic crisis. The fact that the less cyclical lifescience businesses account for more than 70% of our sales is paying off. For the markets relevant to our HealthCare business we predict largely steady growth of between 3% and 5%. For the CropScience markets we are assuming moderate growth of 2% to 3%. In the main sectors of importance for our MaterialScience business, however, we anticipate a very difficult year marked by a great deal of uncertainty. We have budgeted for an exchange rate of us$ 1.35 to the euro. For HealthCare and CropScience we expect a gratifying trend in 2009, with growth in sales and ebitda before special items. At MaterialScience the start to the year has been even weaker than expected, and we therefore anticipate an extremely difficult year for this subgroup, with a severe drop in sales and earnings. In this negative scenario for MaterialScience we are nevertheless confident of limiting the decline in Group ebitda before special items to about 5%. Group sales would probably then be in the region of 32 billion. Should there be a tangible recovery in our MaterialScience business in the short term, Group ebitda before special items could match the very high level of 2008 or even post a slight increase. We are not currently issuing any sales or earnings guidance beyond 2009 in view of the considerable uncertainty as to the future development of the global economy. As the holding company for the Bayer Group, Bayer AG derives most of its income from its subsidiaries. The principal operating subsidiaries in Germany transfer their earnings directly to Bayer AG under profit and loss transfer agreements, and to that extent the earnings of Bayer AG are also directly affected by the development of the Group s business. Bayer AG also receives dividend income. Assuming the necessary earnings are generated by the Group, we expect that by appropriate dividend management we will derive sufficient income from our subsidiaries and affiliates to cover Bayer AG s operating costs as a holding company as well as to service and further reduce our financial debt. Moreover, our goal for 2009 is once again to report a level of net income that enables us to allow stockholders to share appropriately in the company s success. Subsequent Events At MaterialScience in Germany we have initiated a reduction in the working hours of payscale employees for a limited period, accompanied by a corresponding salary reduction, along with equivalent pay-related measures for managerial staff. We have taken this action in response to the drop in orders and the resulting decline in capacity utilization. Measures such as temporarily shutting down certain plants and cutting back production at others, bringing forward planned maintenance work and making greater use of flextime arrangements were already adopted at an early stage.

33 AUDITOR S REPORT 31 Auditor s Report We have audited the annual financial statements comprising the balance sheet, income statement and notes together with the accounting system, and the management report of Bayer Aktiengesellschaft, Leverkusen, Germany, for the financial year from January 1 to December 31, The maintenance of the books and records and the preparation of the annual financial statements and management report in accordance with German commercial law are the responsibility of the Board of Management of Bayer AG. Our responsibility is to express an opinion on the annual financial statements, together with the accounting system, and the management report based on our audit. We conducted our audit of the annual financial statements in accordance with 317 hgb (Handelsgesetzbuch German Commercial Code) and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer in Deutschland (idw). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the annual financial statements in accordance with German generally accepted accounting principles and in the management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Company and evaluations of possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the books and records, the annual financial statements and the management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and significant estimates made by the Company s Board of Management, as well as evaluating the overall presentation of the annual financial statements and management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion based on the findings of our audit the annual financial statements comply with the legal requirements and give a true and fair view of the net assets, financial position and results of operations of the Company in accordance with German generally accepted accounting principles. The management report is consistent with the financial statements and as a whole provides a suitable view of the Companyís position and suitably presents the opportunities and risks of future development. Essen, February 27, 2009 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (ARMIN SLOTTA) Wirtschaftsprüfer (VOLKER LINKE) Wirtschaftsprüfer

34 32 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Statements of Income Note million million Income from investments in affiliated companies net [1] 3,030 2,711 Interest expense net [2] (744) (948) Other non-operating income (expense) net [3] 18 (228) Other operating income [4] General administration expenses (197) (194) Other operating expenses [5] (242) (266) Income before income taxes 2,125 1,284 Income taxes [6] (197) (123) Net income 1,928 1,161 Allocation to retained earnings (896) (91) Balance sheet profit 1,032 1,070

35 FINANCIAL STATEMENTS 33 Balance Sheets Balance Sheets Note Dec. 31, 2007 Dec. 31, 2008 million million ASSETS Noncurrent assets Intangible assets [13] Property, plant and equipment [14] Investments [15] 25,195 34,532 25,579 34,913 Current assets Receivables and other assets Trade accounts receivable [16] Receivables from subsidiaries 14,828 1,697 Other assets [17] [18] 15,274 2,297 Marketable securities [19] 3 4 Cash and cash equivalents [20] 968 1,302 16,245 3,603 Deferred charges [21] ,853 38,540 STOCKHOLDERS EQUITY AND LIABILITIES Stockholders equity [22] Capital stock 1,957 1,957 Capital reserves 4,037 4,037 Other retained earnings 3,627 3,718 Balance sheet profit 1,032 1,070 10,653 10,782 Special item with an equity component [23] 4 0 Provisions Provisions for pensions and other post-employment benefits [24] 2,501 3,158 Other provisions [25] ,029 3,547 Other liabilities Bonds and notes [26] 6,937 7,117 Liabilities to banks 1,267 1,261 Trade accounts payable [27] Payables to subsidiaries [28] 19,337 15,110 Miscellaneous liabilities [29] [30] 28,165 24,209 Deferred income ,853 38,540

36 34 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Notes to the Financial Statements of Bayer AG Changes in Corporate Structure Effective July 1, 2008 Bayer Schering GmbH, Leverkusen, a wholly owned subsidiary of Bayer AG, was merged into Bayer AG. The merger was entered in the Commercial Register for Bayer AG on December 2, Bayer Schering GmbH owned all the shares of Bayer Schering Pharma AG, Berlin, Germany, following the squeeze-out of minority stockholders effective September 25, As a consequence of the merger, Bayer Schering Pharma AG is now a direct subsidiary of Bayer AG. The merger of Bayer Schering GmbH into Bayer AG took place at its carrying amount pursuant to Section 24 of the German Transformation Act (UmwG). Thus the amounts recognized in the balance sheet of Bayer AG as the cost of acquisition of the assets and liabilities of Bayer Schering GmbH are those stated in the latter s closing balance sheet as of June 30, These comprised investments in subsidiaries totaling 16,278 million, balances with banks totaling 1 million, other provisions amounting to 17 million and miscellaneous liabilities of 1 million. Receivables of 300 million from Bayer AG for the transfer of losses for the period January 1 to June 30, 2008 (date of closing balance sheet) and payables of 13,560 million due to Bayer AG were eliminated as part of the merger. Similarly, the 3,001 million carrying amount of the interest in Bayer Schering GmbH was derecognized in the balance sheet of Bayer AG. The table summarizes the impact of the merger on the balance sheet of Bayer AG as of July 1, 2008: ASSETS STOCKHOLDERS EQUITY AND LIABILITIES million million NONCURRENT ASSETS STOCKHOLDERS EQUITY Investments Net income (300) Investments in subsidiaries 13,277 PROVISIONS CURRENT ASSETS Miscellaneous provisions 17 Receivables and other assets Accounts receivable from subsidiaries (13,560) OTHER LIABILITIES Miscellaneous liabilities 1 Balances with banks 1 (13,559) (282) (282) Accounting Policies The financial statements of Bayer AG are prepared in accordance with the German Commercial Code (Handelsgesetzbuch) and Stock Corporation Act (Aktiengesetz). Certain income statement and balance sheet items are combined for the sake of clarity, as explained in the Notes. Non-operating income and expenses whose disclosure is not covered by a mandatory item are stated under other non-operating income or expenses. The income statement is drawn up by the cost-of-sales method. To improve clarity, the presentation has been altered compared with the previous year. In line with Bayer AG s role as a holding company, the items included in the non-operating result are presented first. Revenues previously recognized as net sales are now recognized as other operating income, since they do not

37 NOTES Recognition and Valuation Principles 35 constitute the principal business activity of Bayer AG. Similarly, the related cost of goods sold and selling expenses are now reflected in other operating expenses. The prior-year figures have been restated to enhance comparability. A Declaration of Conformity with the German Corporate Governance Code has been issued pursuant to Section 161 of the German Stock Corporation Act and made permanently available to stockholders. Recognition and Valuation Principles Intangible assets that have been acquired are recognized at cost and amortized on a straight-line basis over their estimated useful lives. Property, plant and equipment is carried at its cost of acquisition or construction, less depreciation of assets that are subject to depletion. Amounts added to property, plant and equipment on or after January 1, 2008 are depreciated by the straight-line method. Assets that were already recognized in the balance sheet as of December 31, 2007 are depreciated by the decliningbalance method where this is permitted under tax laws at the maximum permissible depreciation rates, switching to the straight-line method as soon as this leads to higher annual depreciation. Write-downs are made for any declines in value that go beyond the depletion reflected in depreciation. Useful Life of Property, Plant and Equipment Factory, commercial and residential buildings Outdoor infrastructure Plant installations Vehicles Computer equipment 25 to 50 years 10 to 20 years 7 to 20 years 5 years 3 to 4 years Assets that can be utilized separately and are subject to depletion are depreciated in full in the year of acquisition if their acquisition or production cost does not exceed 150. Assets with an acquisition or production cost of between 150 and 1,000 are aggregated annually in a single item and depreciated over five years. The cost of construction of self-constructed property, plant and equipment comprises the direct cost of materials, direct manufacturing expenses, appropriate allocations of material and manufacturing overheads, and an appropriate share of the depreciation of assets used in construction. Investments in subsidiaries and affiliated companies are carried at cost, less write-downs for any decline in value that is expected to be permanent. Write-downs made in previous years are written back if the reasons for them no longer apply. However, such write-backs must not cause the carrying amount to exceed the cost of acquisition. Loans receivable that are interest-free or bear low rates of interest are carried at present value; other loans receivable are carried at nominal value. The loans also include profit-sharing capital granted to Bayer Pensionskasse VVaG, Leverkusen, Germany, and the latter s drawings on a retroactive contribution to its effective initial fund made available by Bayer AG. These are recognized at nominal value. Receivables and other assets are stated at nominal value, less any necessary write-downs for amounts unlikely to be recovered. Marketable securities are shown at the lower of cost or market as of the closing date. Where the redemption value of liabilities exceeds their issue price, the difference is capitalized and amortized over the term of the liabilities.

38 36 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Allocations to the special item with an equity component are made at the amounts permitted for tax purposes where tax recognition is subject to their inclusion in the accounting balance sheet. Provisions for pensions and other post-employment benefits are computed by the actuarial method based on biometric probability using the Heubeck 2005 g reference tables. In the past, they were computed by the actuarial method that takes tax regulations into account, applying the statutory discount rate of 6.00%. Pension obligations are now computed by the projected unit credit method. Unlike the previous method, this takes account of expected future salary and pension increases. We currently assume annual salary increases of 3.00% and annual pension increases of 2.00%. A discount factor of 4.75% is applied. This is derived from the average market interest rate in the past seven years for euro-denominated fixed interest-rate swaps with a maturity of 15 years. In our view, the change of method results in a more accurate presentation of the company s financial obligations arising from pension commitments. Other provisions are established to cover all foreseeable risks and uncertain liabilities, based on reasonable estimates of such commitments as of the closing date. Provisions for expenses pursuant to Section 249, Paragraph 2 of the German Commercial Code are not established. Other liabilities are carried at nominal or redemption value, whichever is higher. Regular future obligations are recorded at present value calculated using a suitable discount rate that reflects the company s financial commitments. Foreign currency receivables and liabilities, forward exchange contracts and other currency derivatives are recognized using the limited mark-to-market method. For this purpose, foreign currency receivables and payables are valued using spot rates on the reporting date and the fair value of currency derivatives on the reporting date is determined. Unrealized gains and losses are then offset in each currency. Provisions are set up for any net unrealized losses; net unrealized gains are not recognized. The actual receivables and payables are translated using the exchange rate at which they are originally recorded. Cash and cash equivalents and bank balances held in foreign currencies are translated at the rate on the reporting date. Contingent liabilities arising from sureties and debt guarantees are shown at the amounts equivalent to the loans or commitments actually outstanding as of the closing date. Notes to the Statements of Income (1) Income from investments in affiliated companies net million million Dividends and similar income of which 291 million (2007: 245 million) from subsidiaries Income from profit and loss transfer agreements with subsidiaries 4,041 1,856 Expenses from profit and loss transfer agreements with subsidiaries (1,200) (778) Write-downs of investments in affiliated companies (69) (3) Gains from the sale of investments in affiliated companies / capital decreases 13 1,348 Losses from the sale of investments in affiliated companies - (3) 3,030 2,711

39 NOTES Notes to the Statements of Income 37 The Management Report contains details of the composition and development of dividend income from investments in affiliated companies and profits and losses resulting from profit and loss transfer agreements. The previous year s 69 million in write-downs of investments in affiliated companies included 60 million for Bayer Technology Services GmbH and 9 million for CuraGen Corporation, United States. Bayer MaterialScience AG, a wholly owned subsidiary of Bayer AG, reduced its capital stock by 3,722 million in 2008 and repaid this amount to Bayer AG. The carrying amount of the shares in this company was reduced by 2,374 million to 110 million, which represents its remaining stockholders equity. The amount of 1,348 million remaining after the reduction in the carrying amount is recognized in gains from the sale of investments in affiliated companies / capital decreases. In 2007, gains from the sale of investments in affiliated companies comprised 13 million from the spin-off of the diagnostics operations of Bayer Sp.z.o.o., Poland, and their subsequent sale to Siemens. (2) Interest expense net million million Income from other securities and loans included in investments 7 7 Other interest and similar income of which 391 million (2007: 746 million) from subsidiaries 1, Interest and similar expenses of which 907 million (2007: 1,037 million) to subsidiaries (1,984) (1,823) (744) (948) The changes in net interest expense are explained in the Management Report. (3) Other non-operating expense net million million Allocations to personnel-related provisions (190) (753) Allocation to personnel-related provisions assigned to subsidiaries Miscellaneous non-operating expenses (32) (141) Miscellaneous non-operating income (228) The allocations to personnel-related provisions reflected in other non-operating income and expense include the expense representing the interest portion of pension and other noncurrent personnel-related provisions. It also contains other allocations to these provisions pertaining to former employees of Bayer AG who retired before the hive-down of the business areas and service areas in 2002 and 2003 or who left the company before then and have vested pension rights. In 2008 these allocations include one-time expense of 545 million arising from the remeasurement of pension obligations. The pension obligations were remeasured to provide what we consider to be a more accurate presentation of the financial impact of pension commitments on the company. The expenses for the above allocations to miscellaneous provisions are reimbursed by the subsidiaries on a pro rata basis under the respective carve-out agreements. The miscellaneous non-operating expenses principally comprise 136 million in losses from the translation of foreign-currency receivables and payables and the corresponding derivatives. In 2007 the main item of miscellaneous non-operating expenses was a 29 million write-down of a loan with a debtor warrant clause granted to Bayer AB, Sweden, to increase its capital. 11 mil-

40 38 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 lion of this loan was repaid in fiscal 2008 and this amount recognized in miscellaneous nonoperating income. Miscellaneous non-operating income also includes 6 million from the sale and exercise of stock options used to hedge price risks relating to the company s stock-based compensation programs, and 13 million from the reversal of a provision for the payment of a guaranteed dividend to minority stockholders of Bayer Schering Pharma AG, which was no longer required following the squeeze-out. In 2007, miscellaneous non-operating income comprised gains of 19 million from the sale and exercise of stock options and a gain of 33 million on currency translation. (4) Other operating income Other operating income comprises: million million Income from the leasing of real estate Income from the provision of services Gains from retirements of noncurrent assets 6 - Reversals of unutilized provisions 5 9 Reversals of the special item with an equity component - 4 Miscellaneous income The income from the leasing of real estate owned by Bayer AG principally relates to real estate leased to Currenta GmbH & Co. OHG (until July 31, 2008) and Bayer Real Estate GmbH (from August 1, 2008), which subleased them to the operating subgroups and service companies in the Bayer Group. The corresponding expense items principally comprise depreciation of the real estate assets, which is included in other operating expenses. Income from the provision of services relates to services provided by the Corporate Center departments of Bayer AG, mainly to subsidiaries. The expenses incurred in rendering these services are reflected in other operating expenses. (5) Other operating expenses Other operating expenses comprise: million million Expenses in connection with the leasing of real estate Expenses for the provision of services Expenses for corporate advertising Compensation payments 13 - Allocations to the special item with an equity component 6 - Transfer of the special item with an equity component - 4 Expenses arising from the remeasurement of pension obligations Miscellaneous expenses

41 NOTES Notes to the Statements of Income 39 Other operating expenses for 2007 included 13 million for compensation payments that Bayer AG had undertaken to make to settle claims based on alleged infringements of u.s. capital market regulations. In 2008, 4 million of the special item with an equity component was offset against the cost of acquisition of newly acquired assets. The resulting expense was balanced by income of the same amount reflected in other operating income from the reversal of the special item. The remeasurement of pension obligations resulted in one-time expense of 653 million in Of this amount, 108 million relates to pension obligations toward current employees of Bayer AG and former employees who have retired from the company since Bayer AG was transformed into a holding company in 2002 and 2003 or who have left the company since then and have vested pension rights. Expenses arising from this change in the accounting that relate to employees who left the company prior to the transformation are included in other non-operating expenses. (6) Income taxes The taxes reflected here are corporate income tax, trade tax, the solidarity surcharge and income taxes paid outside Germany. (7) Other taxes Where other taxes can be allocated to general administration expenses they are assigned to the respective functional cost item. In other cases they are assigned to other operating expenses. Other taxes totaled 8 million in 2008 (2007: 10 million). (8) Cost of materials million million Expenses for raw materials, supplies and goods purchased for resale 4 3 Expenses for purchased services (9) Personnel expenses / employees million million Wages and salaries Social expenses 7 7 Pension expenses The personnel expenses shown here do not contain the interest portion of the allocation to personnel-related provisions, which is included in the non-operating result as other non-operating expense. These personnel-related provisions are mainly for employee pensions. The pension expenses for 2008 include one-time expense of 108 million relating to the remeasurement of pension obligations. The average number of employees at Bayer AG was 660 (2007: 646).

42 40 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 (10) Stock-based compensation Since 2000 Bayer AG has offered its employees long-term stock-based compensation programs as an additional component of their compensation. Different collective programs are offered to different groups of employees. The program offered to members of the Board of Management and other senior executives from 2000 through 2004 was essentially a stock option program with variable stock-based awards. This program provides for cash payments. In the same period, middle managers and other groups of employees were offered a stock incentive program or a stock participation program, respectively. A new stock-based compensation program for members of the Board of Management, other senior executives and middle managers, known as Aspire, was introduced in It comprises two variants. For other managers and non-managerial employees, a different type of stock participation program has been offered annually since 2005, under which Bayer subsidizes employee purchases of shares in Bayer AG. Provisions are recorded for all obligations existing under the stock-based compensation programs at the reporting date. The amount of such provisions is based on the fair value of the obligations and the proportion of the total duration of the respective program that has elapsed since its introduction. Allocations to provisions are expensed. The fair value of obligations under the stock-based compensation programs has been calculated by the Monte Carlo simulation method using the following key parameters: Dividend yield 1.91% 3.80% Risk-free interest rate 4.06% 1.93% Volatility of Bayer shares 22.19% 31.56% Volatility of the Dow Jones EURO STOXX 50 SM 13.83% 25.72% Correlation between Bayer stock price and the Dow Jones EURO STOXX 50 SM Aspire I To participate in Aspire i, members of the Board of Management and other senior executives are required to purchase a certain number of Bayer shares that is predetermined according to specific guidelines and to retain them for the full term of the program. A percentage of the executive s annual base salary based on his / her position is defined as a target for variable payments ( Aspire target opportunity ). Depending on the performance of Bayer stock, both in absolute terms and relative to the Dow Jones euro stoxx 50 sm benchmark index during a three-year performance period, participants are granted an award of up to 200% of their individual Aspire target opportunity at the end of the program. The 2005 Aspire i tranche expired in 2008, with participants receiving the maximum 200% of their individual target opportunities. The 2006 tranche also ended at the end of The payment of 150% of the target opportunity with respect to this tranche was made at the beginning of Aspire II Other senior managers are offered Aspire ii, a variant of Aspire i that does not require a personal investment in Bayer shares. Moreover, the amount of the award is based entirely on the absolute performance of Bayer stock. The maximum award is 150% of each manager s Aspire target opportunity.

43 NOTES Notes to the Statements of Income 41 In fiscal 2008 managers participating in the Aspire II program received the maximum possible payment of 150% of the target opportunity for the 2005 tranche, which expired during the fiscal year. The 2006 tranche ended at the end of 2008 and the payment of 100% of the target opportunity was made at the beginning of Stock Participation Program (since 2005) Under this program Bayer offers eligible employees the opportunity to purchase shares in Bayer at a discount. The discount is set separately each year. In 2008 it was 15%, as in the previous year. Employees could invest up to 10% of their annual salary in 2008, as in 2007, but not more than 5,000 or 10,000 depending on their position in the company (2007: 5,000 or 7,500). The shares purchased must be held in a special securities account and may not be sold prior to the end of the defined retention period, which expires on December 31 of the year following the year of subscription. Stock Option Program The stock option programs offered to members of the Board of Management and other senior executives up to 2004 ran for five-year periods, and were also subject to a three-year retention condition, followed by a two-year exercise period. The tranches issued in the years 2000 to 2003 have now expired. Options issued under the 2004 tranche can currently be exercised. The exercise period ends in August Options that have not been exercised by the end of the exercise period will be exercised automatically on behalf of the participants. The right to exercise the options and the cash payment to which each participant is entitled depend on the absolute performance of Bayer stock and its performance relative to the Dow Jones euro stoxx 50 sm. The maximum personal investment in Bayer stock eligible for the program was set individually for each participant at the start of each tranche, according to their position. This determined the number of options allocated. For the tranche issued in 2004, participants received up to three options for each share held as a personal investment. For each option, a cash payment equivalent to the market price of one Bayer share and an outperformance premium are awarded at the exercise date, subject to the attainment of certain performance and outperformance targets. Stock Incentive Program Participants in this program receive a cash payment equivalent to a defined number of Bayer shares on certain dates during the ten-year duration of the program. For every ten shares held in a special account (personal investment), they receive the cash equivalent of two shares after two years, and the cash equivalent of a further four shares after six and ten years respectively. To qualify for these payments, they must still hold the personal investment on the incentive payment dates and the percentage rise in the price of Bayer stock by the payment date must be above the performance of the Dow Jones euro stoxx 50 sm since the start of the program. The Stock Incentive Program differs from the Stock Option Program in that participants may sell their shares during the term of the program. However, the shares sold do not qualify for incentive payments on subsequent distribution dates. The number of shares that each employee could transfer to the program was equivalent to half of their performance-related bonus for the preceding fiscal year. Stock Participation Program (until 2004) The structure of this program, which was offered until 2004, is similar to the Stock Incentive Program. However, the incentive payments are based exclusively on the period for which employees hold their personal investment in Bayer shares. Incentive payments are half those allocated under the Stock Incentive Program. After two years, participants are entitled to receive the cash equivalent of one Bayer share for every ten shares held. After six and again after ten years they are entitled to receive the cash equivalent of two Bayer shares on each occasion. Bayer AG spent 5 million (2007: 17 million) on stock-based compensation programs. This amount is reflected in personnel expenses. Provisions for these programs amounted to 9 million as of December 31, 2008 (2007: 15 million).

44 42 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 (11) Valuation write-downs, depreciation for tax purposes In 2008 write-downs of 3 million (2007: 69 million) were made to reflect declines in the value of investments in affiliated companies that were expected to be permanent. (12) Effects of valuation adjustments made for tax purposes The net income for 2008 was increased by 15 million (2007: 18 million) as a result of accelerated depreciation undertaken in 2008 and prior years for tax purposes. In 2007 the increase was also partly due to the net effect of allocations to, and partial reversals of, the special item with an equity component. The higher income taxes that will be incurred as a result of these valuation adjustments will be spread over a maximum of 32 years and therefore will not materially affect net income for the individual years. Notes to the Balance Sheets (13) Intangible assets Acquired concessions, industrial property rights, similar rights and assets, and licenses thereunder Advance payments made Total million million million Gross carrying amounts, Dec. 31, Capital expenditures Gross carrying amounts, Dec. 31, Accumulated amortization and write-downs, Dec. 31, Amortization and write-downs in Accumulated amortization and write-downs, Dec. 31, Net carrying amounts, Dec. 31, Net carrying amounts, Dec. 31, (14) Property, plant and equipment Land and buildings Furniture, fixtures and other equipment Construction in progress and advance payments to vendors and contractors Total million million million million Gross carrying amounts, Dec. 31, , ,105 Capital expenditures Retirements (35) - - (35) Transfers 6 - (6) - Gross carrying amounts, Dec. 31, , ,099 Accumulated depreciation and write-downs, Dec. 31, , ,749 Depreciation and write-downs in Retirements (34) - - (34) Accumulated depreciation and write-downs, Dec. 31, , ,744 Net carrying amounts, Dec. 31, Net carrying amounts, Dec. 31,

45 NOTES Notes to the Balance Sheets 43 (15) Investments Investments in subsidiaries Loans to subsidiaries Investments in other affiliated companies Loans to other affiliated companies Other loans Total million million million million million million Gross carrying amounts, Dec. 31, ,051 1, ,439 Additions 17, ,227 Retirements (7,842) (1,050) - - (2) (8,894) Transfers (2) 2 - Gross carrying amounts, Dec. 31, , ,772 Accumulated write-downs, Dec. 31, Write-downs in Write-backs (1) (2) (3) Retirements (4) (4) Accumulated write-downs, Dec. 31, Net carrying amounts, Dec. 31, , ,532 Net carrying amounts, Dec. 31, ,982 1, ,195 The interest in Bayer Schering Pharma AG was transferred to Bayer AG through the merger of Bayer Schering GmbH into Bayer AG effective July 1, Further, the shares held by minority shareholders of Bayer Schering Pharma AG were acquired through a squeeze-out effective September 25, This resulted in an addition of 16,974 million to investments in subsidiaries. Further additions to investments in subsidiaries resulting from intragroup share transactions amounted to 72 million, including 52 million pertaining to Bayer Hispania, S.L., Spain, and 13 million to Bayer Türk Kimya Sanayi Ltd. Sirketi, Turkey. A further 9 million was attributable to capital increases at subsidiaries. The remaining additions of 862 million were due to a realignment of the intragroup legal-entity structure that mainly involved mergers between Group companies. These are offset by retirements of the same amount. Other retirements comprise 2,374 million relating to a capital reduction at Bayer Material- Science AG and 1,601 million due to capital repayments by Bayer Corporation, u.s.a. This item also reflects retirement of the shares in Bayer Schering GmbH amounting to 3,001 million upon its merger into Bayer AG. The remaining 4 million relate to smaller capital repayments by subsidiaries. Retirements of 1,050 million from loans to subsidiaries relate to the early repayment of a loan granted to Bayer CropScience AG in 2002 to finance the acquisition of Aventis CropScience, which was originally due in In December 2008 Bayer AG made repayable capital in an initial amount of 310 million available to Bayer-Pensionskasse VVaG, Leverkusen, Germany, as a contribution to an effective initial fund to serve as long-term financing in light of the rising life expectancy of persons insured by this pension fund. This is recognized as an addition to other loans. A list of Bayer AG s direct and indirect holdings can be found in Note 36 and forms part of these Notes.

46 44 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 (16) Trade accounts receivable Dec. 31, 2007 Dec. 31, 2008 million million Accounts receivable from subsidiaries Accounts receivable from other customers (17) Other assets The other assets totaling 581 million (2007: 421 million) mainly consist of 195 million (2007: 229 million) in accrued interest, 275 million (2007: 75 million) in claims for tax refunds and 77 million (2007: 69 million) in premiums paid to conclude options transactions. Also included are a large number of other items such as payroll receivables, current receivables from loans, advance payments and amounts that cannot yet be invoiced. (18) Receivables and other assets maturing in more than one year The total receivables and other assets amounting to 2,297 million (2007: 15,274 million) include 60 million (2007: 143 million) due in more than one year. Of this, 23 million (2007: 72 million) comprises receivables from subsidiaries and 37 million (2007: 71 million) comprises other assets. (19) Securities To secure pension obligations and credit balances on employees long-term accounts, Bayer AG and other Group companies have made contributions to Bayer Pension Trust e.v. under a contractual trust arrangement (cta). These amounts totaled 4 million on December 31, 2008 (2007: 3 million), almost all of which is invested in investment funds and recognized under other securities. They may only be used for the defined purpose. Under German commercial law, they still have to be reflected in the annual financial statements of Bayer AG. (20) Cash and cash equivalents Cash and cash equivalents as of December 31, 2008 include 57 million (2007: 60 million) to settle civil law compensation claims relating to antitrust violations in the fields of rubber, polyester polyols and urethanes in the United States and Canada. Bayer has placed this amount in an escrow account administered in the u.s. pending acceptance or judicial confirmation of the settlements offered. (21) Deferred charges Deferred charges as of December 31, 2008 include unamortized discounts totaling 23 million pertaining to bonds issued by Bayer AG between 2002 and The amount of 27 million recognized at the beginning of the year was diminished during the year by amortization of 8 million and increased by 4 million in additions. The remaining deferred charges are prepaid premiums for business insurance and other accrued charges.

47 NOTES Notes to the Balance Sheets 45 (22) Stockholders equity Stockholders equity changed as follows in 2008: Dec. 31, 2007 Capital increase Dividend for 2007 Net income Dec. 31, 2008 million million million million million Capital stock 1, ,957 Capital reserves 4, ,037 Other retained earnings 3, ,718 Balance sheet profit 1,032 - (1,032) 1,070 1,070 10,653. (1,032) 1,161 10,782 The capital stock of Bayer AG totals 1,956,718, million (2007: 1,956,715,315.20) and is divided into 764,343,225 (2007: 764,341,920) no-par bearer shares. Each share confers one voting right. In 2008 the partial conversion of the 2.3 million mandatory convertible bond issued by Bayer Capital Corporation B.V., Netherlands in 2006 resulted in an increase of 3, in the capital stock and the issuance of 1,305 new shares. The difference between this amount and the converted bond value of 50, is reflected in retained earnings. Authorized capital of 465 million was approved by the Annual Stockholders Meeting on April 28, It expires on April 27, It can be used to increase the capital stock by issuing new no-par bearer shares against cash contributions and / or contributions in kind, but capital increases against contributions in kind may not exceed a total of 370 million (Authorized Capital i). Stockholders must normally be granted subscription rights. However, subject to the approval of the Supervisory Board, the Board of Management is authorized to exclude subscription rights for the stockholders with respect to any excess shares remaining after rights have been allocated (fractional amounts) and also to the extent necessary to grant subscription rights for new shares to holders of convertible bonds or bonds with attached warrants or mandatory convertible bonds issued by Bayer AG or its Group companies, who would be entitled to subscription rights upon exercise of the conversion rights or warrants. In addition the Board of Management is authorized to exclude stockholders subscription rights, subject to the approval of the Supervisory Board, in cases where an increase in capital against contributions in kind is carried out for the purpose of acquiring companies, parts of companies, participating interests in companies or other assets. Further authorized capital was approved by the Annual Stockholders Meeting on April 27, The Board of Management is authorized until April 26, 2012 to increase the capital stock, subject to the approval of the Supervisory Board, by up to a total of 195 million in one or more installments by issuing new no-par bearer shares against cash contributions (Authorized Capital ii). Under the resolution adopted by the Annual Stockholders Meeting, stockholders must normally be granted subscription rights. However, the Board of Management is authorized to exclude subscription rights for stockholders with respect to one or more capital increases out of the Authorized Capital ii, subject to the approval of the Supervisory Board, provided that such capital increase does not exceed 10% of the capital stock existing at the time this authorization becomes effective or the time this authorization is exercised, for purposes of issuing new shares against cash contributions at a price that is not significantly below the market price of shares in the company that are already listed on the stock exchange at the time the issue price is finally determined. Shares acquired on the basis of an authorization of the Stockholders Meeting and sold pursuant to Section 71, Paragraph 1, No. 8, Sentence 5 of the German Stock Corporation Act in conjunction with Section 186, Paragraph 3, Sentence 4 of the German Stock Corporation Act during the term of this authorization shall count toward the above 10% limit. Shares issued or to be issued to service bonds with conversion rights, attached warrants or mandatory conversion rights shall also count toward this limit where such bonds were issued during the term of this authorization and stockholders subscription rights were excluded by application of Section 186, Paragraph 3, Sentence 4 of the German Stock Corporation Act.

48 46 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Conditional capital of 186,876,659.20, corresponding to 72,998,695 shares, exists to service the conversion rights under a mandatory convertible bond issued by Bayer Capital Corporation B.V., Netherlands, on April 6, The mandatory convertible bond was reduced by 3, through partial conversion in The Annual Stockholders Meeting on April 25, 2008 approved the creation of Conditional Capital 2008 I and Conditional Capital 2008 II and authorized a conditional increase in the capital stock in each case of 195,584, through the issue of 76,400,000 shares. This conditional capital increase may be used to grant shares to the holders of bonds with warrants or convertible bonds, profit-sharing rights or profit participation bonds (or combinations of these instruments) with option or conversion rights or obligations, issued on or before April 24, 2013 by Bayer AG or a Group company in which Bayer AG holds a direct or indirect interest of at least 90%. The authorization to issue such instruments is limited to a total nominal value of 6 billion. In principle, stockholders have a statutory right to be granted subscription rights to such instruments. However, the Board of Management is authorized to exclude subscription rights, subject to the approval of the Supervisory Board, if the instruments are issued at a price that is not significantly below the market price. The limit of 10% of the capital stock set analogously with Section 186 Paragraph 3 Sentence 4 of the German Stock Corporation Act for the exclusion of stockholders subscription rights may not be exceeded. Both shares and other such instruments shall count towards this limit if they were issued under exclusion of subscription rights in direct or analogous application of Section 186, Paragraph 3, Sentence 4 of the German Stock Corporation Act. Notifications of direct and indirect shareholdings We received no notifications in 2008 or 2007 of direct or indirect holdings of shares in Bayer AG that exceed 10% of the capital stock. The Capital Research and Management Company, u.s.a., notified us that the proportion of voting rights it holds in our company exceeded the 10% threshold on November 8, 2006, and that since that date it has held % of the voting rights. (23) Special item with an equity component The 4 million special item with an equity component recognized in 2007 was established in accordance with Section 6b of the German Income Tax Act (EStG). It was transferred in full to newly acquired land in (24) Provisions for pensions and other post-employment benefits This item includes provisions for current and future pension entitlements. It also includes commitments to former employees of the business and service areas hived down into separate legal entities who retired before July 1, 2002 or who left the company before this date and have vested pension rights. The respective companies reimburse Bayer AG for these expenses. This item also includes commitments entered into under early retirement agreements. In 2008 the method used to measure pension obligations was altered. In place of the actuarial method using a statutory discount factor, we have switched as of 2008 to the projected unit credit method. Apart from the use of a different discount factor, the main difference is that the projected unit credit method takes account of expected future salary and pension rises. This change led to a 653 million increase in pension provisions.

49 NOTES Notes to the Balance Sheets 47 (25) Other provisions Dec. 31, 2007 Dec. 31, 2008 million million Provisions for taxes Miscellaneous provisions Miscellaneous provisions include amounts for environmental protection measures, vacations, part-time working by older employees, annual bonuses, long-service awards to employees, the costs of preparing and auditing the annual financial statements and other uncertain liabilities. It also includes anticipated losses, for example on foreign exchange derivatives. As of December 31, 2008, provisions of 65 million (2007: 80 million) existed for commitments in the United States and Canada arising from compensation claims relating to antitrust violations in the fields of rubber, polyester polyols and urethanes. As of December 31, 2007, there was also a provision of 22 million for obligations arising out of antitrust proceedings instituted by the e.u. Commission. (26) Bonds and notes Nominal value Stated rate % Effective rate % Dec. 31, 2007 Dec. 31, 2008 % % million million Eurobonds 2002 / 2012 EUR 2,000 million 6,000 6,075 2,000 2,000 Eurobonds 2006 / 2013 EUR 1,000 million 4,500 4,621 1,000 1,000 Eurobonds 2006 / 2009 EUR 1,600 million floating floating 1,600 1,600 Eurobonds 2006 / 2018 GBP 250 million 5,625 5, Eurobonds 2006 / 2018 (increase) GBP 100 million 5,625 5, Eurobonds 2007/ 2010 EUR 300 million floating floating Eurobonds 2007/ 2011 EUR 200 million 4,375 4, Hybrid bond 2005 / 2105* EUR 1,300 million 5,000** 5,155 1,300 1,300 Eurobonds 2004 / 2008 private placement EUR 20 million 3,490 3, Eurobonds 2008 / 2011 private placement EUR 200 million 4,000 4, ,937 7,117 * redeemable at three months notice from 2015 ** fixed interest rate until 2015, floating rate thereafter In December 2008 a bond with a nominal value of 200 million was issued under the multi-currency Euro Medium Term Note (emtn) program. The coupon is 4.000% and the bond matures on January 27, In April 2007, Bayer AG issued a floating rate bond with a maturity of three years and a nominal value of 300 million under the same program. The coupon is the three-month Euribor rate plus 10 basis points. At the same time, a four-year bond with a nominal value of 200 million and a coupon of 4.375% was issued.

50 48 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 (27) Trade accounts payable Dec. 31, 2007 Dec. 31, 2008 million million Payables to subsidiaries Payables to other suppliers (28) Payables to subsidiaries The payables to subsidiaries mainly comprise loans and overnight funds invested at Bayer AG by subsidiaries. (29) Miscellaneous liabilities Miscellaneous liabilities exist solely toward third parties and comprise 452 million (2007: 457 million) in accrued interest and 93 million (2007: 75 million) in premiums received on options. 110 million (2007: 0) relates to drawings on a commercial paper program. This item also includes 12 million (2007: 14 million) in short-term capital investments and 4 million (2007: 7 million) in employees income and church taxes held for paying over to the authorities. (30) Further information on other liabilities The other liabilities are due as follows: Dec. 31, 2007 Dec. 31, 2008 Maturing in 2008 Maturing in Maturing after 2012 Maturing in 2008 Maturing in Maturing after 2012 million million million million million million Debentures 20 4,100 2,817 1,600 3,700 1,817 Liabilities to banks 6 1, ,256 1 Trade accounts payable Payables to subsidiaries 16,980 2,357-15, Miscellaneous liabilities ,556 7,790 2,819 17,385 5,006 1,818 The miscellaneous liabilities as of December 31, 2008 include 454 million (2007: 458 million) in liabilities that only arose from a legal viewpoint after year-end. They are almost exclusively accrued interest liabilities.

51 NOTES Other Information 49 Other Information (31) Contingent liabilities Contingent liabilities include sureties of 6 million (2007: 15 million), including 1 million (2007: 4 million) for subsidiaries. Bayer AG has also assumed debt guarantees and issued letters of comfort totaling 6,018 million (2007: 5,060 million) to other Group companies. Dec. 31, 2007 Dec. 31, 2007 Dec. 31, 2008 Dec. 31, 2008 Nominal amount million Nominal amount million Debt guarantees Bayer Capital Corporation B.V., Netherlands - Mandatory convertible bond EUR 2,300 million 2,300 EUR 2,300 million 2,300 - Liabilities to banks - - EUR 450 million 450 Bayer (China) Limited, China - Liabilities to banks USD 70 million Bayer Corporation, U.S.A % EMTN Notes, maturing in 2009 EUR 460 million 460 EUR 460 million % Notes, maturing in 2015 USD 200 million 136 USD 200 million % Notes, maturing in 2028 USD 350 million 238 USD 350 million % Puttable Reset Securities (PURS SM, maturing at the latest in 2028) USD 250 million Sale-and-lease-back agreement Pass Through Trust USD 288 million 196 USD 283 million 203 Bayer Holding Japan LLC, Japan % EMTN Notes, maturing in 2010 JPY 10 billlion 61 JPY 10 billion 79 - Floating rate EMTN Notes, maturing in 2012 JPY 30 billion 181 JPY 30 billion % EMTN Notes, maturing in 2012 JPY 15 billion 91 JPY 15 billion Floating rate EMTN Notes, maturing in JPY 10 billion % EMTN Notes, maturing in JPY 15 billion 119 Bayer Polymers (Shanghai) Co. Ltd., China - Liabilities to banks CNY 2,427 million 226 CNY 2,359 million 248 Bayer Polyurethanes (Shanghai) Co. Ltd., China - Liabilities to banks CNY 3,871 million 360 CNY 5,910 million 622 Bayer Schering Pharma AG - Liabilities to banks EUR 179 million 179 EUR 200 million Liabilities to banks - - USD 263 million 189 Bayer Türk Kimya Sanayi Limited Sirketi, Turkey - Liabilities to banks EUR 55 million 55 EUR 70 million 70 Guarantees for other Group companies Letters of comfort ,060 6,018 In addition to the contingent liabilities listed above, Bayer AG has given an assurance to Bayer Antwerpen NV, Belgium, that at the latter s request it will purchase loans of up to us$ 4 billion granted by Bayer Antwerpen to Bayer Corporation, u.s.a. This obligation will be assumed if Bayer Corporation is not required to repay the loans under the terms of the loan agreement with Bayer Antwerpen NV. As of December 31, 2008 the loans covered by this assurance amounted to us$ 2.16 billion ( 1.53 billion). Bayer AG bears joint and several liability under Section 133 of the German Transformation Act (UmwG) for the obligations of the polymers business area (now MaterialScience) and the two service areas Business Services and Industry Services (now Currenta), which were hived down from Bayer AG to legally separate entities effective October 1, 2003, where such obligations relate to the period prior to the hive-downs. This liability ends five years after the announcement of the entry of the hive-down into the Commercial Register of Bayer AG, which took place in January 2004.

52 50 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 The same applies to the obligations of Lanxess AG, which was spun off effective July 1, The entry into the Commercial Register of the spin-off from Bayer AG was announced in February / March The Spin-Off and Acquisition Agreement specifies that Bayer AG and Lanxess AG shall each release the other from the liability each has assumed as principal debtor under that Agreement. Bayer AG and Lanxess AG also signed a master agreement covering the apportionment of general liability and of specific liability for environmental contamination, antitrust violations and product liability. (32) Other financial commitments In addition to provisions, other liabilities and contingent liabilities, there are also other financial commitments. Minimum non-discounted future payments relating to operating leases total 101 million (2007: 115 million), of which 54 million (2007: 65 million) relates to lease and rental agreements with subsidiaries. These have been concluded with Bayer Real Estate GmbH, a wholly owned subsidiary of Bayer AG, whose business purpose includes leasing Bayer s real estate. Until July 2008 this task was performed by Currenta GmbH & Co. OHG. The commitments under lease and rental agreements are due as follows: million After In 2008 the establishment of an effective initial fund was agreed with Bayer-Pensionskasse. This was due to the rise in the present and future life expectancy of those insured with this pension fund. The effective initial fund entails the granting of a repayable, interest-bearing loan to Bayer-Pensionskasse as required. Following the payment of 310 million in 2008, there is a commitment to pay in a further 490 million. (33) Derivatives In the course of its business, Bayer AG is exposed to foreign exchange, interest rate and price risks, which it hedges largely by means of derivatives. It mainly uses over-the-counter (otc) instruments, particularly forward rate contracts, currency options, interest rate options, interest rate swaps, cross-currency interest rate swaps, and stock options. These instruments are employed according to uniform guidelines and are subject to strict internal controls. Apart from a few low-value exceptions, their use is confined to the hedging of the operating business and of the related investments and financing transactions. In addition, interest options and interest swaps are used to achieve the defined benchmarks for interest rates. In the commodities markets Bayer AG concludes derivatives agreements with external counterparties to hedge raw material and energy prices on behalf of Group companies. The main objective of using derivatives is to reduce fluctuations in cash flows and earnings associated with changes in interest rates, foreign exchange rates, share prices and market prices. There is a risk that the value of derivatives could change as a result of fluctuations in underlying parameters such as exchange rates, interest rates or share prices. Where derivatives are designated as hedges, possible declines in their value due to falling prices are offset by corresponding increases in the value of the hedged contracts.

53 NOTES Other Information 51 Where derivatives have a positive fair value, a credit or default risk arises from the fact that the counterparties may not be able to meet their obligations. To minimize this risk, we assign credit limits to the individual banks according to their creditworthiness. The notional amount of financial derivative contracts concluded with external counterparties was 20.4 billion on December 31, 2008 (2007: 14.6 billion). Back-to-back derivative contracts in a notional amount of 8.6 billion (2007: 4.5 billion) were concluded with Group companies. The total notional amount of derivatives was 29.0 billion (2007: 19.1 billion) on the closing date and was comprised as follows: Notional amount Fair value Carrying amount Dec. 31, 2007 Dec. 31, 2008 Dec. 31, 2007 Dec. 31, 2008 Dec. 31, 2007 Dec. 31, 2008 million million million million million million Forward rate contracts positive fair values 4,800 8, negative fair values 4,734 6,759 (139) (448) 9,534 15, (13) (3) Currency options positive fair values negative fair values (32) (3) (31) (2) (20) 0 Cross-currency interest rate swaps positive fair values 27 1, negative fair values 504 1,701 (29) (256) 531 2,802 (29) (142) 0 0 Interest-rate swaps positive fair values 2,773 4, negative fair values 4,600 4,003 (183) (188) 7,373 8,793 (90) 3 (41) (46) Interest-rate options positive fair values 500 1, negative fair values 500 1,000 0 (3) 1,000 2, (1) Share options positive fair values negative fair values 0 0 (1) Commodity contracts positive fair values negative fair values (456) (293) ,109 29,012 (104) 2 (66) (47) To hedge currency risks Bayer AG mainly uses forward exchange contracts, currency options and cross-currency interest-rate swaps.

54 52 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Hedging is focused on financial exposure. To hedge the currency risk arising from receivables and liabilities at Group companies relating to business activities, contracts in a notional amount of 4.8 billion (2007: 4.0 billion) were concluded with external counterparties. Back-to-back transactions with Group companies total 4.0 billion (2007: 2.6 billion). These transactions have a net positive fair value of 136 million (2007: 12 million). To hedge planned transactions in foreign currencies, Bayer AG has concluded forward exchange contracts and currency options with a notional value of 2.8 billion (2007: 1.3 billion) with external counterparties. Back-to-back agreements with a notional value of 3.4 billion (2007: 1.3 billion) are concluded with Group companies. The positive and negative fair values of these transactions therefore cancel each other out. Cross-currency interest-rate swaps with a notional value of 0.5 billion (2007: 0.5 billion) were used to hedge interest and foreign exchange risks arising from the gbp bonds issued in They have a net negative fair value of 142 million (2007: 29 million). Other cross-currency interest-rate swaps in a notional amount of 1.2 billion (2007: 0) were concluded to hedge Group loans granted by Bayer Antwerpen NV, Belgium. As a result of back-toback agreements with Bayer Antwerpen with a notional value of 1.1 billion (2007: 0), the positive and negative fair values canceled each other out. Other forward exchange contracts, including internal back-to-back contracts, have a total notional value of 0.2 billion (2007: 0.5 billion). Their net negative fair value is 2 million (2007: 30 million). Interest-rate swaps were used partly to hedge the interest-rate risk relating to Eurobonds issued by Bayer AG. The notional amount of these derivatives is 1.7 billion (2007: 1.6 billion), and they have a net positive fair value of 39 million (2007: net negative fair value of 62 million). Further interest-rate swaps with a notional value of 7.1 billion (2007: 5.8 billion) have now been economically closed out. They have a net negative fair value of 36 million (2007: 28 million). Caps were also used to manage interest rates. The premiums paid on these interest-rate options have been capitalized, and options received have been recognized as liabilities. Their notional value is 2.0 billion (2007: 1.0 billion). The positive and negative fair values cancel each other out. In 2007 the options had a net positive fair value of 4 million. Bayer AG and other Group companies have established a variety of stock programs for their employees, all of which run for several years. During the term of these programs employees receive the cash equivalent of the value of shares in Bayer AG provided that they meet certain conditions. One condition is that employees must make a personal investment in Bayer shares which must be retained throughout the program. Employees lose their right to these cash payments if they sell the personal investment. To hedge the risk of fluctuations in the share price, Bayer AG has acquired stock purchase options. These are closed out through call and put options if the actual period for which these personal investments are retained differs from the expected retention pattern. They had a net fair value of 7 million on December 31, 2008 (2007: 29 million). The external commodity futures and options contracts were passed on to group companies on reciprocal terms. The results of such transactions through year end were mutually offsetting. The remaining open contracts were measured on the basis of closed positions, so no income was derived in this case either.

55 NOTES Other Information 53 The fair values of derivatives are measured by the usual methods in light of the market data available at the measurement date. The following principles are applied: Currency contracts are measured individually at their forward rates on the balance sheet date. These depend on spot rates, including time spreads. The market value of interest-rate swaps is determined by discounting expected future cash flows. Discounting applies market interest rates for the remaining term of these instruments. The fair values of interest-rate options are determined using a Black-Scholes model. The fair value of share options is determined either by the Black-Scholes method (for simple European options) or, in the case of more complex u.s. options, by conventional binomial methods. The fair value of forward commodity contracts is calculated from future price data obtained from the markets or from external data providers. Certain long-term commodity contracts to which fair values cannot be assigned are measured with the aid of valuation models based on internal fundamental data. Forward exchange contracts are recognized using the limited mark-to-market method. For this purpose, forward exchange contracts used for hedging purposes are measured at fair value on the reporting date, while the underlying foreign currency receivables and payables are measured at the spot rates on the reporting date. The resultant unrealized gains and losses in each currency are then netted. Provisions totaling 3 million (2007: 13 million) have been established for any net unrealized losses resulting from this valuation method. These are recognized under other provisions. Net unrealized gains are not recognized. Currency options are recognized on the basis of the option premiums paid or received at the lower of cost or market value, or higher of cost or market value, respectively. The values canceled each other out in 2008, while in 2007 they resulted in net unrealized losses of 20 million. Wherever possible, interest-rate swaps were valued in closed positions with the corresponding underlyings, so no unrealized gains or losses had to be recognized. Interest-rate swaps originally used to hedge bonds were closed out with back-to-back interest rate swaps. The resulting closed positions resulted in a net unrealized loss of 46 million ( 41 million) which was recognized by a provision for impending losses. The interest-rate swaps and cross-currency interest-rate swaps used to hedge bonds are not reflected in the financial statements prepared in accordance with commercial law. Interest-rate options are capitalized at the lower of cost or market value or recognized as liabilities at the higher of cost or market value, respectively. As of December 31, 2008, capitalized interest options totaled 1 million (2007: 3 million). Interest-rate option liabilities totaled 2 million (2007: 1 million). They are recognized in the balance sheet in other assets and miscellaneous liabilities respectively. Put and call options on shares are also reflected in other assets and miscellaneous liabilities. They are measured at the higher or lower, respectively, of cost or market prices. As of December 31, 2008 the net value of share options was 3 million (2007: 6 million).

56 54 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 (34) Audit fees The following fees for the services of the auditor of the financial statements, Pricewaterhouse- Coopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, are recognized as expenses: million million Financial statement auditing Audit-related services and other audit work Other services The fees for the auditing of financial statements mainly comprise those for the audits of the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group. Fees for audit-related services and other audit work primarily relate to audits of the internal control system, including project audits in connection with the implementation of new it systems, and auditor reviews of interim financial statements. (35) Total remuneration of the Board of Management and the Supervisory Board and loans The aggregate benefits of the Board of Management for 2008 amounted to 9,787 thousand (2007: 9,709 thousand) and comprised: thousand thousand Base salary 1,986 2,105 Fixed supplement 983 1,042 Remuneration in kind and other benefits Total non-performance-related remuneration 3,114 3,315 Short-term incentive 5,769 5,498 Directly effected remuneration 8,883 8,813 Fair value of newly granted stock-based compensation as of grant date Aggregate benefits (according to the German Commercial Code) 9,709 9,787 Members of Board of Management participate in stock-based compensation programs. These are multi-year programs under which entitlements are earned in stages during their terms. The fair value of these programs at the time they are granted forms part of the overall compensation package and is included in the above overview. The entitlements earned in 2008 under the stockbased compensation programs granted in current and previous years are shown separately in the table below. The changes in the value of entitlements earned prior to 2008 are also shown separately thousand thousand Stock-based compensation entitlements earned in the respective year 2,839 1,509 Change in value of existing entitlements 1,993 (533)

57 NOTES Other Information 55 Expenses for pension entitlements granted to the members of the Board of Management serving in 2008 amounted to 4,059 thousand (2007: 1,690 thousand). The significant increase in pension expense compared with the previous year results from the inclusion of one-time additional expense arising from the remeasurement of pension obligations. Pension provisions for the members of the Board of Management serving at year end amounted to 34,339 thousand (2007: 25,836 thousand). The pensions paid to retired members of the Board of Management and their surviving dependents amounted to 11,679 thousand (2007: 10,997 thousand). Pension provisions for former members of the Board of Management and their surviving dependents amounting to 121,557 thousand (2007: 101,144 thousand) are reflected in the balance sheet of Bayer AG. The remuneration of the Supervisory Board amounted to 2,295 thousand (2007: 2,347 thousand), including 765 thousand (2007: 782 thousand) in variable components. There were no loans to members of the Board of Management or the Supervisory Board outstanding as of December 31, 2008, nor any repayments of such loans during the year. Details of the remuneration of the Board of Management and Supervisory Board are set out in the compensation report of Bayer AG, which forms part of the Management Report. (36) Overview of interests Bayer AG directly or indirectly holds at least 20% of the shares in the following companies (disclosure pursuant to Section 285 No. 11 of the German Commercial Code). The stockholders equity and net income / loss amounts are rounded. Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million Europe 1. BCrSV GmbH Leverkusen, Germany *), **) 2. BHCV GmbH Leverkusen, Germany *), **) A / O Bayer Moscow, Russia (4.6) *) Agreva GmbH Frankfurt, Germany *), **) AgrEvo Verwaltungs - gesellschaft mbh Frankfurt, Germany *) Ausbildungsinitiative Rheinland GmbH Leverkusen, Germany *) Axxam Srl Milan, Italy (0.2) *) Baulé S. A. S. Romans-sur-Isère, France *) Bayer (Schweiz) AG Zurich, Switzerland *) Bayer 04 Immobilien GmbH Leverkusen, Germany (2.8) *), **) Bayer 04 Leverkusen Fußball GmbH Leverkusen, Germany (14.9) *), **) Bayer 04 Leverkusen Sport förderung GmbH Leverkusen, Germany *) Bayer 04 Marketing GmbH Leverkusen, Germany *), **) Bayer 04 Mobilien GmbH Leverkusen, Germany *), **) Bayer A / S Lyngby, Denmark *) Bayer AB Stockholm, Sweden *) Bayer AEH Limited Cambridge, U. K Bayer AGCO Limited Cambridge, U. K (1.2) Bayer Agriculture Limited Cambridge, U. K (4.0) *) Bayer Animal Health GmbH Leverkusen, Germany *), **) Bayer Antwerpen NV Antwerp, Belgium , *) *) provisional result **) before profit / loss transfer

58 56 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million Bayer AS Oslo, Norway *) Bayer Austria Gesellschaft m. b. H. Vienna, Austria (3.9) Bayer B. V. Mijdrecht, Netherlands *) Bayer Bel IOOO Minsk, Belarus Bayer Beteiligungsverwaltung Goslar GmbH Leverkusen, Germany *) Bayer Beteiligungsverwaltungsgesellschaft mbh Leverkusen, Germany , *), **) Bayer Biologicals S. r. l. Milan, Italy *) Bayer BioScience GmbH Potsdam, Germany (1.0) *), **) Bayer BioScience N. V. Gent, Belgium *) Bayer Bitterfeld GmbH Bitterfeld, Germany *), **) Bayer Bulgaria EOOD Sofia, Bulgaria Bayer Business Services GmbH Leverkusen, Germany (145.6) *), **) Bayer Capital Corporation B. V. Mijdrecht, Netherlands *) Bayer Chemicals AG Leverkusen, Germany (138.2) *), **) Bayer Consumer Care AG Basel, Switzerland , *) Bayer CropScience (Portugal) Produtos para a Agricultura, Lda Carnaxide, Portugal *) Bayer CropScience AG Monheim, Germany , **) Bayer CropScience B. V. Mijdrecht, Netherlands *) Bayer CropScience Beteiligungsgesellschaft mbh Frankfurt, Germany (0.5) *) Bayer CropScience Deutschland GmbH Langenfeld, Germany *) Bayer CropScience France S. A. S. Lyon, France (7.0) *) Bayer CropScience Holding SA Lyon, France *) Bayer CropScience Holdings Limited Cambridge, U. K (7.2) 0.2 Bayer CropScience Limited Cambridge, U. K *) Bayer CropScience Nufarm Limited Cambridge, U. K (3.1) *) Bayer CropScience Nufarm SA Lyon, France (2.9) (8.4) *) Bayer CropScience S. A. Lyon, France *) Bayer CropScience S. L. Valencia, Spain *) Bayer CropScience S. r. l. Milan, Italy *) Bayer CropScience SA-NV Brussels, Belgium *) Bayer CropScience Vermögensverwaltungsgesellschaft mbh Leverkusen, Germany *) Bayer d. o. o. Belgrad, Serbia *) Bayer d. o. o. Ljubljana, Slovenia *) Bayer d. o. o. Zagreb, Croatia *) Bayer d. o. o. Sarajevo Sarajevo, Bosnia-Herzegovina *) Bayer Diagnostics Manufacturing Limited Bridgend, U. K *) Bayer Direct Services GmbH Leverkusen, Germany *), **) Bayer Environmental Science S. A. S. Lyon, France *) Bayer Gastronomie GmbH Leverkusen, Germany (3.7) *), **) *) provisional result **) before profit / loss transfer

59 NOTES Other Information 57 Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million Bayer Gesellschaft für Beteiligungen mbh Leverkusen, Germany , *), **) Bayer HealthCare AG Leverkusen, Germany *), **) Bayer Healthcare Srl Milan, Italy *) Bayer Hellas AG Athens, Greece (0.4) *) Bayer Hispania, S. L. Sant Joan Despi, Spain , *) Bayer Hungaria Kft. Budapest, Hungary *) Bayer Immobilier SAS Puteaux, France *) Bayer Innovation GmbH Düsseldorf, Germany (15.3) *), **) Bayer Innovation Ventures GmbH Düsseldorf, Germany *), **) Bayer International S. A. Fribourg, Switzerland *) Bayer International Services GmbH Leverkusen, Germany *) Bayer Limited Dublin, Ireland *) Bayer Ltd. Kiev, Ukraine *) Bayer MaterialScience AG Leverkusen, Germany (79.6) **) Bayer MaterialScience Customer Services GmbH Leverkusen, Germany (4.9) *), **) Bayer MaterialScience S. r. l. Milan, Italy *) Bayer OÜ Tallinn, Estonia Bayer Oy Espoo, Finland *) Bayer Polimeros S. L. Sant Joan Despi, Spain *) Bayer Polyols S. N. C. Puteaux, France *) Bayer Polyurethanes B. V. Mijdrecht, Netherlands *) Bayer Portugal S. A. Lisbon, Portugal *) Bayer Public Limited Company Newbury, U. K *) Bayer Real Estate GmbH Leverkusen, Germany (2.2) *), **) Bayer S. A. S. Puteaux, France , *) Bayer S. p. A. Milan, Italy *) Bayer s. r. o. Prague, Czech Republic *) Bayer Sante Familiale SAS Gaillard, France *) Bayer Sante SAS Puteaux, France *) Bayer SA-NV Brussels, Belgium *) Bayer Schering Pharma AG Berlin, Germany , *) Bayer Schering Pharma Medical, S. L Sant Joan Despi, Spain (0.1) (0.1) *) Bayer Schering Pharma Oy Turku, Finland *) Bayer Sheet Europe GmbH Darmstadt, Germany (0.1) Bayer Sheet Europe N. V. Tielt, Belgium *) Bayer Sheet Europe S. p. A. Milan, Italy (0.2) *) Bayer Sp. z. o. o. Warsaw, Poland *) Bayer Technology Services GmbH Leverkusen, Germany (83.4) *), **) Bayer UK Limited Newbury, U. K *) Bayer Unterstützungskasse GmbH Leverkusen, Germany (0.2) *) Bayer Verwaltungsgesellschaft für Anlagevermögen m. b. H. Leverkusen, Germany *), **) Bayer Vital GmbH Leverkusen, Germany *), **) Bayer, spol. s. r. o. Bratislava, Slovakia *) Bayer-Handelsgesellschaft mbh Leverkusen, Germany *), **) Bayer-Kaufhaus GmbH Leverkusen, Germany (0.6) **) *) provisional result **) before profit / loss transfer

60 58 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million Bayfin GmbH Leverkusen, Germany , *), **) Bayhealth Comercializacao de Produtos Farmaceuticos Unipessoal Lda. Lisbon, Portugal Bayhealth S. L. Sant Joan Despi, Spain *) BayInvest GmbH Leverkusen, Germany *), **) BaySecur GmbH Leverkusen, Germany *) BaySports-Travel GmbH Leverkusen, Germany *) BaySystems a. s. Prague, Czech Republic *) BaySystems B. V. Foxhol, Netherlands *) BaySystems Büfa Polyurethane GmbH & Co. KG Oldenburg, Germany (0.2) *) BaySystems Büfa Polyurethane Verwaltungs GmbH Oldenburg, Germany BaySystems Italia S. p. A. Mussolente, Italy *) BaySystems Northern Europe A / S Otterup, Denmark *) BBB Management GmbH Campus Berlin-Buch Berlin, Germany ***) BCS Romania SRL Bucharest, Romania Berlex Especialidades Farmaceuticas Lda. Carnaxide, Portugal Berlifarma Lda Carnaxide, Portugal Berlimed, S. A. Madrid, Spain *) Berlimed-Especialidades Farmaceuticas Lda. Carnaxide, Portugal Berlipharm B. V. Weesp, Netherlands *) Berlis AG Zurich, Switzerland *) BerliServe Professional Services GmbH Berlin, Germany *), **) Biogenetic Technologies BV Rotterdam, Netherlands *) byometric systems AG Ainring, Germany 26.0 (0.8) 0.0 *) CENTROFARMA-Industria e Comercio de Prod. Farmaceuticos,Lda. Coimbra, Portugal Chemie-Beteiligungsaktiengesellschaft Glarus, Switzerland Chemion Logistik GmbH Leverkusen, Germany *), **) CIS (U.K.) Limited Burgess Hill, U. K Currenta Geschäftsführungs-GmbH Leverkusen, Germany *) Currenta GmbH & Co. OHG Leverkusen, Germany DIREVO Biotech AG Cologne, Germany (21.4) *) Disalfarm, S. A. Barcelona, Spain *) Drugofa GmbH Cologne, Germany *), **) Dynevo GmbH Leverkusen, Germany (5.4) **) Ehrfeld Mikrotechnik BTS GmbH Wendelsheim, Germany **) EMP-Estrusione Materiali Plastici S. A. Stabio, Switzerland *) EPUREX Films Geschäfts führungs-gmbh Walsrode, Germany *) EPUREX Films GmbH & Co. KG Walsrode, Germany *) *) provisional result **) before profit / loss transfer ***) figures for 2007

61 NOTES Other Information 59 Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million Erste K-W-A Beteiligungs gesellschaft mbh Leverkusen, Germany (15.0) *), **) Euroservices Bayer GmbH Leverkusen, Germany (6.5) *), **) Euroservices Bayer, S. L. Sant Joan Despi, Spain *) Farbenfabriken Bayer GmbH Leverkusen, Germany (0.1) *), **) Faserwerke Hüls GmbH Marl, Germany *) Fünfte Bayer VV GmbH Leverkusen, Germany *), **) Generics Holding GmbH Leverkusen, Germany *), **) GENUS Grundstücks- und Vermietungsgesellschaft mbh & Co.KG Düsseldorf, Germany *) GIGAS Grundstücks-Vermietungsgesellschaft mbh (in Liquidation) Düsseldorf, Germany ***) GP Grenzach Produktions GmbH Grenzach, Germany (7.3) *), **) Hild Samen GmbH Marbach am Neckar, Germany HTV Gesellschaft für Hochtemperaturverbrennung mbh Bergkamen, Germany ***) ICON Genetics GmbH Munich, Germany *), **) Indurisk Rückversicherung AG Luxembourg, Luxembourg *) Intendis Austria Handels GesmbH Vienna, Austria *) Intendis Dermatologie GmbH Berlin, Germany *), **) Intendis Farma S. A. Madrid, Spain *) Intendis GmbH Berlin, Germany *), **) Intendis Manufacturing S. p. A. Milan, Italy *) Intendis Polska SP. Z. O. O. Warsaw, Poland *) Intendis Portugal Sociedade Unipessoal Lda. Mem Martins, Portugal Intendis S. p. A. Milan, Italy *) Jenapharm GmbH & Co. KG Jena, Germany Job@ctive GmbH Leverkusen, Germany **) Justesa Imagen, S. A. Madrid, Spain *) Kosinus Grundstücks- Verwaltungs-Gesellschaft mbh & GAMMA OHG Berlin, Germany *) Kosinus Grundstücks- Verwaltungs-Gesellschaft mbh Berlin, Germany *) KVP Pharma+Veterinär- Produkte GmbH Kiel, Germany **) Lusal Producao Quimico Farmaceutica Luso-Alema, Lda. Carnaxide, Portugal Lusalfarma-Especialidades Farmaceuticas, Lda Carnaxide, Portugal Lyondell Bayer Manufacturing Maasvlakte VOF Rotterdam, Netherlands Lyttron Technology GmbH Leverkusen, Germany (12.0) *), **) Marotrast GmbH Jena, Germany (0.3) **) Mediwest Norway AS Oslo, Norway *) Medrad Belgium BVBA Antwerp, Belgium *) Medrad Denmark ApS Glostrup, Denmark *) Medrad Europe B. V. Maastricht, Netherlands *) Medrad France S. A. R. L. Rungis Cedex, France *) *) provisional result **) before profit / loss transfer ***) figures for 2007

62 60 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million Medrad Italia S. R. L. Cava Manara, Italy *) Medrad Medizinische Systeme GmbH Volkach, Germany *) Medrad Sweden AB Västra Frölunda, Sweden *) Medrad UK Limited Ely, U. K *) MENADIER Heilmittel GmbH Berlin, Germany *), **) Nunhems B.V. Nunhem, Netherlands *) Nunhems France S. A. R. L. Soucelles, France Nunhems Hungary Kft. Szolnok, Hungary Nunhems Italy S. r. l. St. Agata Bolognes, Italy *) Nunhems Netherlands B. V. Nunhem, Netherlands *) Nunhems Poland Sp. Zo. o. Poznan, Poland *) Nunhems Spain, S. A. Valencia, Spain Pallas Versicherung AG Leverkusen, Germany *) pbi Home & Garden Limited Cambridge, U. K Pharma Verlagsbuchhandlung GmbH Berlin, Germany (0.3) *), **) Plant Genetics System International NV Den Haag, Netherlands *) PYCO SA Mont de Marsan, France Quimica Farmaceutica Bayer, S. L. Sant Joan Despi, Spain *) Rhone Poulenc Plant SA (in Liquidation) Brussels, Belgium ***) Sauerstoff- und Stickstoffrohrleitungsgesellschaft mbh Krefeld, Germany ***) SC Bayer SRL Bucharest, Romania *) Schering Agrochemicals Holdings Burgess Hill, U. K *) Schering Aktiengesellschaft Berlin, Germany *), **) Schering Espana, S. A. Madrid, Spain *) Schering GmbH und Co. Produktions KG Weimar, Germany *) Schering Health Care Limited Burgess Hill, U. K *) Schering Holdings Ltd. Burgess Hill, U. K (0.6) *) Schering Industrial Products Burgess Hill, U. K *) Schering Industrial Products Holdings Burgess Hill, U. K Schering International Holding GmbH Berlin, Germany *), **) Schering Kahlbaum GmbH Berlin, Germany *), **) Schering Romania SRL (in liquidation) Bucharest, Romania Schering Verwaltungsgesellschaft mbh Weimar, Germany Schering ZAO Moscow, Russia (8.7) (14.5) *) Sechste Bayer VV GmbH Leverkusen, Germany *), **) SIA Bayer Riga, Latvia Societe Immobiliere de Gaillard d Economie Mixte (SIGEM) Gaillard, France ***) SOLAVISTA GmbH & Co. KG Potsdam, Germany Solavista Verwaltungs GmbH Potsdam, Germany *) provisional result **) before profit / loss transfer ***) figures for 2007

63 NOTES Other Information 61 Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million Sportrechte Vermarktungs- und Verwertungs-GmbH & Co. ohg Leverkusen, Germany *) SuNyx GmbH (in Liquidation) Düsseldorf, Germany 41.8 (1.0) ***) Tecpol Technologieentwicklungs GmbH für ökoeffiziente Polymerverwert. Hannover, Germany (0.3) *) TECTRION GmbH Leverkusen, Germany (4.2) *), **) TOO Bayer KAZ Astana, Kazakhstan (0.5) *) TravelBoard GmbH Leverkusen, Germany *), **) UAB Bayer Vilnius, Lithuania *) Viverso GmbH Bitterfeld, Germany *), **) ZAO Rhone-Poulenc AO Moscow, Russia *) Zweite K-W-A Beteiligungsgesellschaft mbh Leverkusen, Germany , *), **) North America Bayer Corporation Pittsburgh, U.S.A , mit folgenden wesentlichen Beteiligungen Bayer Business and Technology Services LLC Pittsburgh, U.S.A ) Bayer Canadian Holdings Inc. Toronto, Canada ) Bayer Cotton Seed International Inc. Research Triangle Park, U.S.A ) Bayer CropScience Holding Inc. Research Triangle Park, U.S.A ) Bayer CropScience Inc. Research Triangle Park, U.S.A ) Bayer CropScience LLC Research Triangle Park, U.S.A ) Bayer CropScience LP Research Triangle Park, U.S.A ) Bayer HealthCare LLC Tarrytown, U.S.A ) Bayer HealthCare Pharmaceuticals Inc. Pine Brook, U.S.A ) Bayer HealthCare Pharmaceuticals LLC Seattle, U.S.A ) Bayer MaterialScience LLC Pittsburgh, U.S.A ) Bayer Pharma Chemicals Inc. Pine Brook, U.S.A ) BayOne Urethane Systems LLC Saint Louis, U.S.A ) BAYPO Limited Partnership New Martinsville, U.S.A ) BHCP Holdings LLC Wilmington, U.S.A ) BIPPO Corporation New Martinsville, U.S.A ) Collateral Therapeutics, Inc. San Diego, U.S.A ) Cooper Land Company of New Jersey, Inc. Tarrytown, U.S.A ) Deerfield Urethane Inc. South Deerfield, U.S.A ) Medrad Saxonburg Inc. Saxonburg, U.S.A ) Medrad, Inc. Indianola, U.S.A ) MTFP Inc. Wilmington, U.S.A ) NOR-AM Agro LLC Pine Brook, U.S.A ) NOR-AM Land Company Pine Brook, U.S.A ) Pallas North America Insurance Company, Inc. Burlington, U.S.A ) *) provisional result **) before profit / loss transfer ***) figures for ) preconsolidated

64 62 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million SB Capital Corporation Pine Brook, U.S.A ) Schering Berlin Inc. Pine Brook, U.S.A ) Schering Berlin Venture Corporation Pine Brook, U.S.A ) SCIC Holdings LLC Burlington, U.S.A ) Sheffield Plastics Inc. Sheffield, U.S.A ) Stoneville Pedigreed Seed Company Saint Louis, U.S.A ) STWB Inc. Pittsburgh, U.S.A ) Bayer CropScience Holdings Inc. Calgary, Canada *) Bayer CropScience Inc. Calgary, Canada *) Bayer Inc. Toronto, Canada *) Bayer Puerto Rico Inc. Guaynabo, Puerto Rico *) BayOne Canada, Inc. Niagara Falls, Canada (0.3) (0.1) *) Baypo I LLC New Martinsville, U.S.A Baypo II LLC New Martinsville, U.S.A Berlex Canada, Inc. Pointe-Claire, Canada Boston Poly Company Wilsonville, U.S.A *) Burrill Nutraceuticals Capital Fund Limited Partnership Wilmington, U.S.A (0.2) Chromatin, Inc. Chicago, U.S.A Delinting and Seed Treating Company Maricopa, U.S.A Guidance Interactive Healthcare, Inc. Tarrytown, U.S.A *) ICON Genetics, Inc. Montmouth Junction, U.S.A (2.9) 1.4 *) Intendis Inc. Pine Brook, U.S.A isense Corporation Wilsonville, U.S.A *) isense Development Corporation Wilsonville, U.S.A *) isense Hospital Care LLC Wilsonville, U.S.A *) NippoNex Inc. Springfield, U.S.A Nunhems USA, Inc. Morgan Hill, U.S.A (1.2) PO JV, LP Wilmington, U.S.A (41.5) *) Schein Pharmaceutical Canada, Inc. Ontario, Canada 50.0 (6.3) 0.0 The SDI Divestiture Corporation Cincinnati, U.S.A Viterion TeleHealthcare LLC Tarrytown, U.S.A *) Asia-Pacific AgrEvo (Thailand) Limited Bangkok, Thailand *) Bayer (Beijing) Sheet Company Limited Beijing, China *) Bayer (China) Limited Beijing, China *) Bayer (Malaysia) Sdn. Bhd. Petaling Jaya, Malaysia *) Bayer (Sichuan) Animal Health Co. Ltd. Chengdu, China *) Bayer (South East Asia) Pte Ltd Singapore, Singapore (2.1) *) Bayer Australia Limited Pymble, Australia *) Bayer BioScience Pvt. Ltd. Hyderabad, India *) Bayer Co. (Malaysia) Sdn Bhd Petaling Jaya, Malaysia 100, *) *) provisional result +) preconsolidated

65 NOTES Other Information 63 Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million Bayer Coatings Systems Shanghai Co. Ltd. Shanghai, China *) Bayer CropScience (China) Company Ltd. Hangzhou, China *) Bayer CropScience (OHQ) (Malaysia) Sdn Bhd Kuala Lumpur, Malaysia *) Bayer CropScience (Private) Limited Karachi, Pakistan *) Bayer CropScience (Thailand) Company Limited Bangkok, Thailand *) Bayer CropScience Holdings Pty Ltd East Hawthorn, Australia Bayer CropScience K. K. Tokyo, Japan *) Bayer CropScience Limited Mumbai, India *) Bayer CropScience Ltd. Dhaka, Bangladesh *) Bayer CropScience Ltd. Seoul, South Korea *) Bayer CropScience Pty Limited East Hawthorn, Australia (2.1) *) Bayer CropScience Seeds Pty Ltd Toowoomba, Australia *) Bayer CropScience Taiwan Ltd. Taipei, Taiwan *) Bayer CropScience, Inc. Laguna, Philippines Bayer DAS (Private) Limited Karachi, Pakistan 50.0 (0.5) 0.0 *) Bayer Environmental Health Singapore Private Limited Singapore, Singapore Bayer Far East Service Co. Ltd. Hong Kong, Hong Kong *) Bayer Healthcare Co. Ltd. Beijing, China *) Bayer HealthCare Limited Hong Kong, Hong Kong *) Bayer Holding Ltd. Tokyo, Japan 100, (3.7) *) Bayer Jinling Polyurethane Company Ltd. Nanjing, China *) Bayer Korea Ltd. Seoul, South Korea *) Bayer MaterialScience Limited Hong Kong, Hong Kong (5.8) *) Bayer MaterialScience Ltd. Tokyo, Japan *) Bayer MaterialScience Private Limited Mumbai, India (3.5) *) Bayer MaterialScience Trading (Shanghai) Company Limited Shanghai, China *) Bayer New Zealand Limited Auckland, New Zealand *) Bayer Pakistan (Private) Limited Karachi, Pakistan (0.5) *) Bayer Pharmaceuticals Private Limited Mumbai, India (0.2) *) Bayer Philippines, Inc. Makati City, Philippines Bayer Polychem (India) Limited Thane, India (2.1) 0.0 *) Bayer Polymers Shanghai Co. Ltd. Shanghai, China (32.8) *) Bayer Polyurethanes (Shanghai) Co. Ltd. Shanghai, China (56.1) *) Bayer Polyurethanes Taiwan Ltd. Taipei, Taiwan *) Bayer Sheet Korea Ltd. Kimhae-City, South Korea *) Bayer Taiwan Company Ltd. Taipei, Taiwan *) Bayer Technology and Engineering (Shanghai) Company Limited Shanghai, China *) Bayer Thai Company Limited Bangkok, Thailand *) *) provisional result

66 64 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million Bayer TPU (Shenzhen) Co. Ltd. Shenzhen, China *) Bayer Uretech Ltd. Yu Pu Village, Taiwan *) Bayer Vietnam Ltd. Bien Hoa City (Amata), Vietnam *) Bayer Yakuhin, Ltd. Osaka, Japan (15.1) *) BCS (Private) Limited Karachi, Pakistan (2.4) 0.0 *) Bilag Industries Private Ltd. Andheri, India *) Chemdyes Pakistan (Private) Limited Karachi, Pakistan *) Cotton Growers Services Pty. Ltd. Wee Waa, Australia *) C-Qentec Diagnostics Pty. Ltd. Epping, Australia DIC Bayer Polymer Ltd. Tokyo, Japan *) Guangzhou Bayer MaterialScience Company Limited Guangzhou, China *) Imaxeon Pty. Ltd. Rydalmere, Australia Intendis K. K. Osaka, Japan *) Laserlite Australia Pty. Ltd. Pymble, Australia (1.7) *) Medipharm (Pvt) Ltd. Lahore, Pakistan *) Medrad Asia Pte. Ltd. Singapore, Singapore Medrad Medical Equipment Trading Company Beijing, China Myanmar Aventis CropScience Ltd. Yangon, Myanmar Nihon Medrad Kabushiki Kaisha Osaka, Japan Nunhems Beijing Seed Co. Ltd. Beijing, China (0.1) Nunhems India Private Limited Haryana, India *) PT. Bayer Indonesia Jakarta, Indonesia *) PT. Bayer MaterialScience Indonesia Jakarta, Indonesia (1.9) *) Schering (Hong Kong) Ltd. Hong Kong, Hong Kong Schering (Malaysia) Sdn Bhd Kuala Lumpur, Malaysia *) Schering (Singapore) Private Limited Singapore, Singapore Schering Asia-Pacific Private Limited Singapore, Singapore Schering China Ltd Hong Kong, Hong Kong Schering Pty. Ltd. Alexandria, Australia Sumika Bayer Urethane Co., Ltd. Amagasaki, Japan *) Teijin-Bayer Polytec Ltd. Tokyo, Japan *) U I M Agrochemicals (Aust) Pty Ltd. East Hawthorn, Australia *) Latin America / Africa / Middle East AgrEvo Middle East (Cyprus) Ltd. (in Liquidation) Limassol, Cyprus AgrEvo South Africa (Pty) Ltd. Isando, South Africa (2.4) 0.0 Alimtec S. A. Santiago de Chile, Chile (0.2) *) Aventis CropScience Malawi Ltd. Blantyre, Malawi (0.1) 0.0 *) Bayer (Proprietary) Limited Isando, South Africa *) Bayer Algerie S. P. A. Algiers, Algeria *) *) provisional result

67 NOTES Other Information 65 Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million Bayer Boliviana Ltda Santa Cruz De La Sierra, Bolivia *) Bayer Central America Sociedad Anonima San Jose, Costa Rica *) Bayer Cropscience SA Bogota, Colombia *) Bayer CropScience Zimbabwe (Private) Limited Harare, Zimbabwe *) Bayer de Mexico, S. A. de C. V. Mexico City, Mexico *) Bayer Distribuidora de Produtos Quimicos e Farmaceuticos Ltda. São Paulo, Brazil Bayer East Africa Ltd. Nairobi, Kenya Bayer IMSA, S. A. de C. V. Leon, Mexico *) Bayer Iranchemie AG Teheran, Iran Bayer Israel LTD. Hod Hasharon, Israel (0.3) (0.7) *) Bayer Middle East FZE Dubai, United Arab Emirates *) Bayer Namibia (Proprietary) Limited Windhoek, Namibia *) Bayer S. A. Asuncion, Paraguay *) Bayer S. A. Bogota, Colombia *) Bayer S. A. Buenos Aires, Argentina *) Bayer S. A. Caracas, Venezuela Bayer S. A. Casablanca, Morocco *) Bayer S. A. Colon, Panama Bayer S. A. Guatemala City, Guatemala Bayer S. A. Lima, Peru Bayer S. A. Managua, Nicaragua *) Bayer S. A. Quito, Ecuador Bayer S. A. San Jose, Costa Rica Bayer S. A. Santiago de Chile, Chile *) Bayer S. A. Santo Domingo, Dom. Republic Bayer S. A. São Paulo, Brazil *) Bayer S. A. de C. V. Tegucigalpa, Honduras Bayer SA Montevideo, Uruguay *) Bayer Schering Pharma Moçambique, Lda Maputo, Mozambique Bayer Türk Kimya Sanayi Limited Sirketi Istanbul, Turkey (2.2) *) Bayer Zimbabwe (Private) Limited Harare, Zimbabwe *) Bayer, S. A. San Salvador, El Salvador BaySystems Pearl FZCO Dubai, United Arab Emirates Centro Estrategico Canada Latinoamerica S. A. de C. V. Mexico City, Mexico Comercial Interamericana, S. A. Guatemala City, Guatemala Coopers Environmental Health Pty Ltd. Pomona Gardens, South Africa *) Corporacion Bonima S. A. de C. V. Ilopango, El Salvador Cropsa Ltda. Bogota, Colombia *) CROPSA S. A. C. Lima, Peru Farmaco Ltda. São Paulo, Brazil *) provisional result

68 66 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Company Name Place of Business Bayer s interest Stockholders equity Net income / loss amounts Footnotes % million million Innhorm Sociedad Anonima, Industrial, Comercial y Financiera Buenos Aires, Argentina *) Intendis do Brasil Farmaceutica Ltda. Itapevi, Brazil *) Intendis Ilac Ticaret Limited Sirketi Istanbul, Turkey (3.2) *) Intendis Mexicana S. A. de C. V. Mexico City, Mexico *) Junta Comercializadora de Productos de Latinoamerica, S. A. de C. V. Mexico City, Mexico Justesa Imagem do Brasil S / A Rio de Janeiro, Brazil Justesa Imagen Argentina, S. A. Buenos Aires, Argentina (0.3) *) Justesa Imagen Mexicana, S. A. de C.V. Mexico City, Mexico (0.2) *) Kyrgyz Agra Investment Company Ltd. (in Liquidation) Nicosia, Cyprus ***) Laboratorio Berlimed S. A. Santiago de Chile, Chile *) Mediterranean Seeds Ltd. Einat, Israel *) Medrad America Latina Ltda. São Paulo, Brazil (0.5) Medrad Mexicana S. de R. L. de CV Mexico City, Mexico Miles, S. A. Guatemala Branch Guatemala City, Guatemala Nunhems Chile S. A. Santiago de Chile, Chile Nunhems do Brasil Comercio de Sementes Ltda Campinas, Brazil Nunhems Mexico S. A. de C. V. Queretaro, Mexico 99.0 (0.5) (0.3) *) Nunhems Tohumculuk Limited Sirketi Antalya, Turkey Palthough Industries (1998) Ltd. Kibbutz Ramat Yochanan, Israel Polygal Plastics Industries Ltd. Kibbutz Ramat Yochanan, Israel PROQUINA Productos Quimicos Naturales, S. A. de C. V. Orizaba, Mexico *) Quimicas Unidas S. A. Havanna, Cuba Schering (Pty) Ltd. Midrand, South Africa Schering do Brasil Quimica e Farmaceutica Ltda. São Paulo, Brazil (12.5) *) Schering Peruana S. A. Lima, Peru *) Wenkem SA (Proprietary) Limited Midrand, South Africa *) *) provisional result ***) figures for 2007

69 NOTES Other Information 67 In addition, Bayer directly or indirectly holds more than 5% of the voting rights in the following major companies, which are not included in the above list (disclosure pursuant to Section 285 No. 11 of the German Commercial Code). Company name Baywoge GmbH CuraGen Corporation Hokkai Sankyo Co. Ltd. OncoGenex Pharmaceuticals, Inc. Salzgewinnungsgesellschaft Westfalen mbh & Co. KG Place of Business Leverkusen, Germany New Haven, U.S.A. Tokyo, Japan Bothell, U.S.A. Ahaus, Germany Bayer AG is a partner with unlimited liability in Currenta GmbH & Co. OHG, Leverkusen (disclosure pursuant to Section 285 No. 11a of the German Commercial Code). Leverkusen, February 17 / 24, 2009 Bayer Aktiengesellschaft The Board of Management Proposal for Distribution of the Profit The net income of Bayer AG in 2008 amounted to 1,161 million, of which 91 million was allocated to other retained earnings, giving a balance sheet profit of 1,070 million. We propose that this amount be used to pay a dividend of 1.40 per no-par share (764,343,225 shares) on the capital stock of 1,957 million entitled to the dividend for RESPONSIBILITY STATEMENT To the best of our knowledge, and in accordance with the applicable reporting principles, the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the company, and the management report includes a fair review of the development and performance of the business and the position of the company, together with a description of the principal opportunities and risks associated with the expected development of the company. Leverkusen, February 24, 2009 Bayer Aktiengesellschaft The Board of Management WERNER WENNING KLAUS KÜHN DR. WOLFGANG PLISCHKE DR. RICHARD POTT

70 68 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 Report of the Supervisory Board During 2008 the Supervisory Board monitored the conduct of the company s business and acted in an advisory capacity. We performed these functions on the basis of detailed written and oral reports received from the Board of Management. In addition, the Chairman of the Supervisory Board and the Chairman of the Board of Management maintained a constant exchange of information and ideas. In this way the Supervisory Board was kept continuously informed about the company s intended business strategy, corporate planning (including financial, investment and human resources planning), earnings performance, the state of the business and the situation in the company and the Group as a whole. The documents relating to Board of Management decisions or actions which by law or under the articles of incorporation or the rules of procedure required the approval of the Supervisory Board were inspected by the Supervisory Board at its plenary meetings, sometimes after preparatory work by the committees. In certain cases the Supervisory Board gave its approval on the basis of documents circulated to its members. The Supervisory Board was involved in decisions of material importance to the company. We discussed at length the business trends described in the reports from the Board of Management and the prospects for the development of the Bayer Group as a whole, the individual organizational units and the principal affiliated companies in Germany and abroad. Four plenary meetings of the Supervisory Board were held during In addition, a decision concerning the Possis Medical Inc. acquisition project was made after the relevant documents had been circulated to the members. No member of the Supervisory Board attended fewer than half of its meetings. All members of the Board of Management regularly attended the meetings of the Supervisory Board. PRINCIPAL TOPICS DISCUSSED BY THE SUPERVISORY BOARD At the focus of the Supervisory Board s deliberations were questions relating to the strategies and business activities of the Group as a whole and of the subgroups. Other selected topics were dealt with at each of the meetings. At the meeting held in February, the Supervisory Board devoted special attention to the Bayer Group s risk management system and a sale-and-leaseback transaction entered into for financing purposes. At the focus of the September meeting were activities at the Berlin site, research in the fields of women s healthcare and diagnostic imaging, and the acquisition of Direvo Biotech AG, which has since been completed. At the meeting in December 2008, the Board of Management presented its operational, financial and balance sheet planning for the years 2009

71 REPORT OF THE SUPERVISORY BOARD 69 through 2011, which was the subject of detailed discussion, and delib erated on the new version of the German Corporate Governance Code and the issuance of a new Declaration of Conformity with the Code. The regular efficiency audit of the Supervisory Board s work was also initiated in December COMMITTEES OF THE SUPERVISORY BOARD The Supervisory Board has a Presidial Committee, an Audit Committee, a Human Resources Committee and a Nominations Committee*. WORK OF THE COMMITTEES The Presidial Committee of the Supervisory Board was not required to convene in 2008 in its capacity as the Mediation Committee under Section 27 Paragraph 3 of the German Codetermination Act, nor did it need to resolve on any other matters. The Audit Committee met four times during the year, addressing in particular the company s and the Group s financial reporting, the Group s risk management system, the internal control system and compliance issues. The Audit Committee also set the budget for the services of the external auditor and discussed with the auditor the main areas of the audit for the 2008 fiscal year. The auditor was present at all the meetings of the Audit Committee, reporting in detail on the audit work and the audit reviews of the interim financial statements. * The description of the responsibilities and membership of the committees, which forms part of the Report of the Supervisory Board, can be found in the Corporate Governance Report on page 10 of this publication and therefore is not reproduced here.

72 70 / / BAYER AG FINANCIAL STATEMENTS AND MANAGEMENT REPORT 2008 The principal topics addressed at the meetings of the Audit Committee were, at the February meeting, the internal control system and the consequences of deregistering with the u.s. Securities and Exchange Commission; at the April meeting, the management of pension risk at Bayer; at the July meeting, the reports received on the status of the tax audits; and at the October meeting, the effects of the financial crisis on Bayer and the implications of the imminent entry into force of the Accounting Law Modernization Act in Germany for the financial reporting of the company and the Group. The Human Resources Committee convened on two occasions, dealing mainly with matters relating to the remuneration of the Board of Management and the pensions of former members of the Board of Management. At its meeting in December the Committee deliberated on the division of responsibilities between the Human Resources Committee and the full Supervisory Board provided for in the June 2008 revised version of the German Corporate Governance Code and the Code s new recommendations on limiting the severance payment to a member of the Board of Management in the event of premature contract termination. At this meeting the Human Resources Committee also discussed the reappointment of Dr. Plischke to the Bayer AG Board of Management and the renewal of his service contract. On one occasion in 2008, in accordance with its responsibilities, the Nominations Committee discussed possible candidates for future election to the Bayer AG Supervisory Board as representatives of the stockholders. The meetings and decisions of the committees were prepared on the basis of reports and other information provided by the Board of Management. Members of the Board of Management regularly attended the committee meetings. Reports on the committee meetings were presented at the plenary meetings of the Supervisory Board. CORPORATE GOVERNANCE The Supervisory Board dealt with the ongoing development of corporate governance at Bayer, taking into account the amendments made to the German Corporate Governance Code in June In December 2008 the Board of Management and the Supervisory Board issued a new Declaration of Conformity, which is also reproduced in the Corporate Governance Report on page 105 of this Annual Report. FINANCIAL STATEMENTS AND AUDITS The financial statements and management report of Bayer AG were drawn up according to the requirements of the German Commercial Code and Stock Corporations Act, while the consolidated financial statements and management report of the Bayer Group were prepared according to the principles of the International Financial Reporting Standards (ifrs). The financial statements of Bayer AG, the consolidated financial statements of the Bayer Group, the management report of Bayer AG and the management report of the Bayer Group have been examined by the auditor, PricewaterhouseCoopers Aktiengesell-

73 REPORT OF THE SUPERVISORY BOARD 71 schaft, Wirtschafts prüfungsgesellschaft, Essen. The conduct of the audit is explained in the auditor s report. The auditor finds that Bayer has complied with the requirements of the German Commercial Code and the International Financial Reporting Standards, respectively, and issues an unqualified opinion on the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group. The financial statements and management report of Bayer AG, the consolidated financial statements and management report of the Bayer Group, and the audit reports were submitted to all members of the Supervisory Board. They were discussed in detail by the Audit Committee and at a plenary meeting of the Supervisory Board. The auditor submitted a report on both occasions and was present during the discussions. We examined the financial statements and management report of Bayer AG, the proposal for distribution of the profit, and the consolidated financial statements and management report of the Bayer Group. We found no objections, thus we concur with the result of the audit. We have approved the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group prepared by the Board of Management. The financial statements of Bayer AG are thus confirmed. We are in agreement with the management reports of Bayer AG and the Bayer Group and, in particular, with the assessment of the future development of the enterprise. We also concur with the dividend policy and the decisions concerning earnings retention by the company. We assent to the proposal for distribution of the profit, which provides for payment of a dividend of 1.40 per share. The Supervisory Board would like to thank the Board of Management and all employees for their dedication and hard work in Leverkusen, February 2009 For the Supervisory Board DR. MANFRED SCHNEIDER Chairman