##### Table of Contents



As filed with the Securities and Exchange
Commission on May 24, 2004




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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




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FORM 20-F/A

Amendment No. 1

to


Annual Report


|           |  |                                                                                                                                                      |  | 
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|(Mark One) |  |                                                                                                                                                      |  | 
|o          |  | REGISTRATION STATEMENT PURSUANT TO
    SECTION 12(b) OR 12(g) OF
    THE SECURITIES EXCHANGE ACT OF 1934
    OR                                      |  | 
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF
    THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2003.
    OR |  | 
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934
    Commission file number 001-16829                |  | 

BAYER AKTIENGESELLSCHAFT


(Exact name of Registrant as specified in its
charter)


BAYER CORPORATION*


(Translation of Registrants name into
English)


Federal Republic of Germany


(Jurisdiction of incorporation or
organization)


Bayerwerk, Gebäude W11

Kaiser-Wilhelm-Allee


51368 Leverkusen, GERMANY


(Address of principal executive
offices)




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Securities
registered or to be registered pursuant to Section 12(b) of
the Act.

|                                                                                         |  |                                           
|---------------------------------------------------------------------------------------- |  | ------------------------------------------
|Title of each class:                                                                     |  | Name of each exchange on which registered:
|                                                                                         |  |                                           
|American Depositary Shares representing
    Bayer AG
    ordinary shares of no par value |  | New York Stock Exchange                   
|Bayer AG ordinary shares of no par value                                                 |  | New York Stock Exchange**                 



---

Securities
registered or to be registered pursuant to Section 12(g) of
the Act.

None

(Title of class)


Securities
for which there is a reporting obligation pursuant to
Section 15(d) of the Act.

None

(Title of class)


Indicate
the number of outstanding shares of each of the issuers
classes of capital or common stock as of the close of the period
covered by the annual report.

As
of December 31, 2003, 730,341,920 ordinary shares, of no
par value, of Bayer AG were outstanding.

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

Yes
x          No
o          Not
applicable.

Indicate
by check mark which financial statement item the registrant has
elected to follow:

Item 17
o          Item 18
x



|   |                                                                                                            
|-- | -----------------------------------------------------------------------------------------------------------
|*  | Bayer Corporation is also the name of a
    wholly-owned subsidiary of the registrant in the United States.
|  
|** | Not for trading, but only in connection with the
    registration of American Depositary Shares.           



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TABLE OF CONTENTS

|             |                                                                                               |                                                         |              |     |     |    | 
|------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------ | --- | --- | -- | 
|             |                                                                                               | Page                                                   
|             |                                                                                               |                                                        
|PART I       |                                                                                               |                                                         | 5            |    
|             | Item 1. Identity of
    Directors, Senior Management and Advisors                             |                                                         |              | 5   |    
|             | Item 2. Offer
    Statistics and Expected Timetable                                           |                                                         |              | 5   |    
|             | Item 3. Key
    Information                                                                   |                                                         |              | 5   |    
|             | Item 4. Information on
    the Company                                                        |                                                         |              | 13  |    
|             |                                                                                               | History and Development of
    the Company              |              |     | 13  |   
|             |                                                                                               | Business                                                |              |     | 15  |   
|             |                                                                                               | Bayer HealthCare                                        |              |     | 17  |   
|             |                                                                                               | Bayer CropScience                                       |              |     | 39  |   
|             |                                                                                               | Bayer Polymers                                          |              |     | 45  |   
|             |                                                                                               | Bayer Chemicals                                         |              |     | 55  |   
|             |                                                                                               | Intellectual Property
    Protection                    |              |     | 62  |   
|             |                                                                                               | Governmental Regulation                                 |              |     | 64  |   
|             |                                                                                               | Organizational Structure                                |              |     | 69  |   
|             |                                                                                               | Property, Plants and
    Equipment                      |              |     | 71  |   
|             | Item 5. Operating and
    Financial Review and Prospects                                      |                                                         |              | 72  |    
|             |                                                                                               | Overview                                                |              |     | 72  |   
|             |                                                                                               | Critical Accounting
    Policies                        |              |     | 74  |   
|             |                                                                                               | Operating Results 2001, 2002
    and 2003               |              |     | 76  |   
|             |                                                                                               |                                                         | Bayer Group  |     |     | 81 | 
|             |                                                                                               |                                                         | Segment Data |     |     | 84 | 
|             |                                                                                               | Liquidity and Capital
    Resources 2001, 2002 and 2003 |              |     | 96  |   
|             |                                                                                               | Research and Development                                |              |     | 102 |   
|             |                                                                                               | Basis of Presentation                                   |              |     | 102 |   
|             | Item 6. Directors,
    Senior Management and Employees                                        |                                                         |              | 107 |    
|             | Item 7. Major
    Shareholders and Related Party Transactions                                 |                                                         |              | 117 |    
|             | Item 8. Financial
    Information                                                             |                                                         |              | 118 |    
|             | Item 9. The Listing                                                                           |                                                         |              | 128 |    
|             | Item 10. Additional
    Information                                                           |                                                         |              | 129 |    
|             | Item 11. Quantitative
    and Qualitative Disclosures about Market Risk                       |                                                         |              | 133 |    
|             | Item 12. Description of
    Securities Other Than Equity Securities                           |                                                         |              | 137 |    
|PART II      |                                                                                               |                                                         | 138          |    
|             | Item 13. Defaults,
    Dividend Arrearages and Delinquencies                                  |                                                         |              | 138 |    
|             | Item 14. Material
    Modifications to the Rights of Security Holders and Use of
    Proceeds |                                                         |              | 138 |    
|             | Item 15. Controls and
    Procedures                                                          |                                                         |              | 138 |    
|             | Item 16. [Reserved]                                                                           |                                                         |              | 138 |    
|             | Item 16A. Audit
    Committee Financial Expert                                                |                                                         |              | 138 |    
|             | Item 16B. Code of
    Ethics                                                                  |                                                         |              | 138 |    
|             | Item 16C. Principal
    Accountant Fees and Services                                          |                                                         |              | 138 |    
|             | Item 16D. Exemptions
    from the Listing Standards for Audit Committees                      |                                                         |              | 140 |    
|             | Item 16E. Purchases of
    Equity Securities by the Issuer and Affiliated Purchasers          |                                                         |              | 140 |    
|PART III     |                                                                                               |                                                         | 140          |    
|             | Item 17. Financial
    Statements                                                             |                                                         |              | 140 |    
|             | Item 18. Financial
    Statements                                                             |                                                         |              | 140 |    
|             | Item 19. Exhibits                                                                             |                                                         |              | 140 |    
|Exhibit 12.1
|Exhibit 12.2
|Exhibit 13.1



2



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##### Table of Contents



Explanatory Note

This Amendment No. 1 to Bayer AGs
annual report on Form 20-F for the fiscal year ended
December 31, 2003 (the Annual Report) is filed
solely to correct cost of goods sold, gross profit, selling
expenses, general administration expenses and other operating
expenses for 2001, to correct the captions of certain debentures
of the Bayer Group in the debentures table in Note 30 and
to correct other typographical errors in the financial
statements.

Other than the corrections mentioned in this note
and conforming changes related thereto, no part of the Annual
Report on Form 20-F filed on April 8, 2004 is being
amended, and this report continues to speak as of April 8,
2004. The filing of this Amendment No. 1 to the Annual
Report should not be understood to mean that any statements
contained herein are true or complete as of any date subsequent
to April 8, 2004.

Accordingly, pursuant to Rule 12b-15 under
the Securities Exchange Act of 1934, as amended, Bayer AG hereby
amends Items 5, 18 and 19 in their entirety.

Defined Terms and Conventions

Bayer AG is a corporation organized under the
laws of the Federal Republic of Germany. As used in this annual
report, unless otherwise specified or required by the context,
the term Company, Bayer or Bayer
AG refers to Bayer AG and the terms we,
us and our refer to Bayer AG and, as
applicable, Bayer AG and its consolidated subsidiaries.

Due to rounding, numbers presented throughout
this document may not add up precisely to the totals we provide
and percentages may not precisely reflect the absolute figures.

Forward-Looking Information

This annual report contains forward-looking
statements that reflect our plans and expectations. As these
statements are based on current plans, estimates and
projections, you should not place undue reliance on them. We
generally identify forward-looking statements with words such as
expects, intends,
anticipates, plans,
believes, estimates and similar
expressions.

Forward-looking statements involve known and
unknown risks, uncertainties and other factors. We caution you
that a number of important factors may cause our actual results,
performance, achievements or financial position to be materially
different from any results, performance, achievements or
financial position expressed or implied by forward-looking
statements. These factors include, but are not limited to:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | Cyclicality in our industries;                                                                             
|
| |  | Reduced demand for older products in response to
    advances in biotechnology;                            
|
| |  | Increasingly stringent regulatory controls;                                                                
|
| |  | Increased raw materials prices;                                                                            
|
| |  | The expiration of patent protections;                                                                      
|
| |  | Environmental liabilities and compliance costs;                                                            
|
| |  | Failure to compete successfully, integrate
    acquired companies or develop new products and technologies;
|
| |  | Risks from hazardous materials;                                                                            
|
| |  | Litigation and product liability claims; and                                                               
|
| |  | Fluctuations in currency exchange rates.                                                                   

A discussion of these and other factors that may
affect our actual results, performance, achievements or
financial position is contained in Item 3, Key
Information  Risk Factors, the various
Strategy sections in Item 4, Information on
the Company, Item 5, Operating and Financial Review
and Prospects and elsewhere in this annual report.

3



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##### Table of Contents



Forward-looking statements speak only as of the
date they are made, and we undertake no obligation to update
publicly any of them in light of new information or future
events.

Enforceability of Civil Liabilities under
U.S. Federal Securities Laws

We are a German corporation. All of our directors
and executive officers are residents of Germany. A substantial
portion of our assets and those of such individuals is located
outside the United States.

As a result, although a multilateral treaty to
which both Germany and the United States are party guarantees
service of writs and other legal documents in civil cases if the
current address of the defendant is known, it may be difficult
or impossible for you to effect service of process upon these
persons from within the United States.

Also, because these persons and assets are
outside the United States, it may be difficult for you to
enforce judgments against them in the United States, even if
these judgments are of U.S. courts and are based on the
civil liability provisions of the U.S. securities laws.

If you wish to execute the judgment of a foreign
court in Germany, you must first obtain from a German court an
order for execution (Vollstreckungsurteil). A German
court may grant an order to execute a U.S. court judgment
with respect to civil liability under the U.S. federal
securities laws if that judgment is final as a matter of
U.S. law. In granting the order, the German court will not
enquire whether the U.S. judgment was, as a matter of
U.S. law, correct. However, the German court must refuse to
grant the order if:



| |   |                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the U.S. court lacked jurisdiction, as
    determined under German law;                                                                                                                                                                                                                      
|
| |  | the person against whom the judgment was obtained
    did not receive service of process adequate to permit a proper
    defense, did not otherwise acquiesce in the original action and
    raises the lack of service of process as a defense against the
    grant of the execution order;
|
| |  | the judgment would conflict with the final
    judgment of a German court or with the final judgment of another
    foreign court that is recognizable under German law;                                                                                                                     
|
| |  | recognition of the judgment would violate an
    important principle of German law, especially basic
    constitutional rights; or                                                                                                                                                           
|
| |  | there is a lack of reciprocity between Germany
    and the jurisdiction whose court rendered the original judgment.                                                                                                                                                                          

You should be aware that German courts hold
certain elements of some U.S. court judgments, for example,
punitive damages, to violate important principles of German law.
Judgments for ordinary compensatory damages are generally
enforceable, unless in an individual case one of the reasons
described above would forbid enforcement.

If you bring an original action before a German
court based on the provisions of the U.S. securities laws
and the court agrees to take jurisdiction over the case, the
court will decide the matter in accordance with the applicable
U.S. laws, to the extent that these do not violate
important principles of German law. However, the court may
refuse to accept jurisdiction if another action is pending
before a U.S. or other foreign court in the same matter.
Furthermore, the court might decide that, for a lawsuit brought
by a U.S. resident under U.S. law against a defendant
that, like Bayer, has a significant presence in the United
States, a U.S. court would be the more proper forum.

4



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PART I






|        |                                                          
|------- | ---------------------------------------------------------
|Item 1. | Identity of Directors, Senior Management and
    Advisors

Directors and Senior Management

Not applicable.






|        |                                            
|------- | -------------------------------------------
|Item 2. | Offer Statistics and Expected
    Timetable

Not applicable.






|        |                
|------- | ---------------
|Item 3. | Key Information

Selected Financial Data

We derived the following selected financial data
for each of the years in the five-year period ended
December 31, 2003 from our consolidated financial
statements. We have prepared our consolidated financial
statements in accordance with International Financial Reporting
Standards, or IFRS, and, where indicated, in accordance with
U.S. Generally Accepted Accounting Standards or
U.S. GAAP. Since 2002, IFRS is the term for the entire body
of accounting standards issued by the International Accounting
Standards Board, replacing the earlier IAS, or International
Accounting Standards. Individual accounting standards that the
IASB issued prior to this change in terminology continue to use
the prefix IAS. Note 44 to our consolidated
financial statements included in Item 18 of this annual
report describes the reconciliation of significant differences
between IFRS and U.S. GAAP.

Since January 1, 1999, we have prepared our
financial statements in European Union
euros ().
In this annual report, we have translated certain euro amounts
into U.S. dollar amounts at the rate of $1.2597 =
1.00, the noon
buying rate of the Federal Reserve Bank of New York on
December 31, 2003. We have translated these amounts solely
for your convenience, and you should not assume that, on that or
any other date, one could have converted these amounts of euros
into dollars at that or any other exchange rate.

The financial information presented below is only
a summary. You should read it together with the consolidated
financial statements included in Item 18.

5



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##### Table of Contents



Consolidated Income Statement
Data

|                                                          |  |                                      |        |      |  |      |        |      |  |      |        |      |  |  |        |   |  |  |        |     |  |  |        |    
|--------------------------------------------------------- |  | ------------------------------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  |  | ------ | - |  |  | ------ | --- |  |  | ------ | ---
|                                                          |  |                                     
|                                                          |  | Year ended December 31,             
|                                                          |  |                                     
|                                                          |  | 1999                                 |        | 2000 |  | 2001 |        | 2002 |  | 2003 |        | 2003
|                                                          |  |                                      |        |      |  |      |        |      |  |      |        |     
|                                                          |  |                                     |        |     |  |     |        |     |  |     |        | $   
|                                                          |  |                                     
|                                                          |  | (in millions, except per share data)
|IFRS:                                                     |  |                                      |        |      |  |      |        |      |  |      |        |      |  |  |        |   |  |  |        |     |  |  |        |    
|Net sales from continuing operations                      |  |                                      |       | (1)  |  |      |       | (1)  |  |      | 21,702 |      |  |  | 22,038 |   |  |  | 22,178 |     |  |  | 27,938 |    
|Net sales from discontinuing operations                   |  |                                      |       | (1)  |  |      |       | (1)  |  |      | 8,573  |      |  |  | 7,586  |   |  |  | 6,389  |     |  |  | 8,048  |    
|Net sales                                                 |  |                                      | 27,320 |      |  |      | 30,971 |      |  |      | 30,275 |      |  |  | 29,624 |   |  |  | 28,567 |     |  |  | 35,986 |    
|Operating result from continuing operations               |  |                                      |       | (1)  |  |      |       | (1)  |  |      | 1,466  |      |  |  | 850    |   |  |  | 449    |     |  |  | 566    |    
|Operating result from discontinuing operations            |  |                                      |       | (1)  |  |      |       | (1)  |  |      | 210    |      |  |  | 760    |   |  |  | (1,652 | )   |  |  | (2,081 | )  
|Operating result                                          |  |                                      | 3,357  |      |  |      | 3,287  |      |  |      | 1,676  |      |  |  | 1,610  |   |  |  | (1,203 | )   |  |  | (1,515 | )  
|Non-operating result                                      |  |                                      | (521   | )    |  |      | (297   | )    |  |      | (561   | )    |  |  | (654   | ) |  |  | (791   | )   |  |  | (996   | )  
|Income before income taxes                                |  |                                      | 2,836  |      |  |      | 2,990  |      |  |      | 1,115  |      |  |  | 956    |   |  |  | (1,994 | )   |  |  | (2,512 | )  
|Income taxes                                              |  |                                      | (818   | )    |  |      | (1,148 | )    |  |      | (154   | )    |  |  | 107    |   |  |  | 645    |     |  |  | 813    |    
|Income after taxes                                        |  |                                      | 2,018  |      |  |      | 1,842  |      |  |      | 961    |      |  |  | 1,063  |   |  |  | (1,349 | )   |  |  | (1,699 | )  
|Minority stockholders interest                           |  |                                      | (16    | )    |  |      | (26    | )    |  |      | 4      |      |  |  | (3     | ) |  |  | (12    | )   |  |  | (15    | )  
|Net income                                                |  |                                      | 2,002  |      |  |      | 1,816  |      |  |      | 965    |      |  |  | 1,060  |   |  |  | (1,361 | )   |  |  | (1,714 | )  
|Average number of shares in issue                         |  |                                      | 730    |      |  |      | 730    |      |  |      | 730    |      |  |  | 730    |   |  |  | 730    |     |  |  | 730    |    
|Operating result from continuing operations per
    share |  |                                      |       | (1)  |  |      |       | (1)  |  |      | 2.01   |      |  |  | 1.16   |   |  |  | 0.61   |     |  |  | 0.77   |    
|Basic net income/loss per share                           |  |                                      | 2.74   |      |  |      | 2.49   |      |  |      | 1.32   |      |  |  | 1.45   |   |  |  | (1.86  | )   |  |  | (2.34  | )  
|Diluted net income/loss per share                         |  |                                      | 2.74   |      |  |      | 2.49   |      |  |      | 1.32   |      |  |  | 1.45   |   |  |  | (1.86  | )   |  |  | (2.34  | )  
|Dividends per share                                       |  |                                      | 1.30   |      |  |      | 1.40   |      |  |      | 0.90   |      |  |  | 0.90   |   |  |  | N/A    | (2) |  |  | N/A    | (2)
|U.S. GAAP:                                                |  |                                      |        |      |  |      |        |      |  |      |        |      |  |  |        |   |  |  |        |     |  |  |        |    
|Net income                                                |  |                                      | 1,967  |      |  |      | 1,783  |      |  |      | 800    |      |  |  | 1,277  |   |  |  | (1,445 | )   |  |  | (1,820 | )  
|Basic and diluted net income per share                    |  |                                      | 2.69   |      |  |      | 2.44   |      |  |      | 1.10   |      |  |  | 1.75   |   |  |  | (1.98  | )   |  |  | (2.49  | )  



---



|    |                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We do not present discontinuing operations data
    for 1999 and 2000 because we were unable without unreasonable
    effort and expense to restate these years financial data
    to reflect the operations we classified as discontinuing
    operations in all more recent periods.        
|(2) | The dividend payment for 2003 has not yet been
    decided on. Our Supervisory Board has accepted our Board of
    Managements proposal to recommend at our annual general
    shareholders meeting a dividend for 2003 of
    0.50 per share,
    for a total dividend of
    365 million.

Consolidated Balance Sheet
Data

|                                         |  |                                      |        |      |  |      |        |      |  |      |        |      |  |  |        |  |  |  |        |  |  |  |        | 
|---------------------------------------- |  | ------------------------------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                                         |  |                                     
|                                         |  | December 31,                        
|                                         |  |                                     
|                                         |  | 1999                                 |        | 2000 |  | 2001 |        | 2002 |  | 2003 |        | 2003
|                                         |  |                                      |        |      |  |      |        |      |  |      |        |     
|                                         |  |                                     |        |     |  |     |        |     |  |     |        | $   
|                                         |  |                                     
|                                         |  | (in millions, except per share data)
|IFRS:                                    |  |                                      |        |      |  |      |        |      |  |      |        |      |  |  |        |  |  |  |        |  |  |  |        | 
|Total Assets                             |  |                                      | 31,279 |      |  |      | 36,451 |      |  |      | 37,039 |      |  |  | 41,692 |  |  |  | 37,445 |  |  |  | 47,169 | 
|Of which discontinuing operations        |  |                                      |       | (1)  |  |      |       | (1)  |  |      | 8,813  |      |  |  | 6,904  |  |  |  | 5,655  |  |  |  | 7,124  | 
|Stockholders equity                     |  |                                      | 15,006 |      |  |      | 16,140 |      |  |      | 16,992 |      |  |  | 15,335 |  |  |  | 12,213 |  |  |  | 15,385 | 
|Liabilities                              |  |                                      | 16,097 |      |  |      | 20,074 |      |  |      | 20,019 |      |  |  | 26,237 |  |  |  | 25,109 |  |  |  | 31,630 | 
|Of which long-term financial obligations |  |                                      | 2,359  |      |  |      | 2,803  |      |  |      | 3,071  |      |  |  | 7,318  |  |  |  | 7,113  |  |  |  | 8,960  | 
|Of which discontinuing operations        |  |                                      |       | (1)  |  |      |       | (1)  |  |      | 3,489  |      |  |  | 3,143  |  |  |  | 3,153  |  |  |  | 3,972  | 
|U.S. GAAP:                               |  |                                      |        |      |  |      |        |      |  |      |        |      |  |  |        |  |  |  |        |  |  |  |        | 
|Stockholders equity                     |  |                                      | 17,177 |      |  |      | 19,110 |      |  |      | 18,300 |      |  |  | 16,734 |  |  |  | 13,327 |  |  |  | 16,788 | 
|Total assets                             |  |                                      | 32,769 |      |  |      | 38,740 |      |  |      | 37,831 |      |  |  | 42,668 |  |  |  | 38,012 |  |  |  | 47,884 | 



---



|    |                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We do not present discontinuing operations data
    for 1999 and 2000 because we were unable without unreasonable
    effort and expense to restate these years financial data
    to reflect the operations we classified as discontinuing
    operations in all more recent periods.

6



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##### Table of Contents



Dividends

The following table indicates the dividends per
share paid from 2001 to 2003. Shareholders who are
U.S. residents should be aware that they will be subject to
German withholding tax on dividends received. See Item 10,
Additional Information  Taxation.

|                                   |  |      |      |      |  |      |      |  |  |  |     |    
|---------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  |  | --- | ---
|                                   |  | 2001 |      | 2002 |  | 2003
|                                   |  |      |      |      |  |     
|Total dividend (euros in millions) |  |      | 657  |      |  |      | 657  |  |  |  | N/A | (1)
|Dividend per share (euro)          |  |      | 0.90 |      |  |      | 0.90 |  |  |  | N/A | (1)



---



|    |                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The dividend payment for 2003 has not yet been
    decided on. Our Supervisory Board has accepted our Board of
    Managements proposal to recommend at our annual general
    shareholders meeting a dividend for 2003 of
    0.50 per share,
    for a total dividend of
    365 million.

See also Item 8, Financial
Information  Dividend Policy and Liquidation
Proceeds.

Exchange Rate Data

The following table shows, for the periods and
dates indicated, the exchange rate of the U.S. dollar to
the euro based on the noon buying rate of the Federal Reserve
Bank of New York. Fluctuations in the exchange rate between the
euro and the dollar will affect the market price of the shares
and the ADSs, the dollar amount received by holders of shares
and the ADSs on conversion by the Depositary of any cash
dividends paid in euro and the dollar translation of our results
of operations and financial condition.

|     |  |                   |        |         |  |      |        |     |  |  |        |  |  |  |        | 
|---- |  | ----------------- | ------ | ------- |  | ---- | ------ | --- |  |  | ------ |  |  |  | ------ | 
|Year |  | Period End        |        | Average |  | High |        | Low
|     |  |                   |        |         |  |      |        |    
|     |  |                  
|     |  | (dollar per euro)
|1999 |  |                   | 1.0070 |         |  |      | 1.0655 |     |  |  | 1.1812 |  |  |  | 1.0016 | 
|2000 |  |                   | 0.9388 |         |  |      | 0.9233 |     |  |  | 1.0335 |  |  |  | 0.8270 | 
|2001 |  |                   | 0.8901 |         |  |      | 0.8909 |     |  |  | 0.9535 |  |  |  | 0.8370 | 
|2002 |  |                   | 1.0485 |         |  |      | 0.9454 |     |  |  | 1.0485 |  |  |  | 0.8594 | 
|2003 |  |                   | 1.2597 |         |  |      | 1.1321 |     |  |  | 1.2597 |  |  |  | 1.0361 | 

|                    |  |                   |        |     |  |  |        | 
|------------------- |  | ----------------- | ------ | --- |  |  | ------ | 
|Previous six months |  | High              |        | Low
|                    |  |                   |        |    
|                    |  |                  
|                    |  | (dollar per euro)
|October 2003        |  |                   | 1.1833 |     |  |  | 1.1596 | 
|November 2003       |  |                   | 1.1995 |     |  |  | 1.1417 | 
|December 2003       |  |                   | 1.2597 |     |  |  | 1.1956 | 
|January 2004        |  |                   | 1.2853 |     |  |  | 1.2389 | 
|February 2004       |  |                   | 1.2848 |     |  |  | 1.2426 | 
|March 2004          |  |                   | 1.2431 |     |  |  | 1.2088 | 

Risk Factors

An investment in our shares or ADSs involves a
significant degree of risk. You should carefully consider these
risk factors and the other information in this annual report
before deciding to invest in our shares or ADSs. The risks
described below are the ones we consider material. However, they
are not the only ones that may exist. Additional risks not known
to us or that we consider immaterial may also have an impact on
our business operations. The occurrence of any of these events
could seriously harm our business, operating results and
financial condition. In that case, the trading price of our
shares or ADSs could decline and you could lose all or part of
your investment.

Our intended transactions relating to
Lanxess may be unsuccessful and we may not realize the benefits
we expect from these transactions

As announced in November 2003, we plan to combine
Bayer Chemicals (except for Wolff Walsrode and H.C. Starck),
with certain parts of the Bayer Polymers business in a new
company to be named Lanxess. In a

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first step, we intend to contribute the
activities we have identified for this business, including the
foreign activities and the related functions in our service and
corporate center, into Lanxess, which at that time will be a
wholly-owned subsidiary. In a second step, we intend to dispose
of the shares in this subsidiary. Our aim for this company is to
be listed on the Frankfurt Stock Exchange by early 2005.


We may not be successful in combining businesses
with Lanxess on strategically advantageous terms, and our
strategy for choosing which business we place in Lanxess and
which we retain may be flawed. Lanxess and our continuing
businesses could each or all fail to succeed for reasons
relating to our actions or for external reasons. Any of this can
lead to a loss of revenues or income. Moreover, any definitive
plan for any spin-off of this business may be subject to
regulatory action and other execution risks. Our financial
condition, results of operations and stock price could be
adversely affected if we do not conclude the Lanxess transaction
on advantageous terms or in a timely manner (or if we fail to
conclude it at all).

Furthermore, we may not realize all the benefits
for our Group that we intend to realize from this transaction
and our related reorganization.

Cyclicality may reduce our operating
margins or cause operating losses

Several of the industries in which Bayer operates
are cyclical. These industries include chemicals and polymers in
particular. Typically, increased demand during peaks in the
business cycle in these industries leads producers to increase
their production capacity. Although peaks in the business cycle
have been characterized by increased selling prices and higher
operating margins, in the past these capacity increases have led
to overcapacities because they have exceeded demand growth. Low
periods in the business cycles are then characterized by
decreasing prices and excess capacity. These factors can depress
operating margins and may result in operating losses.

We believe that several areas within the chemical
and polymer industries currently show overcapacity, especially
those areas, such as basic chemicals, that are subject to
commoditization, and we expect that there may be further
capacity additions in the next few years. Future growth in
demand may not be sufficient to absorb current overcapacity or
future capacity additions without significant downward pressure
on prices and adverse effects on our operating results.

The agriculture sector is particularly subject to
seasonal and weather factors and fluctuations in crop prices,
which may have a negative influence on our business results. As
climate conditions and market prices for agricultural products
change, the demand for our agricultural products generally also
changes. For example, a drought will often reduce demand for our
fungicides products.

Failure to develop new products and
production technologies may harm our competitive
position

Bayers operating results significantly
depend on the development of commercially viable new products
and production technologies. We devote substantial resources to
research and development. Because of the lengthy development
process, technological challenges and intense competition, we
cannot assure you that any of the products we are currently
developing, or may begin to develop in the future, will become
market-ready or achieve commercial success. If we are
unsuccessful in developing new products and production processes
in the future, our competitive position and operating results
will be harmed.

Competitive pressure from new agrochemical
compounds that achieve similar or improved results with better
ecotoxicological profiles and smaller doses may reduce the sales
of our existing products. The growing importance of plant
biotechnology in the crop protection field could reduce market
demand for some of our agrochemical products and, to the extent
that our competitors supply those biotechnological products,
could lead to declines in our revenues.

Regulatory controls and changes in public
policy may reduce the profitability of new or current
products

We must comply with a broad range of regulatory
controls on the testing, manufacture and marketing of many of
our products. In some countries, including the United States,
regulatory controls have become increasingly demanding. We
expect that this trend will continue and will expand to other
countries, particularly

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those of the European Union. A proposed new EU
chemicals policy could mandate a significant increase in the
testing and assessment of all chemicals, leading to increased
costs and reduced operating margins for these products. Although
we have adopted measures to address these stricter regulations,
such as increasing the efficiency of our internal research and
development process in order to reduce the impact of extended
testing on time-to-market, stricter regulatory regimes could
delay our product development or restrict our marketing and
sales.


Our Pharmaceuticals, Biological Products segment
and our Consumer Care, Diagnostics segment are subject to
particularly strict regulatory regimes. Failure to achieve
regulatory approval of new products can mean that we do not
recoup our research and development investment through sales of
that product. Withdrawal by regulators of an approval previously
granted can mean that the affected product ceases to generate
revenue. This can occur even if regulators take action falling
short of actual withdrawal or direct their action at
over-the-counter (OTC) products that do not require
regulatory approval. For example, in November 2000, the
U.S. Food and Drug Administration issued a recommendation
to all manufacturers of products containing phenylpropanolamine
(PPA). As a result, we voluntarily discontinued marketing our
Consumer Care products that contained this substance. In
addition, in some cases we may voluntarily cease marketing a
product even in the absence of regulatory action.

Our Biological Product Division is generally
facing complicated production processes that are more subject to
disruption than is the case with other processes and therefore
pose increased risk of manufacturing problems, unplanned
shutdowns and loss of products.

Pharmaceutical product prices are subject to
controls or pressures in many markets. Some governments
intervene directly in setting prices. In addition, in some
markets major purchasers of pharmaceutical products (whether
governmental agencies or private health care providers) have the
economic power to exert substantial pressure on prices. Price
controls limit the financial benefits of growth in the life
sciences markets and the introduction of new products. We cannot
predict whether existing controls will increase or new controls
will be introduced, further limiting our financial benefits from
these products.

Changes in governmental agricultural policies
could significantly change the structure of the overall market
for agricultural products in affected countries in which we
operate. A substantial change in the level of subsidies for
agricultural commodities could negatively affect the level of
agricultural production and the extent of the area under
cultivation. As a consequence, existing markets could change
with a corresponding negative impact on our CropScience
subgroups sales and operating results.

As it is impossible at present to determine
precisely what changes, if any, may occur, whether and when such
changes will be implemented and the extent of their impact,
close monitoring and analyses of the related political
developments are necessary. We expect the operating result of
our CropScience business to reflect the uncertainties of this
industry. Similarly, but to a lesser extent, changes in
agricultural policy could also have a negative effect on the
sales and operating results of our Animal Health business.

Our operating margins may decrease if we
cannot pass increased raw material prices on to customers or if
prices for our products decrease faster than raw material
prices

Significant variations in the cost and
availability of raw materials and energy may reduce our
operating results. Bayer uses significant amounts of
petrochemical-based raw materials in manufacturing a wide
variety of our products. We also purchase significant amounts of
natural gas, coal, electricity and fuel oil to supply the energy
required in our production processes. The prices and
availability of these raw materials and energy vary with market
conditions and may be highly volatile. There have been in the
past, and may be in the future, periods during which we cannot
pass raw material price increases on to customers. Even in
periods during which raw material prices decrease, we may suffer
decreasing operating profit margins if the prices of raw
materials decrease more slowly than do the selling prices of our
products. In the past, we have entered into hedging arrangements
with respect to raw materials prices only to a limited extent.
If the market for these hedging arrangements attains sufficient
liquidity and we can obtain their protection at a reasonable
cost, we would consider making more extensive use of these hedge
instruments.

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Litigation and administrative claims could
harm our operating results and cash flows

We are involved in a number of legal proceedings
and may become involved in additional legal proceedings. See
Item 8, Financial Information  Legal
Proceedings. Each of these proceedings or potential
proceedings could involve substantial claims for damages or
other payments. These proceedings include claims alleging
product liability and claims alleging antitrust violations. If
our opponents in these lawsuits obtain judgments against us or
if we determine to settle any of these lawsuits, we could be
required to pay substantial damages and related costs.

We are also plaintiff in lawsuits to enforce our
patent rights in our products. If we are not successful in these
actions, we would expect our revenue from these products to
decline as generic competitors enter the market.

In cases where we believe it appropriate, we have
established provisions to cover potential litigation-related
costs. Increased risks currently result from litigation
commenced in the United States after we voluntarily withdrew
Lipobay/Baycol (cerivastatin) from the market and
voluntarily stopped marketing products containing
phenylpropanolamine (PPA).

Due to the considerable uncertainty associated
with these proceedings related to Lipobay/Baycol
(cerivastatin), it is currently not possible to more accurately
estimate the potential liability and thus no provisions
exceeding the expected insurance coverage and our accounting
measures already taken have yet been made. Depending on the
progress of the litigation, Bayer may face payments that exceed
our expected insurance coverage and our accounting measures and
will continue to reconsider the need to establish additional
provisions, which may have a negative effect on our financial
results.

Due to the considerable uncertainty associated
with the proceedings related to PPA, it is currently not
possible to more accurately estimate potential liability and
thus no provisions for such potential liabilities have yet been
made. Depending on the progress of the litigation, Bayer may
face payments that exceed our insurance coverage and will
continue to reconsider the need to establish provisions, which
may have a negative effect on our financial results.

The loss of patent protection or
ineffective patent protection for marketed products may result
in loss of sales to competing products

During the life of its patent related to the
compound per se, a patented product is normally only subject to
competition from alternative products. After a patent expires,
the producer of the formerly patented product is likely to face
increased competition from generic products entering the market.
This competition is likely to reduce market share and sales
revenue. See Item 4, Information on the
Company  Intellectual Property Protection, for a
discussion of the scheduled expiration dates of our significant
patents. In addition, generic drug manufacturers, particularly
in the United States, may seek marketing approval for
pharmaceutical or agricultural products currently under patent
protection by attacking the validity or enforceability of a
patent. If a generic manufacturer succeeds in voiding a patent
protecting one of our products, that product could be exposed to
generic competition before the natural expiration of the patent.
See Item 8, Financial Information  Legal
Proceedings, for a discussion of several important
patent-related proceedings in which we are involved.

The extent of patent protection varies from
country to country. In some of the countries in which we
operate, patent protection may be significantly weaker than in
the United States or the European Union. Piracy of
patent-protected intellectual property has often occurred in
recent years, particularly in some Asian countries. In
particular, these countries could facilitate competition within
their markets from generic manufacturers who would otherwise be
unable to introduce competing products for a number of years. We
do not currently expect any proposed patent law modifications to
affect us materially. Nevertheless, if a country in which we
sell a substantial volume of an important product were to
effectively invalidate our patent rights in that product, our
revenue could suffer.

Failure to compete successfully or
integrate newly acquired businesses may reduce our operating
profits

Bayer operates in highly competitive industries.
Actions of our competitors could reduce our profitability and
market share. In some commodity areas (especially within our
Plastics, Rubber segment, our Polyurethanes,

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Coatings, Fibers segment and our Chemicals
segment), we compete primarily on the basis of price and
reliability of product and supply. All of our segments, however,
also compete in specialty markets on the basis of product
differentiation, innovation, quality and price. Significant
product innovations, technical advances or the intensification
of price competition by competitors could harm our operating
results.


In the Healthcare business our competitors are
consolidating, and the strength of combined companies could
affect our competitive position.

From time to time, we acquire all or a portion of
an established business and combine it with our existing
business units. Integration of existing and newly acquired
businesses requires difficult decisions with respect to staffing
levels, facility consolidation and resource allocation. We must
also plan carefully to ensure that established product lines and
brands retain or increase their market position. If we fail to
effectively integrate a new business or if integration results
in significant unexpected costs, our results of operations could
suffer.

Risks from the handling of hazardous
materials could harm our operating results

Bayers operations are subject to the
operating risks associated with pharmaceutical and chemical
manufacturing, including the related storage and transportation
of raw materials, products and wastes. These hazards include,
among other things:



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | pipeline and storage tank leaks and ruptures;                         
|
| |  | explosions; and                                                       
|
| |  | discharges, disposal or releases of toxic or
    hazardous substances.

These operating risks can cause personal injury,
property damage and environmental contamination, and may result
in the shutdown of affected facilities and the imposition of
civil or criminal penalties or negatively impact the reputation
of the whole company. The occurrence of any of these events may
significantly reduce the productivity and profitability of a
particular manufacturing facility and harm our operating results.

Although we maintain property, business
interruption and casualty insurance that we believe is in
accordance with customary industry practices, this insurance may
not be adequate to cover fully all potential hazards incident to
our business.

For more detailed information on environmental
issues, see Item 4, Information on the
Company  Business  Governmental
Regulation.

Environmental liabilities and compliance
costs may have a significant negative effect on our operating
results

The environmental laws of various jurisdictions
impose actual and potential obligations on Bayer to remediate
contaminated sites. These obligations may relate to sites:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | that we currently own or operate;                                                                     
|
| |  | that we formerly owned or operated;                                                                   
|
| |  | where waste from our operations was disposed; or                                                      
|
| |  | where we contaminate air, water or soil by
    emissions or spills onto the property of third parties.

These environmental remediation obligations could
significantly reduce our operating results. In particular, our
accruals for these obligations may be insufficient if the
assumptions underlying these accruals prove incorrect or if we
are held responsible for additional, currently undiscovered
contamination. See Item 4, Information on the
Company  Business  Governmental
Regulation.

Furthermore, Bayer is or may become involved in
claims, lawsuits and administrative proceedings relating to
environmental matters. An adverse outcome in any of these might
have a significant negative impact on our operating results and
public reputation.

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Stricter environmental, safety and health laws
and enforcement policies could result in substantial costs and
liabilities to Bayer and could subject our handling,
manufacture, use, reuse or disposal of substances or pollutants
to more rigorous scrutiny than is currently the case.
Consequently, compliance with these laws could result in
significant capital expenditures as well as other costs and
liabilities, thereby harming our business and operating results.

Existing insurance coverage may turn out to
be inadequate

We are aiming at adequately covering foreseeable
risks by insurance. Such insurance coverage, however, may turn
out not to fully cover the risks to which the company is
exposed. For certain risks, adequate insurance coverage may not
be available on the market or may not be available at reasonable
conditions.

Fluctuations in exchange rates may affect
our financial results

Bayer conducts a significant portion of its
operations outside the euro zone. Fluctuations in currencies of
countries outside the euro zone, especially the
U.S. dollar, can materially affect our revenue as well as
our operating results. For example, changes in currency exchange
rates may affect:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | the relative prices at which we and our
    competitors sell products in the same market; and
|
| |  | the cost of items we require for our operations.                                             

Although these fluctuations can benefit us, they
can also harm our results. From time to time, we may use
financial instruments to hedge our exposure to foreign currency
fluctuations. As of December 31, 2003, we had entered into
forward foreign exchange contracts and currency swaps with a
total notional value of
4.0 billion
(excluding cross currency interest rate swaps included in our
6.3 billion
notional amount of interest rate hedging contracts). For further
information on these products, see Item 11, Quantitative
and Qualitative Disclosures about Market Risk.

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|        |                           
|------- | --------------------------
|Item 4. | Information on the Company




HISTORY AND DEVELOPMENT OF THE
COMPANY

Bayer Aktiengesellschaft, or Bayer AG, is a stock
corporation (Aktiengesellschaft) organized under the laws
of the Federal Republic of Germany.

Bayer AG was incorporated in 1951 under the name
Farbenfabriken Bayer AG for an indefinite term and
adopted its present name in 1972. Bayer AGs registered
office (Sitz) and principal place of business are at the
Bayerwerk, 51368 Leverkusen, Germany. Its telephone number
is +49 (214) 30-1 and its home page on the World Wide
Web is at www.bayer.com. Reference to our website does not
incorporate the information contained on the website into this
annual report. The headquarters of Bayer AGs
U.S. subsidiary, Bayer Corporation, are located at
100 Bayer Road, Pittsburgh, PA 15205-9741.

Although Bayer AG was incorporated in 1951, it
traces its roots to Friedr. Bayer & Co., an aniline dye
works founded in Wuppertal, Germany in 1863 by Friedrich Bayer
and Johann Friedrich Weskott. This company achieved a leading
position in its industry, opening facilities and agencies in the
United States and in other European countries. Friedr.
Bayer & Co. made numerous discoveries, most notably of
aspirin (acetylsalicylic acid), perhaps the best-known and most
widely used medication in world history.

In 1925, the original Bayer company merged with
five other leading German chemical and pharmaceutical companies,
including the ancestors of todays Aventis and BASF, to
form I.G. Farbenindustrie AG, or I.G. Farben. After
the second World War, the Allied High Commission, formed by the
United States, the United Kingdom, France and the former Soviet
Union to administer occupied Germany, seized the assets of I.G.
Farben. Pursuant to Law No. 35 of the Allied High
Commission, some of these assets were later distributed among 12
newly formed companies, including the present Bayer AG.

After World War I, the U.S. government
expropriated the U.S. rights to the Bayer name and
trademarks as enemy property. In 1986, Bayer
reacquired the U.S. rights to the Bayer trademark with
respect to products for the manufacturing industry and, in 1994,
reacquired full U.S. rights to its name and trademarks,
including the Bayer cross.

Friedr. Bayer & Co. established
operations in the United States as early as 1870. In 1992, Bayer
AGs U.S. subsidiaries Mobay Corporation, Miles Inc.
and Agfa Corporation merged with the management holding company
Bayer USA Inc. to form a new operating company, Miles Inc. In
April 1995, Miles Inc. changed its name to the current form,
Bayer Corporation.

Since 2001, we have incurred capital expenditures
as follows:

|                                     |       |                     |     |       |  |      |     |       |  |  |     |       | 
|------------------------------------ | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                                     |       | 2001                |     | 2002  |  | 2003
|                                     |       |                     |     |       |  |     
|                                     |       |                    
|                                     |       | (euros in millions)
|Pharmaceuticals, Biological Products |       |                     | 375 |       |  |      | 178 |       |  |  | 185 |      
|Consumer Care, Diagnostics           |       |                     | 238 |       |  |      | 272 |       |  |  | 201 |      
|Animal Health                        |       |                     | 45  |       |  |      | 26  |       |  |  | 21  |      
|CropScience                          |       |                     | 199 |       |  |      | 297 |       |  |  | 413 |      
|Plastics, Rubber                     |       |                     | 536 |       |  |      | 504 |       |  |  | 290 |      
|Polyurethanes, Coatings, Fibers      |       |                     | 468 |       |  |      | 506 |       |  |  | 283 |      
|Chemicals                            |       |                     | 501 |       |  |      | 285 |       |  |  | 203 |      
|Reconciliation(1)                    |       |                     | 255 |       |  |      | 315 |       |  |  | 143 |      
|                                     |       |                     |     |       |  |      |     |       |  |  |     |      
|                                     | Total |                     |     | 2,617 |  |      |     | 2,383 |  |  |     | 1,739 | 
|                                     |       |                     |     |       |  |      |     |       |  |  |     |      



---



|    |                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------
|(1) | Capital expenditures not allocated to an
    individual segment (such as investments in the Corporate Center).

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Our expenditures on acquisitions in the past
three years were as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2001, we spent
    0.5 billion
    on acquisitions, including rights to manufacture and market
    products that detect hepatitis C and HIV antibodies, as
    well as the corn herbicide Mikado®. We also made a
    93 million
    equity investment in CuraGen.                                                                                                                                                                                                
|
| |  | In 2002, we spent a total of
    7.9 billion
    on acquisitions, mainly for the acquisition of Aventis
    CropScience effective June 1, 2002 from Aventis and
    Schering. Approval of this acquisition by the relevant antitrust
    authorities, particularly in Europe and the United States, was
    conditional upon our divesting or outlicensing a number of
    products. We also acquired Visible Genetics Inc. in Canada and
    Tectrade A/S in Denmark.
|
| |  | In 2003, we spent a total of
    72 million
    on acquisitions mainly for increasing our interest in the Bayer
    Polymers Sheet Europe Group (formerly known as Makroform) up to
    100 percent.                                                                                                                                                                                                                                                                  
|
| |  | In March 2004, we purchased Crompton
    Corporations 50 percent stake in the Gustafson seed
    treatment business in the United States, Canada and Mexico for a
    purchase price of $124 million. This purchase gave Bayer
    CropScience, which already held a 50 percent stake in the
    U.S. and Canadian Gustafson joint ventures, full ownership
    of Gustafsons NAFTA business.                                                                        

We divested the following operations in the past
three years:



| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our acrylic fiber product line in the first half
    of 2001. We classified the remainder of our Fibers business
    group under Discontinuing Operations. In May 2002,
    we reclassified Fibers as part of our ongoing business. See
    Item 5, Operating and Financial Review and
    Prospects  Overview.
|
| |  | Our interest in the EC Erdölchemie joint
    venture in May 2001, which we had previously classified under
    Discontinuing Operations.                                                                                                                                                                        
|
| |  | Haarmann & Reimer effective
    September 30, 2002, as part of the streamlining of our
    portfolio.                                                                                                                                                                                                             
|
| |  | The remaining 30 percent of our Agfa
    business segment in June 2002, of which we had already divested
    70 percent in 1999.                                                                                                                                                                                  
|
| |  | Our 94.9 percent interest in Bayer
    Wohnungen, effective March 1, 2002.                                                                                                                                                                                                                                        
|
| |  | A large part of the global household insecticides
    business of our Consumer Care division was divested in 2002
    amounting to
    0.4 billion;
    we also sold the remaining parts of this business in 2003
    amounting to
    0.3 billion.                                                             
|
| |  | Our French and Spanish generic pharmaceutical
    operations, as a further part of our drive to streamline our
    portfolio.                                                                                                                                                                                     
|
| |  | Our 50 percent interest in PolymerLatex.
    This transaction was closed on May 9, 2003.                                                                                                                                                                                                                          

Following the acquisition of Aventis CropScience
in 2002, our global business activities have been integrated and
the divestments imposed by the European Commission and the
United States Federal Trade Commission have largely been
completed. We terminated our research agreement with Millennium
Pharmaceuticals, Inc. on October 31, 2003 as planned and
sold our interest in this biotechnology company in the fourth
quarter 2003, realizing
0.3 billion.

In connection with the planned realignment of the
Bayer Group, we classified our chemicals activities 
excluding H.C. Starck and Wolff Walsrode  and certain
parts of our polymers activities under Discontinuing
Operations (see Item 4  Business).
As part of our ongoing portfolio management, we plan to divest
the plasma business of the Biological Products division. These
activities are also shown under Discontinuing
Operations.

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BUSINESS

We are a global company offering a wide range of
products, including ethical pharmaceuticals, diagnostics and
other health care products; agricultural products; polymers; and
chemicals.

Bayer AG is headquartered in Leverkusen, Germany
and is the management holding company of the Bayer Group, which
includes over 330 consolidated subsidiaries. During 2003, we
continued to implement the decision to adopt a holding company
structure that was approved by our shareholders in April 2002.
Under our plan for this new structure, we transferred most of
Bayer AGs assets to the new subsidiaries.

This new structure, which evolves out of our
historical four pillar strategy, resulted in the
division of our business operations among four new, legally
independent operating companies heading up four subgroups, which
in turn, consist of a total of seven business segments:



| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Bayer HealthCare AG(heading up the Bayer HealthCare subgroup, which consists of our
    three health care segments: Pharmaceuticals, Biological
    Products; Consumer Care, Diagnostics; and Animal Health), which
    became legally independent on September 30, 2003, with
    retroactive economic effect from January 1, 2003;
|
| |  | Bayer CropScience AG(heading up the Bayer CropScience subgroup, which consists of
    our CropScience segment), which became legally independent on
    October 1, 2002, with retroactive economic effect from
    January 1, 2002;                                                                                                 
|
| |  | Bayer MaterialScience
    AG(heading up the Bayer Polymers
    subgroup, which consists of our Plastics, Rubber segment and our
    Polyurethanes, Coatings, Fibers segment), which became legally
    independent on December 30, 2003, with retroactive economic
    effect from October 1, 2003; and                             
|
| |  | Bayer Chemicals AG(heading up the Bayer Chemicals subgroup, which consists of our
    Chemicals segment), which became legally independent on
    September 30, 2003, with retroactive economic effect from
    July 1, 2003.                                                                                                       

The activities of the seven business segments,
which house the business operations, are performed by the
operating companies Bayer HealthCare AG, Bayer CropScience AG,
Bayer MaterialScience AG and Bayer Chemicals AG. Each operating
company, together with the domestic and international
subsidiaries assigned to it, forms a Bayer subgroup. Each of the
four subgroups Bayer HealthCare, Bayer CropScience, Bayer
Polymers and Bayer Chemicals is, within the framework of
strategies, targets and guidelines determined by the Bayer AG
Board of Management, an independent operating unit with
worldwide business accountability and its own management. Each
of the operating companies has entered into a control and profit
and loss transfer agreement with Bayer AG.

Three legally independent service companies
provide support functions to the four subgroups, Bayer AG and
third parties. They include:



| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Bayer Technology Services
    GmbH(providing engineering
    functions), which became legally independent on
    September 30, 2003, with retroactive economic effect from
    January 1, 2003;                                                                        
|
| |  | Bayer Business Services
    GmbH(providing information
    management, accounting and reporting, consulting and
    administrative services), which became legally independent on
    December 30, 2003, with retroactive economic effect from
    October 1, 2003; and
|
| |  | Bayer Industry Services GmbH & Co.
    OHG(operating the Bayer Chemical Park
    network in Germany and providing site specific services), which
    became legally independent on December 30, 2003, with
    retroactive economic effect from October 1, 2003.       

Under the new structure, our Board of Management
continues to determine the overall strategy of the Bayer Group
and control resource allocation. It also nominates the
management of the subsidiary Group companies and sets each
companys performance criteria. Although these entities are
currently wholly-owned subsidiaries, we may consider strategic
partnerships and collaborations involving them.

15



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For the year ended December 31, 2003, Bayer
reported total sales of
28,567 million,
an operating loss of
1,203 million,
and a net loss of
1,361 million.
Sales from continuing operations amounted to
22,178 million.
As of December 31, 2003, we employed 115,400 people
worldwide.

The following table shows a breakdown of our
sales in 2003 based on the location of the Bayer entity on the
books of which our sales are recorded (point of origin):

|                                 |  |                     |        |                       |  |  |      | 
|-------------------------------- |  | ------------------- | ------ | --------------------- |  |  | ---- | 
|                                 |  |                    
|                                 |  | Sales              
|Region                           |  |                    
|                                 |  | (euros in millions) |        | (percentage of total)
|Europe                           |  |                     | 13,518 |                       |  |  | 47.3 | 
|North America                    |  |                     | 8,763  |                       |  |  | 30.7 | 
|Asia/Pacific                     |  |                     | 3,913  |                       |  |  | 13.7 | 
|Latin America/Africa/Middle East |  |                     | 2,373  |                       |  |  | 8.3  | 

In the future, we plan to focus more closely on
our strengths in the fields of health care, nutrition and
innovative materials. The Board of Management and the
Supervisory Board of Bayer AG have therefore decided to adjust
the Groups structure and business alignment accordingly.
We plan to place the Chemicals business (except H.C. Starck and
Wolff Walsrode) and parts of the Polymers subgroup that we no
longer regard as core businesses into an independent company, to
be named Lanxess, which we plan to list on the Frankfurt Stock
Exchange by early 2005. We intend to combine the other
activities of the Polymers and Chemicals subgroups in the new
Bayer MaterialScience subgroup. Our goal is to strengthen the
competitiveness of our fast-growing, innovation-driven
businesses in the HealthCare, CropScience and MaterialScience
subgroups by concentrating on the special needs of these
businesses.

We are therefore specializing in businesses that
we believe have greater potential for growth, value creation and
innovation. These businesses require more sophisticated
structures and a substantial level of investment. We believe
that businesses that do not fit this profile are better served
by being placed in an environment in which they can fully deploy
their own management resources and create the structures they
need.

In connection with the new alignment of the Bayer
Group, we have decided to position Pharmaceuticals as a
medium-sized enterprise with the appropriate structures. Here we
intend to concentrate on infectious diseases, cardiovascular
risk management, urology and oncology. We also intend to
strengthen regional collaborations, partnerships and
in-licensing activities. An additional element of our strategy
is continuous life cycle management, with which we aim to
further enhance the success of our products that are already on
the market. See Item 4, Pharmaceuticals  Research
and Development.

In the Biological Products Division, we plan to
expand our profitable Kogenate® business,
emphasizing that products good profile and further
improvements to its delivery. We announced on October 2,
2003 our intent to divest the plasma business. The
Kogenate® business is not affected by this decision.

In Bayer HealthCare, we plan to focus more
closely on our competencies and experience in the
consumer-oriented health care business. In Consumer Care, we aim
to continue our growth by strengthening our own products and
brands, including in particular non-prescription pain-relievers.
We also regularly review options for expanding our product
portfolio and regional presence through in-licensing and
acquisitions.

In Diagnostics, we aim to maintain our position
as one of the market leaders. We intend, through the
introduction of new products, to spur our growth in the
consumer-oriented Self-Testing unit. In Professional Testing, we
plan to pursue strong development with further product launches
that will allow us to serve our customers even more
specifically. Other focuses include the forging of new strategic
partnerships and the expansion of existing collaborations.

In Animal Health, we aim to further expand our
position as one of the worlds leading suppliers of
veterinary pharmaceuticals. Here we intend to concentrate on
strengthening the consumer-oriented Companion Animals business
unit and systematically expanding our Livestock business. To
solidify our position, we aim to maintain our focus on
attractive key markets and on the steady expansion of our core
products. We are also analyzing options for improving our market
position and rounding out our product portfolio through
acquisitions or strategic alliances.

16



---



##### Table of Contents



In the Bayer CropScience subgroup, the
integration of Aventis CropScience and the divestitures required
to fulfill antitrust conditions are nearly complete. We intend
to further strengthen our market positions in Crop Protection
and Environmental Science and expand our seed business and plant
biotechnology activities. We regard new product launches,
realization of synergies, strict cost management and portfolio
streamlining as key factors in achieving our target operating
result for Bayer CropScience.

In the Crop Protection Business Group, we aim to
expand our business by exploiting our strong market positions,
our regional presence and our broad range of herbicide,
fungicide, insecticide and seed treatment products. Over and
above these activities, we are planning to focus primarily on
new products from our research and development pipeline.
Environmental Science intends to further strengthen its position
as a leading supplier of non-agricultural pest control products,
in particular through strategic partnerships in the
U.S. lawn and garden business and through consistent
portfolio optimization. In BioScience, the focus lies on cotton,
canola, rice and vegetable crops. We also plan to access new
markets using plant biotechnology.

In the new Bayer MaterialScience subgroup, we aim
to further expand our strong market positions primarily through
exploiting our technological expertise in the field of
innovative materials, with a focus on polycarbonates and
isocyanates. By further optimizing our processes and expanding
our activities in Asia in particular, we intend to create
competitive advantages that will strengthen the long-term
earning power of our businesses in these growth markets.

The strategic alignment on core competencies
should enable Bayer to increase investment in growth businesses
and innovative technologies. We expect that this will allow us
to play a leading role in these attractive markets and expand
our current strong positions. We intend to optimize the
allocation of resources as well as continue with our cost-saving
and efficiency-improvement programs in order to increase
Bayers corporate value over the long term.

We aim to avoid accidents, to prevent our
activities from harming human and animal health and to tailor
our product range to the tenets of sustainability. Bayers
long-term strategy and activities are guided by the principles
of sustainable development. Our objective is to meet the
economic, ecological and social needs of todays society
without compromising the ability of future generations to meet
their own needs. We contribute to sustainable development by
participating in the worldwide Responsible Care®
initiative developed by companies in the global chemical
industry.




BAYER HEALTHCARE

PHARMACEUTICALS, BIOLOGICAL
PRODUCTS

Overview

Our Pharmaceuticals, Biological Products segment
is comprised of the Pharmaceuticals and Biological Products
divisions. This segment formerly consisted of a single division
responsible for both pharmaceutical and biological products.
Beginning in 2002, we have organized the segment internally into
two separate divisions. The following table shows the
segments performance for the last three years.

|                   |                                      |                     |       |      |   |      |       |      |   |  |       |      |  
|------------------ | ------------------------------------ | ------------------- | ----- | ---- | - | ---- | ----- | ---- | - |  | ----- | ---- | -
|                   |                                      | 2001                |       | 2002 |   | 2003
|                   |                                      |                     |       |      |   |     
|                   |                                      |                    
|                   |                                      | (euros in millions)
|External net sales |                                      |                     | 5,729 |      |   |      | 4,767 |      |   |  | 4,745 |     
|                   | Percentage of total sales            |                     |       | 18.9 |   |      |       | 16.1 |   |  |       | 16.6 |  
|                   | thereof Discontinuing Operations     |                     |       | 695  |   |      |       | 679  |   |  |       | 613  |  
|Intersegment sales |                                      |                     | 38    |      |   |      | 33    |      |   |  | 51    |     
|Operating result   |                                      |                     | 52    |      |   |      | (186  | )    |   |  | (425  | )   
|                   | Percentage of total operating result |                     |       | 3.1  |   |      |       |     |   |  |       |     |  
|                   | thereof Discontinuing Operations     |                     |       | (139 | ) |      |       | (111 | ) |  |       | (353 | )
|                   | thereof special items(1)             |                     |       | (321 | ) |      |       | (333 | ) |  |       | (832 | )



---



|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The special items are detailed in Item 5,
    Operating and Financial Review and Prospect 
    Operating Results 2001, 2002 and 2003  Segment
    Data.

17



---



##### Table of Contents



The following table shows our sales during the
past three years from the products that we regard as material to
the sales of the segment as a whole.

|                   |  |           |       |            |  |           |      |            |  |           |       |            |  |  |      |  |  |  |       |  |  |  |      | 
|------------------ |  | --------- | ----- | ---------- |  | --------- | ---- | ---------- |  | --------- | ----- | ---------- |  |  | ---- |  |  |  | ----- |  |  |  | ---- | 
|                   |  |           |       |            |  |          
|Product            |  | 2001      |       | 2002       |  | 2003     
|                   |  |           |       |            |  |          
|                   |  | Sales     |       | Percentage |  | Sales     |      | Percentage |  | Sales     |       | Percentage
|                   |  | (euros in |       | of segment |  | (euros in |      | of segment |  | (euros in |       | of segment
|                   |  | millions) |       | sales      |  | millions) |      | sales      |  | millions) |       | sales     
|                   |  |           |       |            |  |           |      |            |  |           |       |           
|Cipro®             |  |           | 1,964 |            |  |           | 34.3 |            |  |           | 1,411 |            |  |  | 29.6 |  |  |  | 1,411 |  |  |  | 29.7 | 
|Adalat®            |  |           | 975   |            |  |           | 17.0 |            |  |           | 800   |            |  |  | 16.8 |  |  |  | 676   |  |  |  | 14.2 | 
|Kogenate®          |  |           | 250   |            |  |           | 4.4  |            |  |           | 400   |            |  |  | 8.4  |  |  |  | 497   |  |  |  | 10.5 | 
|Gamimune®/Gamunex® |  |           | 343   |            |  |           | 6.0  |            |  |           | 333   |            |  |  | 7.0  |  |  |  | 304   |  |  |  | 6.4  | 
|Avelox®            |  |           | 181   |            |  |           | 3.2  |            |  |           | 280   |            |  |  | 5.9  |  |  |  | 299   |  |  |  | 6.3  | 
|Glucobay®          |  |           | 312   |            |  |           | 5.4  |            |  |           | 287   |            |  |  | 6.0  |  |  |  | 273   |  |  |  | 5.8  | 
|Prolastin®         |  |           | 131   |            |  |           | 2.3  |            |  |           | 151   |            |  |  | 3.2  |  |  |  | 166   |  |  |  | 3.5  | 
|Trasylol®          |  |           | 136   |            |  |           | 2.4  |            |  |           | 154   |            |  |  | 3.2  |  |  |  | 157   |  |  |  | 3.3  | 
|Levitra®           |  |           | 0     |            |  |           | 0    |            |  |           | 6     |            |  |  | 0.1  |  |  |  | 144   |  |  |  | 3.0  | 

Segment Strategy

Pharmaceutical Products

In connection with the new alignment of the Bayer
Group, we have decided to position Pharmaceuticals as a
medium-sized enterprise with the appropriate structures.

To achieve this target our strategic priorities
include:



| |   |                                 
| | - | --------------------------------
| |  | Focusing on the following areas:



| |   |                                
| | - | -------------------------------
| |  | Infectious diseases,           
|
| |  | Cardiovascular Risk Management,
|
| |  | Urology, and                   
|
| |  | Oncology; and                  



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | Working on regional co-operations, alliances and
    licensing, all as appropriate in light of the local
    circumstances.

In addition to our immediate priorities, life
cycle management remains a continuing element of our strategy.
Successful life cycle management enables us to extend the
commercial success of established products.
See  Research and Development 
Life Cycle Management.

Biological Products

Our strategic priorities for the Biological
Products division include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the midterm future, we intend to focus on
    growth of the Kogenate® brand while maintaining
    profitability. To achieve this, the Kogenate®
    strategy is to create greater differentiation between
    Kogenate® and other recombinant Factor VIII
    (FVIII) products by adding value with product improvements,
    expanding new technology to patients and care givers and
    investing in the development of strategic partnerships for the
    future.                                                                                                                           
|
| |  | Bayer AG announced on October 2, 2003 its
    intent to divest the plasma business. The Kogenate®
    business is not affected by this decision. Until the plasma
    business has been divested, we intend to pursue a strategy of
    maintaining this business market share and generating an
    improved operating result and cash flow for the business. To
    accomplish these targets, we intend to expand the portfolio with
    selected product line extensions, new developments and added
    indications and to improve the efficiency of the plasma
    production site operations.

18



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##### Table of Contents



Pharmaceuticals

Overview

Our Pharmaceuticals division focuses on the
development and marketing of ethical pharmaceuticals. Ethical
pharmaceuticals are medications requiring a physicians
prescription and sold under a specific brand name.

Major Products

The following table shows the sales of our
Pharmaceuticals division during the past three years from the
products that we regard as material to the sales of the division
in 2003.

|          |       |           |       |            |  |           |      |            |  |           |       |            |  |  |      |      |  |  |       |       |  |  |      |      | 
|--------- | ----- | --------- | ----- | ---------- |  | --------- | ---- | ---------- |  | --------- | ----- | ---------- |  |  | ---- | ---- |  |  | ----- | ----- |  |  | ---- | ---- | 
|          |       |           |       |            |  |          
|Product   |       | 2001      |       | 2002       |  | 2003     
|          |       |           |       |            |  |          
|          |       | Sales     |       | Percentage |  | Sales     |      | Percentage |  | Sales     |       | Percentage
|          |       | (euros in |       | of segment |  | (euros in |      | of segment |  | (euros in |       | of segment
|          |       | millions) |       | sales      |  | millions) |      | sales      |  | millions) |       | sales     
|          |       |           |       |            |  |           |      |            |  |           |       |           
|Cipro®    |       |           | 1,964 |            |  |           | 34.3 |            |  |           | 1,411 |            |  |  | 29.6 |      |  |  | 1,411 |       |  |  | 29.7 |     
|Adalat®   |       |           | 975   |            |  |           | 17.0 |            |  |           | 800   |            |  |  | 16.8 |      |  |  | 676   |       |  |  | 14.2 |     
|Avelox®   |       |           | 181   |            |  |           | 3.2  |            |  |           | 280   |            |  |  | 5.9  |      |  |  | 299   |       |  |  | 6.3  |     
|Glucobay® |       |           | 312   |            |  |           | 5.4  |            |  |           | 287   |            |  |  | 6.0  |      |  |  | 273   |       |  |  | 5.8  |     
|Trasylol® |       |           | 136   |            |  |           | 2.4  |            |  |           | 154   |            |  |  | 3.2  |      |  |  | 157   |       |  |  | 3.3  |     
|Levitra®  |       |           | 0     |            |  |           | 0.0  |            |  |           | 6     |            |  |  | 0.1  |      |  |  | 144   |       |  |  | 3.0  |     
|Others    |       |           | 1,216 |            |  |           | 21.1 |            |  |           | 750   |            |  |  | 15.7 |      |  |  | 675   |       |  |  | 14.2 |     
|          |       |           |       |            |  |           |      |            |  |           |       |            |  |  |      |      |  |  |       |       |  |  |      |     
|          | Total |           |       | 4,784      |  |           |      | 83.5       |  |           |       | 3,688      |  |  |      | 77.4 |  |  |       | 3,635 |  |  |      | 76.6 | 
|          |       |           |       |            |  |           |      |            |  |           |       |            |  |  |      |      |  |  |       |       |  |  |      |     

Ciprofloxacin, marketed under the trademark
Cipro® in the United States and
Ciproxin®, Ciproxine®,
Ciprobay®, Ciproxina®,
Bacip® and Ciflox® in other countries,
is a broad-spectrum antimicrobial agent of the fluoroquinolone
class. We launched Cipro® in 1986 and have since
marketed it in more than 100 countries.
Cipro®s main uses are in the treatment of
urinary tract infections and in severe hospital infections,
where it competes with other fluoroquinolones as well as with
antibiotics of other classes. It is also approved for the
treatment of anthrax. In January 2003, we launched in the United
States Cipro® XR (Extended Release) in a 500 mg
extended release tablet for once daily administration in the
treatment of uncomplicated urinary tract infections, and in
September 2003, we launched Cipro® XR in a 1,000 mg
extended release tablet for once daily therapy of complicated
urinary tract infections. In addition, in June 2003, Barr
Laboratories, Inc. started to supply the U.S. market with
generic versions of Cipro® standard oral
presentations based upon an agreement concluded with us in 1996.
Barr Laboratories is sourcing the products from Bayer
Pharmaceuticals Corporation. In December 2003, patent protection
for the active pharmaceutical ingredient expired in the
U.S. However, market exclusivity has been granted for
another six months by the FDA based upon fulfillment of written
requests of the FDA on the pediatric use of Cipro®.
Cipro® is our leading pharmaceutical product.

Adalat® is the
brand name for nifedipine, the first representative of the
dihydropyridine class of calcium antagonists. Calcium plays an
important role in the bodys regulation of blood pressure
and the supply of blood to the heart tissues. Calcium
antagonists can reduce blood pressure and improve blood supply
to heart tissue.

Moxifloxacin, marketed under the trade name
Avelox® in the United States and
Avalox®, Izilox® and Actira®
in other countries, is an antibiotic used to treat common
bacterial respiratory tract infections. We currently market
Avelox® in more than 90 countries. It is indicated
for the treatment of community-acquired pneumonia, acute
exacerbations of chronic bronchitis and acute sinusitis. In late
2001, we launched Avelox® i.v., a new
intravenous form of this product, in the United States, our most
important market for this product in terms of sales, and
subsequently in other markets.

Glucobay®,
Precose® (in the United States) and
Prandase® (in Canada) are our trade names for
acarbose, an oral antidiabetic product that delays carbohydrate
digestion. Glucobay® improves metabolic control in
diabetics alone or in combination with other antidiabetic drugs.

19



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##### Table of Contents



Trasylol® is a
natural proteinase inhibitor obtained from bovine lung tissue.
Used prophylactically, it reduces blood loss during coronary
bypass surgery, reducing the patients need for blood
transfusions.

Vardenafil, our erectile dysfunction medication
marketed under the trade name Levitra®, has been
launched in the United States and all major markets with the
exception of Canada and Japan. The application that we filed
with the Japanese authorities in December 2001 is currently
under review. We market the product in co-operation with
GlaxoSmithKline in all markets except Japan and also jointly
perform life cycle management. For more information on life
cycle management, see  Research and
Development  Life Cycle Management. See
Item 8, Financial Information  Legal
Proceedings for a discussion of the intellectual property
status in the United States of Levitra® and other
erectile dysfunction medications.

CardioAspirinrefers
to Bayers collective group of products (in both our
Pharmaceuticals and Consumer Care divisions) that are
professionally indicated for the prevention of an MI (myocardial
infarction, or heart attack) in either those individuals who
have already had an initial MI (secondary prevention) or in
individuals deemed at risk for a first MI by their physician
(primary prevention). These products vary in status (whether or
not a prescription is required) based on local regulations. We
face competition from both over-the-counter and prescription
drugs in the cardiovascular marketplace which claim secondary
and/or primary prevention benefits.

Markets and Distribution

The Pharmaceuticals divisions principal
markets are North America, Western Europe and Asia (especially
Japan). The divisions sales by region and total sales for
the past three years are as follows:

|                                 |       |                     |       |       |  |      |       |       |  |  |       |       | 
|-------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                 |       | 2001                |       | 2002  |  | 2003
|                                 |       |                     |       |       |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 1,450 |       |  |      | 1,155 |       |  |  | 1,067 |      
|North America                    |       |                     | 2,049 |       |  |      | 1,420 |       |  |  | 1,532 |      
|Asia/Pacific                     |       |                     | 895   |       |  |      | 769   |       |  |  | 705   |      
|Latin America/Africa/Middle East |       |                     | 390   |       |  |      | 344   |       |  |  | 331   |      
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      
|                                 | Total |                     |       | 4,784 |  |      |       | 3,688 |  |  |       | 3,635 | 
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      

Among the factors that have affected, or may
affect, our Pharmaceuticals business are:



| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | in Europe and North America, increasingly
    competitive price pressures, as managed care groups, health care
    institutions, government agencies and other purchaser groups
    seek price discounts and rebates for pharmaceutical products;
|
| |  | the impact of competing generic products entering
    the European and North American markets;                                                                                                                                                   
|
| |  | currency effects resulting from transactions in
    countries outside the euro zone;                                                                                                                                                             
|
| |  | competition from large pharmaceutical companies
    in the market with substantial resources for research, product
    development and promotion; and                                                                                            
|
| |  | in Japan, regulation of pharmaceutical prices and
    mandatory price reductions stipulated by the Japanese Ministry
    of Health, Labor and Welfare.                                                                                           

We generally distribute our products through
wholesalers, pharmacies and hospitals as well as, to a certain
extent, directly to patients. Where appropriate, we actively
seek to supplement the efforts of our sales force through
co-promotion and co-marketing arrangements. In November 2001, we
entered into a co-promotion agreement with GlaxoSmithKline for
Levitra® (vardenafil), our erectile dysfunction
medication. See  Major Products.

We currently produce the active ingredients for
our ethical pharmaceutical products almost entirely at the Bayer
facilities in Wuppertal and Leverkusen, Germany. Bayer
facilities throughout the world compound our raw materials and
package the finished product for shipment. Our main
pharmaceutical production facilities are in Leverkusen, Germany;
Garbagnate, Italy; and Shiga, Japan.

20



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##### Table of Contents



We obtain the raw materials for our active
ingredients in ethical pharmaceuticals partly from Bayers
Chemicals business segment and partly from third parties in
Europe and Asia. We maintain strategic reserves of our products
to avoid breaks in the supply chain. We obtain additional
ingredients and packaging materials from diverse suppliers on a
worldwide basis. As a rule, we approve several suppliers for
each required material. At the same time, we are increasingly
entering into global contracts in order to secure advantageous
pricing. Where a required material is available from only one
supplier, our policy is to amass a strategic reserve, typically
equal to a 90-day supply, while mounting an intensive search for
potential alternative suppliers.

We encounter competition in all of our
geographical markets from large national and international
competitors. Our main competitors are GlaxoSmithKline, Pfizer
and Abbott Laboratories in the antibacterial products market;
Pfizer, Merck & Co., Novartis, and AstraZeneca in the area
of hypertension and coronary heart disease therapy; Takeda,
GlaxoSmithKline, Aventis and Bristol-Myers Squibb in the oral
antidiabetics market; and Pfizer and Eli Lilly in the erectile
dysfunction market.

Research and Development

Bayer allocates the largest part of its research
and development budget to the Pharmaceuticals division. Within
this division, we focus our research and development activities
on therapeutic areas in which we believe there is a high degree
of inadequately met medical need and where we expect our
research and development investment to yield high productivity.
Our established areas of core competency are infectious diseases
as well as cardiovascular diseases, urology (erectile
dysfunction and urinary incontinence) and oncology. Research was
discontinued in the areas of respiratory diseases and
neurological/ neurodegenerative disorders in 2003. However,
focused development activities in these areas will be completed.

The divisions largest research and
development facilities are located in Wuppertal, Germany for
cardiovascular and anti-infectives; West Haven, Connecticut for
cancer and metabolic diseases; and Kyoto, Japan for urology. In
December 2003, a decision was made to close the research center
in Kyoto, Japan and discontinue Biotech research in Berkeley,
California. Urology research will be transferred from the
research center in Kyoto to the other sites, as will ongoing
research projects and appropriate parts of the technology
platform for the biotech research now in Berkeley.

Life Cycle Management

We apply life cycle management measures to our
marketed products to expand the scope of possible treatment
opportunities by identifying new indications and improved
formulations. Adalat® is a prime example of
successful life cycle management: eighteen years after the
patent protection for the active ingredient nifedipine, its key
component, expired, the drug generated
676 million
in sales in 2003. Similarly, we are implementing life cycle
management measures, such as improved formulations and dosage
forms, for other major products.

Phase II/III Trials

In October 2003, Bay 43-9006, a Raf Kinase
inhibitor, an investigational compound directed against a
specific molecular target involved in excess growth signaling in
cancer and developed jointly with U.S.-based Onyx
Pharmaceuticals Inc., began enrollment in a large Phase III
clinical trial in Renal Cell Carcinoma. Our Factor Xa inhibitor
for the prevention and treatment of thrombosis has also done
well in trials so far and is currently in phase II clinical
testing. Drug candidates in Phase II/III of clinical development
are listed in the following table with their respective
indications:

|                     |  |                       |  |             
|-------------------- |  | --------------------- |  | ------------
|Project              |  | Indication            |  | Status      
|                     |  |                       |  |             
|Repinotan            |  | Acute ischemic stroke |  | In Phase II 
|Faxtor Xa inhibitor  |  | Thrombosis            |  | In Phase II 
|Novel Taxane         |  | Cancer                |  | In Phase II 
|PDE4 Inhibitor       |  | Respiratory diseases  |  | In Phase II 
|Raf Kinase inhibitor |  | Cancer                |  | In Phase III

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The listed compounds represent a snapshot of the
Bayer pipeline. The nature of drug development and discovery is
such that not all products can be expected to fulfill or meet
with favorable regulatory response, so it is possible that some
of the above listed projects under clinical development will not
result in marketed products.

Microbial resistance to antibiotics

The development by microbes of resistance to
antibiotics is a cause for concern for the medical community.
Resistance development is a natural process. It is almost
certainly impossible to eliminate it altogether. Although
emergent ciprofloxacin or moxifloxacin resistance could become a
problem on an isolated, individual-patient basis, we do not
believe that microbial resistance will impair the general
clinical usefulness of these two products in large patient
populations in the foreseeable future.

We actively encourage health care professionals
to adopt standards of appropriate antibiotic use to avoid
facilitating the development of resistance. Inappropriate use of
antibiotics is one factor that facilitates the development of
microbial resistance. This includes using antibiotics when not
indicated, for example, for treating viral infections, but it
also includes not using the most efficacious antibiotics when
there is a need for antibacterial treatment. To provide
physicians and patients with information on how they can use
antibiotics appropriately, we have initiated the
LIBRAINITIATIVE.COM project to collect data on bacterial
resistance on a global basis.

Collaborations

To supplement our internal research and
development efforts, we have established an integrated program
for collaborations with research-oriented companies that are
leaders in their technologies. Our research collaboration
program brings together major research companies to create a
pool of expertise covering the entire research cycle, from
discovery of pharmaceutical mechanisms through characterization
of new active compounds to identification of a novel development
candidate.

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Research Collaborations

The following table illustrates the phases of the
typical pharmaceutical research cycle, the various disciplines
and techniques involved and the major companies that provide us
with active assistance in our research efforts.

|                                                                                                                             |  |                                                                                                                              |  |                                                                                            
|---------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------
|Research Cycle                                                                                                               |  | Discipline/Technique                                                                                                         |  | Research Company                                                                           
|                                                                                                                             |  |                                                                                                                              |  |                                                                                            
|Understanding the disease mechanism and
    identifying new targets                                                          |  | Functional genomics (functional analysis of
    genetic data)                                                                |  | Millennium; Incyte Affymetrix; CuraGen                                                     
|                                                                                                                             |  | Proteomics (mapping protein expression and
    function in an organism or tissue)/Target Validation                          |  | Galapagos; Artemis; Pharmagene Jackson Labs;
    Dharmacon; Cenix; Cellzome; Kings College
|                                                                                                                             |  | Bioinformatics (applying the tools of
    Information Technology to biological data analysis)                                |  | Lion Bioscience                                                                            
|Screening the candidate substances                                                                                           |  | High-throughput screening (rapid, automated
    testing of compounds for potential effectiveness against a given
    target) |  | Axxam; Discovery Partners                                                                  
|                                                                                                                             |  | Toxico- and Pharmacogenomics (increasing the
    quality and probability of success of drug candidates)                      |  | CuraGen                                                                                    
|                                                                                                                             |  | Animal Models                                                                                                                |  | Phenomix                                                                                   
|Increasing the pool of potential drug candidates
    by small-chemical molecules and macromolecules (proteins,
    peptides) |  | Combinatorial Chemistry/Substance synthesis
    (techniques for increasing the number and diversity of test
    compounds)   |  | ArQule; ComGenex                                                                           
|                                                                                                                             |  | X-ray crystallography                                                                                                        |  | Structural Genomix                                                                         
|                                                                                                                             |  | Pool of Bayer biomolecules (for example,
    monoclonal antibodies and conjugates)                                           |  | Morphosys; Seattle Genetics                                                                

In addition to the collaborations focusing on
disease mechanisms and screening, we have established
collaborations in the field of medicinal chemistry. These
collaborations together with our internal research efforts have
given us access to more than one million substances; the HTS
(high-throughput screening) technologies that we developed in
collaboration with our partners enable us to screen more than
200,000 substances for a given target in a single day. Although
our relationship with each of the individual research partners
is important to us, it is the cooperative structure as a whole
that is a key element of our strategy.

Three of our research collaborations 
those with Millennium Inc., LION Bioscience and
CuraGen  are or have been of particular importance.

Millennium

Together with Millennium, we have created a
substantial collaborative effort to use the tools of genomics to
identify new drug targets. The collaboration ended on
October 31, 2003 as planned and we sold our interest in
Millennium in the fourth quarter of 2003. During the
collaboration, Bayer progressed more than 180 targets into
various stages of assay configuration and drug discovery. The
companies amended the agreement to provide Bayer, at no
additional cost, extended access for up to seven years to a pool
of 280 additional proprietary targets which have for technical
reasons not yet been configured into assays. At the end of the
seven-year period, the targets remaining in the pool will be
returned to Millennium.

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An additional goal which has been realized in
this collaboration was to obtain technology and expertise to
enable us to continue the genomics program independently after
the completion of the collaboration.

The final financial volume of this collaboration
was $465 million including a $96.6 million equity
investment.

LION Bioscience

We have established two collaboration projects
with LION Bioscience, a bioinformatics technology provider.

Under the first project, which began in 1999,
LION established a subsidiary in Cambridge, Massachusetts, LION
Bioscience Research Inc. (LBRI). LBRI provides our life sciences
effort with a strong IT platform and software development
program and allows us to review drug-relevant target gene data
for further use in our laboratories. LBRI delivered more than
400 disease-related targets, which we have developed into a
large number of new patent applications.

In October 2000, we began our second project with
LION, in the field of pharmacophore informatics. The goal of
this collaboration is to develop software tools to cross-link
biological and chemical data.

We expect to invest $46.5 million plus
34.1 million
in our collaborations with LION, including a
27.7 million
equity investment that we have already made. We have an option
to acquire LBRI when both collaboration projects are complete.

CuraGen

In 2001, we initiated two collaborative projects
with CuraGen. In the first project, CuraGen agreed to provide
drug targets during an initial five-year period. The goal is to
identify drug candidates for obesity and diabetes treatment for
clinical development over a 15-year period. Our agreement
provides that during this period, we will share the expenses of
pre-clinical and clinical development (up to $1.3 billion).
We will also share with CuraGen co-promotion rights and any
profits derived from these drugs.

The goal of the second project is to compile a
database of gene-based markers and information to predict
potential drug toxicities, understand how specific drugs
function and identify new disease conditions. Through this
project, we expect to reduce drug development costs and create
safer and more effective drugs. We plan to invest a total of
$124 million in this five-year project, including an
$85 million equity investment that we have already made and
which was written down in 2003.

Product Development Collaborations

The major collaborations in the area of Product
Development are described below:

Onyx.Bayer and Onyx
are co-developing Raf Kinase Inhibitor, an investigational
compound directed against a specific molecular target involved
in excess growth signaling in cancer. This collaboration results
in Onyx funding 50 percent of the development costs for
Raf-Kinase Inhibitor. In return, Onyx has a 50 percent
profit share in the United States, where the companies may
co-promote the product. Everywhere else in the world except
Japan, Onyxs share is somewhat less than 50 percent
since Bayer has exclusive marketing rights. In Japan, Bayer
funds product development and Onyx receives a royalty.

GlaxoSmithKline.Vardenafil, the active ingredient of
Levitra®, researched by Bayer, is being marketed in
co-operation with GlaxoSmithKline in all markets except Japan.
The co-operation also includes life cycle management.

Paratek.Bayer and
Paratek Pharmaceuticals signed a Collaborative Development and
License Agreement in August 2003 for a novel aminomethylcycline
antibiotic. The agreement provides Bayer with a global,
exclusive patent and know-how license for the development,
manufacturing and marketing of injectable preparations. Paratek
will contribute to global development costs, retain co-promotion
rights and share profits in the United States and receive
royalties on net sales outside the United States.

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Indena.Bayer signed
a licensing agreement with Indena S.p.A in March 2000, which
gives Bayer worldwide exclusive rights to IDN 5109, a new
anti-cancer compound, and its derivatives. The terms of the
agreement state that Indena is responsible for extracting and
producing the compound and Bayer will see the compound through
clinical development and commercialization.

In-licensing activities

We supplement our portfolio of products of our
own Research and Development with in-licensed products both on
global or national level. Recent examples are
Fosrenol®, a remedy to treat hyperphosphatemia
associated with End Stage Renal Disease, which we in-licensed
from Shire International Licensing BV for Japan, and
Sativex®, a cannabis-based medicinal extract product
for the treatment of the debilitating symptoms of multiple
sclerosis and severe neuropathic pain, which we in-licensed from
GW Pharmaceuticals plc for the United Kingdom and Canada.
Fosrenol® is in early stage of clinical development;
Sativex® is in the process of registration.

Biological Products

Overview

Our Biological Products division focuses on
biological products (for example, blood plasma products) and
recombinant protein therapies. Biological Products operated as a
separate business unit within Pharma until December 31,
2001. As of January 1, 2002, it has been a division within
Bayer HealthCare.

Major Products

The following table shows the sales of our
Biological Products division during the past three years, broken
down by category of activity.

|          |       |                     |     |               |  |                     |      |               |  |                     |     |               |  |  |      |      |  |  |     |       |  |  |      |      | 
|--------- | ----- | ------------------- | --- | ------------- |  | ------------------- | ---- | ------------- |  | ------------------- | --- | ------------- |  |  | ---- | ---- |  |  | --- | ----- |  |  | ---- | ---- | 
|          |       |                     |     |               |  |                    
|          |       | 2001                |     | 2002          |  | 2003               
|          |       |                     |     |               |  |                    
|          |       | Sales               |     | Percentage of |  | Sales               |      | Percentage of |  | Sales               |     | Percentage of
|Category  |       | (euros in millions) |     | segment sales |  | (euros in millions) |      | segment sales |  | (euros in millions) |     | segment sales
|          |       |                     |     |               |  |                     |      |               |  |                     |     |              
|Kogenate® |       |                     | 250 |               |  |                     | 4.4  |               |  |                     | 400 |               |  |  | 8.4  |      |  |  | 497 |       |  |  | 10.5 |     
|Plasma    |       |                     | 695 |               |  |                     | 12.1 |               |  |                     | 679 |               |  |  | 14.2 |      |  |  | 613 |       |  |  | 12.9 |     
|          |       |                     |     |               |  |                     |      |               |  |                     |     |               |  |  |      |      |  |  |     |       |  |  |      |     
|          | Total |                     |     | 945           |  |                     |      | 16.5          |  |                     |     | 1,079         |  |  |      | 22.6 |  |  |     | 1,110 |  |  |      | 23.4 | 
|          |       |                     |     |               |  |                     |      |               |  |                     |     |               |  |  |      |      |  |  |     |       |  |  |      |     

Kogenate®

Kogenate®
FS (Kogenate® Bayer in the EU) is a
genetically engineered recombinant version of the protein FVIII.
Patients with Hemophilia A cannot produce sufficient FVIII, and
their blood therefore cannot clot properly. Physicians use both
plasma-derived and recombinant FVIII to treat Hemophilia A.
Because recombinant products like Kogenate® do not
derive from human donors, the risk that their users will
inadvertently contract infection with HIV, hepatitis or other
viruses occasionally present in plasma-derived products is
greatly reduced.

We supply recombinant FVIII to Aventis Behring,
which markets it under the brand name Helixate®
FS.

Plasma Products

Gamunex®is a
plasma-derived concentrate of human antibodies (chromatography
purified Immune Globulin Intravenous or IGIV-C) registered in
the United States and Canada. In addition, the Paul Ehrlich
Institut in Germany has approved a license application for the
German market. Gamunex® represents the first
completely new IGIV therapy development by Bayer in more than a
decade. Biological Products received approval for its new IGIV-C
Gamunex® for the Canadian and the U.S. markets
in August 2003 and the first sales to customers took place in
October 2003.

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Gamimune®/Polyglobin®
is a plasma-derived concentrate of human antibodies
(IGIV) registered worldwide, including the United States,
Canada, Germany and Japan. Physicians use it to treat immune
system deficiencies as well as for the treatment of some
autoimmune disorders, in which the immune system mistakenly
attacks the bodys own tissues.

Prolastin®
(alpha1-proteinase inhibitor human) is a plasma-derived product
approved for use in the United States, Canada and several
European countries. It is used for chronic therapy in
individuals with emphysema related to congenital
alpha1-antitrypsin (AAT) deficiency. AAT deficiency is an
inherited disorder that causes insufficient AAT in the body.
This deficiency can cause serious lung disease and, ultimately,
emphysema.

Markets and Distribution

The Biological Products divisions principal
markets are North America, Europe and Japan. The divisions
sales by region and total for the past three years are as
follows:

|                                 |       |                     |     |      |  |      |     |       |  |  |     |       | 
|-------------------------------- | ----- | ------------------- | --- | ---- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                                 |       | 2001                |     | 2002 |  | 2003
|                                 |       |                     |     |      |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 179 |      |  |      | 256 |       |  |  | 352 |      
|North America                    |       |                     | 588 |      |  |      | 664 |       |  |  | 622 |      
|Asia/Pacific                     |       |                     | 136 |      |  |      | 115 |       |  |  | 104 |      
|Latin America/Africa/Middle East |       |                     | 42  |      |  |      | 44  |       |  |  | 32  |      
|                                 |       |                     |     |      |  |      |     |       |  |  |     |      
|                                 | Total |                     |     | 945  |  |      |     | 1,079 |  |  |     | 1,110 | 
|                                 |       |                     |     |      |  |      |     |       |  |  |     |      

We generally distribute our products through
governmental agencies, wholesalers, pharmacies and hospitals as
well as, to a certain extent, directly to patients.

We produce plasma-derived products and, under a
license from Genentech, recombinant FVIII at our facilities in
Clayton, North Carolina and Berkeley, California in the United
States. We obtain raw plasma as well as some intermediates and
supplies for plasma-derived products from third-party
U.S. suppliers. As Biological Products does not own plasma
collection centers, we have to buy raw plasma from third-party
collection centers or other manufacturers. The price and
availability of raw plasma depends on the available donor base,
ongoing consolidation between larger collectors and regulatory
procedures.

Our main competitors are Baxter and Aventis in
the blood coagulation market and CSL, Baxter and Aventis in the
markets for proteinase inhibitors and Immune Globulins.

In January 2003, Bayer and Aventis terminated
negotiations regarding the establishment of a joint venture for
biological products.

Research and Development

Key research and product development projects
include Kogenate®  Next Generation,
Kogenate® FS EZ-FuseTM, Plasmin,
Prolastin® (Alpha C), and IGIV-C
(Gamunex®) Expanded Indications.

R&D Facilities

The divisions research and development
facilities are located in the United States, specifically in
Raleigh, North Carolina for Bioanalytic Research; Clayton, North
Carolina for Bioanalytic Development and Plasma Technology;
Research Triangle Park, North Carolina for Research and Pathogen
Safety; Berkeley, California for Process Technology
(Kogenate®); and Raleigh, North Carolina for Nucleic
Acid Testing (NAT).

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Phase II/III Trials

|        |  |                                                                               |  |          
|------- |  | ----------------------------------------------------------------------------- |  | ---------
|Product |  | Indication                                                                    |  | Status   
|        |  |                                                                               |  |          
|IGIV-C  |  | Multiple Sclerosis  New Indication                                           |  | Phase II 
|IGIV-C  |  | ITP (idiopathic thrombocytopenic purpura) Rapid
    Infusion                  |  | Phase III
|IGIV-C  |  | CIDP  New Indication (Chronic
    inflammatory demyelinating polyneuropathy) |  | Phase III
|IGIV-C  |  | PID (primary immune deficiency) Rapid Infusion                                |  | Phase III

Kogenate®  Next
Generation

We have identified five constructs for potential
Next Generation Kogenate® development; evaluation of
proteins and technology is ongoing and the decision to proceed
with the initiation of clinical trials is targeted for 2004.

On June 3, 2003, Bayer signed an exclusivity
agreement with Opperbas Holding B.V. for use of
Kogenate® FS in proprietary formulation
development. The decision to continue further development is
scheduled for the second quarter of 2004.

Additionally, Bayer has an agreement with Avigen
(signed in November 2000) to develop Factor IX
(FIX) gene therapy for Hemophilia B patients to reduce
spontaneous bleeding episodes and the need for FIX protein
injections. Avigens proprietary adeno associated virus
(AAV) vector, Coagulin-B®, is designed to deliver
the FIX gene into the patients cells where it will produce
FIX. Avigen is currently conducting a Phase I trial. Bayer
will collaborate with Avigen in conducting Phase II/ III
clinical trials for Coagulin-B®.

Kogenate®-FS
EZ-FuseTMDelivery System

The EZ-FuseTM infusion device
was developed to provide patients with a more convenient and
safer delivery system that complemented Kogenate®
FS. It enables patients to safely reconstitute Factor
VIII without having to handle any exposed transfer needles. It
is a self-contained design to reduce risk of contamination, it
is latex free to reduce the risk of allergic reactions and it
requires fewer steps for faster infusions. The application for
approval was submitted to the FDA in the fourth quarter of 2003.

Plasmin  New Protein

A new thrombolytic agent, plasmin (derived from
human plasma) has entered Phase I clinical trial stage. It is a
direct thrombolytic agent and is infused at the site of the clot
to prevent it from activating plasmin downstream, making it
potentially safer. The Phase I trial for Hemodialysis Graft
Occlusion has begun screening patients. It is planned that Phase
II will commence in the third quarter of 2004 and, based on
successful outcomes, trials for a second indication, deep vein
thrombosis, will commence late 2004. Launch is anticipated in
2008.

Prolastin®  Aerosolized AAT
and Alpha-C

The Alpha-C project is the development of an
improved Alpha-1 Proteinase Inhibitor (A1-Pi;
Prolastin®) product with greater purity and
increased yield as an intravenous formulation for congenitally
deficient (CD) patients and as an aerosol formulation.

On October 8, 2003, Bayer acquired exclusive
rights for a new advanced inhalation technology for the dosing
of alpha-1 antitrypsin (AAT) protein from Inamed GmbH. Under
this deal, Bayer will have worldwide exclusive rights to the new
AKITA compressor and any other products developed by Inamed
based on the same technology for clinical development and
marketing of its inhaled AAT products. Currently, all AAT must
be administered intravenously. It is planned to commence with
Intravenous Phase I and II non-inferiority pharmakokinetic
to IV Prolastin® and proof of principal in patients
in 2004. Anticipated launch for CD is 2007 and for the
aerosolized product in 2009.

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IGIV-C  Expanded
Indications

A number of studies are being conducted to
enhance marketability of Gamunex®. For the purpose
of obtaining labeling for new indications, a Phase II
120-patient multinational multiple sclerosis trial was initiated
in 2002 and is planned to be completed in 2005; and a
Phase III 110-patient CIDP (neuropathy) trial was initiated
in 2003 and is planned to be completed in 2006. To support
existing indications, rapid infusion in PID Phase III
(primary immune deficiency) and ITP Phase III (ideopathic
thrombocytopenic purpura) patients initiated in 2003 is planned
to be completed in 2004. Additionally, the division is
supporting investigator-led projects in the areas of renal
transplant and pregnancy loss.

CONSUMER CARE, DIAGNOSTICS

Overview

Our Consumer Care, Diagnostics segment is
comprised of the Consumer Care and Diagnostics divisions.

The following table shows the segments
performance of the last three years.

|                   |                                      |                     |       |      |   |      |       |      |  |  |       |      | 
|------------------ | ------------------------------------ | ------------------- | ----- | ---- | - | ---- | ----- | ---- |  |  | ----- | ---- | 
|                   |                                      | 2001                |       | 2002 |   | 2003
|                   |                                      |                     |       |      |   |     
|                   |                                      |                    
|                   |                                      | (euros in millions)
|External net sales |                                      |                     | 4,104 |      |   |      | 3,755 |      |  |  | 3,336 |     
|                   | Percentage of total sales            |                     |       | 13.6 |   |      |       | 12.7 |  |  |       | 11.7 | 
|Intersegment sales |                                      |                     | 2     |      |   |      | 2     |      |  |  | 4     |     
|Operating result   |                                      |                     | 342   |      |   |      | 602   |      |  |  | 589   |     
|                   | Percentage of total operating result |                     |       | 20.4 |   |      |       | 37.4 |  |  |       |     | 
|                   | thereof special items(1)             |                     |       | (40  | ) |      |       | 214  |  |  |       | 268  | 



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The special items are detailed in Item 5,
    Operating and Financial Review and Prospects 
    Operating Results 2001, 2002 and 2003  Segment
    Data.

The following table shows our sales during the
past three years from the products that we regard as material to
the sales of the segment as a whole.

|               |  |           |     |            |  |           |      |            |  |           |     |            |  |  |      |  |  |  |     |  |  |  |      | 
|-------------- |  | --------- | --- | ---------- |  | --------- | ---- | ---------- |  | --------- | --- | ---------- |  |  | ---- |  |  |  | --- |  |  |  | ---- | 
|               |  |           |     |            |  |          
|               |  | 2001      |     | 2002       |  | 2003     
|               |  |           |     |            |  |          
|               |  | Sales     |     | Percentage |  | Sales     |      | Percentage |  | Sales     |     | Percentage
|               |  | (euros in |     | of segment |  | (euros in |      | of segment |  | (euros in |     | of segment
|Product        |  | millions) |     | sales      |  | millions) |      | sales      |  | millions) |     | sales     
|               |  |           |     |            |  |           |      |            |  |           |     |           
|Aspirin®(1)    |  |           | 723 |            |  |           | 17.6 |            |  |           | 589 |            |  |  | 15.7 |  |  |  | 574 |  |  |  | 17.2 | 
|Ascensia®      |  |           | 492 |            |  |           | 12.0 |            |  |           | 689 |            |  |  | 18.3 |  |  |  | 593 |  |  |  | 17.8 | 
|Advia Centaur® |  |           | 259 |            |  |           | 6.3  |            |  |           | 340 |            |  |  | 9.1  |  |  |  | 387 |  |  |  | 11.6 | 
|Canesten®      |  |           | 162 |            |  |           | 3.9  |            |  |           | 142 |            |  |  | 3.8  |  |  |  | 135 |  |  |  | 4.0  | 



---



|    |                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------
|(1) | The figures include CardioAspirin, which is
    partially distributed by our Pharmaceutical division.

Segment Strategy

Consumer Care

The objective of our Consumer Care division is to
outpace market growth in the over-the-counter (OTC) market and
to improve our global position.

The key strategic focus to exploit our organic
growth potential is on our analgesics business, mainly through
Aspirin®. In parallel, we plan to consider licensing
and acquisitions in order to strengthen both our product
portfolio and our regional presence.

Diagnostics

Our Diagnostics business consists of two
Strategic Business Entities (SBEs): the Professional Testing
SBE, which includes the Laboratory Testing, the Near Patient
Testing and the Nucleic Acid Diagnostics business units,

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and the Self Testing SBE. We furthermore
established Viterion TeleHealthcare LLC as a joint venture with
Matsushita Electric Industrial Co., Ltd.


The overall objective for Diagnostics is to
outpace industry sales growth in the markets and to achieve a
long-term sustainable position with above industry average
profitability.

We strive to reach these objectives by
introducing innovative solutions to improve the overall
efficiency and economics of targeted Professional Testing
customers by focusing our efforts in building a product
portfolio with breadth and depth. In Self Testing, we are
expanding our product offering by regularly introducing
innovative systems with improved convenience and sampling with
minimal pain for diabetic patients. To support our objectives,
we continue to develop our strategic partnerships in desired
areas of expertise to complement our in-house strengths.

Consumer Care

Overview

Our Consumer Care division develops and markets
over-the-counter (OTC) medications (analgesics, cough and cold,
dermatological and gastrointestinal remedies), as well as
vitamin and nutritional supplements.

Major Products

The following table sets forth the sales of our
Consumer Care division for the last three years, broken down by
category of activity.

|                  |       |           |     |            |  |           |      |            |  |           |     |            |  |  |      |      |  |  |     |       |  |  |      |      | 
|----------------- | ----- | --------- | --- | ---------- |  | --------- | ---- | ---------- |  | --------- | --- | ---------- |  |  | ---- | ---- |  |  | --- | ----- |  |  | ---- | ---- | 
|                  |       |           |     |            |  |          
|                  |       | 2001      |     | 2002       |  | 2003     
|                  |       |           |     |            |  |          
|                  |       | Sales     |     | Percentage |  | Sales     |      | Percentage |  | Sales     |     | Percentage
|                  |       | (euros in |     | of segment |  | (euros in |      | of segment |  | (euros in |     | of segment
|Category          |       | millions) |     | sales      |  | millions) |      | sales      |  | millions) |     | sales     
|                  |       |           |     |            |  |           |      |            |  |           |     |           
|Analgesics        |       |           | 775 |            |  |           | 18.9 |            |  |           | 621 |            |  |  | 16.5 |      |  |  | 588 |       |  |  | 17.6 |     
|Cough/Cold        |       |           | 177 |            |  |           | 4.3  |            |  |           | 120 |            |  |  | 3.2  |      |  |  | 120 |       |  |  | 3.6  |     
|Dermatologicals   |       |           | 246 |            |  |           | 6.0  |            |  |           | 218 |            |  |  | 5.8  |      |  |  | 209 |       |  |  | 6.3  |     
|Gastrointestinals |       |           | 266 |            |  |           | 6.5  |            |  |           | 209 |            |  |  | 5.6  |      |  |  | 185 |       |  |  | 5.6  |     
|Nutritionals      |       |           | 197 |            |  |           | 4.8  |            |  |           | 174 |            |  |  | 4.6  |      |  |  | 205 |       |  |  | 6.1  |     
|Others            |       |           | 434 |            |  |           | 10.6 |            |  |           | 374 |            |  |  | 10.0 |      |  |  | 96  |       |  |  | 2.9  |     
|                  |       |           |     |            |  |           |      |            |  |           |     |            |  |  |      |      |  |  |     |       |  |  |      |     
|                  | Total |           |     | 2,095      |  |           |      | 51.0       |  |           |     | 1,716      |  |  |      | 45.7 |  |  |     | 1,403 |  |  |      | 42.1 | 
|                  |       |           |     |            |  |           |      |            |  |           |     |            |  |  |      |      |  |  |     |       |  |  |      |     



| |           
| | ----------
| | Analgesics

The analgesics market comprises pain relief
products both in oral form (for example, pills and tablets) and
for topical use (for example, ointments and salves). We
concentrate primarily on the oral products segment. Our OTC
products also face competition from prescription drugs, for
example cyclooxygenase (COX-II) inhibitor pain relievers.

Aspirin®
(Bayer® brand aspirin in the United States) is a
nonsteroidal anti-inflammatory drug (NSAID). It is used for pain
relief and, in countries where so indicated, for the prevention
of heart attacks. Bayer first synthesized aspirin in 1893 and
began marketing it in powder form in Germany in 1900. We
introduced the familiar aspirin tablets in 1910.

Aleve® is a
nonprescription strength of the analgesic naproxen sodium.
Aleve® is a long-lasting pain reliever and can be
used for fever reduction.

Our Midol® product family, which
competes in the menstrual pain relief category, comprises
several specific product positions, for example, Maximum
Strength Menstrual Formula, Teen Formula, PMS and Cramp Pain. We
sell Midol® products only in the United States and
Canada.

29



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##### Table of Contents





| |                                                          
| | ---------------------------------------------------------
| | CardioAspirin (see Pharmaceuticals  Major
    Products)

CardioAspirin refers to Bayers collective
group of products (in both our Consumer Care and Pharmaceuticals
divisions) that are professionally indicated for the prevention
of an MI (myocardial infarction, or heart attack) in either
those individuals who have already had an initial MI (secondary
prevention) or in individuals deemed at risk for a first MI by
their physician (primary prevention). These products vary in
status (whether or not a prescription is required) based on
local regulations. We face competition from both
over-the-counter and prescription drugs in the cardiovascular
marketplace who claim secondary and/or primary prevention
benefits.



| |           
| | ----------
| | Cough/Cold

Within the total cough and cold market, we
concentrate on the cold/flu remedy segment. This OTC category
faces threats from non-medicinal remedies (for
example, nutritional or herbal products such as zinc supplements
and echinacea), as well as from preventive medicines available
by prescription or under development.

Alka-Seltzer
Plus® is an effervescent product
to relieve symptoms accompanying the common cold. We market
Alka-Seltzer Plus® in the United States and Canada.
Tabcin is a line of products similar to Alka-Seltzer
Plus®; we market it primarily in Latin America.

Aleve® Cold
& Sinus was launched in the United States in 2000 as the
first long-lasting combination of analgesic naproxen sodium and
nasal decongestant.



| |                
| | ---------------
| | Dermatologicals

The dermatological category includes a broad
range of skin treatments. Within this market, we focus on the
antifungal category, which in turn consists of three
sub-segments: gynecological, dermatological and general topical/
other antifungals. All topical dermatologicals face significant
threats from the prescription drug area, as well as from locally
marketed generic products and low-price brands.

Canesten® is
treatment for vaginal yeast infections, athletes foot and
other dermatological problems. Originally introduced in 1973 as
a prescription drug, Canesten® has been switching to
OTC status on a country-by-country basis since 1990.

Rid® is a
topical head lice treatment marketed only in the U.S. We
acquired this brand from Pfizer (Warner-Lambert) in 2000.

Gastrointestinals

The gastrointestinal (GI) category includes
antacids, anti-gas products, digestives, laxatives and
anti-diarrheals. Our primary focus within this category includes
all non-prescription segments except laxatives and
anti-diarrheals. Longer term, all OTC GI products will face
threats from related business areas including products switching
from prescription to OTC status, OTC brand expansion from
related categories (for example, anti-diarrheal brands extending
or re-positioning to cover the antacid segment) and possible
future preventative or curative therapies (for example, products
that eradicate or manage the ulcer-causing bacterium H.
pylori).

Alka-Seltzer®
was developed in the late 1920s by Miles Laboratories and
U.S. national distribution began in 1931,
Alka-Seltzer® is used for speedy relief of acid
indigestion, sour stomach or heartburn with headache, or body
aches and pains. Today we market Alka-Seltzer® in
close to 100 countries.

Phillips Milk of
Magnesia® is a saline laxative
used as an overnight remedy for constipation and acid
indigestion, heartburn or sour stomach that may accompany it.
The original Phillips formulation entered the
U.S. market in 1873.

Talcid® was
originally a prescription medication developed and sold by our
Pharmaceuticals segment. Since 1988, it has obtained OTC status
in several countries in Europe, Asia and South America.
Talcid® is used for the relief of symptoms from
heartburn and acid indigestion.

30



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##### Table of Contents



Nutritionals

The nutritionals category is very broad,
encompassing vitamins, minerals, multi-vitamins/minerals,
herbals, sports nutrition and specialty supplements in many
different forms. Applicable regulations vary greatly, both from
country to country and across nutritional segments (for example,
herbals vs. vitamins). As a general rule, however, regulation of
nutritionals tends to be less stringent than that of other OTC
products. Bayers primary interests in the nutritionals
field are in the vitamin and mineral (especially
multi-vitamins/minerals) segments.

One-A-Day®
multivitamins entered the marketplace in 1940. Since 1994, we
have offered a variety of special formulations, such as
Mens, Womens, 55 Plus, Maximum and Essential
formulas. In 2003, One-A-Day® introduced
WeightSmartTM, a complete multivitamin
specially designed to provide nutritional support to people who
are working to control their weight through diet and exercise.

Flintstones®
are multivitamin dietary supplements containing (depending on
type) 10-19 essential nutrients for children ages 2-12. They
were introduced nationally in the United States in 1969. Bugs
Bunny® childrens sugar-free multivitamins were
introduced in 1971 in the United States. To strengthen our
position in the childrens vitamin market, we launched
Scooby-Doo® childrens vitamins in the United
States in 2001.

We recently launched nine products the
development of which was coordinated internally. These products
are:

|                                         |  |                         |  |                 
|---------------------------------------- |  | ----------------------- |  | ----------------
|Product/Brand name                       |  | Principal application   |  | Status          
|                                         |  |                         |  |                 
|Aspirin Complex®                         |  | Congestion, pain relief |  | Launched in 2003
|Canesten®
    Oral                       |  | Vaginal Mycosis         |  | Launched in 2003
|Alka-Seltzer
    Plus® Ready Relief Tabs |  | Cough & Cold            |  | Launched in 2003
|Bayer Muscle & Joint                     |  | Topical pain            |  | Launched in 2003
|Phillips®
    Chews                      |  | GI                      |  | Launched in 2003
|Rid Pure
    AlternativeTM               |  | Lice treatment          |  | Launched in 2003
|One-A-Day®
    WeightSmartTM             |  | Nutritional Supplement  |  | Launched in 2003
|Lasonil®
    Gel                         |  | Topical pain            |  | Launched in 2003
|Aspirin®
    Effect                      |  | Pain relief             |  | Launched in 2003

Aspirin
Complex®is a combination product
(Aspirin® & pseudoephedrin), launched in Germany
in 2003 for the relief of cold symptoms.

Canesten®Oral is a one-dose antifungal oral product for the
treatment of vaginal yeast infections launched in the United
Kingdom.

Alka-Seltzer
Plus®Ready Relief is a
fast-dissolve antihistamine/nasal decongestant introduced in the
United States.

Bayer Muscle &
Jointis a topical analgesic for pain
relief launched in the United States.

Phillips® Chewsare a laxative dietary supplement providing overnight relief of
occasional constipation introduced in the United States.

Rid Pure
AlternativeTMis a pesticide-free lice removal system consisting of a patented
comb and dimethicone gel launched in the United States.

One-A-Day®WeightSmartTM is a complete multivitamin
specially designed to provide nutritional support to people who
are working to control their weight through diet and exercise
introduced in the United States.

Lasonil®Gel is a topical painkiller containing Ketoprofene,
launched in Italy, for treatment of sports-related injuries and
muscle pain.

Aspirin®Effect is a dry granule analgesic product that dissolves
on the tongue and was launched in Germany.

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Markets and Distribution

Our Consumer Care division focuses on the OTC
market for medicinal products that consumers may generally
purchase without a prescription. In some European markets, this
category also includes products sold to consumers on a
prescription basis and later reimbursed under an insurance plan.

The divisions sales by region and totals
for the past three years are as follows:

|                                 |       |                     |     |       |  |      |     |       |  |  |     |       | 
|-------------------------------- | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                                 |       | 2001                |     | 2002  |  | 2003
|                                 |       |                     |     |       |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 467 |       |  |      | 452 |       |  |  | 387 |      
|North America                    |       |                     | 894 |       |  |      | 680 |       |  |  | 668 |      
|Asia/Pacific                     |       |                     | 222 |       |  |      | 188 |       |  |  | 56  |      
|Latin America/Africa/Middle East |       |                     | 512 |       |  |      | 396 |       |  |  | 292 |      
|                                 |       |                     |     |       |  |      |     |       |  |  |     |      
|                                 | Total |                     |     | 2,095 |  |      |     | 1,716 |  |  |     | 1,403 | 
|                                 |       |                     |     |       |  |      |     |       |  |  |     |      

The division experiences moderate seasonality,
primarily due to the cough/cold market.

The typical sales and marketing channels of the
division outside Europe are supermarket chains and other mass
marketers. In Europe, however, pharmacies are the usual
distribution channel.

Consumer Care procures many high-volume raw
materials internally from other Bayer divisions and companies.
Our major externally procured high-volume raw materials are
sodium citrate, sodium bicarbonate, citric acid and ascorbic
acid. These are readily available and are usually not subject to
significant price fluctuations. Changes in oil and energy prices
can affect a few key items, such as acetylsalicylic acid, phenol
and aluminum foil. We diversify our raw materials sources
internationally to help balance currency exchange rate risk.

We regard Johnson & Johnson,
GlaxoSmithKline, Wyeth and Pfizer as our major competitors in
the Consumer Care business.

Research and Development

Consumer Care focuses its research and
development activities on identifying, developing and launching
products and initiatives which can contribute to achieving
business growth through:



| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | efficient development of new products and
    indications to support current brands; and                                                                                                                                                      
|
| |  | product development, clinical and regulatory
    strategies, which provide opportunity to capitalize on new
    technologies, expanded label indications and reclassifications
    of products from prescription required to over-the-counter.

The divisions primary research and
development facilities are located in Morristown, New Jersey.

Bayer is involved in a joint venture with
Hoffmann-LaRoche to market and sell Aleve®,
Vanquish® and Midol® in the United
States. Both partners are actively involved in research and
development planning for these products.

Diagnostics

Overview

Diagnostics, based in Tarrytown, New York, is one
of the largest diagnostics businesses in the world. We support
customers in over 100 countries with an extensive portfolio of
products for the Laboratory Testing, Near Patient Testing,
Nucleic Acid Diagnostics (NAD) and Self Testing environments.
These products serve in the assessment and management of health
in such areas as infectious diseases, cardiovascular disease,
oncology, virology, womens health and diabetes.

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Major Products

The following table sets forth the sales of our
Diagnostics division for the last three years, broken down by
category of activity.

|                     |       |           |     |            |  |           |      |            |  |           |     |            |  |  |      |      |  |  |     |       |  |  |      |      | 
|-------------------- | ----- | --------- | --- | ---------- |  | --------- | ---- | ---------- |  | --------- | --- | ---------- |  |  | ---- | ---- |  |  | --- | ----- |  |  | ---- | ---- | 
|                     |       |           |     |            |  |          
|                     |       | 2001      |     | 2002       |  | 2003     
|                     |       |           |     |            |  |          
|                     |       | Sales     |     | Percentage |  | Sales     |      | Percentage |  | Sales     |     | Percentage
|                     |       | (euros in |     | of segment |  | (euros in |      | of segment |  | (euros in |     | of segment
|Category             |       | millions) |     | sales      |  | millions) |      | sales      |  | millions) |     | sales     
|                     |       |           |     |            |  |           |      |            |  |           |     |           
|Laboratory testing   |       |           | 791 |            |  |           | 19.3 |            |  |           | 813 |            |  |  | 21.7 |      |  |  | 796 |       |  |  | 23.9 |     
|Near patient testing |       |           | 407 |            |  |           | 9.9  |            |  |           | 398 |            |  |  | 10.6 |      |  |  | 381 |       |  |  | 11.4 |     
|NAD testing          |       |           | 86  |            |  |           | 2.1  |            |  |           | 99  |            |  |  | 2.6  |      |  |  | 126 |       |  |  | 3.8  |     
|Self-testing         |       |           | 722 |            |  |           | 17.6 |            |  |           | 729 |            |  |  | 19.4 |      |  |  | 625 |       |  |  | 18.7 |     
|Tele Healthcare      |       |           | 0   |            |  |           | 0.0  |            |  |           | 0   |            |  |  | 0.0  |      |  |  | 1   |       |  |  | 0.0  |     
|Others               |       |           | 3   |            |  |           | 0.1  |            |  |           | 0   |            |  |  | 0.0  |      |  |  | 4   |       |  |  | 0.1  |     
|                     |       |           |     |            |  |           |      |            |  |           |     |            |  |  |      |      |  |  |     |       |  |  |      |     
|                     | Total |           |     | 2,009      |  |           |      | 49.0       |  |           |     | 2,039      |  |  |      | 54.3 |  |  |     | 1,933 |  |  |      | 57.9 | 
|                     |       |           |     |            |  |           |      |            |  |           |     |            |  |  |      |      |  |  |     |       |  |  |      |     



| |                   
| | ------------------
| | Laboratory Testing

The ADVIA® family of products is the
centerpiece of our Laboratory Testing portfolio, which provides
a wide range of solutions for the laboratory. ADVIA®
products include medium- and high-throughput systems for
immunoassay diagnostics (the measurement of such substances as
proteins, steroids, drugs and antibodies in patients
blood), clinical chemistry and hematology analysis and other
diagnostic disciplines. The main systems include ADVIA
Centaur®, ADVIA®1650, ADVIA®120
and ADVIA IMS® 800i, for medium- to
large-size hospitals and laboratories. In addition, we offer
large laboratory integration and automation solutions with
LabCell® and WorkCellTM. In
addition to our ADVIA® products, we offer the
ACS:180® and Bayer Immuno 1®
immunodiagnostic analyzers, as well as the Clinitek
Atlas® urine chemistry system for high volume
urinalysis testing. The market position of the
ADVIA® product line was strengthened in 2003 by the
introduction of a new BNP test to assist in the diagnosis of
heart failure.



| |                     
| | --------------------
| | Near Patient Testing

We provide a variety of solutions for the Near
Patient Testing environment, both in the hospital and in
physicians office laboratories. For the critical care
environment, we offer the RapidTM family of
instruments and reagents for the measurement of blood gases and
electrolytes.

In the field of urinalysis, we offer the
Multistix® family of urine reagent strips for visual
reading of up to 10 parameters and the Clinitek®
line of instruments for automated sample analysis. We also offer
the DCA 2000®+ system that provides diagnostic tests
for diabetes and kidney disease management.



| |                         
| | ------------------------
| | Nucleic Acid Diagnostics

With the completion of the Visible Genetics Inc.
(VGI) integration, Diagnostics now offers a complete virology
infectious disease portfolio including quantitative and
qualitative analysis as well as genotyping and resistance
testing. For highly specific testing of infectious diseases, we
offer a family of DNA probes under the VERSANT®
brand for the testing of HIV and Hepatitis B and C.
NAD techniques detect nucleic acids such as DNA and RNA to
allow for effective treatment of infectious and other diseases.
In 2003, we obtained FDA approval for our VERSANT®
HCV RNA 3.0 (bDNA) assay, which complements our
already FDA approved products VERSANT®
HIV-1 RNA 3.0 (bDNA) assay,
VERSANT® HCV RNA qualitative assay and
TRUGENE® HIV-1 Genotyping assay.

Self Testing

In the Self Testing segment, we launched the
Ascensia® brand for our blood glucose monitoring
products. Our key products include the Ascensia®
DEX®/ESPRIT® and the
Ascensia® BREEZE®/CONFIRM®
blood

33



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##### Table of Contents



glucose meters. These products incorporate a
10-test disc to provide greater convenience to patients who test
their blood sugar levels several times per day. Another part of
our key products is the Ascensia®
CONTOUR® meter which uses a single test strip. Our
best selling diagnostics product, the Ascensia
ELITE®, is a versatile blood glucose meter that serves
a wide spectrum of patient needs.




| |               
| | --------------
| | TeleHealthcare

We signed a joint venture agreement with
Matsushita Electric Industrial Co. to establish
ViterionTM TeleHealthcare LLC, an independent
company that is marketing products and services for the
telemedicine sector. The company was established in January
2003. Main products are the ViterionTM 100
TeleHealth Monitor, a compact home health care monitor and the
ViterionTM 500 TeleHealth Monitor, a state of the art
home health care monitor.

We recently launched the following products:

|                                           |  |                                                                                                                        |  |                                           
|------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------
|Product/Brand name                         |  | Principal application                                                                                                  |  | Status(1)                                 
|                                           |  |                                                                                                                        |  |                                           
|ADVIA IMS® 800iIntegrated Modular System   |  | Modular platform, combining immunodiagnostic and
    clinical chemistry on a single instrument with a broad assay menu |  | Launched in August 2003                   
|                                          
|ADVIA Centaur®
    menu expansion          |  | Infectious disease, Her-2/neu, BNP and
    homocysteine                                                                |  | Throughout 2003                           
|                                          
|ADVIA® 1650& ADVIA® 2400menu
    expansion |  | High-volume clinical chemistry                                                                                         |  | Throughout 2003                           
|                                          
|Rapidpoint®405                             |  | Blood gas electrolyte instrument with co-oximetry                                                                      |  | Launched in March 2003                    
|                                          
|Clinitek Status®                           |  | Automated urinalysis instrument                                                                                        |  | Launched in November 2003                 
|                                          
|VERSANT®
    HCV RNA 3.0 (bDNA)            |  | Quantitative detection of Hepatitis C                                                                                  |  | Launched in May 2003                      
|                                          
|Ascensia®
    BREEZE®/CONFIRM®             |  | Next generation 10-cartridge whole blood glucose
    monitoring system                                                 |  | Launched in June 2003                     
|                                          
|Ascensia®
    ENTRUSTTM                    |  | Low-cost alternative whole blood glucose
    monitoring system                                                         |  | Launched in May 2003                      
|                                          
|Ascensia® CONTOUR®                         |  | Next generation whole blood glucose monitoring
    single strip system                                                 |  | Launched in April 2003                    
|                                          
|ViterionTM100 TeleHealth Monitor           |  | Compact home healthcare monitor                                                                                        |  | FDA approved and launched in November 2003



---



|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The term throughout refers to the
    fact that there are multiple products that were launched at
    different times throughout the year; launched in
    refers to a single product.

Markets and Distribution

Our Diagnostics division markets its products in
over 100 countries worldwide, both directly and through a
network of distributors. Our principal markets include North
America, Western Europe and Japan.

34



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##### Table of Contents



The divisions sales by region and totals
for the past three years are as follows:

|                                 |       |                     |     |       |  |      |     |       |  |  |     |       | 
|-------------------------------- | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                                 |       | 2001                |     | 2002  |  | 2003
|                                 |       |                     |     |       |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 697 |       |  |      | 742 |       |  |  | 735 |      
|North America                    |       |                     | 880 |       |  |      | 901 |       |  |  | 836 |      
|Asia/Pacific                     |       |                     | 289 |       |  |      | 268 |       |  |  | 246 |      
|Latin America/Africa/Middle East |       |                     | 143 |       |  |      | 128 |       |  |  | 116 |      
|                                 |       |                     |     |       |  |      |     |       |  |  |     |      
|                                 | Total |                     |     | 2,009 |  |      |     | 2,039 |  |  |     | 1,933 | 
|                                 |       |                     |     |       |  |      |     |       |  |  |     |      

Diagnostics sales are typically lower in the
first quarter, but show a slightly stronger performance in the
fourth quarter.

We market our Laboratory Testing and NAD
products, as well as most of our Near Patient Testing products,
directly to customers, who are primarily reference or private
laboratories and hospitals. In the Near Patient Testing segment,
we market urine chemistry primarily through distributors. We
channel our Self Testing products to the consumer market through
distributors and large pharmacy and retail chains. We market our
TeleHealthcare products directly to home health care agencies,
disease management companies and the government.

We manufacture or assemble a significant portion
of our own products. In order to do so, we rely on a supplier
management process to supply raw materials, sub-assemblies and
finished goods on an OEM (original equipment manufacturer)
basis. Most of our direct materials are readily available
commodities. Typically, these materials are not subject to
significant changes in price or availability.

We do require some direct or OEM materials that
carry a substantial risk to the business if they were to become
unavailable. In these instances, we maintain strategic reserves
of selected direct materials or finished products to avoid
interruptions in our customers continuous and reliable
supply. We maintain a global supplier base with contracts in
place where appropriate. Our supplier management process
includes procedures for continuous supplier monitoring and
evaluation, as well as new supplier analysis and qualification.

Our primary competitors in the diagnostics market
are:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | Laboratory Testing:Abbott, Roche, Beckman Coulter, Dade Behring and Johnson &
    Johnson;      
|
| |  | Nucleic Acid
    Diagnostics:Roche, Abbott and
    Gen-Probe;                                   
|
| |  | Near Patient
    Testing:Roche,
    Radiometer, i-Stat and Instrumentation Laboratory;          
|
| |  | Self Testing:Roche,
    Johnson & Johnson (Lifescan), Abbott (Medisense) and
    Therasense; and
|
| |  | TeleHealthcare:HomMed, American Telecare, Health Hero, Philips Medical, Alere
    Medical.      

Research and Development

Our Diagnostics division focuses its research and
development activities primarily on strengthening its core
product lines and on expanding into high growth/high margin
segments of the market:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | in Laboratory Testing, through development of the
    ADVIA® family of systems and in the expansion of
    assays in growth areas;                                                                                                                                                                                                                                                                                                         
|
| |  | in NAD Testing, through menu expansion of assays
    for infectious disease and oncology testing;                                                                                                                                                                                                                                                                                                                                          
|
| |  | in Near Patient Testing, through enhancements of
    our Rapid systems and Clinitek products, and entry into the
    Point of Care Immunoassay market; and                                                                                                                                                                                                                                                                                 
|
| |  | in Self Testing, through internal development and
    in-sourcing of mass market, user-friendly whole blood glucose
    monitoring systems and by focusing research on a minimally
    invasive system, using a small blood sample and having a short
    testing time, coupled with the convenience of no test strip
    handling and non-invasive technology, which is glucose
    monitoring without the painful sampling of body fluid.

35



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The divisions primary research and
development facilities are located in the United States:
Tarrytown, New York and Walpole and Cambridge, Massachusetts for
our Laboratory Testing Segment; Medfield, Massachusetts for our
Near Patient Testing Segment; Elkhart, Indiana for our Self
Testing Segment; and Berkeley, California and Walpole,
Massachusetts for our Nucleic Acid Diagnostics Segment.

We currently have a number of products in late
stages of development. Depending on completion of clinical
trials and subsequent grant of any necessary FDA approvals, we
expect to launch these products during the periods indicated
below. These products are:

|                                              |  |                                                                  |  |                                 
|--------------------------------------------- |  | ---------------------------------------------------------------- |  | --------------------------------
|Product/Brand name                            |  | Principal Application                                            |  | Status(1)                       
|                                              |  |                                                                  |  |                                 
|ADVIA Centaur®menu expansion                  |  | Completion of full ID panel                                      |  | Launches planned throughout 2004
|ADVIA® 1200                                   |  | Clinical chemistry system                                        |  | Launch planned for 2004         
|ADVIA® 1650and
    ADVIA® 2400menu expansions |  | Extension of clinical chemistry menu                             |  | Launches planned throughout 2004
|ADVIA® 2120with Autoslide                     |  | Second generation hematology system with slide
    maker/stainer |  | Launch planned for 2004         
|Rapidlab®1200                                 |  | Blood gas/electrolyte analyzer                                   |  | Launch planned for 2004         
|VERSANT® HBV 3.0 (bDNA)                       |  | Quantitative detection of Hepatitis B                            |  | Launch planned for 2004         



---



|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The term launch(es) planned
    throughout refers to the fact that there are multiple
    products that we expect to launch at different times throughout
    the year; launch planned for refers to a single
    product.

In December 2003, we signed an exclusive
worldwide development and supply agreement with Amersham
Biosciences Corp. for the joint development of assays and
instrumentation in the field of human immunodeficiency virus
(HIV) sequencing, as well as sequencing of other important
infectious disease-causing pathogens.

In 2003, we entered into a licensing agreement
with Sontra Medical Corporation for their continuous
non-invasive glucose monitoring technology, including exclusive
worldwide rights to the intellectual property in Sontras
SonoPrepTM ultrasonic skin permeation
technology for the continuous non-invasive glucose monitoring
field.

ANIMAL HEALTH

Overview

Our Animal Health segment researches, develops
and markets new products for the health care of animals. These
products are divided between the two business units Livestock
and Companion Animal. The main activities of the Animal Health
segment are the development of therapies for infectious diseases
caused by bacteria, virus and parasites, and the development of
pharmacologicals. This range of products is supplemented by a
line of cosmetic care products as well as farm hygiene products.

The following table shows the segments
performance of the last three years.

|                   |                                      |                     |     |      |  |      |     |      |   |  |     |     | 
|------------------ | ------------------------------------ | ------------------- | --- | ---- |  | ---- | --- | ---- | - |  | --- | --- | 
|                   |                                      | 2001                |     | 2002 |  | 2003
|                   |                                      |                     |     |      |  |     
|                   |                                      |                    
|                   |                                      | (euros in millions)
|External net sales |                                      |                     | 858 |      |  |      | 850 |      |   |  | 790 |    
|                   | Percentage of total sales            |                     |     | 2.8  |  |      |     | 2.9  |   |  |     | 2.8 | 
|Intersegment sales |                                      |                     | 4   |      |  |      | 1   |      |   |  | 8   |    
|Operating result   |                                      |                     | 162 |      |  |      | 170 |      |   |  | 170 |    
|                   | Percentage of total operating result |                     |     | 9.7  |  |      |     | 10.6 |   |  |     |    | 
|                   | thereof special items(1)             |                     |     | 0    |  |      |     | (11  | ) |  |     | 22  | 



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The special items are detailed in Item 5,
    Operating and Financial Review and Prospects 
    Operating Results 2001, 2002 and 2003  Segment
    Data.

36



---



##### Table of Contents



The following table shows our sales during the
past three years from the products that we regard as material to
the sales of the segment as a whole.

|                                         |  |           |     |            |  |           |      |            |  |           |     |            |  |  |      |  |  |  |     |  |  |  |      | 
|---------------------------------------- |  | --------- | --- | ---------- |  | --------- | ---- | ---------- |  | --------- | --- | ---------- |  |  | ---- |  |  |  | --- |  |  |  | ---- | 
|                                         |  |           |     |            |  |          
|Product                                  |  | 2001      |     | 2002       |  | 2003     
|                                         |  |           |     |            |  |          
|                                         |  | Sales     |     | Percentage |  | Sales     |      | Percentage |  | Sales     |     | Percentage
|                                         |  | (euros in |     | of segment |  | (euros in |      | of segment |  | (euros in |     | of segment
|                                         |  | millions) |     | sales      |  | millions) |      | sales      |  | millions) |     | sales     
|                                         |  |           |     |            |  |           |      |            |  |           |     |           
|Advantage®
    (incl. Combi)/K9Advantix® |  |           | 211 |            |  |           | 24.6 |            |  |           | 205 |            |  |  | 24.1 |  |  |  | 196 |  |  |  | 24.8 | 
|Baytril®                                 |  |           | 187 |            |  |           | 21.8 |            |  |           | 183 |            |  |  | 21.5 |  |  |  | 170 |  |  |  | 21.5 | 

Segment Strategy

Animal Health aims to be a worldwide leading
company in the Livestock and Companion market and strives to be
the preferred partner for and provider of veterinary solutions.

It is part of our business strategy for Animal
Health to sustain its current profit position by focusing on
attractive key countries and target markets. Furthermore, Animal
Health pursues a policy of organic growth by exploiting existing
core brands supported by new business development activities. To
complete our existing product portfolio, Animal Health
periodically evaluates the possibility of acquisitions or
strategic alliances. The Animal Health segment collaborates
closely with our Pharmaceuticals division and CropScience
segment as well as other life science companies in research and
development in order to bring to the market new active
ingredients and products that combat diseases in animals.

Major Products

The following table sets forth the segments
sales for the last three years, broken down by category of
activity.

|                            |       |           |     |            |  |           |      |            |  |           |     |            |  |  |      |     |  |  |     |     |  |  |      |     | 
|--------------------------- | ----- | --------- | --- | ---------- |  | --------- | ---- | ---------- |  | --------- | --- | ---------- |  |  | ---- | --- |  |  | --- | --- |  |  | ---- | --- | 
|                            |       |           |     |            |  |          
|Category                    |       | 2001      |     | 2002       |  | 2003     
|                            |       |           |     |            |  |          
|                            |       | Sales     |     | Percentage |  | Sales     |      | Percentage |  | Sales     |     | Percentage
|                            |       | (euros in |     | of segment |  | (euros in |      | of segment |  | (euros in |     | of segment
|                            |       | millions) |     | sales      |  | millions) |      | sales      |  | millions) |     | sales     
|                            |       |           |     |            |  |           |      |            |  |           |     |           
|Parasiticides               |       |           | 455 |            |  |           | 53.0 |            |  |           | 448 |            |  |  | 52.7 |     |  |  | 406 |     |  |  | 51.4 |    
|Antimicrobials              |       |           | 208 |            |  |           | 24.2 |            |  |           | 205 |            |  |  | 24.1 |     |  |  | 187 |     |  |  | 23.7 |    
|Biologicals                 |       |           | 45  |            |  |           | 5.2  |            |  |           | 39  |            |  |  | 4.6  |     |  |  | 36  |     |  |  | 4.6  |    
|Nutritionals                |       |           | 69  |            |  |           | 8.0  |            |  |           | 63  |            |  |  | 7.4  |     |  |  | 52  |     |  |  | 6.6  |    
|Others (incl. Farm Hygiene) |       |           | 81  |            |  |           | 9.4  |            |  |           | 95  |            |  |  | 11.2 |     |  |  | 109 |     |  |  | 13.8 |    
|                            |       |           |     |            |  |           |      |            |  |           |     |            |  |  |      |     |  |  |     |     |  |  |      |    
|                            | Total |           |     | 858        |  |           |      | 100        |  |           |     | 850        |  |  |      | 100 |  |  |     | 790 |  |  |      | 100 | 
|                            |       |           |     |            |  |           |      |            |  |           |     |            |  |  |      |     |  |  |     |     |  |  |      |    

Parasiticides

K9 Advantix®is
a flea and tick control product in an easy-to-use spot-on
application form with additional repelling effect against ticks
and mosquitoes.

Advantage® is a
flea control product in an easy-to-use, spot-on application form.

The Droncit® and Drontal®
product family offers solutions for the control of tapeworm and
roundworm.

Bayticol® is a
topical product against major tick species that attack livestock
animals.

Baycox® is a
product for controlling coccidiosis, primarily in poultry and,
more recently, in piglets.

Antimicrobials

The Baytril® family is our line of
fluoroquinolone antimicrobials for the treatment of severe
bacterial infections in animals.

37



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##### Table of Contents



Biologicals

Before December 2003, the Bayovac®
vaccine family comprised three main product types. Foot and
mouth disease, or FMD, vaccines have been part of this product
line for 50 years. Our Bayovac® IBR Marker
vaccines, used in controlling bovine respiratory disease, make
it possible to distinguish vaccinated from infected animals.
Baypamune® is an immunomodulator which is an aid in
the prevention and treatment of infectious and stress-induced
diseases.

In December 2003, the non-FMD products of our
biological business were sold to Pfizer. The acquisition
agreement, effective from December 9, 2003, also provides
for cooperation in the contract manufacture of these products by
Bayer. These products include IBR-Marker-Vaccine and the
immunostimulant Baypamune®. FMD-Vaccines will
continue to be produced and marketed by Bayer.

Nutritionals

These highly generic and homogenous commodities
are essential for higher-value proprietary products like
Baytril® and Baycox® to participate in
the Asian market.

Farm Hygiene

Integrated into our livestock business is our
biosecurity management process that includes Farm Hygiene
products. These products include insecticides for fly control,
rodenticides against rats and mice (which now belong to our
CropScience segment but are also marketed by Animal Health in
some countries) and disinfectants against bacteria.

Markets and Distribution

The Animal Health business covers worldwide
markets, including emerging markets such as China, Vietnam and
others in South-East Asia. We divide our marketing activities
into two main business areas: marketing for food-producing
(livestock) animals, and marketing for companion animals
including horses.

The combined sales by region and totals for the
past three years for these two business areas are as follows:

|                                 |       |                     |     |      |  |      |     |     |  |  |     |     | 
|-------------------------------- | ----- | ------------------- | --- | ---- |  | ---- | --- | --- |  |  | --- | --- | 
|                                 |       | 2001                |     | 2002 |  | 2003
|                                 |       |                     |     |      |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 237 |      |  |      | 243 |     |  |  | 242 |    
|North America                    |       |                     | 340 |      |  |      | 337 |     |  |  | 305 |    
|Asia/Pacific                     |       |                     | 134 |      |  |      | 136 |     |  |  | 122 |    
|Latin America/Africa/Middle East |       |                     | 147 |      |  |      | 134 |     |  |  | 121 |    
|                                 |       |                     |     |      |  |      |     |     |  |  |     |    
|                                 | Total |                     |     | 858  |  |      |     | 850 |  |  |     | 790 | 
|                                 |       |                     |     |      |  |      |     |     |  |  |     |    

On a worldwide basis, the activities of the
Animal Health segment are not subject to any significant
seasonal effects.

Depending on national legislation, Animal Health
products may be available to end users on a prescription or
non-prescription basis. End users may purchase prescription
products directly from veterinarians or pharmacies with a
written prescription issued from a licensed practicing
veterinarian. Also, based on national legislation,
non-prescription products may be available through
over-the-counter retailers, cooperatives, pet shops, integrators
in the livestock segment and other specialized channels in the
companion animal market.

We currently obtain the active pharmaceutical
ingredients for our veterinary pharmaceutical products either
within the Bayer Group or from third parties world-wide. We
obtain additional ingredients and packaging materials from
diverse suppliers on a world-wide basis. As a rule, we approve
our suppliers for each required material.

Our main pharmaceutical production facilities
devoted to formulation and packaging of our products for
shipment are Kiel, Germany and Shawnee, Kansas.

38



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##### Table of Contents



We take measures in order to assure continuous
product supply. This includes entering into long-term contracts
or building strategic reserves of the material in question.

Merial, Pfizer and Intervet are our main
competitors, with Merial and Pfizer being active in both
segments companion and livestock animals and Intervet
concentrating on the livestock business. The global animal
health market is characterized by market consolidations and
increasing competitive pressure from generic substitutes.

Research and Development

The Animal Health segment focuses its research
and development activities on antimicrobials, parasiticides and
pharmacologicals. A particular goal of our research and
development efforts is to provide the segment with innovative
and patent-protected products (new active ingredients,
formulations and application technologies).

The segments primary research and
development facilities are located in Monheim, Germany and
Kansas City, Missouri.

We currently have several products or product
families in late stages of development. Subject to regulatory
approval, we expect to launch these products between 2004 and
2007. These products are:

|                                                   |  |                                                                                    |  |                                               
|-------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ----------------------------------------------
|Projects/Products                                  |  | Indication                                                                         |  | Status                                        
|                                                   |  |                                                                                    |  |                                               
|Endoparasiticide and ectoparasiticide combinations |  | Control of fleas, ticks, heartworm and
    gastrointestinal worms in cats and dogs |  | launch/in registration/in clinical development
|Red mite control remedy                            |  | Poultry                                                                            |  | in clinical development                       
|Baycox® calves                                     |  | Coccidiosis control in calves                                                      |  | in clinical development                       
|Baytril® swine
    (North America)                 |  | Antimicrobial infections in pigs                                                   |  | in registration                               
|Pradofloxacin                                      |  | Antimicrobial for dogs and cats                                                    |  | in clinical development                       




BAYER CROPSCIENCE

Overview

Bayer CropScience develops and markets chemical
crop protection products, seeds and integrated plant
biotechnology solutions for agricultural and non-agricultural
uses. Bayer CropScience operates through three business groups:
Crop Protection, Environmental Science and BioScience. Crop
Protection markets chemical crop protection products for the
control of insects, weeds and fungi (plant diseases) and
develops active ingredients with new modes of action for
enhanced effectiveness against these target pests. Environmental
Science markets pest-control products for non-agricultural uses,
including products for professional pest control; the green
industry (including the treatment of golf courses, lawn care and
industrial vegetation management); lawn, garden and household
care; termite and vector control; and rural hygiene. BioScience
focuses on the research, development and marketing of
conventional seeds and plant biotechnology products. The
following table shows Bayer CropSciences performance for
the last three years.

|                                     |  |                     |       |      |  |      |       |   |  |  |       |  
|------------------------------------ |  | ------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                     |  | 2001                |       | 2002 |  | 2003
|                                     |  |                     |       |      |  |     
|                                     |  |                    
|                                     |  | (euros in millions)
|External net sales                   |  |                     | 2,838 |      |  |      | 4,697 |   |  |  | 5,764 |  
|Percentage of total sales            |  |                     | 9.4   |      |  |      | 15.9  |   |  |  | 20.2  |  
|Intersegment sales                   |  |                     | 102   |      |  |      | 90    |   |  |  | 69    |  
|Operating result                     |  |                     | 490   |      |  |      | (108  | ) |  |  | 324   |  
|Percentage of total operating result |  |                     | 29.2  |      |  |      |      |   |  |  |      |  
|thereof special items(1)             |  |                     | 0     |      |  |      | 67    |   |  |  | (81   | )



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The special items are detailed in Item 5,
    Operating and Financial Review and Prospects 
    Operating Results 2001, 2002 and 2003  Segment
    Data.

39



---



##### Table of Contents



The following table shows the sales during the
past three years from the products that we regard as material to
the sales of Bayer CropScience as a whole.

|                                               |  |           |     |            |  |           |      |            |  |           |     |            |  |  |      |  |  |  |     |  |  |  |      | 
|---------------------------------------------- |  | --------- | --- | ---------- |  | --------- | ---- | ---------- |  | --------- | --- | ---------- |  |  | ---- |  |  |  | --- |  |  |  | ---- | 
|                                               |  |           |     |            |  |          
|Product                                        |  | 2001      |     | 2002       |  | 2003     
|                                               |  |           |     |            |  |          
|                                               |  | Sales     |     | Percentage |  | Sales     |      | Percentage |  | Sales     |     | Percentage
|                                               |  | (euros in |     | of segment |  | (euros in |      | of segment |  | (euros in |     | of segment
|                                               |  | millions) |     | sales      |  | millions) |      | sales      |  | millions) |     | sales     
|                                               |  |           |     |            |  |           |      |            |  |           |     |           
|Confidor®,
    Gaucho®, Admire®,
    Merit®(1) |  |           | 608 |            |  |           | 21.4 |            |  |           | 561 |            |  |  | 11.9 |  |  |  | 590 |  |  |  | 10.2 | 
|Folicur®/Raxil®                                |  |           | 272 |            |  |           | 9.6  |            |  |           | 260 |            |  |  | 5.5  |  |  |  | 315 |  |  |  | 5.5  | 
|Puma®/Accord®(2)                               |  |           |    |            |  |           |     |            |  |           | 92  |            |  |  | 2.0  |  |  |  | 226 |  |  |  | 3.9  | 
|FLINT®                                         |  |           | 97  |            |  |           | 3.4  |            |  |           | 159 |            |  |  | 3.4  |  |  |  | 200 |  |  |  | 3.5  | 
|Basta®/Liberty®(2)                             |  |           |    |            |  |           |     |            |  |           | 70  |            |  |  | 1.5  |  |  |  | 159 |  |  |  | 2.8  | 
|Decis®/K-Othrine®(2)                           |  |           |    |            |  |           |     |            |  |           | 87  |            |  |  | 1.9  |  |  |  | 159 |  |  |  | 2.8  | 
|Betanal®(2)                                    |  |           |    |            |  |           |     |            |  |           | 41  |            |  |  | 0.9  |  |  |  | 143 |  |  |  | 2.5  | 
|Fenikan®/Javelin®(2)                           |  |           |    |            |  |           |     |            |  |           | 71  |            |  |  | 1.5  |  |  |  | 115 |  |  |  | 2.0  | 
|Aliette®/Mikal®/Chipco®Signature(2)            |  |           |    |            |  |           |     |            |  |           | 64  |            |  |  | 1.4  |  |  |  | 107 |  |  |  | 1.9  | 
|Balance®/Merlin®(2)                            |  |           |    |            |  |           |     |            |  |           | 36  |            |  |  | 0.8  |  |  |  | 106 |  |  |  | 1.8  | 



---



|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | The active ingredient imidacloprid contained in
    these products is also used in the Animal Health segments
    Advantage® product.
|(2) | Sales after Aventis CropScience acquisition (June
    2002).                                                                          

Segment Strategy

Following the acquisition of Aventis CropScience
in 2002, the global business activities have largely been
integrated and the divestments imposed by European, United
States and Canadian antitrust authorities have been completed,
with the exception of the product propoxycarbazone.

Bayer CropScience aims to strengthen its market
position in the Crop Protection and Environmental Science
businesses and to expand its activities in seeds and plant
biotechnology. We intend to improve Bayer CropSciences
operating result by introducing new products, realizing our
synergy targets, controlling costs and streamlining the
portfolio. Bayer CropScience is continuously exploring
opportunities to improve its portfolio through strategic joint
ventures and acquisitions.

In Crop Protection, the strategic focus is to
grow our business by utilizing our strong market position,
regional representation and broad product portfolio comprising
insecticides, fungicides, herbicides and seed treatment
products. A key growth driver is the introduction of new
products from our research and development pipeline.

Environmental Science is among the leading
suppliers for non-agricultural pest control solutions worldwide.
Our objective is to strengthen this market position through
selective partnerships for the lawn and garden business in the
United States and the continuous optimization of our portfolio.

BioScience is an emerging player in the research,
development and marketing of products derived from plant
biotechnology and seeds. Our strategic approach comprises three
specific business fields.



| |   |                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Agricultural Crops focuses on delivering high
    quality seeds and technologies to field crop growers
    particularly in our core crops cotton, oilseed rape (canola) and
    rice.                                                              
|
| |  | In New Business Ventures, we are exploring the
    opportunities to establish platforms that enable us to develop
    novel plant-based specialty products for the non-agricultural
    markets in the areas of Nutrition, Health and BioMaterials.
|
| |  | In the Vegetables field, where the Nunza unit of
    BioScience is a leading developer and supplier of high quality
    vegetable seed varieties, we intend to pursue growth
    opportunities.                                                    

40



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##### Table of Contents



Major Products

Crop Protection

Insecticides

Imidacloprid (Confidor®,
Admire®, Provado®) is an active
ingredient in the chemical class of neonicotinoids. It controls
a broad range of pests, including aphids, thrips, whiteflies,
leafhoppers, locusts, leafminers, wireworms and many species of
beetles, and is suitable for a wide variety of application
methods, including foliar spray, soil drench, seed treatment and
drip irrigation. Imidacloprid is now marketed in more than 120
countries for use on numerous important crops.

Deltamethrin (Decis®) is a
broad-spectrum pyrethroid insecticide. Although used primarily
against chewing and biting insects, it is also effective against
various sucking pests. Decis® is marketed in more
than 100 countries for use on a wide range of crops (including
cotton, soybeans, vegetables and cereals).

Aldicarb (Temik®) is a broad-spectrum
carbamate insecticide and nematicide in granular form.
Temik® is applied to soil to protect crop roots from
insects and nematodes and to protect against pests such as
aphids or mites. Temik® is used on a large number of
crops, such as cotton, citrus and potatoes.

Fungicides

Tebuconazole (Folicur®) prevents the
targeted fungus from synthesizing vital components of its cell
membrane. It can be used as a spray and in special applications,
such as sealing wounds in woody plants and in material
protection. In addition, tebuconazole has certain plant
growth-regulatory properties that are useful in certain crops.

Trifloxystrobin (Flint®) is a
strobilurin-type broad-spectrum fungicide used primarily to
protect cereals and a variety of other crops. It is used in
foliar sprays as a straight product under our lead brand
Flint® and in numerous combinations such as
Stratego® and Sphere®.

Fosetyl Aluminum (Aliette®) is a
fungicide with specific activity against downy mildew fungi in
vines, fruits and vegetables. A key property of fosetyl aluminum
is its upward and downward mobility in plants. Sprayed on
leaves, it is either absorbed and transported inside the plants
downward to the roots to protect them against attack from fungi
in the soil, or it is re-directed inside the plants upward to
protect newly emerging leaves as well. It is used in foliar
sprays and soil drenches as a straight product under our lead
brand Aliette® and in various combinations under
brands, such as Mikal® or Valiant®.

Herbicides

Fenoxaprop-P-ethyl (Puma®), Bayer
CropSciences best selling herbicide, is used in more than
73 countries and is one of the leading products used worldwide
against grass weeds in cereals, rice, soybeans and canola.

Glufosinate-Ammonium (Basta®) is a
post-emergence herbicide with a broad spectrum of efficacy
against annual and perennial weeds and grasses. It is primarily
used on perennial tree crops, vegetables, non-crop areas and as
a harvest aid. Liberty®, introduced in 1998 in the
United States and Canada, refers to the registered trade name of
glufosinate-ammonium applied on herbicide tolerant crops.

The active ingredients phenmedipham, desmedipham
and ethofumesate make up the Betanal® product
family, the basis of weed control systems in various beet
varieties. Ongoing improvements in the efficiency and range of
uses of these products have extended the life cycle of the
product family, resulting in its strong position in the sugar
beet market.

Foramsulfuron (Option®,
Maister®), is a post-emergence herbicide for broad
spectrum weed control in corn, launched in 2002. Primarily
controlling annual and perennial grassy weeds, it controls an
important range of broadleaved weeds as well. A line extension
has taken foramsulfuron (Revolver®) into the turf
market in our Environmental Science business for annual grass
control.

41



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##### Table of Contents



Mesosulfuron-methyl (Mesomaxx® as
globally protected trademark for the active ingredient, core
product brands Atlantis® and Cossack®)
stands for the latest generation of safened cereal herbicide
sulfonylureas, and has been in the launch phase globally since
2002. The products offer a broad and consistent grass control
performance in global cereal production.

Seed Treatment

The insecticidal active ingredient imidacloprid
(Gaucho®) is Bayer CropSciences best selling
seed treatment product. It is registered in over 100 countries
for the treatment of early season pests and soil and leaf pests
in key crops such as sugarbeet, corn, cereals and cotton.

Tebuconazole (Raxil®) is registered
in our most important markets worldwide as a seed treatment to
control seed and soil borne diseases in cereals.

Environmental Science

Environmental Science markets its products to
different end customers, including pest management
professionals, homeowners and do-it-yourself gardeners.

Imidacloprid-based Premise® is a
termite control product launched in the United States in 1996.
Merit®, another imidacloprid-based product, is used
in the green industry segment, in particular in turf and
ornamentals. It controls a large spectrum of insects such as
grubs and cutworms.

Deltamethrin (K-Othrine®,
Deltagard®), another important insecticide marketed
by Environmental Science, controls a large spectrum of flying
and crawling insects. Deltamethrin is recommended by the World
Health Organization and has been used for many years to control
insect-borne diseases such as malaria.

Maxforce® is an
insecticide used in passive treatment applications such as gels
and baits. It contains hydramethylnone or fipronil.
Maxforce®s range of products includes a large
number of insecticides controlling crawling insects.

The products targeting the non-professional users
are marketed under the umbrella brands Bayer
Advanced® in the United States and Bayer
Garden® in Europe.

BioScience

Nunza is a leading developer and supplier of high
quality vegetable seed varieties that are marketed to
professional outdoor and greenhouse growers, plant raisers and
the food processing and service industries. The main crop seeds
are carrots, onions, melons, leeks and tomatoes. The brand names
used for these products are Nunhems® and
Sunseeds®.

LibertyLink®
corn, provided by licensee seed companies in North America,
provides farmers with the ability to utilize
Liberty® brand herbicide (glufosinate-ammonium) in a
post-emergent weed control program for corn.

FiberMax®
cottonseed brand was launched in the U.S. market in 1998.
It was also introduced in Greece, Spain, Turkey and some Latin
American countries. FiberMax® cotton fiber displays
qualities which are well suited for the textile industry.

InVigor® hybrid
canola (oilseed rape) varieties are available to farmers in
Canada and the USA. InVigor® hybrid canola varieties
are high yielding and provide agricultural management options
that require less cultivation. These hybrid varieties also have
tolerance to glufosinate-ammonium.

Markets and Distribution

Europe has traditionally been Bayer
CropSciences strongest crop protection market, accounting
for 40 percent of our sales in 2003.

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Bayer CropSciences sales by region and
totals for the past three years are as follows:

|                                 |       |                     |       |       |  |      |       |       |  |  |       |       | 
|-------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                 |       | 2001                |       | 2002  |  | 2003
|                                 |       |                     |       |       |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 1,063 |       |  |      | 1,851 |       |  |  | 2,296 |      
|North America                    |       |                     | 636   |       |  |      | 1,024 |       |  |  | 1,339 |      
|Asia/Pacific                     |       |                     | 558   |       |  |      | 797   |       |  |  | 963   |      
|Latin America/Africa/Middle East |       |                     | 581   |       |  |      | 1,025 |       |  |  | 1,166 |      
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      
|                                 | Total |                     |       | 2,838 |  |      |       | 4,697 |  |  |       | 5,764 | 
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      

The following table sets forth Bayer
CropSciences sales for the last three years, broken down
by category of activity.

|                      |       |                     |       |       |  |      |       |       |  |  |       |       | 
|--------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                      |       | 2001                |       | 2002  |  | 2003
|                      |       |                     |       |       |  |     
|                      |       |                    
|                      |       | (euros in millions)
|Insecticides          |       |                     | 1,059 |       |  |      | 1,250 |       |  |  | 1,376 |      
|Fungicides            |       |                     | 821   |       |  |      | 1,030 |       |  |  | 1,168 |      
|Herbicides            |       |                     | 538   |       |  |      | 1,452 |       |  |  | 1,848 |      
|Seed Treatment        |       |                     |      |       |  |      | 270   |       |  |  | 409   |      
|                      |       |                     |       |       |  |      |       |       |  |  |       |      
|Total Crop Protection |       |                     | 2,418 |       |  |      | 4,002 |       |  |  | 4,801 |      
|Environmental Science |       |                     | 420   |       |  |      | 605   |       |  |  | 692   |      
|BioScience            |       |                     |      |       |  |      | 90    |       |  |  | 271   |      
|                      |       |                     |       |       |  |      |       |       |  |  |       |      
|                      | Total |                     |       | 2,838 |  |      |       | 4,697 |  |  |       | 5,764 | 
|                      |       |                     |       |       |  |      |       |       |  |  |       |      

Due to the fact that more than 80 percent of
Bayer CropSciences business is realized in the northern
hemisphere, the business is affected by the seasonality of the
various crop and distribution cycles.

Bayer CropScience obtains a significant part of
its raw materials from within the Bayer Group but also enters
into contractual agreements with non-Bayer companies. Some raw
materials can be subject to price volatility caused by
fluctuation in the price of oil, energy or transport costs.

We market our Crop Protection products through a
two- or three-step distribution system, depending on local
market conditions. Under this system, products are sold either
to wholesalers or directly to retailers.

Environmental Science products are directed
towards professional and consumer markets. For each of these
markets, the products run through different distribution
channels. For professional markets, products are sold to the
pest control industry, the green industry, as well as the public
health and rural hygiene sectors. In the consumer business, Lawn
and Garden products are sold to end user consumers through
specialized distribution channels. Also, specialty active
ingredients are sold to marketers of household products.

BioScience markets its seeds to end users,
distributors and processing industries. Plant biotechnology
traits are mainly distributed through out-licensing to seed
companies, which produce commercial seeds on the licensors
behalf. In some cases, traits are provided to other companies
that utilize the technology in their own research and products.

Our main competitors in the Crop Protection
business are Syngenta, Monsanto, BASF, Dow AgroSciences and
DuPont. Dow AgroSciences and Syngenta are our main competitors
in the overall Environmental Science business. In the business
of plant biotechnology-based products and seeds, DuPont,
Monsanto and Syngenta are the market leaders.

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Research and Development

Crop Protection

Bayer CropScience Research and Development is
globally represented with main facilities in Monheim
(headquarters) and Frankfurt, Germany; Lyon and Sophia
Antipolis, France; Stilwell, Kansas and Raleigh, North Carolina;
and Yuki City, Japan.

The responsibility of the Crop Protection
Research and Development function is to discover and develop
customer-focused, innovative and profitable solutions in crop
protection.

Research covers all activities to identify new
active ingredients that can be developed as insecticides,
fungicides or herbicides. Genomics, high-throughput screening
and combinatorial chemistry are part of the technological
platform to identify new lead structures.

Collaborations with research companies supplement
our internal research activities (e.g., target
identification carried out by Paradigm Genetics or GenOptera
LLC, a joint venture between Bayer and Exelixis, Inc.).

Once a compound is identified for development,
its biological, environmental and toxicological profile, as well
as its economic potential, is assessed. Suitable candidates are
launched in the market.

Bayer CropScience actively supports its products
through continuous life cycle management. This includes the
development of new formulations for existing active ingredients
and expanding their applicability to additional crops and
countries.

Environmental Science

The molecules invented by Crop Protection
Research are also tested and evaluated in Environmental Science
for potential development. Development projects include passive
treatments (gels, baits) and innovative formulations to control
insects, as well as new herbicide products and new mixtures of
fungicides for the turf and ornamental market segments.

BioScience

The BioScience research and development
facilities are located in Lyon and Evry, France; Haelen, The
Netherlands; Gent, Belgium; and Potsdam, Germany.

Plant biotechnology research and development is
predominantly directed towards agronomic and quality
improvement. The technologies include all relevant
tools  from identifying the gene of interest to
development  to improve key crops (cotton, oilseed
rape (canola), rice) for growers and industrial partners.
Research activities range from the exploration of novel
agronomic traits to the discovery of new plant-based specialty
products for the Nutrition, Health and BioMaterials markets.

The following new active ingredients were
launched in 2003 or are expected to be launched subject to
regulatory approval in 2004:

|                       |  |                |  |                        
|---------------------- |  | -------------- |  | -----------------------
|New active ingredients |  | Product Family |  | Status                 
|                       |  |                |  |                        
|Spirodiclofen          |  | Insecticides   |  | Launched in 2003       
|Clothianidin(1)        |  | Insecticides   |  | Launched in 2003       
|Prothioconazole        |  | Fungicides     |  | Launch expected in 2004



---



|    |                                                             
|--- | ------------------------------------------------------------
|(1) | Co-developed with Sumitomo Chemical Takeda Agro
    Co. Ltd.

The broad spectrum acaricide spirodiclofen
(Envidor®) belongs to the new chemical class of
tetronic acid derivatives discovered by Bayer CropScience. The
product shows excellent activity against mite pests in perennial
crops. Spirodiclofen has a new mode of action (interference with
lipid biosynthesis) and shows no cross-resistance to any
resistant mite field population and is therefore also a valuable
tool for resistance management. Spirodiclofen is being developed
for worldwide use in pome fruit, stone fruit, citrus, grapes,
almonds and nuts.

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Clothianidin (Poncho®) is a new
active ingredient in the chemical class of chloronicotinyls. It
has been jointly developed by Sumitomo Chemical Takeda Agro Co.
Ltd. and Bayer CropScience AG. Bayer CropScience has exclusive
rights for seed treatment developments. The active ingredient,
which is applied as a seed treatment, has been developed
primarily for the control of the major soil and early season
pests in corn, sugarbeet, oilseed rape (canola) and cereals.

Prothioconazole (Proline®) is the
newest development in triazole chemistry for broad spectrum
disease control. As part of crop resistance management, this
product will be used for foliar and seed treatment application
in cereals, oilseed rape (canola), peanuts and other crops.




BAYER POLYMERS

PLASTICS, RUBBER

Overview

Our Plastics, Rubber segment comprises seven
strategic business entities which are summarized under
Thermoplastic Polymers and Rubber Polymers below. The following
table shows the segments performance for the last three
years.

|                                     |                                  |                     |       |       |   |      |       |       |   |  |       |       |  
|------------------------------------ | -------------------------------- | ------------------- | ----- | ----- | - | ---- | ----- | ----- | - |  | ----- | ----- | -
|                                     |                                  | 2001                |       | 2002  |   | 2003
|                                     |                                  |                     |       |       |   |     
|                                     |                                  |                    
|                                     |                                  | (euros in millions)
|External net sales                   |                                  |                     | 5,396 |       |   |      | 5,210 |       |   |  | 4,813 |      
|Percentage of total sales            |                                  |                     | 17.8  |       |   |      | 17.6  |       |   |  | 16.8  |      
|                                     | thereof discontinuing operations |                     |       | 3,689 |   |      |       | 3,337 |   |  |       | 3,096 |  
|Intersegment sales                   |                                  |                     | 116   |       |   |      | 115   |       |   |  | 76    |      
|Operating result                     |                                  |                     | 214   |       |   |      | 76    |       |   |  | (666  | )    
|Percentage of total operating result |                                  |                     | 12.8  |       |   |      | 4.7   |       |   |  |      |      
|                                     | thereof discontinuing operations |                     |       | 6     |   |      |       | (48   | ) |  |       | (716  | )
|                                     | thereof special items(1)         |                     |       | (70   | ) |      |       | (91   | ) |  |       | (593  | )



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The special items are detailed in Item 5,
    Operating and Financial Review and Prospects 
    Operating Results 2001, 2002 and 2003  Segment
    Data.

No individual product is material to the revenue
of the segment as a whole.

Segment Strategy

Our goal is to continue expanding our leading
market position (based on product volume) in high-value added
plastic and rubber products. We intend to continue developing
new applications for our products. We aim to improve profit
margins by continually streamlining our existing product
portfolio, implementing efficient cost structures, eliminating
capacity constraints and further exploiting our regional growth
potential.

In November 2003, Bayer announced that the Bayer
Group intends to maintain its focus on its core businesses and
therefore combine Bayer Chemicals with certain parts of the
Bayer Polymers business in a new company to be named Lanxess
(see  Business). Only Polycarbonates,
Polycarbonate Sheets and Polycarbonate Blends will remain within
Bayer Group. This remaining business within the Plastics, Rubber
segment together with the Polyurethanes, Coatings segment
(without Fibers), as well as Wolff Walsrode and H.C. Starck from
Bayer Chemicals, will comprise the Bayer MaterialScience
subgroup and will be conducted from a wholly-owned subsidiary of
Bayer Group called Bayer MaterialScience AG.

We are continuing our stringent cost and
efficiency programs in the Polyurethanes, Coatings, Fibers and
the Plastics, Rubber segments. As part of these programs, we had
announced in 2002 that we planned to reduce the headcount in the
Polyurethanes, Coatings, Fibers and the Plastics, Rubber
segments. We reduced headcount by 2,200 (or 8.5 percent) in
2003 and continue to reduce the number of employees in these
segments. We plan to continue cost reduction and efficiency
programs as well as the reduction of headcount for Bayer
MaterialScience.

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Thermoplastic Polymers

Overview

With its broad product portfolio, our
Thermoplastic Polymers business entities (Polycarbonates,
Styrenics, Semi-Crystalline Products and Polycarbonate Sheets)
are some of the leading global suppliers and manufacturers of
engineering thermoplastics. Our acquisition of the remaining
shares of Makroform GmbH on July 15, 2003 strengthens our
position as a leading supplier of polycarbonate sheets based on
product volumes. Many Bayer materials have chemical and physical
properties that enable them to resist very low or very high
operating temperatures as well as corrosive chemicals and
solvents.

Major Products

Polycarbonates (will remain with
Bayer)

Polycarbonates are plastics that are transparent
and highly stable across a wide temperature range.
Polycarbonates almost completely dominate the field of optical
data storage media, such as pre-recorded and recordable CDs and
DVDs, and are widely used throughout the electrical/ electronics
segments in general for injection molding purposes. The
construction industry is also a major user of polycarbonates,
for example, for Polycarbonate sheet applications.
Makrolon® is our leading polycarbonate product. Its
key characteristics include high transparency, heat resistance
and toughness. It can be both sterilized  important
for the food and medical industries  and recycled.
Our other polycarbonates include the APEC® range for
high temperature usages such as components for automobile
headlights and Makroblend®.

Styrenics (will be partially transferred to
Lanxess)

Styrenics lend themselves well to blending with
other forms of plastic. Blend technology can transform a palette
of a few basic polymers into a wide range of new, advanced
polymers with tailored properties, creating user-specific
solutions and, in many cases, cost advantages as well. Styrenics
are widely used in the automotive, electric/ electronic and IT
industries. Special applications exist in household, packaging,
toys and medical area. Novodur® and
Lustran®, both acrylonitrile/
butadiene/styrene  ABS copolymers, are our leading
stryrenics. Other styrenics include Lustran SAN®,
Bayblend® (Polycarbonate/ABS blend) (which will stay
with Bayer), Triax® and Centrex®.

Polycarbonate Sheets (Fabricated Products)
(will remain with Bayer)

We also produce plastic films as well as solid
and multiwall sheets with a broad range of characteristics for a
wide variety of applications. These materials consist of
polycarbonate, polycarbonate blends or thermoplastic polyethers.
We market our films under the trade names Makrofol®
and Bayfol®, and our sheets as
Makrolon®, Vivak® and Axpet®.

Semi-Crystalline Products (will be transferred
to Lanxess)

Polyamides.Polyamides are tough, strong, high-performance plastics. They
are resistant to chemicals and can often replace metal and other
materials. The most important consumers of polyamides are the
automotive, food packaging and electrical/ electronic
industries. In addition, we use these materials in producing
halogen-free flame retardant products. In the automotive field
alone, applications of polyamides range from such
long-established uses as coolant casings, hubcaps, door handles,
external mirrors, sun-roofs and central electrical systems to
more recent developments, such as tail pipes, vehicle
electronics and AntiBlockingSystems. Durethan® is a
product within our range of engineering thermoplastics based on
Polyamid 6, Polyamid 66 and their copolyamides.

Polyesters.Semi-Crystalline thermoplastic polyesters like polybutylene
terephthalate (PBT) and engineering plastics polyethylene
terephthalate (PET) show high resistance to chemicals, heat
distortion and stress cracking and show low water absorption.
They are used unreinforced, glass fiber reinforced, flame
retardant, filled and in blends. Pocan® is our
trademark for engineering thermoplastics based on PBT and PET.

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Markets and Distribution

We sell the products of our Thermoplastic
Polymers business entities to thousands of customers worldwide.
These customers include injection-molding operators and a large
number of plastic-component manufacturers, whose products are
overwhelmingly used in the automotive, electrical, electrical
engineering, construction, data technology, medical and leisure
fields.

The business entities external sales, by
region and totals, for the past three years are as follows:

|                                 |       |                     |       |       |  |      |       |       |  |  |       |       | 
|-------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                 |       | 2001                |       | 2002  |  | 2003
|                                 |       |                     |       |       |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 1,490 |       |  |      | 1,402 |       |  |  | 1,387 |      
|North America                    |       |                     | 781   |       |  |      | 722   |       |  |  | 601   |      
|Asia/Pacific                     |       |                     | 699   |       |  |      | 700   |       |  |  | 669   |      
|Latin America/Africa/Middle East |       |                     | 211   |       |  |      | 171   |       |  |  | 185   |      
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      
|                                 | Total |                     |       | 3,181 |  |      |       | 2,995 |  |  |       | 2,842 | 
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      

The following table sets forth the business
entities external sales for the last three years, broken
down by category of activity.

|                          |       |                     |       |       |  |      |       |       |  |  |       |       | 
|------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                          |       | 2001                |       | 2002  |  | 2003
|                          |       |                     |       |       |  |     
|                          |       |                    
|                          |       | (euros in millions)
|Polycarbonates            |       |                     | 1,231 |       |  |      | 1,067 |       |  |  | 1,091 |      
|Styrenics                 |       |                     | 1,162 |       |  |      | 1,102 |       |  |  | 981   |      
|Semi-Cristalline Products |       |                     | 493   |       |  |      | 528   |       |  |  | 515   |      
|Polycarbonate Sheets      |       |                     | 279   |       |  |      | 268   |       |  |  | 236   |      
|Others                    |       |                     | 16    |       |  |      | 30    |       |  |  | 19    |      
|                          |       |                     |       |       |  |      |       |       |  |  |       |      
|                          | Total |                     |       | 3,181 |  |      |       | 2,995 |  |  |       | 2,842 | 
|                          |       |                     |       |       |  |      |       |       |  |  |       |      

The market for engineering thermoplastics is
characterized by constant pressure on margins and growing price
competition due to globalization, excess capacities, reduced
demand due to the economic slow-down and increasing customer
purchasing power. The primary driver of competition is price.
Our major customers also expect global presence, high quality
products, technical support and service and reliable delivery.
In order to meet these demands and to achieve leadership in both
cost and technology, we are extending our production and
marketing presence in our key regions and markets.

Despite continually growing demand, global
overcapacity remains a problem in some product lines. Although
several producers have cancelled or postponed expansion plans,
capacity continues to increase. We expect that the industry will
continue to consolidate and new low-cost technologies will
replace small, increasingly obsolete facilities.

Bayer does not produce basic petrochemicals. The
principal raw materials of our Thermoplastic Polymers business
entities are styrene, butadiene, acrylonitrile, acetone, phenol,
cyclohexane, butandiol and dimethylterephthalate. Because many
of these materials derive from petrochemicals, we obtain them
almost exclusively from third parties. We do, however, produce
Bisphenol-A, which is a major precursor of polycarbonate, from
phenol and acetone internally. Nevertheless, our costs are
affected by fluctuations in raw material prices, driven in turn
by fluctuations in oil prices. We typically procure third-party
raw materials under long-term, as-if-producer
contracts that establish cost-based pricing formulas, limiting
raw material price fluctuation to the effects of fluctuation in
the price of crude oil and energy.

We market substantially all our plastics products
through regional distribution channels, supported by regional
competence centers and by our head office. In addition, we also
use trading houses and local distributors to work with small
volume customers. We are increasingly using e-commerce tools to
market our products.

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Our most significant global competitor in all
regions is General Electric Plastics. We also compete with
several other companies, most notably BASF, Dow and DuPont.
Particularly in the Far East, local competitors with more
limited product portfolios, such as Teijin, Chimei, Idemitsu,
Mitsubishi and LG, are also important market players.

Research and Development

The Thermoplastic Polymers business entities
focus their research and development activities on process
development in polycarbonates, styrenics and semi-crystalline
thermoplastics. We have been introducing a new polycarbonate
melt manufacturing process which will be the basis for our new
investment in China. We are also furthering the development of
the PA 6 polymerization process. In product development, we
focus on consolidating our product portfolio, developing new
blends, refining optical data carriers and modifying the surface
of plastics with coatings.

The business entities primary research and
development facilities are located in Krefeld and Dormagen,
Germany; Pittsburgh, Pennsylvania; Addyston, Ohio; and Moxi,
India.

The Thermoplastic Polymers business entities are
currently focusing their research and development activities on
the following products.

|                                                        |  |                                         
|------------------------------------------------------- |  | ----------------------------------------
|Product/Brand name                                      |  | Application                             
|                                                        |  |                                         
|Surface-modified Makrolon                               |  | Automotive, construction                
|Improved Makrolon ODS grade                             |  | Recordable ODS formats                  
|Extension of Bayblend FR series                         |  | Business machines/information technology
|Electroconductive Triax for online painting             |  | Automotive exterior parts               
|Pocan, Durethan for thinwall application
    (EasyFlow) |  | Electric/Electronic                     
|Halogenfree flame retardant Pocan                       |  | Electric/Electronic                     

Rubber Polymers (will be transferred to
Lanxess)

Overview

As a leading supplier of raw materials, our
Rubber Polymers business entities (BR/Butyl, Technical Rubber
Products, Rubber Chemicals) are an important partner to the
rubber and tire industry. Our portfolio comprises synthetic
rubber, rubber chemicals and modifiers for the plastics
industry, along with special preparations and processing
chemicals. On May 9, 2003, we sold our interest in
PolymerLatex, a joint venture with Degussa AG.

Major Products

BR/Butyl

Butadiene Rubber
(BR).We produce polybutadiene rubbers
(BR) using three different catalyst systems, each type imparting
specific characteristics to the resulting polymers. BR is used
principally in tire treads, invariably compounded with other
rubbers to give the desired balance of properties such as long
life, skid resistance and improved fuel economy. Polystyrene
modification is the second major application for BR, which is
also used in golf balls and some industrial products. The BR
product family includes solution-polymerised styrene-butadiene
rubbers.

Butyl.We produce a
full range of standard and halogenated butyl rubber, the
principal characteristic of which is impermeability to air and
gases, making them well suited for use in the pneumatic tire.
Inner tubes are manufactured from standard grades, whereas the
halogenated types are used in impermeable linings in the tire
itself. Other applications include pharmaceutical stoppers and
chewing gum.

Technical Rubber Products

We produce a wide range of synthetic rubber. Our
portfolio comprises polychloroprene, ethylene-proylene co- and
ter-polymers, nitrile rubber and styrene-butadiene copolymers as
well as hydrogenated nitrile rubber and

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ethylene-vinyl acetate copolymers specialities.
Our customers may process our rubber materials into end
products, often blending them with other synthetic rubbers or
natural rubber to form a wide range of compounds. Our products
offer customers an array of varying characteristics, including
processability, hardness, flexibility and wear, heat and
chemical resistance, to suit their specific needs. Our rubber
products are the basis for a wide variety of other articles such
as hoses, belts, cable and wire sheathing, footwear and golf
balls.


Rubber Chemicals.We
produce a broad range of chemical products for use in the rubber
compounding and production process. These products help rubber
producers to control the speed of vulcanization, to protect
rubber products against degradation caused by oxidation or
effects of ozone and heat and to alter the physical properties
of rubber products. The products range consists mainly of
relatively mature products with limited substitution risk. These
products are in general use by all rubber fabricators. The tire
and automotive industry is the largest end user market.

PolymerLatex and Rhein
Chemie.Our subsidiary Rhein Chemie
produces a wide variety of substances used in rubber manufacture
and processing. On May 9, 2003, we sold our interest in the
PolymerLatex joint venture.

Markets and Distribution

The main markets for the Rubber Polymers business
entities are Europe and North America. The tire and automotive
industries generate a large percentage of the business
entities revenue, both from new car production and
replacement tires.

The business entities external sales by
region and total for the past three years are as follows:

|                                 |       |                     |       |       |  |      |       |       |  |  |     |       | 
|-------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | --- | ----- | 
|                                 |       | 2001                |       | 2002  |  | 2003
|                                 |       |                     |       |       |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 1,063 |       |  |      | 1,023 |       |  |  | 950 |      
|North America                    |       |                     | 725   |       |  |      | 679   |       |  |  | 585 |      
|Asia/Pacific                     |       |                     | 307   |       |  |      | 370   |       |  |  | 306 |      
|Latin America/Africa/Middle East |       |                     | 120   |       |  |      | 143   |       |  |  | 130 |      
|                                 |       |                     |       |       |  |      |       |       |  |  |     |      
|                                 | Total |                     |       | 2,215 |  |      |       | 2,215 |  |  |     | 1,971 | 
|                                 |       |                     |       |       |  |      |       |       |  |  |     |      

The following table sets forth the business
entities sales for the last three years, broken down by
category of activity.

|                 |       |                     |     |       |  |      |     |       |  |  |     |       | 
|---------------- | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                 |       | 2001                |     | 2002  |  | 2003
|                 |       |                     |     |       |  |     
|                 |       |                    
|                 |       | (euros in millions)
|BR/Butyl         |       |                     | 960 |       |  |      | 951 |       |  |  | 900 |      
|Technical Rubber |       |                     | 477 |       |  |      | 508 |       |  |  | 458 |      
|Rubber Chemicals |       |                     | 287 |       |  |      | 292 |       |  |  | 270 |      
|Rhein Chemie     |       |                     | 293 |       |  |      | 280 |       |  |  | 257 |      
|PolymerLatex     |       |                     | 190 |       |  |      | 179 |       |  |  | 66  |      
|Other            |       |                     | 8   |       |  |      | 5   |       |  |  | 20  |      
|                 |       |                     |     |       |  |      |     |       |  |  |     |      
|                 | Total |                     |     | 2,215 |  |      |     | 2,215 |  |  |     | 1,971 | 
|                 |       |                     |     |       |  |      |     |       |  |  |     |      

Our Rubber Polymers business entities are not
subject to significant seasonality.

We regard the following companies as the major
competitors of our Rubber Polymers business entities:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | Technical Rubber:Exxon, Polimeri Europa, DuPont Dow Elastomers, DSM and Nippon
    Zeon;
|
| |  | Rubber Chemicals:Flexsys and Crompton;                                                  
|
| |  | Butyl:Exxon; and                                                                        

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| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | Butadiene Rubber (BR):Michelin, Bridgestone, and Goodyear,
    as the largest tire companies, all have in-house production.

Research and Development

The Rubber Polymers business entities focus their
research and development activities on creating new products,
improving processing technology and improving testing methods.
The business entities primary research and development
facilities are located in Leverkusen and Dormagen, Germany, and
Sarnia, Canada.

Because a substantial portion of our business
comes from the automotive sector, anticipating and meeting that
sectors needs is a key priority of our research and
development effort. In the non-tire automotive industry, the
primary goal is developing rubber parts that have longer
durability in more demanding environments. Another aspect of our
work is promoting the use of our materials in non-traditional
applications, such as the packaging industry.

We have four products in late stages of
development. These products are:

|                   |  |                                                                                             
|------------------ |  | --------------------------------------------------------------------------------------------
|Product/Brand name |  | Application                                                                                 
|                   |  |                                                                                             
|Therban XT         |  | Improved hot abrasion and adhesion                                                          
|Levapren 900       |  | PVC substitute in NitrileButadieneRubbers blends                                            
|Vulcuren           |  | Vulcanization of rubber goods with less reversion                                           
|Buna VSL KA8955    |  | New modified Solution-StyreneButadieneRubber
    (S-SBR) for improved tire tread performance

POLYURETHANES, COATINGS,
FIBERS

Overview

Our Polyurethanes, Coatings, Fibers segment
comprises seven strategic business entities which are summarized
under Polyurethane Materials and Coatings Materials below. The
following table shows the segments performance for the
last three years.

|                                     |                                  |                     |       |      |   |      |       |      |   |  |       |      |  
|------------------------------------ | -------------------------------- | ------------------- | ----- | ---- | - | ---- | ----- | ---- | - |  | ----- | ---- | -
|                                     |                                  | 2001                |       | 2002 |   | 2003
|                                     |                                  |                     |       |      |   |     
|                                     |                                  |                    
|                                     |                                  | (euros in millions)
|External net sales                   |                                  |                     | 5,275 |      |   |      | 5,213 |      |   |  | 5,084 |     
|Percentage of total sales            |                                  |                     | 17.4  |      |   |      | 17.6  |      |   |  | 17.8  |     
|                                     | thereof Discontinuing Operations |                     |       | 228  |   |      |       | 199  |   |  |       | 167  |  
|Intersegment sales                   |                                  |                     | 138   |      |   |      | 78    |      |   |  | 207   |     
|Operating result                     |                                  |                     | 153   |      |   |      | (134  | )    |   |  | (514  | )   
|Percentage of total operating result |                                  |                     | 9.1   |      |   |      |      |      |   |  |      |     
|                                     | thereof Discontinuing Operations |                     |       | (17  | ) |      |       | (99  | ) |  |       | (67  | )
|                                     | thereof special items(1)         |                     |       | (85  | ) |      |       | (374 | ) |  |       | (785 | )



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The special items are detailed in Item 5,
    Operating and Financial Review and Prospects 
    Operating Results 2001, 2002 and 2003  Segment
    Data.

No individual product is material to the revenue
of the segment as a whole.

Segment Strategy

Our goal is to continue expanding our global
position in Polyurethane, Coatings. We plan to focus on capacity
expansion in Asia, where we see opportunities for above-average
growth.

In November 2003, Bayer announced that the Bayer
Group intends to maintain its focus on its core businesses and
therefore combine Bayer Chemicals with certain parts of the
Bayer Polymers business in a new company to be named Lanxess
(see  Business). Our Fibers business that is
included in the Polyurethanes, Coatings, Fibers segment will be
transferred to this new company. The remaining Polyurethanes,
Coatings

50



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business, together with the Polycarbonates,
Polycarbonate Sheets and Polycarbonate-Blends business from the
Plastics, Rubber segment, as well as Wolff Walsrode and H.C.
Starck from Bayer Chemicals, will comprise the Bayer
MaterialScience subgroup and will be conducted through a
wholly-owned subsidiary of Bayer Group called Bayer
MaterialScience AG.


As announced in 2002, we intend to boost our
returns through stringent cost and efficiency programs in the
Polyurethanes, Coatings, Fibers and the Plastics, Rubber
segments. We reduced headcount by 2,200 in 2003 and continue to
reduce the number of employees in the segments. We plan to
continue cost reduction and efficiency programs as well as the
reduction of headcount for Bayer MaterialScience.

Polyurethane Materials

Overview

Our Polyurethane Materials business entities
(MDI, TDI, Polyether) focus on the development, production and
marketing of isocyanates and polyol materials for polyurethane
formulations and systems used in producing a wide variety of
polyurethane polymers for a broad range of industrial and
consumer applications.

Products

Polyurethanes are polymers formed through the
reaction of two liquid chemicals: an isocyanate 
typically diphenylmethane diisocyanate (MDI) or toluene
diisocyanate (TDI)  and a polymeric alcohol such as
polyether polyols. We produce a range of different isocyanates
and polyether polyols under such brand names as
Desmodur®, Desmophen®,
Baydur® and Bayflex®. The
characteristics of a given polyurethane depend on both the
material components used as well as the precise proportion of
each used in the mix.

Our customers use our isocyanates or polyether
polyols, or both, to create their own specific polyurethane
formulations. In addition, upon request we design and evaluate
custom blends to meet specific customer requirements. When we
have perfected a formulation for a specific end product, we
deliver the components to the customer, who then combines them
at its manufacturing site. The customer receives a ready-to-use
two-component system. The precise formulation of each custom
blend is proprietary.

Typical applications for which our customers use
our polyurethane materials include furniture, mattresses,
automotive components, appliances, sport and leisure equipment
and construction.

Markets and Distribution

Europe and the NAFTA nations remain the primary
markets for our Polyurethane Materials business entities,
although Asia is growing in importance.

The Polyurethane Materials business
entities external sales by region and totals for the past
three years are as follows:

|                                 |       |                     |       |       |  |      |       |       |  |  |       |       | 
|-------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                 |       | 2001                |       | 2002  |  | 2003
|                                 |       |                     |       |       |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 1,304 |       |  |      | 1,221 |       |  |  | 1,289 |      
|North America                    |       |                     | 1,110 |       |  |      | 1,138 |       |  |  | 1,049 |      
|Asia/Pacific                     |       |                     | 445   |       |  |      | 451   |       |  |  | 464   |      
|Latin America/Africa/Middle East |       |                     | 414   |       |  |      | 387   |       |  |  | 382   |      
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      
|                                 | Total |                     |       | 3,273 |  |      |       | 3,197 |  |  |       | 3,184 | 
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      

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The following table sets forth the business
entities sales for the last three years, broken down by
product type.

|           |       |                     |       |       |  |      |       |       |  |  |       |       | 
|---------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|           |       | 2001                |       | 2002  |  | 2003
|           |       |                     |       |       |  |     
|           |       |                    
|           |       | (euros in millions)
|TDI        |       |                     | 575   |       |  |      | 593   |       |  |  | 581   |      
|MDI        |       |                     | 1,177 |       |  |      | 1,099 |       |  |  | 1,193 |      
|Polyethers |       |                     | 1,392 |       |  |      | 1,504 |       |  |  | 1,392 |      
|Others     |       |                     | 129   |       |  |      | 1     |       |  |  | 18    |      
|           |       |                     |       |       |  |      |       |       |  |  |       |      
|           | Total |                     |       | 3,273 |  |      |       | 3,197 |  |  |       | 3,184 | 
|           |       |                     |       |       |  |      |       |       |  |  |       |      

For our customers applications, there are
no significant man-made or natural substitute materials for
flexible polyurethane foams. Polystyrenes can compete with rigid
polyurethane foams if the required materials are in sheet or
block form. Conversely, polyurethane elastomers compete with
other thermoplastic materials on cost, performance and fit with
the production mix at the customers site.

In the automotive area, there is constant
competition between polyurethanes and other polymers in many
applications, except for seating and steering wheels, due to
required physical properties, costs, design or functional
requirements.

On a worldwide level, the Polyurethane Materials
business entities sales are not subject to significant
seasonality. On the regional level, business can display
indirect seasonality where, for example, revenue depends on such
seasonal industries as construction and other outdoor
applications.

The basic raw materials for our isocyanates and
polyols are commodity petrochemical products. We typically
purchase these on the open market partially under long term
contracts, as Bayer generally does not produce petrochemicals.
However, through our acquisition of Lyondells polyol
business, we have acquired a low-cost source for propylene
oxide, one of our key raw materials. Although these raw
materials are readily available, they are subject to price
fluctuation driven by, for example, changes in world oil prices.

The Polyurethane Materials business entities sell
their products directly to customers and, to a much smaller
degree, through so-called system houses and traders.
System houses typically serve smaller-volume customers and may
be either independent companies or the subsidiaries of larger
companies. It is our strategy to systematically establish our
own regional system houses.

To further increase efficiency along the supply
chain, we are establishing regional supply chain centers,
replacing country-specific organizations, to fill orders.
Ultimately, we plan to have the regional supply chain centers
balance worldwide supply with regional demand.

We are currently in a consolidation phase
regarding our production sites. As part of this consolidation in
the TDI area, we terminated the Industriale Cydsa Bayer joint
venture (ICB) and closed the TDI plant at Coatzocoalcos, Mexico,
as well as the TDI plants in Leverkusen, Germany, and SBU,
Japan. Other parts of this consolidation included the
termination of the Bayer-Shell Isocyanates N.V. (BSI) joint
venture, as well as the closure of the polyether site at
Institute, West Virginia during 2003.

Our main competitors are BASF, Dow Chemical,
Huntsman, Lyondell, Mitsui Takeda and Shell.

Research and Development

The Polyurethane Materials business entities
focus their research and development activities on:



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | reducing the thermoconductivity of rigid
    polyurethane foams;   
|
| |  | halogen-free flame retardants;                                     
|
| |  | halogen-free blowing agents;                                       
|
| |  | reduction of volatile components in polyurethane
    raw materials;

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| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | new applications for polyurethanes and
    polyurethane materials; and
|
| |  | reducing costs and improving quality in
    production processes.     

The business entities primary research and
technical development facilities are located in Dormagen and
Leverkusen, Germany; Pittsburgh, Pennsylvania; South Charleston,
West Virginia; New Martinsville, West Virginia; Amagasaki,
Japan; and Shanghai, China.

The main areas of innovation in the polyurethane
field are currently the development of new or improved polyether
polyol types and blends as well as the improvement of
manufacturing processes. The business entities concentrate their
research and development efforts with respect to aromatic
isocyanates on improving existing products and technologies for
their manufacture. High-throughput experiments are used for the
development of new formulations and will help to reduce
time-to-market for new products.

Coatings Materials

Overview

Our Coatings Materials business entities (Base-
and modified isocyanates, Polyester TPU and Films, Inorganic
Basic Chemicals and Fibers) develop and market a wide variety of
products that serve as raw materials for lacquers, coatings,
sealants and adhesives. To enable these entities to concentrate
on their core business areas, we transferred the Colorants
business to Bayer Chemicals in 2003.

Major Products

Resins and Hardeners

Polyurethane lacquers are formed through the
combination of an isocyanates component with a polyol-like
polyester, polyacrylate-, polyether- or polycarbonatepolyols. We
offer a variety of polyol components branded as
Desmophen®, Rucote® and
Bayhydrol® (Polyester, TPU and Films) and
polyisocyanates such as Desmodur®, Desmodur
BL®, Bayhydur®, and Crelan®
(base- and modified isocyanates). This variety enables us to
provide custom-tailored solutions for a number of different
applications.

Special raw
materials.Our special material unit
produces such specialty products as Pergut®
(Polyester, TPU and Films) for coatings and adhesives,
Impranil®, our polyurethane coating systems for
textiles, and Baybond® for glass fiber sizing.

Adhesive raw materials

Dispercoll®and
Desmocoll® (Polyester, TPU and Films) are our raw
materials for adhesives. Their primary users are shoe
manufacturers, though we also have customers from the
automotive, furniture and building industries.

Thermoplastic
polyurethanes.Thermoplastic
polyurethanes, or TPUs (Polyester, TPU and Films), belong to the
high-performance thermoplastic elastomers family. A key property
of TPUs is their resistance to high abrasion and wear.
TPUs abrasion- and wear-resistant properties are
substantially superior to those of abrasion-resistant rubber
compounds. Their wet abrasion resistance surpasses even that of
most metals. We market our thermoplastic polyurethanes under the
trademarks Desmopan® in Germany and other EU
countries and Texin® in the United States.

Inorganic basic
chemicals.Inorganic basic chemicals
are of major importance for Bayer. A large part of Bayer
Polymers sales are dependent on chlorine. Chlorine is used for
the production of intermediates that are subsequently processed
into a variety of products, such as polyisocyanates and
polycarbonates. Over 90 percent of the sodium chloride
electrolysis capacity is based on the environmentally-friendly,
energy-efficient membrane process. In addition to chlorine,
sodium chloride electrolysis generates caustic soda, which can
be sold to external markets, to the extent that it is not used
internally.

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Fibers (will be transferred to
Lanxess).Our Fibers business focuses
on the development, production and marketing of fibers for the
textile industry under the trade name Dorlastan®,
and in general applications under the trade names
Atlas® and Bayco®.

Markets and Distribution

Our Coatings Materials business entities are a
major producer of raw materials for coatings and adhesives. The
primary ultimate end users of our products are the automotive,
furniture and plastics industries; other users include the
textile, shoe and building industries.

The business entities external sales by
region and total for the past three years are as follows:

|                                 |       |                     |       |       |  |      |       |       |  |  |       |       | 
|-------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                 |       | 2001                |       | 2002  |  | 2003
|                                 |       |                     |       |       |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 1,024 |       |  |      | 1,031 |       |  |  | 1,020 |      
|North America                    |       |                     | 526   |       |  |      | 552   |       |  |  | 477   |      
|Asia/Pacific                     |       |                     | 299   |       |  |      | 293   |       |  |  | 266   |      
|Latin America/Africa/Middle East |       |                     | 153   |       |  |      | 140   |       |  |  | 137   |      
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      
|                                 | Total |                     |       | 2,002 |  |      |       | 2,016 |  |  |       | 1,900 | 
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      

The following table sets forth the business
entities sales for the last three years, broken down by
category of activity.

|                                     |       |                     |     |       |  |      |     |       |  |  |     |       | 
|------------------------------------ | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                                     |       | 2001                |     | 2002  |  | 2003
|                                     |       |                     |     |       |  |     
|                                     |       |                    
|                                     |       | (euros in millions)
|Base- and modified isocyanates (BMI) |       |                     | 773 |       |  |      | 842 |       |  |  | 791 |      
|Polyester, TPU and Films (PTF)       |       |                     | 708 |       |  |      | 777 |       |  |  | 702 |      
|Inorganic Basic Chemicals            |       |                     | 220 |       |  |      | 181 |       |  |  | 218 |      
|Fibers                               |       |                     | 232 |       |  |      | 200 |       |  |  | 170 |      
|Others                               |       |                     | 69  |       |  |      | 16  |       |  |  | 19  |      
|                                     |       |                     |     |       |  |      |     |       |  |  |     |      
|                                     | Total |                     |     | 2,002 |  |      |     | 2,016 |  |  |     | 1,900 | 
|                                     |       |                     |     |       |  |      |     |       |  |  |     |      

Our revenue is not subject to significant
seasonality over the course of the typical year. Some of the
individual markets and regions that we serve experience seasonal
fluctuation, such as the building industry during the winter
months or southern Europe during the summer. All markets and
regions taken as a whole, however, produce relatively constant
revenue throughout the year.

Temporary fluctuations in prices, such as the
price of crude oil or energy, can have a significant effect on
the cost of our raw materials. Nevertheless, because of our
broadly diversified supplier base and raw material mix, we
secure our most important chemical raw materials through
long-term contracts.

We coordinate and carry out our sales and
marketing from our head office in Leverkusen, Germany, as well
as through our various national subsidiaries. Our key account
managers handle our globally active major customers directly.

We regard the following companies as the chief
competitors of our Coatings Materials business entities.



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | Resin components
    (PTF):UCB/Solutia, Cray Valley, DIC;                                            
|
| |  | Aliphatic isocyanates
    (BMI):Rhodia, Degussa, BASF, Asahi,
    NPU (Nippon Polyurethane Industry);
|
| |  | Aromatic isocyanates
    (BMI):DOW, MITSUI TAKEDA, SAPICI; and                                       
|
| |  | Inorganic basic chemicals
    (IBC):DOW, Solvay, Akzo Nobel.                                         

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Research and Development

The Coatings Materials business entities focus
their research and development activities on developing products
that we can formulate into high performance coatings, such as
aliphatic and aromatic polyisocyanates and resin components. We
are also exploring ways of reducing the amount of solvent needed
by technologies such as high solids and waterborne and powder
coatings systems.

The business entities primary research and
development facilities are located in Leverkusen and Dormagen,
Germany and Pittsburgh, Pennsylvania.




BAYER CHEMICALS

Overview

Bayer Chemicals consists of our Chemicals
segment. The Chemicals segment is comprised of the Chemicals and
H.C. Starck business groups.

Our products are available to customers worldwide
and are used in many different industries (e.g.,
electronic, optics, metal processing, food, coatings, textile,
leather, paper, plastics, rubber, building materials,
pharmaceuticals, and engineering ceramics industries). Our
products are available as either individual building blocks or
as system-wide solutions designed to assist an entire production
process. Our core competencies lie in research and development
and the production and marketing of highly differentiated,
industrial, fine process and performance chemicals.

The following table shows the Chemical
segments performance for the last three years.

|                                     |                                  |                     |       |       |  |      |       |       |  |  |       |       |  
|------------------------------------ | -------------------------------- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | -
|                                     |                                  | 2001                |       | 2002  |  | 2003
|                                     |                                  |                     |       |       |  |     
|                                     |                                  |                    
|                                     |                                  | (euros in millions)
|External net sales                   |                                  |                     | 5,201 |       |  |      | 4,322 |       |  |  | 3,400 |      
|Percentage of total sales            |                                  |                     | 17.2  |       |  |      | 14.6  |       |  |  | 11.9  |      
|                                     | thereof Discontinuing Operations |                     |       | 3,961 |  |      |       | 3,371 |  |  |       | 2,513 |  
|Intersegment sales                   |                                  |                     | 456   |       |  |      | 409   |       |  |  | 370   |      
|Operating result                     |                                  |                     | 527   |       |  |      | 1,057 |       |  |  | (499  | )    
|Percentage of total operating result |                                  |                     | 31.4  |       |  |      | 65.7  |       |  |  |      |      
|                                     | thereof Discontinuing Operations |                     |       | 360   |  |      |       | 1,018 |  |  |       | (516  | )
|                                     | thereof special items(1)         |                     |       | 222   |  |      |       | 857   |  |  |       | (541  | )



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The special items are detailed in Item 5,
    Operating and Financial Review and Prospects 
    Operating Results 2001, 2002 and 2003  Segment
    Data.

No individual product is material to the revenue
of the Chemicals segment as a whole.

Segment Strategy

The focus of our activities in the Chemicals
segment is improving our margins. Our Industrial Chemicals
business entities aim to enhance their operating result by
improving the manufacturing processes. Our other business
entities aim to improve their margins by streamlining the
portfolio and focusing on selected activities in the chemical
industry. These business entities pursue a strategy of achieving
niche positions with focus on the customers.

In November 2003, Bayer announced that the Bayer
Group intends to maintain its focus on its core businesses and
therefore combine Bayer Chemicals (except for Wolff Walsrode and
H.C. Starck) with certain parts of the Bayer Polymers business
in a new company to be named Lanxess (see 
Business). After this separation, Wolff Walsrode and H.C.
Starck will be grouped together with the remaining parts of the
Bayer Polymers business in a wholly-owned subsidiary of Bayer
Group called Bayer MaterialScience.

55



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Lanxess will be focused on four core business
activities: Chemical Intermediates, Performance Chemicals,
Performance Plastics and Performance Rubber. All structures and
processes will be adapted to the specific requirements of these
businesses.

Chemicals

Overview

The Chemicals business group covers eleven
strategic business entities which are summarized under
Industrial Chemicals, Custom Manufacturing, Functional
Chemicals, Process Chemicals and Wolff Walsrode. All these
businesses except for Wolff Walsrode will be transferred to
Lanxess.

Major Products

Industrial Chemicals

Our Industrial Chemicals business entities focus
on the development, manufacture and marketing of a wide range of
basic chemicals, mainly aromatic compounds and iron-oxide
pigments. Industrial chemicals are produced in bulk quantities
using few synthesis steps.

The Industrial Chemicals business entities
produce inorganic and aromatic compounds. In the few last years,
the focus was on improving processes and thereby enhancing
productivity.

Bayferrox® is
our iron-oxide based anorganic colorant, which is available in a
variety of colors for a wide range of uses. For example, it
provides the characteristic reddish tone of roofing tiles.

The product line Lewatit® offers a
broad range of ion-exchangers, adsorbers and catalysts. These
products provide solutions, among others, for drinking or
industrial water, for the food or chemical processing industries
as well as for the mining and petrochemical industries.

Custom Manufacturing

Our Custom Manufacturing business entity produces
a growing range of high specification, customized fine chemicals
for use in advanced industrial sectors such as life sciences.
The multi-step synthesis products are high value-added chemicals
made to exact specifications by means of sophisticated and
complex chemical synthesis processes. These chemicals comprise
two broad categories:



| |   |                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | multi-customer
    products,or catalogue
    products sold to more than one customer; and                                                                                                                                                                                                                                                                                  
|
| |  | single customer
    products,synthesized to the
    specifications of individual customers. Production of our
    single-customer fine chemicals often involves various levels of
    customer cooperation as well as custom-tailored research and
    manufacturing; typical examples are life science intermediates
    for the pharmaceutical and agrochemical industries.

Process Chemicals

In contrast to other chemicals business entities,
the Process Chemicals business entities display a high degree of
custom tailoring for the specific needs of its
customers. There is a variety of broad product families, each of
which contains several product lines. Each product line
represents numerous individual compounds that are related to a
general chemical composition and area of function. Overall, the
product range comprises thousands of compounds and a technically
trained sales force is available to consult with clients. The
Process Chemicals business produces chemicals for the leather,
paper and textile industries.

Functional Chemicals

The Functional Chemicals business entities
comprise, among others, industrial biocides, organic colorants
and plastic additives.

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Our plastic additives, including flame
retardants, plasticizers, blowing agents and modifiers, improve
properties and confer new ones on polymers such as PVC,
thermosets, polyurethanes and elastomers. In respect of material
protection, we offer a broad product range of industrial
biocides and preservatives with applications ranging from wood
protection to anti-fouling, disinfection, personal care, in-can
preservation and corrosion inhibitors. Our range of colorants
includes universal products as well as specialty products for
special requirements. These products vary in their
characteristics such as thermostability, color intensity,
weather stability and brilliance.



| |                                            
| | -------------------------------------------
| | Wolff Walsrode (will remain with
    Bayer)

Wolff Walsrode (which will remain with Bayer and
not be transferred to Lanxess) develops, produces and markets
cellulose derivatives, primarily for use in building materials,
industrial coatings and inks, pharmaceuticals, food and health
care products, and other additives for coatings, emulsion paints
and printing inks.

Walocel M®is
an additive that regulates water balance. It improves the
workability and adhesion of building materials such as tile
adhesives, plasters, mortars and dispersion paints.

Walsroder NC®serves in resin form in wood coatings and other industrial
coatings as well as in printing inks for flexible packaging. It
is also used as a component of nail polish and other specialty
items.

Walocel C®is
used primarily as a thickener and binder in water-based systems.
It is used in pharmaceuticals, dairy products and toothpaste, as
well as in ceramics compounding, textile and paper manufacture
and oil drilling.

Effective November 1, 2003, we sold Walothen
GmbH to the Wihuri Group of Finland. Walothen® is a
class of films based on Polypropylen for food and cigarette
packaging and paper lamination.

Markets and Distribution

The principal markets of the Industrial Chemicals
business entities are industries using organic or inorganic
intermediates. The products of the water treatment business are
used in the consumer, semiconductor and pharmaceuticals
industries, among others. The primary end users of inorganic
colorants are the automotive, furniture and plastics industries.

The principal markets for our Custom
Manufacturing business entity are customized fine chemicals for
the photographic, electronics and life science industries.

Given the individualized nature of their
products, the marketing activities of the Process Chemicals
business entities focus on individual customer requirements. The
end users are the textile, leather and paper industries.

The plastics, construction, food and
pharmaceutical industries are, among others, the main customers
for the Functional Chemicals business entities.

Wolff Walsrode competes in the building
materials, industrial coatings, flexible packaging ink and life
sciences markets, as well as in specialized industrial fields.

The business groups sales, by region and
total, for the past three years are as follows:

|                                 |       |                     |       |       |  |      |       |       |  |  |       |       | 
|-------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                 |       | 2001                |       | 2002  |  | 2003
|                                 |       |                     |       |       |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 2,277 |       |  |      | 1,883 |       |  |  | 1,567 |      
|North America                    |       |                     | 929   |       |  |      | 733   |       |  |  | 496   |      
|Asia/Pacific                     |       |                     | 622   |       |  |      | 600   |       |  |  | 441   |      
|Latin America/Africa/Middle East |       |                     | 562   |       |  |      | 499   |       |  |  | 332   |      
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      
|                                 | Total |                     |       | 4,390 |  |      |       | 3,715 |  |  |       | 2,836 | 
|                                 |       |                     |       |       |  |      |       |       |  |  |       |      

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The following table sets forth the business
groups sales for the last three years, broken down by
category of activity.

|                          |       |                     |       |       |  |      |       |       |  |  |     |       | 
|------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | --- | ----- | 
|                          |       | 2001                |       | 2002  |  | 2003
|                          |       |                     |       |       |  |     
|                          |       |                    
|                          |       | (euros in millions)
|Industrial Chemicals      |       |                     | 1,055 |       |  |      | 1,000 |       |  |  | 975 |      
|Custom Manufacturing      |       |                     | 276   |       |  |      | 215   |       |  |  | 188 |      
|Process Chemicals         |       |                     | 1,038 |       |  |      | 890   |       |  |  | 740 |      
|Functional Chemicals      |       |                     | 397   |       |  |      | 512   |       |  |  | 514 |      
|Wolff Walsrode and others |       |                     | 1,624 |       |  |      | 1,098 |       |  |  | 419 |      
|                          |       |                     |       |       |  |      |       |       |  |  |     |      
|                          | Total |                     |       | 4,390 |  |      |       | 3,715 |  |  |     | 2,836 | 
|                          |       |                     |       |       |  |      |       |       |  |  |     |      

Our Chemicals business group is not subject to
significant seasonality over the course of the year. Some of the
individual markets and regions that we serve experience seasonal
fluctuation, such as the agriculture industry (which mainly
affects our Custom Manufacturing business entity) and the
building industry (which mainly affects our Industrial Chemicals
and Wolff Walsrode business entities). All markets and regions
taken as a whole, however, produce relatively constant revenue
throughout the year.

The Chemicals business group acquires a part of
the raw materials they use internally from other business groups
of the Bayer Group. There are typically multiple sources for the
rest of its raw materials; we purchase these from suppliers
worldwide, usually under long-term contracts. Chemicals has
historically not been affected by shortages; however, rising oil
prices have had a moderate impact on production cost.

We produce part of our chemicals in dedicated,
continuous-process manufacturing plants using advanced
technologies. The other products are manufactured in
batch-processing plants. The plants are predominantly located in
Leverkusen and other German sites while others are located at
locations around the world in order to serve the local markets
more economically.

We market the products of the business group
primarily through Bayers worldwide network of trading
companies and agencies, with their specialized and experienced
salespeople.

We regard the following companies as our chief
competitors:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | Industrial Chemicals:BASF, Dow, Elementis, Rohm & Haas;                                           
|
| |  | Custom Manufacturing:Lonza, DSM, Degussa;                                                         
|
| |  | Process Chemicals:Clariant, BASF, Ciba Specialty
    Chemicals;                                   
|
| |  | Functional Chemicals:Solutia, Akzo Nobel, Rhodia, Avecia;
    and                                 
|
| |  | Wolff Walsrode:Hercules, Dow, Clariant, Bergerac NC/SNPE, Nitroquimica
    Brasileira and Noviant.

Research and Development

The business group focuses its research and
development activities on:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | technological and chemical development and
    improvement of manufacturing processes of industrial and life
    science intermediates;
|
| |  | improved optical brighteners, retention and
    sizing agents for the paper industry;                                                  
|
| |  | improved ion exchange resins for waste water
    treatment and metal recovery;                                                         
|
| |  | environmentally friendly formulations of products
    for the leather, paper and textile industry;                                     
|
| |  | polyurethane dispersions for the finishing of
    leather car seats;                                                                   
|
| |  | high-performance data storage media for
    information technology;                                                                    
|
| |  | new products for the textile industry;                                                                                                 

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| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | new flame retardants and high performance
    plasticizers;               
|
| |  | new colorants for plastics and specialities;                              
|
| |  | new fungicides and efficient formulations for
    material protection; and
|
| |  | irone oxide media for drinking water and waste
    water treatment.       

The primary research and development facilities
are located in Leverkusen, Germany; Ede, the Netherlands;
Woodbridge, Connecticut; and Bomlitz, near Walsrode, Germany.

We currently have over 120 products and new
or improved processes in late stages of development. We expect
to launch these during 2004 and 2005. In 2003, we launched more
than 150 products and processes.

H.C. Starck (will remain with Bayer)

Overview

Our subsidiary H.C. Starck (which will remain
with Bayer and not be transferred to Lanxess) develops, produces
and markets metallic and ceramic powders and mill products for
various markets and applications. H.C. Starck constantly pursues
its policy of forward integration (further development of the
product portfolios towards the customer). After the integration
of CSM Industries, we acquired a majority interest in InDec B.V.
in the first quarter of 2003. InDec produces ceramic cells for
use in fuel cell systems. We expect these ceramic cells to
enable H.C. Starck to advance into the Solid Oxide Fuel Cell
(SOFC) market and to develop higher-value added products in the
field of functional ceramics. There are many future large-scale
applications of SOFC systems, such as residential and commercial
co-generation, auxiliary power units for trucks, buses and
passenger cars and numerous other applications where reliable,
high quality power is needed.

Major Products

Metallic products and compounds

We produce a broad portfolio of products ranging
from ceramic materials to such metals as tungsten, molybdenum,
tantalum and niobium and their various alloys and compounds for
industrial customers. We manufacture these materials not only in
the form of ceramic or metallic powders but also as solid
intermediates or finished parts. This gives us the ability to
provide engineering and design services for a wide variety of
markets and end uses. We bring this ability to customers in the
aerospace, medical, chemical, electronic, lighting,
sophisticated tooling and optical components industries.

KuliteTMis our trademark for fabricated parts made from tungsten alloy
powders. These products are used, for instance, as balance
weights in the aerospace industry.

Molyform®
powders are our molybdenum disulfide solid lubricants. We market
a range of powdered lubricants under the brand name
Lubriform®. Our customers use these compounds in
producing lubricants. The automotive industry also uses
Molyform® in manufacturing brake linings.

Battery intermediates

Ampergy® is our
trade name for our nickel hydroxide and cobalt suboxide battery
intermediates. Our customers in the electrochemical industry use
Ampergy® in making rechargeable batteries for modern
communications devices and in large-scale industrial batteries.

Chemical catalysts

Amperkat® is
the trade name for our line of chemical catalysts. The chemical
industry uses these products in a variety of applications, such
as chemical synthesis, plastics production, hydration processes
and desulphurization for generating low sulphur diesel-fuels.

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Thermal spray powders

Amperit® is the
trade name of our line of thermal spray powders. Our customers
use these powders to give their products a variety of protective
coatings. Our Amperit® customers come primarily from
the machine tool and aeronautics industries.

Ceramic powders and parts

Because of their resistance to corrosive
substances, high mechanical durability and low weight,
high-performance ceramic materials are increasingly replacing
metals in various industrial uses. We produce a broad range of
intermediates for use in advanced ceramics. H.C. Starck Ceramics
produces functional ceramic parts from silicon carbide and
silicon nitride for various industries such as pump seal rings,
foundry parts and ball bearings.

Markets and Distribution

Although growth in the demand for ceramic
products has been steady, strong competitive pressure has
depressed prices. We expect, however, that the market for H.C.
Starck Ceramics products will continue to grow steadily for the
foreseeable future.

For our fabricated products business, we believe
that we gain strength from the wide variety of markets and
customers that we serve. We believe that China will be a
promising market with large demand for all of our fabricated
products in the lighting, telecommunications and transportation
industries.

In 2003, the main factor influencing the H.C.
Starck Group was the failure of the electronics industry to
recover as we had expected.

The business groups external sales by
region, as well as its overall sales, for the past three years
are as follows:

|                                 |       |                     |     |      |  |      |     |     |  |  |     |     | 
|-------------------------------- | ----- | ------------------- | --- | ---- |  | ---- | --- | --- |  |  | --- | --- | 
|                                 |       | 2001                |     | 2002 |  | 2003
|                                 |       |                     |     |      |  |     
|                                 |       |                    
|                                 |       | (euros in millions)
|Europe                           |       |                     | 325 |      |  |      | 248 |     |  |  | 245 |    
|North America                    |       |                     | 234 |      |  |      | 148 |     |  |  | 126 |    
|Asia/Pacific                     |       |                     | 208 |      |  |      | 196 |     |  |  | 183 |    
|Latin America/Africa/Middle East |       |                     | 44  |      |  |      | 15  |     |  |  | 10  |    
|                                 |       |                     |     |      |  |      |     |     |  |  |     |    
|                                 | Total |                     |     | 811  |  |      |     | 607 |  |  |     | 564 | 
|                                 |       |                     |     |      |  |      |     |     |  |  |     |    

China is the primary source for the raw materials
for tungsten products. In the past, China had limited
production, thereby causing shortages. We have our own tungsten
production and recycling facilities, however, and are therefore
only partly dependent on Chinese imports and do not bear the
full brunt of raw material price increases. Tantalum raw
material prices have remained relatively stable during the last
two years. Raw material supply is secured through long term
contracts in general lasting 5 years.

H.C. Starck has its own international sales
organization in Europe, the United States and Japan, its most
important markets. In addition, we have liaison offices for
Scandinavia, the Benelux countries, France, Italy and the United
Kingdom that maintain direct contact with our customers. We also
have a liaison office in Singapore for the South-East Asia
region. In other countries, we either rely on the Bayer-wide
sales organization or use third-party sales agents.

We regard the following companies as our chief
competitors:



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Metallic products and compounds:Bergla, Cabot Group (including its
    associated joint ventures), Mitsui, MolymetOMG, Osram Sylvania,
    Umicore, Plansee AG, Philips Elmet, Phelps Dodge;
|
| |  | Battery intermediates:Tanaka, Umicore;                                                                                                                                                      
|
| |  | Chemical catalysts:Activated Metals, Degussa,
    Grace-Davison, Engelhard;                                                                                                                 

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| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | Thermal spray powders:Praxair, Sulzer Metco, Woka; and                           
|
| |  | Ceramic powders and parts:Denki Kagaku, SB Boron; GE Ceramics,
    Tokuyama Soda.

Research and Development

H.C. Starck focuses its research and development
activities on innovative products and system solutions. For
example, we are developing high-capacity tantalum and niobium
powders as intermediates for capacitors, and precursors for thin
metallic films in microelectronic devices. We are also
developing high-purity tantalum and niobium compounds for
electroceramics and surface acoustic wave filters in computers
and mobile telephones. H.C. Starck is also strongly committed to
developing materials for more technically advanced batteries,
fuel cells, hybrid vehicles and other energy storage and power
generation applications.

The business groups primary research and
development facilities are located in Goslar, Germany; Newton,
Massachusetts (all refractory metals); and Mito, Japan (tantalum
products and battery intermediates).

To follow the technical trends and the high
innovation rates in electronics, all precursor materials for
electronic components must be improved continuously and adapted
to completely new and more challenging applications. In
particular, tantalum and niobium powder for capacitors and
filters must become finer, and the impurity level must be
reduced to lower limits to make capacitors with steadily
increasing capacities and higher reliabilities. We currently
have seven products in late stages of development, and expect to
start and continue their launch during 2004. See also
Item 3, Key Information  Risk
Factors  Failure to develop new products and
production technologies may harm our competitive position.

|                                                                   |  |                       
|------------------------------------------------------------------ |  | ----------------------
|                                                                   |  |                       
|Product/Brand name                                                 |  | Application           
|                                                                   |  |                       
|Niobium Oxide 80 and 120 K powder                                  |  | Capacitors            
|Tantalum 70/80 and 100/120 K powder                                |  | Capacitors            
|P/M tantalum plates PVD                                            |  | Semiconductor Industry
|Nb products for metal processes                                    |  | Capacitors            
|MMC for thermal management sophisticated
    electronic heat sinks |  | Electronics           
|High temperature furnace materials                                 |  | Furnace construction  
|Alternative (ferrous, nickel, cobalt) binders                      |  | Tool industry         

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INTELLECTUAL PROPERTY PROTECTION

To succeed, Bayer must continually seek new
products that provide our customers with better solutions for
existing problems and new solutions for emerging problems. This
requires us to expend significant effort on research,
development, manufacturing and marketing. To preserve the value
of our investment, we rely on the patent and trademarks laws of
the jurisdictions where we do business. In addition, our
production technologies typically incorporate specialized
proprietary know-how.

We have both developed intellectual property
internally and acquired it as assignee through acquisitions. In
addition, Bayer may from time to time grant licenses to third
parties to use our patents and know-how, and may obtain licenses
from others to manufacture and sell products using their
technology and know-how.

Patents

We seek to protect our products with patents in
major markets. Depending on the jurisdiction, patent protection
may be available for:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | individual active ingredients;                                                      
|
| |  | specific compounds, formulations and combinations
    containing active ingredients;
|
| |  | manufacturing processes;                                                            
|
| |  | intermediates useful in the manufacture of
    products;                            
|
| |  | genomic research; and                                                               
|
| |  | new uses for existing products.                                                     

The protection that a patent provides varies from
country to country, depending on the type of claim granted, the
scope of the claims coverage and the legal remedies
available for enforcement. For example, although patent
protection in the United States is generally strong, under some
circumstances, U.S. law permits generic pharmaceuticals
manufacturers to seek regulatory approval of generic products
before the patents expire. See Item 8, Financial
Information  Legal Proceedings. In
addition, some developing countries have announced plans to
reduce patent protection for some drugs.

The advance of genomic research has accelerated
our patent filings for biological products. We typically seek
protection upon determining a genes function.

We currently hold thousands of patents, and have
applications pending for a significant number of new patents.
Although patents are important to our business, we believe that,
with the exception of the patents covering Adalat®,
Avelox®, Cipro®, Levitra®
and imidacloprid, no single patent (or group of related patents)
is material to our business as a whole.

Term and Expiration of
Patents

Patents are valid for varying periods, depending
on the laws of the jurisdiction granting the patent. In some
jurisdictions, patent protection begins from the date a patent
application was filed; in others, it begins on the date the
patent is granted.

The European Union, the United States, Japan and
certain other countries extend or restore patent terms or
provide supplementary protection to compensate for patent term
loss due to regulatory review and substantial investments in
product research and development and regulatory approval. Our
policy is to obtain these extensions where possible.

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Patent protection in our major markets for some
of our key products is scheduled to expire in the near term.
Although the expiration of a patent for an active ingredient
normally results in the loss of market exclusivity, we may
continue to derive commercial benefits from:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | subsequently-granted patents on processes and
    intermediates used in manufacturing the active ingredient;
|
| |  | patents relating to specific uses for the active
    ingredient;                                            
|
| |  | patents relating to novel compositions and
    formulations; and                                            
|
| |  | in certain markets (including the United States),
    market exclusivity under laws other than patent laws. 

The following table sets forth the expiration
dates in our major markets of the patents covering
Adalat®, Avelox®, ciprofloxacin,
imidacloprid and vardenafil:

|                    |                                |         |      |        |  |      |      |       |  |       |      |       |  |        |      |        |  |  |      |      |  |  |      |      |  |  |      |      |  |  |      |      |    
|------------------- | ------------------------------ | ------- | ---- | ------ |  | ---- | ---- | ----- |  | ----- | ---- | ----- |  | ------ | ---- | ------ |  |  | ---- | ---- |  |  | ---- | ---- |  |  | ---- | ---- |  |  | ---- | ---- | ---
|                    |                                |        
|                    |                                | Market 
|                    |                                |        
|Product             |                                | Germany |      | France |  | U.K. |      | Italy |  | Spain |      | Japan |  | U.S.A. |      | Canada
|                    |                                |         |      |        |  |      |      |       |  |       |      |       |  |        |      |       
|Adalat®             |                                |         |      |        |  |      |      |       |  |       |      |       |  |        |      |        |  |  |      |      |  |  |      |      |  |  |      |      |  |  |      |     
|                    | Crystal patent (Retard)        |         |      |       |  |      |      |      |  |       |      |      |  |        |      | 2003   |  |  |      |     |  |  |      |     |  |  |      | 2010 |  |  |      |     |    
|                    | Adalat® CC
    (Coat Core)     |         |      | 2008   |  |      |      | 2008  |  |       |      | 2008  |  |        |      | 2008   |  |  |      | 2008 |  |  |      | 2008 |  |  |      | 2008 |  |  |      | 2009 |    
|                    | Gits/Oros excl. license (Alza) |         |      | 2004   |  |      |      | 2004  |  |       |      | 2003  |  |        |      | 2004   |  |  |      | 2004 |  |  |      | 2004 |  |  |      |     |  |  |      | 2004 |    
|Avelox®             |                                |         |      |        |  |      |      |       |  |       |      |       |  |        |      |        |  |  |      |      |  |  |      |      |  |  |      |      |  |  |      |     
|                    | Compound                       |         |      | 2009   |  |      |      | 2009  |  |       |      | 2009  |  |        |      | 2014   |  |  |      | 2009 |  |  |      | 2009 |  |  |      | 2014 |  |  |      | 2016 |    
|                    | Hydrochloride-Monohydrate      |         |      | 2016   |  |      |      | 2016  |  |       |      | 2016  |  |        |      | 2016   |  |  |      | 2016 |  |  |      | 2016 |  |  |      | 2016 |  |  |      | 2016 |    
|                    | Tablet formulation             |         |      | 2019   |  |      |      | 2019  |  |       |      | 2019  |  |        |      | 2019   |  |  |      | 2019 |  |  |      | 2019 |  |  |      | 2019 |  |  |      | 2019 |    
|Ciprofloxacin       |                                |         |      |        |  |      |      |       |  |       |      |       |  |        |      |        |  |  |      |      |  |  |      |      |  |  |      |      |  |  |      |     
|                    | Active ingredient              |         |      |       |  |      |      | 2004  |  |       |      | 2002  |  |        |      | 2009   |  |  |      |     |  |  |      |     |  |  |      | 2003 |  |  |      | 2004 | (1)
|                    | Process                        |         |      | 2002   |  |      |      | 2002  |  |       |      | 2002  |  |        |      | 2002   |  |  |      | 2003 |  |  |      | 2002 |  |  |      |     |  |  |      | 2004 |    
|                    | IV formulation                 |         |      | 2006   |  |      |      | 2006  |  |       |      | 2006  |  |        |      | 2006   |  |  |      | 2006 |  |  |      | 2006 |  |  |      | 2007 |  |  |      | 2008 |    
|                    | Tablet formulation             |         |      | 2007   |  |      |      | 2007  |  |       |      | 2007  |  |        |      | 2007   |  |  |      | 2007 |  |  |      | 2007 |  |  |      | 2011 |  |  |      | 2009 |    
|Imidacloprid        |                                |         | 2006 |        |  |      | 2006 |       |  |       | 2006 |       |  |        | 2006 |        |  |  | 2007 |      |  |  | 2005 |      |  |  | 2006 |      |  |  | 2007 |     
|Vardenafil compound |                                |         | 2018 |        |  |      | 2018 |       |  |       | 2018 |       |  |        | 2018 |        |  |  | 2018 |      |  |  | 2018 |      |  |  | 2018 |      |  |  | 2018 |     



---



|    |             
|--- | ------------
|(1) | Composition.

See Item 8, Financial
Information  Legal Proceedings for a
description of patent-related litigation in which we are
involved.

Trademarks

Our best-known trademarks include
Alka-Seltzer®, Aspirin®,
Canesten®, Flint®,
One-A-Day®, Rid® and
Admire®, as well as the Bayer name itself and our
distinctive Bayer cross. Trademark protection varies
widely throughout the world. In some countries, trademark
protection continues as long as the mark is used. Other
countries require registration of trademarks. Registrations are
generally for fixed but renewable terms. Although our portfolio
of trademarks is important to our business, we do not believe
that any single trademark is material to Bayers business
as a whole.

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GOVERNMENTAL REGULATION

Our business is subject to significant government
regulation. Many of our products must be examined and approved
by regulatory agencies for safety, environmental impact and
effectiveness before we may market them. In addition, all our
operations must comply with applicable environmental
regulations. Relevant regulation is typically national, although
within the European Union (the EU), a considerable
degree of harmonization exists. The EU institutions have created
a common regulatory framework that applies in all of the EU
Member States (and that sometimes allows EU Member States to
adopt more detailed and more stringent regulations), and has
indirect harmonizing effects in certain other European countries.

Product Regulation

The primary emphasis of product regulation is to
assure the safety and effectiveness of our products. Regulation
in the United States is of particular importance because of the
United States large share of the worldwide market. In the
United States, the Food and Drug Administration (FDA) regulates
many of our products, primarily in our HealthCare business. In
addition, our pharmaceutical facilities typically require
regulatory approval and are subject to periodic re-inspection.
Comparable regulatory frameworks are in place in other regions
as well, such as the EU, Japan, China and in most other
industrialized countries.

The Toxic Substance Control Act (TSCA)
administered under the U.S. Environmental Protection Agency
(EPA) regulates product registrations (PMNs) for new industrial
chemicals and polymers and can also regulate existing chemicals
under test rules. In addition, the U.S. FDA food-contact
regulations permit use of many of our chemicals and materials in
food-contact applications. Furthermore, the EPA registers
biocidal products for use in antimicrobial applications in
addition to those for agricultural uses. For industrial
chemicals and polymers in the United States, in order to insure
proper use and handling, product safety is regulated by the
Occupational Safety and Health Administration Hazard
Communication. This regulation requires notification to our
workers and customers through Material Safety Data Sheets and
precautionary labels for potential hazards from exposure to
chemicals.

Similarly, in the EU as well as in further
regions there are restrictive rules applying to areas including
the production, marketing, processing, use and disposal of
dangerous substances and preparations, food and
feeding stuffs and the use of biocides.

Pharmaceutical Products

Pharmaceutical products must be examined and
approved by regulatory agencies for safety and efficacy before
we may market them. Our pharmaceutical facilities require
regulatory approval and are subject to periodic re-inspection.
All our operations must comply with applicable quality and
environmental regulations.

The various regulatory authorities administer and
execute requirements covering the testing, safety, efficacy,
labeling, approval, manufacturing and marketing of prescription
pharmaceuticals. Pharmaceutical products must receive regulatory
approval before they can be marketed. The regulatory
requirements follow stringent standards that vary by country.
Before a drug can qualify for marketing approval, a registration
dossier must be submitted to a regulatory authority for review
and evaluation. The registration dossier principally contains
detailed information about the safety, efficacy and quality of a
new medication. It also provides details about the manufacturing
process, the production facilities and information to be
provided to patients. The registration process can last from a
few months to a few years and depends on the nature of the
medication under review, the quality of the submitted data and
the efficiency of the relevant agency. If a drug meets the
approval requirements, the regulatory authority will grant a
product license for marketing. In some countries, negotiation on
pricing and reimbursement follow the grant of the product
license. The process of developing a pharmaceutical product from
discovery through testing, registration and initial product
launch could take approximately ten years. The manufacturer is
required to monitor adverse reactions and report them to the
appropriate authorities.

In recent years, the EU, the United States and
Japan have sought to shorten development and registration times
for medicinal products by harmonizing the individual
requirements of the three regions. This process is

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called the International Conference on
Harmonization. For the foreseeable future, however, we will need
to obtain approval in each market.


Increasing requirements from the FDA have
resulted in a higher investment of time and money necessary to
develop new products and bring them to market. The Food and Drug
Administration Modernization Act of 1997 was principally
designed to streamline regulatory procedures and improve the
regulation of drugs, medical devices and food with a view to
expediting the pre-market review process for new products.

In the European Union, there are two different
approval procedures available: a centralized procedure and one
based on the Mutual Recognition Procedure. The London-based
European Agency for the Evaluation of Medicinal Products governs
the centralized drug registration and approval process and
consists of two committees, one for proprietary medicinal
products (CPMP) and one for veterinary medicinal products
(CVMP). The other method is the Mutual Recognition Procedure, in
which one country makes the principal evaluation. The holder of
the authorization may then submit to the other member states an
application for recognition of the marketing authorization,
which must normally be granted within 90 days.

Historically, two issues have affected the
approval process in Japan for drugs developed outside of that
country. First, the Japanese approval agency does not recognize
documents used in registration procedures in other countries.
Second, the Japanese approval agency requires that tests to
determine appropriate dosages for Japanese patients be conducted
on Japanese patient volunteers. However, with the process of ICH
(International Conference on Harmonization), the Japanese
approval agency is increasingly accepting study results and
documentation used in registration procedures in the United
States and Europe.

Biological Products

Our pharmaceuticals segment markets substances
known as biologicals. Biologicals derive from
biological sources (e.g., from human plasma or from cell
lines genetically engineered to produce a specific protein). In
the United States and other markets, biologicals are regulated
more stringently than other drug products. For example, in order
to minimize the risk of infectious disease transmission, human
plasma-derived products require donor screening and plasma
testing, as well as multiple manufacturing steps designed to
remove viruses and other infectious agents. Biological products
are chemically complex, often depending on a precise structure
(e.g., the specific folding of a molecule) for their
effectiveness. Regulations require us to subject these products
to rigorous testing to ensure stability throughout their
shelf-life. Because biological products typically cannot
withstand conventional sterilization techniques, we must use
special processes to ensure sterility. Under applicable
regulatory requirements, we must submit detailed documentation
to demonstrate appropriate controls over our manufacturing
facilities, including associated equipment and supporting
utilities like water supply and climate control.

Consumer Care Products

Most Consumer Care products are subject to
regulations similar to those in the Pharmaceuticals segment. In
the United States, for example, the FDA and, in part, the
Federal Trade Commission, oversee the marketing, manufacturing
and labeling of Consumer Care products.

Diagnostics Products

The products of the Diagnostics business group
are in vitro diagnostic (IVD) products, subject to regulatory
controls similar to those governing the development and
marketing of pharmaceutical products. In the United States, the
FDA regulates IVD products as medical devices, through its
Center for Devices and Radiological Health. All manufacturers of
medical devices must register their facilities with the FDA.
Registered establishments are subject to periodic inspections by
FDA investigators to ensure compliance with quality standards.

Most IVD products require FDA clearance or
approval before they may be marketed. For devices requiring
clearance, we seek where possible to obtain it on the grounds
that the new product is substantially equivalent to
a product the FDA has already cleared. FDA clearance usually
takes between two and eighteen months,

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depending on the degree of novelty involved. For
truly new IVD products, we must submit extensive data to the FDA
based on actual clinical trials. FDA approval almost invariably
involves an inspection of our facilities and a review of our
design and manufacturing processes. After obtaining FDA
approval, we must report all adverse incidents in which a
product was allegedly involved.


In the EU, two Directives regulate these
products. The Medical Device Directive governs diagnostic
products that come in direct contact with the human body. The
IVD Directive, as the name implies, applies to products used in
vitro, that is those that do not come in direct contact with the
human body. In Japan, a special section of the Pharmaceutical
Affairs Law regulates diagnostic products. In Australia and
Canada, the applicable laws and regulations are similar to the
European model. Many countries in South America and Asia have
regulatory requirements similar to those promulgated either by
the FDA or the European Commission. All of these requirements
involve product registration and approval and the reporting of
adverse incidents and corrective actions.

Animal Health Products

Veterinary products must be examined and approved
by regulatory agencies for quality, safety and efficacy before
marketing in all countries. In the United States, the FDAs
Center for Veterinary Medicine is responsible for ensuring that
animal drugs are safe and effective for their intended uses and
that food from treated animals is safe for human consumption.
Animal health products are also regulated in the United States
by the U.S. Department of Agriculture (USDA) and the
Environmental Protection Agency (EPA).

In the EU, animal health products are subject to
regulations similar to those governing the Pharmaceutical
sector, including the two registration procedures described
above. The centralized registration process is also governed by
the European Agency for the Evaluation of Medicinal Products in
London, but the committee responsible for animal health products
is the Committee for Veterinary Medicinal Products (CVMP).

Crop Protection Products

In most countries, crop protection products must
obtain government regulatory approval prior to marketing. This
regulatory framework seeks to protect the consumer, the
applicator and the environment. The strictest standards are
applied in the United States, Japan and in the EU. Because
humans may be exposed to these products (for example, through
residues on food) the safety assessment considers human risk as
well. If the product is used on a food crop, a legal limit for
chemical residue is established.

It generally takes seven to nine years from
discovery of a new crop protection product until the dossier is
submitted to the appropriate regulatory authority for product
approval. Afterwards the authorities usually need another two to
four years to evaluate the data submitted in order to decide
whether a registration can be granted.

The introduction of new regulations, data
requirements or test guidelines is a normal part of enhancing
safety assessments for crop protection products. However,
unpredictable new requirements and inappropriate deadlines have
led to numerous delays of registrations of crop protection
products in the past, especially in the authorization processes
in the EU and in the NAFTA countries. Therefore, Bayer
CropScience must anticipate new regulatory trends and must
closely follow the process of developing and requiring new data.
Bayer CropScience also actively participates in these processes
by commenting on draft guidelines and regulations proposed by
the authorities.

Environmental Science
Products

In both the professional and the consumer
business, as in crop protection, our products must obtain
government regulatory approval prior to marketing. In most
countries, Environmental Science products are regulated by
authorities other than those which regulate the crop protection
products. The regulatory requirements are often different from
crop protection products, due to different routes of exposure.
Generally, there is an increase of regulatory requirements, in
particular in the United States, Europe and Japan. To some
extent, the regulatory files developed for crop protection
products with the same active ingredients can also be used for
the regulatory purposes in the Environmental Science area.

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In the EU, certain products sold in the
professional pest control area, as well as pest control products
available to consumers, fall under the Biocidal Products
Directive (BPD), which requires that complete regulatory
dossiers be developed before placing on the EU market biocidal
products or active substances for use in such products. Certain
green industry products and consumer lawn and garden products
are governed by the Plant Protection Directive, which requires
authorization before products can be placed on the market.

In the United States, registration of
Environmental Science products is granted by the EPA. There has
been an increase of registration requirements due to the
implementation of the Food Quality Protection Act (FQPA), which
considers both dietary and non-dietary exposure aspects. Certain
food-related regulatory requirements exist in other areas,
notably in the EU.

The review period for registration depends on the
country and could vary from two to five years for a product
containing a new active ingredient.

BioScience Products

Plant biotechnology products, in particular those
based on genetic modification, are subject to specific
regulatory oversight covering environmental impact as well as
use and trade of products and derivatives in food and feed. The
number of countries that have regulatory frameworks concerning
plant technology is increasing each year and, in countries that
already have such regulations, the requirements are also
increasing or changing. The most important countries, based on
their importance to us as an agricultural center and/or trading
partner, include the United States, Canada, the EU, Japan,
Brazil, Argentina, Australia and China. In the United States,
the main regulatory authorities are the USDA, the FDA and the
EPA. The EU has implemented a set of new regulations including
the creation of a new EU Food Safety Authority. Similar
regulations in Japan are under review and being updated. Many
Asian countries have developed regulatory frameworks over the
last few years, most recently China, Taiwan, Korea and the
Philippines. With the Cartagena Protocol on BioSafety, which
came into force in September 2003, it is expected that more
countries will establish regulatory frameworks over the next few
years.

The timeframe for approvals varies substantially
around the world. The development of the regulatory file will
take two to three years. In the USA, Canada and Japan, typically
the review of a regulatory file will take another one to two
years. However in the EU, no approvals have been granted over
the last five years, during which time the regulations have been
updated.

Proposed new EU Regulations

We must comply with an increasing range of
regulatory measures concerning testing, manufacturing and
marketing of our products. In some countries, including the
United States, regulatory controls have become increasingly
demanding. We expect this trend to continue and expand to other
countries.

Within the European Union a new chemicals policy
has been proposed and may become effective in 2005/2006. It will
mandate a significant increase in the testing and assessment of
all chemicals used, leading to increased costs and reduced
operating margins for these products. Although we have adopted
measures to address the stricter regulations, such as increasing
the efficiency of our internal research and development process
in order to reduce the impact of extended testing on
time-to-market, stricter regulatory regimes could delay product
development or restrict marketing and sales.

In addition, the EU directive on emissions
trading may affect Bayers business opportunities,
especially in Europe. The directive requires EU member states to
meet the carbon dioxide emissions targets set for each member
state under EU legislation and based on the Kyoto Protocol.
Emissions levels have to be reduced by 21 percent in
Germany and 7.5 percent in Belgium, in each case based on
1990 carbon dioxide emission levels. Compliance may require
material capital expenditures.

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Health, Safety and Environmental
Regulation

The production and distribution of Bayer products
involves the use, storage, transportation, handling and disposal
of toxic and hazardous materials. We are subject to increasingly
stringent environmental regulations, which address:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | emissions into the air;                                                                                                   
|
| |  | discharges of waste water;                                                                                                
|
| |  | other releases into the environment;                                                                                      
|
| |  | generation, handling, storage, transportation,
    treatment and disposal of hazardous and non-hazardous material;
    and
|
| |  | construction and operation of facilities.                                                                                 

It is our policy to comply with all
environmental, health and safety requirements and to provide
workplaces for employees that are safe and environmentally
sound. We track, check and evaluate all environmental legal
initiatives and laws regarding their potential impact on our
actual and past activities in order to develop appropriate
measurements in a timely and effective manner. When necessary,
we incur capital expenditures to ensure this. We expect that
Bayer will continue to be subject to stringent environmental
regulation. Although we cannot predict future expenditures, we
believe that current spending trends will continue.

We are subject to regulations that may require us
to remove or mitigate the effects of the disposal or release of
chemical substances. Under some of these regulations, a current
or previous owner or operator of property may be held liable for
the costs of remediation on, under, or in its property, without
regard as to whether it knew of or caused the presence of the
contaminants, and regardless of whether the practices that
resulted in the contamination were legal at the time they
occurred. As many of our industrial sites have long histories,
we cannot predict the effect these regulations will have on us.
We cannot assure you that soil or groundwater contamination will
not occur or be discovered.

In the United States, we are subject to potential
liability under the U.S. Federal Comprehensive
Environmental Response, Compensation, and Liability Act
(commonly known as Superfund), the
U.S. Resource Conservation and Recovery Act and related
state laws for investigation and clean-up costs at a number of
sites. At many of these sites, companies including Bayer have
been notified that the EPA, the state governing body or private
individuals consider such companies to be potentially
responsible parties under Superfund or related laws. The
proceedings relating to these sites are in various stages. The
clean-up process at many sites is ongoing. We regularly review
the liabilities for these sites and have accrued our best
estimate of our ultimate liability for investigation or clean-up
costs.

It is difficult to estimate the future costs of
environmental protection and remediation because of
uncertainties about the status of regulations, their future
developments, and information related to individual sites,
products and facilities. Taking into consideration our
experience and currently known facts, we believe that capital
expenditures and remedial actions to comply with environmental
regulations will not have a material adverse effect on our
financial position, results of operations or cash flows. As of
December 31, 2003, we had reserved
200 million
for environmental matters.

We believe that we are in substantial compliance
with applicable environmental, health and safety laws and
regulations. We devote considerable attention to the health and
safety of our employees and the protection of public health and
the environment. Although this compliance has not adversely
effected our competitive position or business, we cannot predict
the effect of possible future regulations. As a member of the
American Chemical Council, Bayer is committed to the principles
of Responsible Care®, the chemical industrys
health, safety and environmental performance improvement
initiative.

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ORGANIZATIONAL STRUCTURE

Since the reorganization of our Group, which was
completed at the end of 2003, Bayer AG has been functioning as
the Groups strategic holding company. The Bayer Group is
managed by the four-member Board of Management of Bayer AG.
Among other things, the Board of Management sets long-term
targets and strategies for the Bayer Group and its subgroups and
prescribes guidelines and principles for the corporate policy
derived from them. The Board of Management furthermore decides
on the Groups holdings, oversees the management,
distributes the (financial) resources and is responsible for the
financial management of the Group. The Corporate Center created
within Bayer AG supports the Board of Management in performing
its tasks, by providing certain governance, support and service
functions.

Bayer AG consists of the following corporate
center functions: the Corporate Office; Communications; Investor
Relations; Corporate Auditing; International Human Resources
& Organization; Human Resources Germany; Corporate
Development; Law & Patents, Insurance; Finance; Group
Accounting and Controlling; Governmental & Product Affairs;
and Regional Coordination.

The activities of the seven business segments,
which house the business operations, are performed by the
operating companies Bayer HealthCare AG, Bayer CropScience AG,
Bayer MaterialScience AG and Bayer Chemicals AG. Each operating
company, together with the domestic and international
subsidiaries assigned to it, forms a Bayer subgroup. Each of the
four subgroups Bayer HealthCare, Bayer CropScience, Bayer
Polymers and Bayer Chemicals is, within the framework of
strategies, targets and guidelines determined by the Bayer AG
Board of Management, an independent operating unit with
worldwide business accountability and its own management. Each
of the operating companies has entered into a control and profit
and loss transfer agreement with Bayer AG.

Three legally independent service companies,
Bayer Technology Services GmbH, Bayer Business Services GmbH and
Bayer Industry Services GmbH & Co. OHG, provide support
functions to the four subgroups as well as Bayer AG.

Apart from its interests in the operating and
service companies, Bayer AG also has interests in other domestic
and international companies.

For more information on our current
organizational structure, see  Business.

Subsidiaries

The following table lists Bayer AGs
principal consolidated subsidiaries as of December 31, 2003
and its beneficial ownership interest in each.

|                                               |  |              |     | 
|---------------------------------------------- |  | ------------ | --- | 
|                                               |  | Bayers     
|Company Name and Place of Business             |  | Interest (%)
|                                               |  |             
|Germany                                        |  |              |     | 
|Bayer Chemicals AG, Leverkusen                 |  |              | 100 | 
|Bayer CropScience AG, Monheim                  |  |              | 100 | 
|Bayer CropScience Deutschland GmbH, Langenfeld |  |              | 100 | 
|Bayer CropScience GmbH, Frankfurt am Main      |  |              | 100 | 
|Bayer HealthCare AG, Leverkusen                |  |              | 100 | 
|Bayer MaterialScience AG, Leverkusen           |  |              | 100 | 
|Bayer Vital GmbH, Leverkusen                   |  |              | 100 | 
|H.C. Starck GmbH, Goslar                       |  |              | 100 | 
|Wolff Cellulosics GmbH & Co. KG, Bomlitz       |  |              | 100 | 

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|                                          |  |              |      | 
|----------------------------------------- |  | ------------ | ---- | 
|                                          |  | Bayers     
|Company Name and Place of Business        |  | Interest (%)
|                                          |  |             
|Other European Countries                  |  |              |      | 
|Bayer Antwerpen N.V., Belgium             |  |              | 100  | 
|Bayer Biologicals S.r.l., Italy           |  |              | 100  | 
|Bayer CropScience France S.A., France     |  |              | 100  | 
|Bayer CropScience Holding S.A., France    |  |              | 100  | 
|Bayer CropScience Limited, U.K.           |  |              | 100  | 
|Bayer CropScience S.r.l., Italy           |  |              | 100  | 
|Bayer CropScience S.A., France            |  |              | 100  | 
|Bayer Diagnostics Europe Ltd., Ireland    |  |              | 100  | 
|Bayer International S.A., Switzerland     |  |              | 100  | 
|Bayer Pharma S.A., France                 |  |              | 99.8 | 
|Bayer Polimeros S. L., Spain              |  |              | 100  | 
|Bayer Public Limited Company, U.K.        |  |              | 100  | 
|Bayer Rubber N.V., Netherlands            |  |              | 100  | 
|Bayer S.p.A., Italy                       |  |              | 100  | 
|Quimica Farmaceutica Bayer, S.A., Spain   |  |              | 100  | 
|North America                             |  |              |      | 
|Bayer CropScience LP, USA                 |  |              | 100  | 
|Bayer HealthCare LLC, USA                 |  |              | 100  | 
|Bayer Inc., Canada                        |  |              | 100  | 
|Bayer Pharmaceuticals Corporation, USA    |  |              | 100  | 
|Bayer Polymers LLC, USA                   |  |              | 100  | 
|Asia/Pacific                              |  |              |      | 
|Bayer Australia Ltd., Australia           |  |              | 100  | 
|Bayer CropScience K.K., Japan             |  |              | 100  | 
|Bayer (India) Ltd., India                 |  |              | 71.2 | 
|Bayer Medical Ltd., Japan                 |  |              | 100  | 
|Bayer Polymers Co. Ltd., Hong Kong        |  |              | 100  | 
|Bayer South East Asia Pte Ltd., Singapore |  |              | 100  | 
|Bayer Thai Company Ltd., Thailand         |  |              | 100  | 
|Bayer Yakuhin Ltd., Japan                 |  |              | 100  | 
|Sumika Bayer Urethane Co., Ltd., Japan    |  |              | 60   | 
|Latin America/Africa/Middle
    East      |  |              |      | 
|Bayer CropScience Ltda., Brazil           |  |              | 100  | 
|Bayer de México, S.A.de C.V., Mexico      |  |              | 100  | 
|Bayer (Proprietary) Ltd., South Africa    |  |              | 100  | 
|Bayer S.A., Argentina                     |  |              | 100  | 
|Bayer S.A., Brazil                        |  |              | 100  | 

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Also included in the consolidated financial
statements are the following material associated companies:

|                                                                              |  |              |      | 
|----------------------------------------------------------------------------- |  | ------------ | ---- | 
|                                                                              |  | Bayers     
|Company Name and Place of Business                                            |  | Interest (%)
|                                                                              |  |             
|DyStar Textilfarben GmbH, Frankfurt am Main,
    Germany                      |  |              | 35   | 
|DyStar Textilfarben GmbH & Co.
    Deutschland KG, Frankfurt am Main, Germany |  |              | 35   | 
|Lyondell Bayer Manufacturing Maasvlakte VOF,
    Netherlands                  |  |              | 50   | 
|PO JV, LP Corporation, USA                                                    |  |              | 42.7 | 




PROPERTY, PLANTS AND EQUIPMENT

We operate through a large number of offices,
research facilities and production sites throughout the world.
The principal executive offices of Bayer AG as well as a number
of Bayers key production facilities are located in
Leverkusen, Germany. We also have facilities in Europe, North
and South America, Asia, Oceania and Africa, of which the most
important are in Germany and the United States. We also have
other properties, including office buildings, laboratory and
research laboratories and distribution centers.

Our policy is to acquire full ownership rights in
our manufacturing facilities whenever possible. We own most of
our manufacturing facilities and other properties. Where locally
applicable law does not permit this or acquisition of full
property rights is otherwise unfeasible, we acquire possessory
interests conferring substantially the same rights of use as
ownership (for example, German-law hereditary building rights or
Erbbaurechte and granted land-use rights in Asian
countries).

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|        |                                                 
|------- | ------------------------------------------------
|Item 5. | Operating and Financial Review and
    Prospects

Prospective investors should read the following
operating and financial review and prospects together with the
consolidated financial statements and the notes to those
financial statements included elsewhere in this annual report.
We have prepared these financial statements in accordance with
IFRS, which differs in some respects from U.S. GAAP. For a
reconciliation of net income and stockholders equity to
U.S. GAAP, see Note 44 to our consolidated financial
statements.

The forward-looking statements in this
Item 5 are not guarantees of future performance. They
involve both risk and uncertainty. Several important factors
could cause our actual results to differ materially from those
anticipated by these statements. Many of those factors are
macroeconomic in nature and are, therefore, beyond the control
of our management. See Forward-Looking
Information.

We have based the presentation of our results in
this section on certain significant accounting assumptions. For
a more detailed description of these assumptions, see
Critical Accounting Policies, below.




OVERVIEW

We are a global company offering a wide range of
products, including high-value pharmaceuticals, diagnostics and
other health care products; agricultural products; polymers; and
chemicals.

Bayer comprises the parent company, Bayer AG of
Leverkusen, Germany, and over 330 consolidated
subsidiaries. We are organized into seven business
segments  Pharmaceutical, Biological Products;
Consumer Care, Diagnostics; Animal Health; CropScience;
Plastics, Rubber; Polyurethanes, Coatings, Fibers; and
Chemicals. In 2003, we completed the implementation of plans to
transform Bayer AG into a strategic holding company that
holds our operating businesses through four newly-formed direct
operating subsidiaries. See Item 4, Information on the
Company  Business.

Although Bayer AG was first incorporated in 1951,
we trace our historical roots to Friedr. Bayer & Co.,
founded in 1863. Since our formation in 1951, we have pursued a
program of growing both organically and through selective
acquisitions. In 2001, we spent a total of
514 million
on acquisitions. The largest acquisition in that year was the
purchase by Bayer Corporation, our U.S. subsidiary, of the
development, manufacturing and distribution rights for products
that detect antibodies to the hepatitis C (HCV) and
human immunodeficiency (HIV) viruses. Nearly equal in
magnitude was our acquisition of the Mikado® corn
herbicide, which included patents, other product rights and
know-how.

In October 2001, we entered into an agreement to
acquire Aventis CropScience from Aventis and Schering. We closed
this transaction on June 3, 2002. In 2002, we also acquired
Visible Genetics Inc. in Canada and Tectrade A/S in
Denmark.

We selectively divest businesses and assets that
no longer fit in our strategic plan. We took the following steps
in the years indicated to streamline our portfolio and
concentrate our business on our core businesses:

In 2001:



| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In May 2001, we sold our interest in the EC
    Erdölchemie joint venture, which we had previously
    classified under Discontinuing Operations.                           
|
| |  | During the first half of 2001, we sold our former
    acrylic fiber product lines and classified the remainder of the
    Fibers business group as Discontinuing Operations.

In 2002:



| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In May 2002, we decided to retain our Fibers
    business as part of Polymers. We included the Fibers business in
    our ongoing business for all periods beginning with the second
    quarter of 2002.
|
| |  | We sold Haarmann & Reimer effective
    September 30, 2002.                                                                                                                                              
|
| |  | We sold the remaining 30 percent of our Agfa
    business segment, of which we had already divested
    70 percent in 1999.                                                                              

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| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | Effective March 1, 2002, we sold our
    94.9 percent interest in Bayer Wohnungen.                              
|
| |  | We sold a large part of the global household
    insecticides business of our Consumer Care business group.     
|
| |  | We divested our French and Spanish generic
    pharmaceutical operations.                                       
|
| |  | We contracted to sell our 50 percent
    interest in PolymerLatex. (This transaction closed on
    May 9, 2003.)

In 2003:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We sold the products (and the related rights)
    comprising the insecticidal active ingredients fipronil (for
    regions worldwide outside China) and ethiprole, as well as a
    number of fungicidal active ingredients (primarily for regions
    in Europe and, based on a non-exclusive license, for seed
    treatment outside Europe) to BASF. The sale included production
    facilities in Elbeuf, France.
|
| |  | We sold the remainder of the global household
    insecticides business to SC Johnson & Son Inc.                                                                                                                                                                                                                                                                                                                      
|
| |  | We sold our interest in Millennium
    Pharmaceuticals Inc. to Credit Suisse First Boston.                                                                                                                                                                                                                                                                                                                            

In the future, we plan to focus more closely on
our strengths in the fields of health care, nutrition and
innovative materials. The Board of Management and the
Supervisory Board of Bayer AG have therefore decided to adjust
the Groups structure and business alignment accordingly.
We plan to place the Chemicals business (except H.C. Starck
and Wolff Walsrode) and parts of the Polymers subgroup that we
no longer regard as core businesses into an independent company,
to be named Lanxess, which we plan to list on the Frankfurt
Stock Exchange by early 2005. We intend to combine the other
activities of the Polymers and Chemicals subgroups in the new
Bayer MaterialScience subgroup. Our goal is to strengthen the
competitiveness of our fast-growing, innovation-driven
businesses in the HealthCare, CropScience and MaterialScience
subgroups by concentrating on the special needs of these
businesses.

Lanxess plans to focus on four core business
activities: Chemical Intermediates, Performance Chemicals,
Performance Plastics and Performance Rubber. All structures and
processes will be adapted to the specific requirements of these
businesses.

Because we have determined that we will be
disposing of the Lanxess businesses, we began in 2003 to account
for it as a Discontinuing Operation pursuant to IAS 35. In
accordance with IAS 35, we show net sales from
Discontinuing Operations and operating result from Discontinuing
Operations on the face of our statement of income, and
Note 6 to our Consolidated Financial Statements breaks down
our Discontinuing Operations, including the Lanxess businesses,
in our statement of income individually. We also show
Discontinuing Operations separately in the discussion of our
segments appearing below. We have restated the comparable
information for past periods to segregate the Lanxess businesses
from our continuing operations.

The following table sets forth net sales,
operating result and net income (loss) from Discontinuing
Operations attributable to each of the individual Discontinuing
Operations shown in our financial statements for the three years
under review and the segments to which they relate.

|                  |  |                     |       |                     |  |                     |       |                     |  |      |        |      |  |      |      |      |  |      |      |      |  |      |      |      |  |  |     |  |  |  |     |  |  |  |   |  |  |  |     |  |  |  |   |  |  |  |   | 
|----------------- |  | ------------------- | ----- | ------------------- |  | ------------------- | ----- | ------------------- |  | ---- | ------ | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | --- |  |  |  | --- |  |  |  | - |  |  |  | --- |  |  |  | - |  |  |  | - | 
|                  |  |                     |       |                     |  |                     |       |                    
|                  |  | Lanxess             |       | Plasma              |  | Haarmann & Reimer   |       | Erdölchemie        
|                  |  |                     |       |                     |  |                     |       |                    
|                  |  | 2001                |       | 2002                |  | 2003                |       | 2001                |  | 2002 |        | 2003 |  | 2001 |      | 2002 |  | 2003 |      | 2001 |  | 2002 |      | 2003
|                  |  |                     |       |                     |  |                     |       |                     |  |      |        |      |  |      |      |      |  |      |      |      |  |      |      |     
|                  |  |                     |       |                     |  |                     |       |                    
|                  |  | (euros in millions) |       | (euros in millions) |  | (euros in millions) |       | (euros in millions)
|Net sales         |  |                     | 6,773 |                     |  |                     | 6,241 |                     |  |      | 5,776  |      |  |      | 695  |      |  |      | 679  |      |  |      | 613  |      |  |  | 872 |  |  |  | 666 |  |  |  |  |  |  |  | 233 |  |  |  |  |  |  |  |  | 
|Operating result  |  |                     | (57   | )                   |  |                     | (109  | )                   |  |      | (1,299 | )    |  |      | (139 | )    |  |      | (111 | )    |  |      | (353 | )    |  |  | 73  |  |  |  | 980 |  |  |  |  |  |  |  | 333 |  |  |  |  |  |  |  |  | 
|Net income (loss) |  |                     | (77   | )                   |  |                     | (93   | )                   |  |      | (975   | )    |  |      | (139 | )    |  |      | (126 | )    |  |      | (230 | )    |  |  | 34  |  |  |  | 954 |  |  |  |  |  |  |  | 326 |  |  |  |  |  |  |  |  | 

|                  |  |                            |  |                  |  |           |  |          
|----------------- |  | -------------------------- |  | ---------------- |  | --------- |  | ---------
|Affected segments |  | Plastics,                  |  | Pharmaceuticals, |  | Chemicals |  | Chemicals
|                  |  | Rubber/Polyurethanes,      |  | Biological       |  |           |  |          
|                  |  | Coatings, Fibers/Chemicals |  | Products         |  |           |  |          

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CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that are
both most important to the portrayal of the Groups
financial position and results, and that require application of
managements most difficult, subjective or complex
judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain and may
change in subsequent periods. We are not aware of any reasonably
possible events or circumstances that would result in different
amounts being reported that would have a material effect on our
results of operations or financial position.

Our significant accounting policies are outlined
in the notes to the financial statements. While not all of these
significant accounting policies require the Group to make
difficult, subjective or complex judgments, we believe that the
following accounting policies could be considered critical.

Intangible Assets and Property, Plant and
Equipment

Intangible assets, including goodwill, and
property, plant and equipment, are amortized over their
estimated useful lives. Useful lives are based on our estimates
of the period that the assets will generate revenue.

Intangible assets and property, plant and
equipment are tested for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairment testing under IAS 36 requires
management to compare the carrying value of the assets to the
expected discounted future cash flows from the related assets.
Determining the expected discounted future cash flows involves
significant estimations, including future sales prices and sales
volumes, costs, and risk-adjusted discount rates. In connection
with the impairment review we conducted at year-end 2003, the
necessity of which was indicated by sustained changes in the
macroeconomic environment and the reorganization of our group,
we estimated the future cash flows with our reoriented long-term
planning. This in turn took into account revised views on the
competitive environment in which our businesses operate, changes
in our expectations of long-term price developments and our
expectations about economic growth prospects in our target
markets. The discounting process also requires assumptions and
estimations, which have also changed as macroeconomic conditions
have changed, concerning the cost of capital.

Although we believe that our estimates of useful
lives, our assumptions concerning the macroeconomic environment
and developments in our industries and our estimations of
discounted future cash flows are appropriate, changes in
assumptions or circumstances could require changes to our
analysis. This could lead to additional impairment charges in
the future, or writebacks of value should the trends we have
identified reverse (or our assumptions and estimates prove
incorrect). This would impact our future reported results.

In 2003, we continued to amortize goodwill
according to IFRS, even though for U.S. GAAP purposes we
ceased to amortize goodwill in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142
Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 requires us to
perform an annual review of our U.S. GAAP goodwill for
impairment. We recognize impairment losses if necessary based on
this annual review. As a result of the impairment test we
conducted at the end of 2003, we wrote off, under U.S. GAAP
(but not IFRS),
182 million
of pre-1995 goodwill relating to a 1990 acquisition which we had
capitalized under U.S. GAAP. In general, the process of
evaluating goodwill involves making adjustments and estimates
relating to the projection and discounting of future cash flows.
In addition to their sensitivities to our assumptions regarding
the future performance of the assets concerned, these
evaluations are sensitive to changes in the discount rate we
apply. An increase in discount rates increases the likelihood of
impairment charges under U.S. GAAP.

Pensions and other obligations

We sponsor pension and other retirement plans in
various forms covering employees who meet the plans
eligibility requirements. These plans cover the majority of our
employees. We use several statistical and other models, which
attempt to anticipate future events in calculating the expenses
and liabilities related to the plans. These factors include
assumptions about the discount rate, expected return on plan
assets and rate of future compensation increases. In addition,
our actuarial consultants also use statistical information such
as withdrawal and mortality rates to estimates these factors.
The actuarial assumptions used may differ materially from actual

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results due to changing market and economic
conditions, higher or lower withdrawal rates or longer or
shorter life spans of participants. Such differences may result
in a significant impact on the amount of pension income or
expense recorded in future years.


Environmental Provisions

Our compliance with environmental laws and
regulations may require us to remove or mitigate the effects of
the disposal or release of chemical substances in jurisdictions
where we do business or maintain properties. The cost of such
compliance is provided for when it is probable and can be
reasonably estimated. Provision amounts are estimated based on
currently available facts, remediation strategies, regulations,
our relative share of the total remediation costs, and discount
rate. Changes in these assumptions could impact our future
reported results.

Litigation Provisions

As more fully described in Note 29 to the
financial statements, we are involved in a number of legal
proceedings. As a global company active in a wide range of life
sciences and chemical activities, we have and may, in the normal
course of our business become involved in proceedings relating
to such matters as:



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | product liability;                                                              
|
| |  | patent validity and infringement disputes;                                      
|
| |  | tax assessments;                                                                
|
| |  | competition and antitrust; and                                                  
|
| |  | past waste disposal practices and release of
    chemicals into the environment.

We cannot predict with certainty the outcome of
any proceedings in which we are or may become involved. An
adverse decision in a lawsuit seeking damages from us could
result in a monetary award to the plaintiff and, to the extent
not covered by our insurance policies, could significantly harm
our business or the results of our operations. If we lose a case
in which we seek to enforce our patent rights, we could sustain
a loss of future revenue as other manufacturers begin to market
products we developed.

Litigation cases and claims raise difficult and
complex legal issues and are subject to many uncertainties and
complexities, including, but not limited to, the facts and
circumstances of each particular case and claim, the
jurisdiction in which each suit is brought, and differences in
applicable law. Upon resolution of any pending legal matters, we
may incur charges in excess of presently established provisions
and related insurance coverage. It is possible that our results
of operations and cash flows could be materially affected by an
ultimate unfavorable outcome of certain pending litigation.

Income Taxes

We are required to make estimates in determining
our provision for income taxes and our deferred tax assets and
liabilities.

Additional estimates are made to determine
whether valuation allowances are required against deferred tax
assets. Such valuation allowances are recognized when it is not
sufficiently certain that the assets will be realized.
Uncertainties exist in respect of interpretation of complex tax
regulations and the amount and timing of future taxable income.
Differences between actual results and our assumptions, or
changes in our assumptions in future periods, could result in
adjustments to tax expense in future periods.

Use of Estimates

The preparation of all financial statements
includes the use of estimates and assumptions that affect a
number of amounts included in our financial statements,
including employee benefit costs and related disclosures,
inventory valuations, sales allowances, income taxes and
contingencies. We base our estimates on historical experience
and other assumptions that we believe are reasonable. If actual
amounts are ultimately different from estimates, revisions are
included in our results of operations for the period in which
the actual amounts become

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known. Historically, the aggregate differences,
if any, between our estimates and actual amounts in any year
have not had a significant impact on our consolidated financial
statements.





OPERATING RESULTS 2001, 2002 and
2003

Introduction

The most significant drivers of our sales,
results of operations and cash flows in 2003 were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our decisions to separate the businesses being
    combined in Lanxess from our Groups remaining
    businesses and the determination, arising in part from our
    strategic reorientation, the Lanxess decision and the changing
    business conditions in our industries and generally, that it was
    appropriate to recognize impairment charges, unscheduled
    amortization expenses and other write-downs on a number of our
    businesses and investments;
|
| |  | the net gains and losses on dispositions of
    businesses and other assets described and set forth in
     Acquisitions and Dispositions below;                                                                                                                                                                                                                                                                                                                         
|
| |  | our incurrence of other charges that we view as
    special, consisting primarily of provisions established and
    other expenses incurred in connection with legal matters and
    some headcount reduction initiatives; and                                                                                                                                                                                                                                            
|
| |  | the effects on our results of operations of the
    substantial strengthening of the euro against other currencies,
    especially the dollar.                                                                                                                                                                                                                                                                                                                            

In the consolidated operating results information
we present below, we report, in addition to our operating
result, a measure of operating result that excludes these items
(other than exchange rate effects), all of which we refer to as
special items. We present this measure because we
believe that doing so assists readers in understanding the
performance of our business without the large impacts on the net
result figures resulting from our decisions to reorient our
business and because of certain expenses (such as some of our
impairments and provisions in respect of legal contingencies).
The following table shows our operating profit, the special
items and our operating profit excluding the special items.

|                                                   |                     |                     |       |      |   |      |       |     |  |  |        |        |  
|-------------------------------------------------- | ------------------- | ------------------- | ----- | ---- | - | ---- | ----- | --- |  |  | ------ | ------ | -
|                                                   |                     | 2001                |       | 2002 |   | 2003
|                                                   |                     |                     |       |      |   |     
|                                                   |                     |                    
|                                                   |                     | (euros in millions)
|Operating result                                   |                     |                     | 1,676 |      |   |      | 1,610 |     |  |  | (1,203 | )     
|Impairment charges and write-downs                 |                     |                     | (116  | )    |   |      | (289  | )   |  |  | (1,927 | )     
|Restructuring charges and unscheduled amortization |                     |                     | (216  | )    |   |      | (470  | )   |  |  | (508   | )     
|Portfolio changes                                  |                     |                     | 229   |      |   |      | 1,905 |     |  |  | 469    |       
|Other charges                                      |                     |                     | (210  | )    |   |      | (364  | )   |  |  | (619   | )     
|                                                   |                     |                     |       |      |   |      |       |     |  |  |        |       
|                                                   | Total special items |                     |       | (313 | ) |      |       | 782 |  |  |        | (2,585 | )
|Operating result excluding special items           |                     |                     | 1,989 |      |   |      | 828   |     |  |  | 1,382  |       
|                                                   |                     |                     |       |      |   |      |       |     |  |  |        |       

The following paragraphs describe these major
drivers and the related special items we take into account in
arriving at operating result excluding special items.

Impairments, unscheduled amortization and
restructuring charges

In November 2003, we announced that we intend to
strengthen our focus on our core businesses and therefore
combine Bayer Chemicals (except for Wolff Walsrode and
H.C. Starck) with certain parts of the Bayer Polymers
business in a new company to be named Lanxess. The
aim for this company is to be listed on the Frankfurt Stock
Exchange by early 2005. After this separation, Wolff Walsrode
and H.C. Starck will be grouped together with the remaining
parts of the Bayer Polymers business in a wholly-owned
subsidiary of Bayer Group called Bayer MaterialScience, and we
intend to focus on our core businesses retained in this
subsidiary as well as in Bayer HealthCare and Bayer CropScience.

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In light of the strategic realignment of our
Group, and the changing business conditions for portions of it
(which are described below under  Segment
Data), we determined that it was necessary to carry out
impairment tests on those assets and investments in accordance
with IAS 36 and to recognize unscheduled amortization on
some of our businesses. Accordingly, we recognized charges
related to impairments and other asset write-downs of
1,927 million
in 2003 relating to portions of our polymers and chemicals
activities and our plasma business.

We also incurred charges of
508 million
in respect of restructuring measures and unscheduled
amortizations, including closures of facilities and the related
severance payments. Of this
508 million,
we charged
408 million
in respect of the closure of facilities and the cessation of
business activities and the remaining
100 million
relating primarily to write-downs of enterprise management
systems. This was necessary when we changed and reoriented these
systems when we reorganized our Group into a holding company
structure. Of the
408 million
in restructuring charges and unscheduled amortization in 2003,
182 million
related to severance payments,
145 million
related to unscheduled amortization of fixed assets and
intangibles and
81 million
related to other expenses. We expect that the majority of the
severance payments and other expenses charged in 2003 will be
paid in 2004.

In 2002, we recognized impairment charges
totaling
289 million
and restructuring charges and unscheduled amortization totaling
470 million.
The impairment charges related to our polyols and fibers
businesses. Of the
470 million,
372 million
related to the closure of facilities and the cessation of
business activities, including severance payments, and
98 million
related to write-downs on our enterprise management systems as
described above.

In 2001, we incurred impairment charges totaling
116 million
and charges in respect of restructuring measures and unscheduled
amortization totaling
216 million.
The impairment charges were on inventory and resulted from the
voluntary withdrawal from the market of Lipobay/Baycol.

The following table sets forth the components of
these charges during each of the last three years.

|                                                   |       |                     |      |      |   |      |      |      |   |  |        |        |  
|-------------------------------------------------- | ----- | ------------------- | ---- | ---- | - | ---- | ---- | ---- | - |  | ------ | ------ | -
|                                                   |       | 2001                |      | 2002 |   | 2003
|                                                   |       |                     |      |      |   |     
|                                                   |       |                    
|                                                   |       | (euros in millions)
|Impairment charges and write-downs                 |       |                     | (116 | )    |   |      | (289 | )    |   |  | (1,927 | )     
|Restructuring charges and unscheduled amortization |       |                     | (216 | )    |   |      | (470 | )    |   |  | (508   | )     
|                                                   |       |                     |      |      |   |      |      |      |   |  |        |       
|                                                   | Total |                     |      | (332 | ) |      |      | (759 | ) |  |        | (2,435 | )
|                                                   |       |                     |      |      |   |      |      |      |   |  |        |       

The following table allocates the restructuring
charges and unscheduled amortization of fixed assets and
intangibles we recognized in 2003 according to the businesses
and activities to which they relate:

|                                                                                  |              |                     |     |              |  |         |     |       |  |  |    |    |  |  |     |     | 
|--------------------------------------------------------------------------------- | ------------ | ------------------- | --- | ------------ |  | ------- | --- | ----- |  |  | -- | -- |  |  | --- | --- | 
|                                                                                  |              | Severance           |     | Unscheduled  |  | Other   |     |      
|Activity/Business in 2003                                                         |              | payments            |     | amortization |  | charges |     | Total
|                                                                                  |              |                     |     |              |  |         |     |      
|                                                                                  |              |                    
|                                                                                  |              | (euros in millions)
|Closure of research facilities in Kyoto, Japan
    and Berkeley, California       |              |                     | 10  |              |  |         | 101 |       |  |  | 28 |    |  |  | 139 |    
|Continued integration of businesses acquired in
    2002 from Aventis CropScience |              |                     | 100 |              |  |         | 2   |       |  |  | 0  |    |  |  | 102 |    
|Personnel adjustments in Polymers area                                            |              |                     | 52  |              |  |         | 0   |       |  |  | 0  |    |  |  | 52  |    
|Plant closure in West Haven, Connecticut                                          |              |                     | 8   |              |  |         | 21  |       |  |  | 3  |    |  |  | 32  |    
|Closure of the polyether production site at
    Institute, West Virginia          |              |                     | 3   |              |  |         | 12  |       |  |  | 4  |    |  |  | 19  |    
|Further ongoing restructuring programs to improve
    profitability               |              |                     | 9   |              |  |         | 9   |       |  |  | 46 |    |  |  | 64  |    
|Totals                                                                            |              |                     | 182 |              |  |         | 145 |       |  |  | 81 |    |  |  | 408 |    
|                                                                                  |              |                     |     |              |  |         |     |       |  |  |    |    |  |  |     |    
|Write-downs on enterprise management systems                                      |              |                     | 0   |              |  |         | 100 |       |  |  | 0  |    |  |  | 100 |    
|                                                                                  |              |                     |     |              |  |         |     |       |  |  |    |    |  |  |     |    
|                                                                                  | Grand totals |                     |     | 182          |  |         |     | 245   |  |  |    | 81 |  |  |     | 508 | 
|                                                                                  |              |                     |     |              |  |         |     |       |  |  |    |    |  |  |     |    

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The following table allocates the restructuring
charges and unscheduled amortization of fixed assets and
intangibles we recognized in 2002 according to the businesses
and activities to which they relate. Due to the reorganization
of our businesses in 2003 we are unable to separate severance
payments and other charges for 2002 and 2001 without
unreasonable effort.

|                                                                                                              |              |                     |    |           |  |       |    |     |  |  |    |     | 
|------------------------------------------------------------------------------------------------------------- | ------------ | ------------------- | -- | --------- |  | ----- | -- | --- |  |  | -- | --- | 
|                                                                                                              |              |                     |    | Severance |  |      
|                                                                                                              |              |                     |    | payments  |  |      
|                                                                                                              |              | Unscheduled         |    | and other |  |      
|Activity/Business in 2002                                                                                     |              | amortization        |    | charges   |  | Total
|                                                                                                              |              |                     |    |           |  |      
|                                                                                                              |              |                    
|                                                                                                              |              | (euros in millions)
|Integration of businesses acquired from Aventis
    CropScience                                               |              |                     | 0  |           |  |       | 89 |     |  |  | 89 |    
|Restructuring of the rubber production site in
    Sarnia, Ontario, Canada                                    |              |                     | 41 |           |  |       | 26 |     |  |  | 67 |    
|Shutdown of polymers production in Rieme, Belgium                                                             |              |                     | 31 |           |  |       | 7  |     |  |  | 38 |    
|Shutdown of production of iron oxide in New
    Martinsville, West Virginia                                   |              |                     | 10 |           |  |       | 20 |     |  |  | 30 |    
|Closure of powder coatings production in
    Hicksville, New York                                             |              |                     | 18 |           |  |       | 8  |     |  |  | 26 |    
|Restructuring measures in connection with sale of
    organic pigments facility in Bushy Park, South Carolina |              |                     | 0  |           |  |       | 23 |     |  |  | 23 |    
|Restructuring of the Consumer Care production in
    Elkhart, Indiana                                         |              |                     | 8  |           |  |       | 12 |     |  |  | 20 |    
|Closure of production plant in Barcelona, Spain                                                               |              |                     | 2  |           |  |       | 17 |     |  |  | 19 |    
|Expenses in connection with cooperation
    arrangement with Aventis Behring                                  |              |                     | 0  |           |  |       | 17 |     |  |  | 17 |    
|Reduction of headcount in Polymers area                                                                       |              |                     | 0  |           |  |       | 10 |     |  |  | 10 |    
|Restructuring in New Martinsville, West Virginia                                                              |              |                     | 7  |           |  |       | 3  |     |  |  | 10 |    
|Further ongoing restructuring programs to improve
    profitability                                           |              |                     | 14 |           |  |       | 9  |     |  |  | 23 |    
|                                                                                                              | Totals       |                     |    | 131       |  |       |    | 241 |  |  |    | 372 | 
|                                                                                                              |              |                     |    |           |  |       |    |     |  |  |    |    
|Write-downs on enterprise management systems                                                                  |              |                     | 98 |           |  |       | 0  |     |  |  | 98 |    
|                                                                                                              |              |                     |    |           |  |       |    |     |  |  |    |    
|                                                                                                              | Grand totals |                     |    | 229       |  |       |    | 241 |  |  |    | 470 | 
|                                                                                                              |              |                     |    |           |  |       |    |     |  |  |    |    

The following table allocates the restructuring
charges and unscheduled amortization of fixed assets and
intangibles we recognized in 2001 according to the businesses
and activities to which they relate.

|                                                                                                              |        |                     |    |           |  |       |    |     |  |  |    |     | 
|------------------------------------------------------------------------------------------------------------- | ------ | ------------------- | -- | --------- |  | ----- | -- | --- |  |  | -- | --- | 
|                                                                                                              |        |                     |    | Severance |  |      
|                                                                                                              |        |                     |    | payments  |  |      
|                                                                                                              |        | Unscheduled         |    | and other |  |      
|Activity/Business in 2001                                                                                     |        | amortization        |    | charges   |  | Total
|                                                                                                              |        |                     |    |           |  |      
|                                                                                                              |        |                    
|                                                                                                              |        | (euros in millions)
|Restructuring of styrenics production in Brazil,
    U.S.A. and Germany                                       |        |                     | 35 |           |  |       | 30 |     |  |  | 65 |    
|Restructuring of several facilities regarding the
    Lyondell integration, U.S.A., France and Germany        |        |                     | 7  |           |  |       | 32 |     |  |  | 39 |    
|Restructuring plans in Baytown, Texas and New
    Martinsville, West Virginia                                 |        |                     | 0  |           |  |       | 35 |     |  |  | 35 |    
|Restructuring measures in connection with sale of
    organic pigments facility in Bushy Park, South Carolina |        |                     | 0  |           |  |       | 20 |     |  |  | 20 |    
|Restructuring measures at Bayer AG                                                                            |        |                     | 0  |           |  |       | 17 |     |  |  | 17 |    
|Restructuring of the Consumer Care production in
    Elkhart, Indiana                                         |        |                     | 9  |           |  |       | 6  |     |  |  | 15 |    
|Restructuring measures relating to iron oxide
    production in New Martinsville, West Virginia               |        |                     | 10 |           |  |       | 3  |     |  |  | 13 |    
|Further ongoing restructuring programs to improve
    profitability                                           |        |                     | 12 |           |  |       | 0  |     |  |  | 12 |    
|                                                                                                              |        |                     |    |           |  |       |    |     |  |  |    |    
|                                                                                                              | Totals |                     |    | 73        |  |       |    | 143 |  |  |    | 216 | 
|                                                                                                              |        |                     |    |           |  |       |    |     |  |  |    |    

Acquisitions and Dispositions

Acquisition and disposition activities also
affect our results of operations, and are responsible for
substantial swings in our results from year to year. As a
diversified global company, we often enter into numerous merger

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and acquisition transactions that, taken as a
whole, can have a significant effect. In connection with our
strategic reorientation and focus on our core businesses, we
have been disposing of numerous businesses, investments and
participations. Our most recent transactions are summarized
above in  Overview. Our net gains from our
dispositions were
469 million
in 2003,
1,905 million
in 2002 and
229 million
in 2001.


Acquisitions and divestitures during 2003 and
2002 had a negative effect on net sales in 2003 of
95 million,
and acquisitions and divestitures during 2002 and 2001 had a
positive effect on net sales of
1.9 billion.
This activity affected the comparison between the three
years sales figures as shown in the following two tables:

|                                                                              |                    |                     |       |       | 
|----------------------------------------------------------------------------- | ------------------ | ------------------- | ----- | ----- | 
|                                                                              |                    | Change in 2003     
|                                                                              |                    | from 2002          
|                                                                              |                    |                    
|                                                                              |                    | (euros in millions)
|Acquisitions                                                                  |                    |                     |       |      
|Aventis Crop Science Holding S.A.                                             |                    |                     |       |      
|                                                                              | (Acquired in 2002) |                     |       | 1,450 | 
|Visible Genetics Inc.                                                         |                    |                     |       |      
|                                                                              | (Acquired in 2002) |                     |       | 9     | 
|Tectrade A/S                                                                  |                    |                     |       |      
|                                                                              | (Acquired in 2002) |                     |       | 6     | 
|Other                                                                         |                    |                     | 1     |      
|                                                                              |                    |                     |       |      
|                                                                              |                    |                     | 1,466 |      
|                                                                              |                    |                     |       |      
|Divestitures                                                                  |                    |                     |       |      
|Haarmann & Reimer Group (divested in
    2002)                                |                    |                     | (666  | )    
|Dispositions in compliance with antitrust
    conditions by Bayer CropScience |                    |                     | (435  | )    
|Household insecticides business                                               |                    |                     | (272  | )    
|PolymerLatex group                                                            |                    |                     | (117  | )    
|Organic pigments                                                              |                    |                     | (54   | )    
|Walothen GmbH                                                                 |                    |                     | (10   | )    
|Other                                                                         |                    |                     | (7    | )    
|                                                                              |                    |                     |       |      
|                                                                              |                    |                     | 1,561 |      
|                                                                              |                    |                     |       |      
|Net effects on sales                                                          |                    |                     | (95   | )    
|                                                                              |                    |                     |       |      

|                    |                                           |                     |       |       |  
|------------------- | ----------------------------------------- | ------------------- | ----- | ----- | -
|                    |                                           | Change in 2002     
|                    |                                           | from 2001          
|                    |                                           |                    
|                    |                                           | (euros in millions)
|Acquisitions        |                                           |                     |       |      
|                    | Aventis CropScience Holding S.A.          |                     |       | 1,977 |  
|                    | Tectrade A/S                              |                     |       | 12    |  
|                    | Other                                     |                     |       | 3     |  
|                    |                                           |                     |       |      
|                    |                                           |                     | 1,992 |      
|                    |                                           |                     |       |      
|Divestitures        |                                           |                     |       |      
|                    | ChemDesign Corporation (divested in 2001) |                     |       | (56   | )
|                    | Covexx Films (divested in 2001)           |                     |       | (42   | )
|                    | Sale of the generic business              |                     |       | (16   | )
|                    | Other                                     |                     |       | (8    | )
|                    |                                           |                     |       |      
|                    |                                           |                     | (122  | )    
|                    |                                           |                     |       |      
|Net effect on sales |                                           |                     | 1,870 |      
|                    |                                           |                     |       |      

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Changes in Exchange Rates

Our net sales and our operating result were
significantly affected during 2003 by changes in exchange rates.
Because a substantial portion of our assets, liabilities, sales
and earnings are denominated in currencies other than the euro
zone currencies, we have exposure to fluctuations in the values
of these currencies relative to the euro. These currency
fluctuations, especially the fluctuation of the value of the
U.S. dollar relative to the euro, but also fluctuations in
the currencies of the countries in which we have significant
operations and/or sales, can have a material impact on our
results of operations. We face both transaction risk, where our
businesses generate sales in one currency but incur costs
relating to that revenue in a different currency, and
translation risk, which arises when we translate the income
statements of our subsidiaries into euro for inclusion in our
financial statements. With respect to transaction risk, we
generally enter into hedging transactions for a significant
portion of our forecasted operational foreign currency exposure
and therefore do not believe that even significant increases or
decreases in the exchange rates of the euro relative to other
world currencies materially affect our cash flows or results of
operations. However, transaction risks could over time adversely
affect our cash flows and results of operations to the extent we
are unable to reflect changed exchange rates in the pricing of
our products in local currency. We do not quantify the effects
on our financial statements of transaction risks. Translation
risks, which we do quantify and against which we do not hedge,
do not affect our local currency cash flows or results of
operations, but do affect our consolidated financial statements.
In general, declines in the value of the U.S. dollar
relative to the euro, such as those that occurred in 2003, will
decrease the euro value of our sales and earnings made in the
dollar zone and decrease the competitiveness of our products
produced in Europe in the United States and in other countries
with falling currencies.

In 2003, the euro appreciated substantially
against the dollar and other currencies. This adversely affected
our net sales in cases in which products are sold at prices
denominated in one of the currencies against which the euro
strengthened. To the extent that our non-euro denominated
expenses do not match our non-euro denominated sales, our
operating result is also adversely affected by these translation
effects. The following table sets forth the exchange rates for
the euro of currencies important for our results of operations
during 2003:

|                     |  |                                    |        |                 |  |      |        |      |  |  |        |  |  |  |        | 
|-------------------- |  | ---------------------------------- | ------ | --------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                     |  |                                   
|                     |  | Units of foreign currency per euro
|                     |  |                                   
|                     |  |                                    |        |                
|                     |  |                                    |        | Average for the
|                     |  |                                    |        | year ended     
|                     |  | At December 31,                    |        | December 31,   
|                     |  |                                    |        |                
|                     |  | 2002                               |        | 2003            |  | 2002 |        | 2003
|                     |  |                                    |        |                 |  |      |        |     
|Argentinean pesos    |  |                                    | 3.53   |                 |  |      | 3.70   |      |  |  | 2.97   |  |  |  | 3.33   | 
|Brazilian reals      |  |                                    | 3.71   |                 |  |      | 3.66   |      |  |  | 2.78   |  |  |  | 3.47   | 
|Canadian dollars     |  |                                    | 1.66   |                 |  |      | 1.62   |      |  |  | 1.48   |  |  |  | 1.58   | 
|Great Britain pounds |  |                                    | 0.65   |                 |  |      | 0.70   |      |  |  | 0.63   |  |  |  | 0.69   | 
|Japanese yen         |  |                                    | 124.39 |                 |  |      | 135.05 |      |  |  | 118.06 |  |  |  | 130.96 | 
|Mexican pesos        |  |                                    | 10.99  |                 |  |      | 14.18  |      |  |  | 9.15   |  |  |  | 12.22  | 
|Swiss francs         |  |                                    | 1.45   |                 |  |      | 1.56   |      |  |  | 1.47   |  |  |  | 1.52   | 
|U.S. dollars         |  |                                    | 1.05   |                 |  |      | 1.26   |      |  |  | 0.95   |  |  |  | 1.13   | 

The translation effects of these currency changes
had a negative impact on our sales in 2003, decreasing them by
2.5 billion
compared to
1.5 billion
in 2002 and a positive effect of
0.1 billion
in 2001. For further information concerning our exchange rate
exposure, see Item 11, Quantitative and Qualitative
Disclosures about Market Risk.

Raw Materials, Pricing

The single most important factor that affects our
costs on a continuing basis is the price of raw materials for
our products. We seek to reduce our sensitivity to fluctuations
in many raw material prices by producing at least a part of our
requirements internally, within the Bayer Group. Petrochemical
feedstocks are important raw materials in many of our products,
especially in our Polymers and Chemicals segments. We do not
produce significant volumes of petrochemicals. Effective
May 1, 2001, we sold our 50 percent interest in the EC
Erdölchemie joint venture, which had been our one
significant venture into this area, to Deutsche BP, our former

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joint venture partner. Because of this lack of
internal petrochemicals sourcing, as well as the volatility of
oil prices in recent years, our single greatest raw-materials
sensitivity is to fluctuations in the price of petrochemicals.
In the first half of 2003, these prices were about
10 percent above the average prices in 2002; in the second
half, they returned to a level comparable to those at the
beginning of 2002, which were slightly above the average prices
for that year.





Bayer Group

The following table shows sales and income for
Bayer as a whole.

|                                               |                            |                     |        |               |  |      |       |               |   |      |        |        |  |  |       |      |   |  |        |        |  
|---------------------------------------------- | -------------------------- | ------------------- | ------ | ------------- |  | ---- | ----- | ------------- | - | ---- | ------ | ------ |  |  | ----- | ---- | - |  | ------ | ------ | -
|                                               |                            |                     |        | Change from   |  |      |       | Change from   |   |     
|                                               |                            |                     |        | Previous Year |  |      |       | Previous Year |   |     
|                                               |                            | 2001                |        | (%)           |  | 2002 |       | (%)           |   | 2003
|                                               |                            |                     |        |               |  |      |       |               |   |     
|                                               |                            |                    
|                                               |                            | (euros in millions)
|Net sales from continuing operations           |                            |                     | 21,702 |               |  |      | 1.5   |               |   |      | 22,038 |        |  |  | 0.6   |      |   |  | 22,178 |       
|Net sales from discontinuing operations        |                            |                     | 8,573  |               |  |      | (11.5 | )             |   |      | 7,586  |        |  |  | (15.8 | )    |   |  | 6,389  |       
|                                               | Net sales                  |                     |        | 30,275        |  |      |       | (2.2          | ) |      |        | 29,624 |  |  |       | (3.6 | ) |  |        | 28,567 |  
|Gross profit                                   |                            |                     | 12,851 |               |  |      | (7.1  | )             |   |      | 11,944 |        |  |  | (1.8  | )    |   |  | 11,733 |       
|                                               | as percentage of sales (%) |                     |        | 42.4          |  |      |       |              |   |      |        | 40.3   |  |  |       |     |   |  |        | 41.1   |  
|Selling expenses                               |                            |                     | (7,221 | )             |  |      | 4.0   |               |   |      | (6,933 | )      |  |  | 6.5   |      |   |  | (6,484 | )     
|Research and development expenses              |                            |                     | (2,559 | )             |  |      | (0.7  | )             |   |      | (2,577 | )      |  |  | 6.3   |      |   |  | (2,414 | )     
|General and administrative expenses            |                            |                     | (1,040 | )             |  |      | (40.4 | )             |   |      | (1,460 | )      |  |  | (15.8 | )    |   |  | (1,690 | )     
|Other operating income                         |                            |                     | 885    |               |  |      | 205.8 |               |   |      | 2,706  |        |  |  | (57.2 | )    |   |  | 1,158  |       
|Other operating expenses                       |                            |                     | (1,240 | )             |  |      | (66.9 | )             |   |      | (2,070 | )      |  |  | (69.4 | )    |   |  | (3,506 | )     
|Operating result from continuing operations    |                            |                     | 1,466  |               |  |      | (42.0 | )             |   |      | 850    |        |  |  | (47.2 | )    |   |  | 449    |       
|Operating result from discontinuing operations |                            |                     | 210    |               |  |      | 261.9 |               |   |      | 760    |        |  |  |      |      |   |  | (1,652 | )     
|                                               | Operating result           |                     |        | 1,676         |  |      |       | (3.9          | ) |      |        | 1,610  |  |  |       |     |   |  |        | (1,203 | )
|                                               | as percentage of sales (%) |                     |        | 5.5           |  |      |       |              |   |      |        | 5.4    |  |  |       |     |   |  |        | (4.2   | )
|Non-operating result                           |                            |                     | (561   | )             |  |      | (16.6 | )             |   |      | (654   | )      |  |  | (20.9 | )    |   |  | (791   | )     
|Income before income taxes                     |                            |                     | 1,115  |               |  |      | (14.3 | )             |   |      | 956    |        |  |  |      |      |   |  | (1,994 | )     
|Net income                                     |                            |                     | 965    |               |  |      | 9.8   |               |   |      | 1,060  |        |  |  |      |      |   |  | (1,361 | )     

The following table shows a geographical
breakdown of our sales based on where we sold our products.

|                                 |  |                     |        |               |  |      |      |               |  |      |        |  |  |  |      |   |  |  |        | 
|-------------------------------- |  | ------------------- | ------ | ------------- |  | ---- | ---- | ------------- |  | ---- | ------ |  |  |  | ---- | - |  |  | ------ | 
|                                 |  |                     |        | Change from   |  |      |      | Change from   |  |     
|                                 |  |                     |        | Previous Year |  |      |      | Previous Year |  |     
|                                 |  | 2001                |        | (%)           |  | 2002 |      | (%)           |  | 2003
|                                 |  |                     |        |               |  |      |      |               |  |     
|                                 |  |                    
|                                 |  | (euros in millions)
|Europe                           |  |                     | 12,383 |               |  |      | (0.9 | )             |  |      | 12,266 |  |  |  | (0.8 | ) |  |  | 12,162 | 
|North America                    |  |                     | 9,720  |               |  |      | (7.4 | )             |  |      | 9,005  |  |  |  | (4.1 | ) |  |  | 8,636  | 
|Asia/Pacific                     |  |                     | 4,826  |               |  |      | 1.6  |               |  |      | 4,901  |  |  |  | (7.6 | ) |  |  | 4,529  | 
|Latin America/Africa/Middle East |  |                     | 3,346  |               |  |      | 3.2  |               |  |      | 3,452  |  |  |  | (6.1 | ) |  |  | 3,240  | 

2003 compared with 2002

Net Sales

Net sales represents the gross inflow of economic
benefits from the sales of goods and services that we receive or
that are receivable by us. Net sales excludes rebates and
discounts that we give our customers, as well as the amounts
that we collect on behalf of third parties, such as sales taxes,
goods and services taxes and value added taxes. Net sales of the
Bayer Group declined by 3.6 percent, or
1,057 million,
from 2002 to
28,567 million
in 2003. Net sales from continuing operations remained
essentially flat, while the difficult economic and industry
conditions contributed to a 15.8 percent decline in net
sales of discontinuing operations. Total net sales increased,
however, in local currency terms. Had the average exchange rates
we used to translate

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our non-euro denominated revenues into euros
stayed constant in 2003 as compared with 2002 rather than
declining as they in fact did, our net sales would have
increased, primarily due to volume increase, by
1,433 million,
or 4.8 percent; this was more than offset by the
2,545 million
less in net sales caused by the currency changes. Prices were on
average fairly flat in 2003; in comparison with 2002, price
increases led only to
150 million
of increased net sales, an increase of 0.5 percent. Changes
in our portfolio of businesses accounted for a
95 million
reduction in our net sales.


Gross Profit

Gross profit represents net sales after cost of
goods sold and services provided. Cost of goods sold and
services provided include the production costs of goods sold and
the cost of goods purchased for resale.

The cost of goods sold and services provided
decreased by 4.8 percent in 2003 to
16,834 million,
due mainly to currency effects, as our non-euro denominated
costs were also reduced by the strong euro. Other cost-reducing
factors, apart from portfolio effects, were improved
manufacturing efficiencies in HealthCare and plant closures in
Polymers.

Operating Result

Operating result represents gross profit after
selling expenses, research and development expenses, general
administration expenses and other operating income and expenses.
We distinguish between our result from continuing and
discontinuing operations.

Selling expenses diminished by 6.5 percent
to
6,484 million
due to currency and portfolio factors.

The 15.8 percent increase in general
administration expenses, to
1,690 million,
was largely related to the Aventis CropScience acquisition.

Other operating income amounted to
1,158 million.
This figure includes the gain from the sale of the remaining
part of the household insecticides business
(256 million),
the PolymerLatex group
(28 million)
and real estate in Germany, Belgium and Spain
(106 million).
The previous years figure contained the gain from the sale
of the Haarmann & Reimer group
(933 million),
company housing units
(452 million),
a large part of the household insecticides business
(272 million)
and generics activities
(75 million).

Other operating expenses increased to
3,506 million,
including impairment charges and other write-downs of
1,927 million.
The impairments resulted mainly from a global review of asset
values according to IAS 36 in connection with the planned
strategic realignment of the Bayer Group and the sustained
adverse conditions affecting our industrial business. Other
operating expenses also included the
300 million
we charged to income as a result of the settlement we reached
with a majority of our insurers in connection with
Lipobay/Baycol. (See Item 8
 Legal Proceedings.)

Operating result declined to a loss of
1,203 million,
with special items  mainly impairment charges,
restructuring expenses and items related to portfolio
changes  having a
2,585 million
net negative effect. For a breakdown of these special items,
see  Overview  Introduction 
Impairment, unscheduled amortization and restructuring
charges. Excluding these items, however, operating profit
climbed by 66.9 percent to
1,382 million.
Operating profit from continuing operations was
47.2 percent below 2002s level.

Non-Operating Result

The non-operating result declined to an expense
of
791 million,
due particularly to a drop in the net result of investments in
affiliated companies to an expense of
93 million.
This decrease was attributable to write-downs of our investments
in DyStar and Curagen and a net loss position for companies
included at equity. The principal item of non-operating income
was the
190 million
tax-free gain from the sale of our equity interest in Millennium
Pharmaceuticals.

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Income (Loss) Before Income Taxes

We incurred a loss before income taxes of
1,994 million
in 2003, as compared with income before income taxes of
956 million
in 2002.

Income Taxes

We recognized an income tax credit of
645 million
in 2003, as compared with a credit of
107 million
in 2002. The tax rate for our Group was 32 percent. The tax
result was composed of income taxes paid or payable of
607 million,
offset by deferred tax changes that led to a net credit of
1,252 million.

Net Loss

The Group recorded a
1,361 million
net loss.

2002 compared with 2001

Net Sales

Our net sales were down by
651 million
in 2002, a decrease of 2.2 percent. Currency movements and
price declines reduced sales by 4.8 percent and
2.4 percent, respectively, while portfolio
changes  particularly the acquisition of Aventis
CropScience  added 5.4 percent.

Sales in our Pharmaceuticals, Biological Products
segment decreased 16.8 percent in 2002 to
4,767 million.
Sales in our Consumer Care, Diagnostics segment decreased
8.5 percent to
3,755 million.
Sales in our Animal Health segment declined 0.9 percent to
850 million,
while sales in our CropScience segment increased
65.5 percent, to
4,697 million.
Sales in our Plastics, Rubber segment decreased 3.4 percent
to
5,210 million.
Sales in the Polyurethanes, Coatings, Fibers segment decreased
1.2 percent to
5,213 million.
Sales in our Chemicals segment decreased 16.9 percent to
4,322 million.
See  Segment Data, below, for a more detailed
discussion of the results of each of our business segments.

Gross Profit

Our gross profit decreased 7.1 percent in
2002.

Operating Result

Our operating result fell 3.9 percent to
1,610 million
in 2002 from
1,676 million
in 2001. We incurred special charges of
1,123 million
relating mainly to asset write-downs, restructuring measures and
site consolidations. For a breakdown of these special items,
see  Overview 
Introduction  Impairment, unscheduled
amortization and restructuring charges. Also included here
are provisions established in connection with an agreement
reached with the U.S. federal authorities relating to an
investigation into pharmaceutical product prices. These charges
were partially offset by special income of
1,905 million,
generated mainly by the sale of the Haarmann & Reimer group,
Bayer Wohnungen GmbH and the household insecticides business.
The previous years figure contained
333 million
pertaining to EC Erdölchemie.

The operating result before special items
decreased by 58.4 percent to
828 million.
We attribute this development primarily to additional
depreciation and amortization of goodwill determined and
inventories remeasured in purchase accounting following the
Aventis CropScience acquisition.

In 2002, our selling expenses decreased
4.0 percent, while research and development expenses
increased 0.7 percent. General administration expenses
increased 40.4 percent mainly due to expenses incurred in
connection with the reorganization of the Bayer Group.

Non-Operating Result

Our non-operating loss for 2002 increased
16.6 percent over the previous year, mainly because of the
additional interest expense associated with the financing of the
Aventis CropScience acquisition and also as a

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consequence of securities write-downs. Income
from investments in affiliated companies was sharply higher due
to the sale of our interest in Agfa-Gevaert N.V.


Income Before Income Taxes

Our income before taxes decreased by
14.3 percent from 2001 to
956 million.

Income Taxes

The lower operating result, tax-free income and
deferred tax assets resulted in net tax income of
107 million.
The effective tax rate (i.e., adjusted for tax free
income and expenses) calculated on taxable income was
37.5 percent.

Net Income

Group net income rose by 9.8 percent to
1,060 million.




Segment Data

We use operating result before special items as
an internal reporting measure for our segments in order to
promote comparability from period to period. The special items
we report include primarily expenses relating to impairment
charges, accelerated depreciation, restructuring measures
charged to operating result, costs of facilities shutdowns and
income from divestments. On a consolidated basis, operating
result before special items is considered a non-GAAP financial
measure under applicable rules of the Securities and Exchange
Commission.

Pharmaceuticals, Biological
Products

|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |   |  |        |        |   |  |       |       |  
|---------------------------------------------- | -------------------------- | ------------------- | ----- | ------------- |  | ---- | ----- | ------------- | - | ---- | ----- | ----- | - |  | ------ | ------ | - |  | ----- | ----- | -
|                                               |                            |                     |       | Change from   |  |      |       | Change from   |   |     
|                                               |                            |                     |       | Previous Year |  |      |       | Previous Year |   |     
|                                               |                            | 2001                |       | (%)           |  | 2002 |       | (%)           |   | 2003
|                                               |                            |                     |       |               |  |      |       |               |   |     
|                                               |                            |                    
|                                               |                            | (euros in millions)
|Net sales (external), continuing operations    |                            |                     | 5,034 |               |  |      | (18.8 | )             |   |      | 4,088 |       |   |  | 1.1    |        |   |  | 4,132 |      
|Net sales (external), discontinuing operations |                            |                     | 695   |               |  |      | (2.3  | )             |   |      | 679   |       |   |  | (9.7   | )      |   |  | 613   |      
|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |   |  |        |        |   |  |       |      
|                                               | Total net sales (external) |                     |       | 5,729         |  |      |       | (16.8         | ) |      |       | 4,767 |   |  |        | (0.5   | ) |  |       | 4,745 |  
|Intersegment sales                             |                            |                     | 38    |               |  |      | (13.2 | )             |   |      | 33    |       |   |  | 54.5   |        |   |  | 51    |      
|Operating result from continuing operations    |                            |                     | 191   |               |  |      |      |               |   |      | (75   | )     |   |  | 4.0    |        |   |  | (72   | )    
|Operating result from discontinuing operations |                            |                     | (139  | )             |  |      | 20.1  |               |   |      | (111  | )     |   |  | (218.0 | )      |   |  | (353  | )    
|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |   |  |        |        |   |  |       |      
|                                               | Total operating result     |                     |       | 52            |  |      |       |              |   |      |       | (186  | ) |  |        | (128.5 | ) |  |       | (425  | )
|Special items                                  |                            |                     | (321  | )             |  |      | (3.7  | )             |   |      | (333  | )     |   |  | (149.8 | )      |   |  | (832  | )    
|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |   |  |        |        |   |  |       |      
|Operating result before special items          |                            |                     | 373   |               |  |      | (60.6 | )             |   |      | 147   |       |   |  | 176.9  |        |   |  | 407   |      

The primary special items were as follows:

|     |  |                                                                                                                                      |  |                     |      |  
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------- | ---- | -
|Year |  | Nature of special item                                                                                                               |  | Income/charge      
|     |  |                                                                                                                                      |  |                    
|     |  |                                                                                                                                      |  | (euros in millions)
|2001 |  | Write-downs of inventories and recall charges in
    connection with Lipobay/Baycol                                                  |  |                     | (328 | )
|2002 |  | Legal provisions for settlement with
    U.S. authorities in the context of an investigation into
    pharmaceuticals product prices |  |                     | (272 | )
|     |  | Restructurings and write-downs                                                                                                       |  |                     | (49  | )
|2003 |  | Charges taken on the basis of the final agreement
    reached with the majority of insurers in connection with
    Lipobay/Baycol    |  |                     | (300 | )
|     |  | Impairments and write-downs of plasma business                                                                                       |  |                     | (317 | )
|     |  | Shutdown costs                                                                                                                       |  |                     | (171 | )

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2003 compared with 2002

Sales of the Pharmaceuticals, Biological Products
segment, at
4,745 million
in 2003, almost matched the
4,767 in sales
of the previous year. Sales increased, however, in local
currency terms. Had the average exchange rates we used to
translate our non-euro denominated revenues into euros stayed
constant in 2003 as compared with 2002 rather than declining as
they in fact did, our net sales in the Pharmaceuticals,
Biological Products segment would have been
542 million
higher, and would have risen by 11.4 percent in comparison
with 2002.

Sales growth in the Pharmaceuticals Division was
to a large extent driven by the successful introduction of the
erectile dysfunction drug Levitra®, which is now
being marketed in the United States, Europe, numerous South
American countries and the Asia/Pacific region. In the United
States  the most significant market for
Levitra®  the product had already
captured a 16 percent share of new prescriptions by the end
of 2003, according to the data published by International
Medical Statistics (IMS) Dataview. Levitra® also
made inroads in new prescriptions in other major markets.
Levitra® accounted for
144 million
of net sales in 2003, its first year on the market. We are
engaged in a dispute with Pfizer, Inc., in which Pfizer claims
that the sale of Levitra® infringes upon
Pfizers U.S. patent relating to products for the
treatment of erectile dysfunction. See Item 8, Financial
Information  Legal Proceedings  Patent
validity challenges and infringement proceedings; patent-related
antitrust actions  Vardenafil-related actions.
Sales of the respiratory antibiotic
Avalox®/Avelox® continued to expand in a
highly competitive environment, with sales of this product
rising by 6.8 percent to
299 million.
Had the average exchange rates we used to translate our non-euro
denominated revenues into euros stayed constant in 2003 as
compared with 2002, sales of this product would have shown a
20.4 percent increase. The increased net sales attributable
to Levitra® and
Avalox®/Avelox® were offset in part by a
decline in sales of the antihypertensive drug
Adalat®, which fell by 15.5 percent to
676 million
due to increased competition from producers of generic
substitutes, particularly in the United States. Had the average
exchange rates we used to translate our non-euro denominated
revenues into euros stayed constant in 2003 as compared with
2002, Adalat sales would have declined by 7.6 percent.
Sales of our anti-infective
Ciprobay®/Cipro®, our largest volume
health care product in terms of net sales, remained constant at
the high level of
1,411 million,
with sales in local currencies terms rising by
14.2 percent. The increase was mainly attributable to
continued strong demand in the United States, especially product
sales to the U.S. generics manufacturer Barr Laboratories
and the introduction of the once-daily formulation
Cipro® XR for the treatment of urinary tract
infections. Following the expiration of the U.S. patent for
Cipro®, the Food and Drug Administration extended
Bayers exclusive right to market the antibiotic
Cipro® (for twice-daily administration) in the
United States until June 2004. We expect the net sales
attributable to Cipro® to decline in coming periods
as generic products erode its market share in the absence of
patent protection. Complementing our cardiovascular risk
management portfolio is the innovative in-licensed
antihypertensive drug
Kinzalmono®/Kinzalkomb®, which has been
launched in several European countries, including Germany and
Switzerland.

Due to substantially increased releases of
product and volumes sold, our sales of Kogenate®,
our recombinant Factor VIII clotting factor, expanded by
24.3 percent in 2003, or
97 million,
to
497 million.
Had exchange rates stayed consistent, our sales of
Kogenate® would have risen by 33.4 percent,
partly, we believe, as a result of increases in market share,
particularly in the United States and Japan.

The market where we view our growth prospects the
most optimistically for Pharmaceuticals and Biological Products
is North America. However, sales (in euro terms) in the North
American market, as well as in the Asia/Pacific and Latin
America/ Africa/ Middle East regions, were adversely affected in
2003 by the unfavorable exchange rate movements described above.
Net sales in Europe remained essentially steady in 2003 as
compared to 2002.

We expect our sales environment to be
increasingly challenging. European pharmaceutical companies are
operating in an increasingly difficult environment marked by
ongoing cost-containment measures in the health care sector. In
the United States, while the market for our products continues
to develop favorably overall, there is a growing debate about
ways to reduce expenditure on drugs, for example through
reimports. In Japan, market growth in 2003 was considerably
slower than in the United States or Europe. Developments like
these may reduce the prices we can charge for our products in
these important markets and, if we are unable to reduce our
costs proportionally, may adversely affect our results of
operations.

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Operating result before special items for the
segment grew by
260 million,
or 176.9 percent, in 2003, to
407 million,
due mainly to the upward trend in the Pharmaceuticals Division
and the Kogenate® business of the Biological
Products Division. In Pharmaceuticals, the improvement was also
aided by cost reductions achieved through closures and
relocations of production facilities and the consolidation of
research activities. Additional contributing factors in the
Biological Products Division were increases in the efficiency of
some of our production processes and improved cost structures
for Kogenate®.

Special items in 2003 comprised primarily
impairments of the plasma business of our Biological Products
Division and charges in respect of the shutdowns of our research
centers in Kyoto, Japan, the termination of research activities
in Berkeley, California and of a production facility in West
Haven, Connecticut. We charged
300 million
in respect of the agreement reached with a majority of our
insurers in connection with Lipobay/Baycol.SeeItem 8  Legal Proceedings.

To further streamline our portfolio, we intend to
divest the plasma business. These activities are therefore
reported as discontinuing operations. The Kogenate®
business is not affected by this decision.

2002 compared with 2001

Sales in our Pharmaceuticals, Biological Products
segment declined by 16.8 percent in 2002. Sales in the
Pharmaceuticals business group decreased 22.9 percent, or
1,096 million,
to
3,688 million.
We attribute this development primarily to the withdrawal of the
cholesterol-lowering drug Lipobay/Baycol (which accounted
for net sales of
367 million
in 2001) and to lower sales of the antibiotic
Ciprobay®/Cipro®, for which demand had
been particularly high in the previous year due to its
indication for anthrax (Ciprobay®/Cipro®
sales were
1,411 million
in 2002, a 28.2 percent decline from the
1,964 million
in 2001). Also, sales of the antihypertensive
Adalat® were down, due to increased competition from
generic products. The drivers behind the growth in
Pharmaceuticals that offset the above mentioned declines in part
were the respiratory antibiotic
Avalox®/Avelox® and the cardiovascular
drug Aspirin Cardio®. Sales in the Biological
Products business group expanded by 14.2 percent, or
134 million,
to
1,079 million.
This was due primarily to significant growth in volumes for our
Kogenate® clotting factor.

The segments operating result before
special items decreased to
147 million
in 2002 from
373 million,
a change of 60.6 percent from 2001. We attribute this
development primarily to lower sales of Cipro® and
Adalat®, and the market withdrawal of
Lipobay/Baycol.

In 2002, we incurred special charges of
333 million.
More than half this amount represented provisions for expected
payments under an agreement being negotiated with
U.S. federal authorities. This agreement, which concerned
an investigation into pharmaceutical product prices, has since
been finalized.

Consumer Care, Diagnostics

|                                      |  |                     |       |               |  |      |      |               |  |      |       |  |  |  |       |   |  |  |       | 
|------------------------------------- |  | ------------------- | ----- | ------------- |  | ---- | ---- | ------------- |  | ---- | ----- |  |  |  | ----- | - |  |  | ----- | 
|                                      |  |                     |       | Change from   |  |      |      | Change from   |  |     
|                                      |  |                     |       | Previous Year |  |      |      | Previous Year |  |     
|                                      |  | 2001                |       | (%)           |  | 2002 |      | (%)           |  | 2003
|                                      |  |                     |       |               |  |      |      |               |  |     
|                                      |  |                    
|                                      |  | (euros in millions)
|Net sales (external)                  |  |                     | 4,104 |               |  |      | (8.5 | )             |  |      | 3,755 |  |  |  | (11.2 | ) |  |  | 3,336 | 
|Intersegment sales                    |  |                     | 2     |               |  |      | 0    |               |  |      | 2     |  |  |  | 100.0 |   |  |  | 4     | 
|Operating result                      |  |                     | 342   |               |  |      | 76.0 |               |  |      | 602   |  |  |  | (2.2  | ) |  |  | 589   | 
|Special items                         |  |                     | (40   | )             |  |      |     |               |  |      | 214   |  |  |  | 25.2  |   |  |  | 268   | 
|Operating result before special items |  |                     | 382   |               |  |      | 1.6  |               |  |      | 388   |  |  |  | (17.3 | ) |  |  | 321   | 

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The primary special items were as follows:

|     |  |                                                                       |  |                     |     |  
|---- |  | --------------------------------------------------------------------- |  | ------------------- | --- | -
|Year |  | Nature of special item                                                |  | Income/charge      
|     |  |                                                                       |  |                    
|     |  |                                                                       |  | (euros in millions)
|2001 |  | Voluntary discontinuation of marketing of PPA
    containing products |  |                     | (25 | )
|2002 |  | Divestment of household insecticides                                  |  |                     | 272 |  
|     |  | Shutdown and restructuring charges                                    |  |                     | (44 | )
|2003 |  | Divestment of household insecticides                                  |  |                     | 256 |  

Sales of the Consumer Care Division declined by
18.2 percent, or
313 million,
to
1,403 million,
mainly due to the divestment of the household insecticides
business and the strength of the euro. Of this change,
272 million
related to the divestment of the household insecticides
business, the net sales of which were
345 million
in 2002 and
73 million
in 2003 (up to the effective date of the divestment). The rise
of the euro against non-euro currencies led to a decline of
100 million
in net sales. Excluding the net sales relating to this divested
business in both years, and had we translated our non-euro
denominated net sales at the average exchange rates applicable
in 2002 rather than those applicable in 2003, net sales would
have increased by 11.6 percent. This business thus expanded
much faster than the market, which, according to our internal
estimate based on regional Information Resources Inc. (IRI) and
IMS data, grew by 3 percent.

In the United States, the market in which the
Consumer Care division has grown most significantly in recent
periods, we successfully launched our One-A-Day®
Weight Smart vitamin product, which posted sales of
60 million
in its first year on the market. In the United States, sales of
our analgesic Aleve® advanced by 18.8 percent
in local currency terms (but fell 0.7 percent in euro
terms), boosting our share of the market for over-the-counter
pain relievers according to IRI. Sales of the Diagnostics
Division were down by 5.2 percent, or
106 million,
to
1,933 million.
Adjusting for the
209 million
decline in Diagnostic net sales attributable to the above
mentioned changes in exchange rates, net sales of the
Diagnostics Division would have increased 5.1 percent.
Sales of our Professional Testing products increased
10.6 percent, also in local currency terms, while
ADVIA® Centaur experienced a
24.4 percent sales increase in local currency terms and a
13.8 percent increase, to
387 million,
in euro terms.

Sales in Self-Testing declined by
14.2 percent, to
626 million,
due to negative currency effects and heightened competitive
pressure, with the United States and Europe accounting for most
of the decline. We are hopeful that the new
Ascensia® diabetes care systems we introduced in
mid-2003 will help to improve our market position in
Self-Testing once again. In the German market,
Ascensia® Contour, on the basis of IRI data,
appeared to be gaining market share by the end of 2003.

Based on our industry research (in turn based on
IRI and IMS), sales of over-the-counter (OTC) non-prescription
products generally developed well in 2003, with particularly
strong growth in the United States due to several drugs
attaining non-prescription status. Sales also increased due to a
strong cold and flu season in Europe and North America. On the
other hand, the over-the-counter drugs business in Europe
continued to be hampered by the effects of health care reforms.
The global diagnostic products industry grew more slowly than in
the preceding years, the main reasons being the negative trend
for blood glucose monitoring systems, particularly in the United
States, and the weak economy in our principal markets for these
products.

Operating result for the Consumer Care,
Diagnostics segment slipped by 2.2 percent to
589 million,
marred by the lower sales in Self-Testing and adverse currency
factors. We successfully completed the divestment of the
household insecticides business, initiated in 2002, to
U.S.-based SC Johnson & Son, Inc. Of the total gain of
528 million
on this sale, we realized
256 million
in 2003.

The special items in both 2003 and 2002 related
mostly to gains on our sale of the household insecticide
business.

2002 compared with 2001

Sales in our Consumer Care, Diagnostics segment
decreased by 8.5 percent in 2002, from
4,104 million
in 2001 to
3,755 million
in 2002. Currency depreciation in Latin America and inventory
reduction by North

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American drug suppliers caused sales of the
Consumer Care business group to decline by 18.1 percent, or
379 million,
to
1,716 million.
Sales of the Diagnostics business group rose by
1.5 percent, or
30 million,
to
2,039 million,
driven mainly by growth in laboratory diagnostic systems and
nucleic acid diagnostics.


The segments operating result before
special items increased to
388 million
in 2002, a change of 1.6 percent from 2001. This increase
was a result of improved business performance of Diagnostics in
North America, as well as costs saved through CURE, our internal
restructuring program.

The net special income of
214 million
was primarily related to the sale of Consumer Cares
household insecticides business.

Animal Health

|                                      |  |                     |     |               |  |      |       |               |  |      |     |   |  |  |       |   |  |  |     | 
|------------------------------------- |  | ------------------- | --- | ------------- |  | ---- | ----- | ------------- |  | ---- | --- | - |  |  | ----- | - |  |  | --- | 
|                                      |  |                     |     | Change from   |  |      |       | Change from   |  |     
|                                      |  |                     |     | Previous Year |  |      |       | Previous Year |  |     
|                                      |  | 2001                |     | (%)           |  | 2002 |       | (%)           |  | 2003
|                                      |  |                     |     |               |  |      |       |               |  |     
|                                      |  |                    
|                                      |  | (euros in millions)
|Net sales (external)                  |  |                     | 858 |               |  |      | (0.9  | )             |  |      | 850 |   |  |  | (7.1  | ) |  |  | 790 | 
|Intersegment sales                    |  |                     | 4   |               |  |      | (75.0 | )             |  |      | 1   |   |  |  | 700.0 |   |  |  | 8   | 
|Operating result                      |  |                     | 162 |               |  |      | 4.9   |               |  |      | 170 |   |  |  | 0     |   |  |  | 170 | 
|Special items(1)                      |  |                     | 0   |               |  |      |      |               |  |      | (11 | ) |  |  |      |   |  |  | 22  | 
|Operating result before special items |  |                     | 162 |               |  |      | 11.7  |               |  |      | 181 |   |  |  | (18.2 | ) |  |  | 148 | 



---



|    |                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Special items were accounted for primarily by
    gains from the disposal of the rights to the
    Bayovac®/Baypamun® products in 2003 and charges
    in 2002 for a writedown on an enterprise management system.

2003 compared with 2002

Sales of the Animal Health segment fell by
7.1 percent, or
60 million,
to
790 million,
due primarily to negative currency effects. Had exchange rates
not changed as they did and our non-euro denominated net sales
had been translated into euro at the same exchange rates as in
2002, our net sales would have been
40 million
higher than as reported, and sales would have risen by
4.7 percent. This currency-adjusted positive performance
resulted primarily from the successful launch in North America
of the new antiparasitic treatment Advantix®. Sales
in Europe remained at the previous years level. We
experience declines in net sales in our other regions primarily
due to the negative currency movements.

As part of our ongoing portfolio adjustments, the
rights to the Bayovac®/Baypamun®
products were sold to Pfizer Animal Health in December 2003.

We believe that the global market for animal
health products continued to grow at a moderate pace in 2003; we
observed more positive trends in North America, Europe and
Japan. The Companion Animals market segment continued to expand
at a rate in excess of underlying economic growth in its major
markets. By contrast, the Livestock market segment stagnated,
primarily because of sustained pressure on prices through
increased use of generic products in agricultural production and
the increasing effects of regulatory barriers to the use of
veterinary medicines.

Operating result before special items fell by
33 million
as a result of exchange rate developments, where the negative
impact on sales out weighed the positive impact of translating
non-euro denominated costs into euro, as well as due to expenses
for the Advantix® and other new product
introductions.

2002 compared with 2001

Animal Healths sales, at
850 million,
essentially matched sales from the previous year. While business
was hampered by lower demand for the antiparasitic treatment
Advantage® and the economic crisis in Argentina, we
successfully launched the new antiparasitic treatment
Advantix® in December 2002 in North America.

88



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##### Table of Contents



The operating result before special items
increased to
181 million
in 2002, a change of 11.7 percent from 2001. The primary
factors driving this positive development were a change in
product mix and cost savings.

CropScience

|                                      |  |                     |       |               |  |      |       |               |  |      |       |   |  |  |       |   |  |  |       |  
|------------------------------------- |  | ------------------- | ----- | ------------- |  | ---- | ----- | ------------- |  | ---- | ----- | - |  |  | ----- | - |  |  | ----- | -
|                                      |  |                     |       | Change from   |  |      |       | Change from   |  |     
|                                      |  |                     |       | Previous Year |  |      |       | Previous Year |  |     
|                                      |  | 2001                |       | (%)           |  | 2002 |       | (%)           |  | 2003
|                                      |  |                     |       |               |  |      |       |               |  |     
|                                      |  |                    
|                                      |  | (euros in millions)
|Net sales (external)                  |  |                     | 2,838 |               |  |      | 65.5  |               |  |      | 4,697 |   |  |  | 22.7  |   |  |  | 5,764 |  
|Intersegment sales                    |  |                     | 102   |               |  |      | (11.8 | )             |  |      | 90    |   |  |  | (23.3 | ) |  |  | 69    |  
|Operating result                      |  |                     | 490   |               |  |      |      |               |  |      | (108  | ) |  |  |      |   |  |  | 324   |  
|Special items                         |  |                     | 0     |               |  |      |      |               |  |      | 67    |   |  |  |      |   |  |  | (81   | )
|Operating result before special items |  |                     | 490   |               |  |      |      |               |  |      | (175  | ) |  |  |      |   |  |  | 405   |  

The primary special items were as follows:

|     |  |                                                                          |  |                     |      |  
|---- |  | ------------------------------------------------------------------------ |  | ------------------- | ---- | -
|Year |  | Nature of special item                                                   |  | Income/charge      
|     |  |                                                                          |  |                    
|     |  |                                                                          |  | (euros in millions)
|2002 |  | Restructuring related to the Aventis CropScience
    acquisition         |  |                     | (89  | )
|     |  | Gains on divestments relating to the Aventis
    CropScience acquisition |  |                     | 172  |  
|2003 |  | Restructuring related to the Aventis CropScience
    acquisition         |  |                     | (102 | )
|     |  | Gains on sale of the prior Bayer CropScience
    products                |  |                     | 46   |  

2003 compared with 2002

Sales of the CropScience subgroup climbed by
22.7 percent to
5,764 million
largely because of the Aventis CropScience acquisition. Exchange
rates had an offsetting negative effect. Had we translated our
non-euro denominated revenues in 2003 at 2002s average
exchange rates, we would have had
605 million
more net sales in 2003 than reported. Adjusted for the Aventis
CropScience acquisition and these currency effects, our net
sales would have grown by 11.8 percent.

Sales of the Crop Protection Business Group rose
by 20.0 percent to
4,801 million.
This increase was mainly due to acquisitions and a significant
increase in sales of our top products. Sales of our
Confidor®/Gaucho®/Admire®/Merit®
insecticide/seed treatment/environmental science products grew
by 5.2 percent to
590 million,
with the largest increases being recorded in Germany, France and
Brazil. Net sales of our Folicur®/Raxil®
fungicides/seed treatment products also increased considerably,
advancing by 21.2 percent to
315 million,
mainly due to higher volumes in the United States and Brazil.
Sales of Folicur®/Raxil® more than
doubled in each of these countries. Our Flint®
fungicide also fulfilled our growth expectations, with sales
gaining 25.8 percent to
200 million.
In light of this products effectiveness against the Asian
rust fungus, there was particularly high demand in Brazil for
its new formulations Stratego® for soybeans and
Sphere® for coffee crops.

Sales of the products acquired with the Aventis
CropScience transaction, notably
Puma®/Accord® and Basta®,
also developed well.

Envidor®, our
new broad-spectrum acaricide for use in perennial crops, was
successfully launched in Japan and Brazil in 2003. The new seed
treatment Poncho® had a good start following its
registration in the United States, already accounting for a
significant share of sales of the Seed Treatment unit
(4.6 percent) in its first year on the market.

Net sales of the Environmental Science Business
Group improved by 14.4 percent to
692 million.
This was mainly due to the products Merit®,
MaxForce®, Premise®,
Deltagard® and K-Othrine®, as well as to
the performance of the
Bayer-Advanced®/Bayer-Garden®-line.

The BioScience Business Groups net sales
increased to
271 million.
Sales of our vegetable seeds developed favorably, as did our
cotton and canola seed products in the United States and Canada.
FiberMax® and InVigor® achieved
particularly large sales increases.

89



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##### Table of Contents



In 2003, we proceeded with the integration of
Aventis CropScience, which is now largely complete. With the
exception of the active substance propoxycarbazone, we have now
effected all of the individual product divestitures mandated by
the antitrust authorities.

The net sales of Bayer CropScience developed well
in North America, Latin America, Europe, Africa and the Middle
East, while sales in Japan and South Korea were below
expectations. This was largely due to the varying market
developments in these regions. In our assessment, the global
market for crop protection products  measured in
local currencies  did not change significantly in
size from the previous year, although regional differences were
significant. Measured in euros, however, there was a downward
trend in 2003 due to the sharp rise in the value of the euro
against the U.S. dollar and other currencies. Net sales in
Europe were impacted by the exceptionally dry weather, the main
effect of which was lower fungicide usage. Volumes decreased in
the important markets of France and Germany, with agriculture in
eastern Europe also affected by the drought. The North American
market benefited from favorable weather patterns and good
growing conditions along with a high level of insect
infestation. Prices, however, remained in decline. Developments
in the Asia/Pacific region included a further reduction in rice
acreages in Japan and South Korea, which caused the market for
crop protection products to shrink. However, the markets of both
Australia and India recovered from the adverse climatic
conditions of the previous year. In Latin America, economic
conditions generally stabilized in 2003, leading to increased
usage of crop protection products.

Our operating result in CropScience reversed from
a loss of
108 million
to a positive
324 million
despite negative currency effects, the growth in earnings being
mainly due to higher sales. While special items in 2002
comprised mainly the proceeds of individual product divestments,
in 2003 they included primarily restructuring charges relating
to the integration of the Aventis CropScience business.
Operating result before special items improved by
580 million
to
405 million.

2002 compared with 2001

The acquisition of Aventis CropScience allowed
CropScience to increase sales by 65.5 percent to
4,697 million
in 2002 from
2,838 million
in 2001. Disregarding the Aventis CropScience acquisition, sales
decreased by 4.1 percent, mainly because of the weak
economy in Latin America and a weather-related demand reduction
in North America, Australia and Asia.

The segments operating result before
special items fell to a loss of
175 million
in 2002. This is attributable to additional depreciation and
amortization of goodwill and write-downs of inventory in
connection with the Aventis CropScience acquisition. Following
the acquisition, operating result was also reduced by
integration costs. The net special income was
67 million.
The special items were primarily from the sale of the Everest,
Goltix and Herold products
(172 million)
and for restructuring programs.

Plastics, Rubber

|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |  |  |          |      |   |  |       |       |  
|---------------------------------------------- | -------------------------- | ------------------- | ----- | ------------- |  | ---- | ----- | ------------- | - | ---- | ----- | ----- |  |  | -------- | ---- | - |  | ----- | ----- | -
|                                               |                            |                     |       | Change from   |  |      |       | Change from   |   |     
|                                               |                            |                     |       | Previous Year |  |      |       | Previous Year |   |     
|                                               |                            | 2001                |       | (%)           |  | 2002 |       | (%)           |   | 2003
|                                               |                            |                     |       |               |  |      |       |               |   |     
|                                               |                            |                    
|                                               |                            | (euros in millions)
|Net sales (external), continuing operations    |                            |                     | 1,707 |               |  |      | 9.7   |               |   |      | 1,873 |       |  |  | (8.3     | )    |   |  | 1,717 |      
|Net sales (external), discontinuing operations |                            |                     | 3,689 |               |  |      | (9.5  | )             |   |      | 3,337 |       |  |  | (7.2     | )    |   |  | 3,096 |      
|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |  |  |          |      |   |  |       |      
|                                               | Total net sales (external) |                     |       | 5,396         |  |      |       | (3.4          | ) |      |       | 5,210 |  |  |          | (7.6 | ) |  |       | 4,813 |  
|Intersegment sales                             |                            |                     | 116   |               |  |      | (0.9  | )             |   |      | 115   |       |  |  | (33.9    | )    |   |  | 76    |      
|Operating result from continuing operations    |                            |                     | 208   |               |  |      | (40.4 | )             |   |      | 124   |       |  |  | (59.7    | )    |   |  | 50    |      
|Operating result from discontinuing operations |                            |                     | 6     |               |  |      |      |               |   |      | (48   | )     |  |  | (1,391.7 | )    |   |  | (716  | )    
|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |  |  |          |      |   |  |       |      
|                                               | Total operating result     |                     |       | 214           |  |      |       | (64.5         | ) |      |       | 76    |  |  |          |     |   |  |       | (666  | )
|Special items                                  |                            |                     | (70   | )             |  |      | (30.0 | )             |   |      | (91   | )     |  |  | (551.6   | )    |   |  | (593  | )    
|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |  |  |          |      |   |  |       |      
|Operating result before special items          |                            |                     | 284   |               |  |      | (41.2 | )             |   |      | 167   |       |  |  |         |      |   |  | (73   | )    

90



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##### Table of Contents



The primary special items were as follows:

|     |  |                        |  |                     |      |  
|---- |  | ---------------------- |  | ------------------- | ---- | -
|Year |  | Nature of special item |  | Income/charge      
|     |  |                        |  |                    
|     |  |                        |  | (euros in millions)
|2001 |  | Facilities shutdowns   |  |                     | (26  | )
|     |  | Restructuring charges  |  |                     | (28  | )
|2002 |  | Facilities shutdowns   |  |                     | (67  | )
|     |  | Restructuring charges  |  |                     | (11  | )
|2003 |  | Impairment charges     |  |                     | (463 | )

Sales of the Plastics, Rubber segment fell by
7.6 percent in 2003 to
4,813 million
from
5,210 million
in 2002. Had we translated our non-euro denominated net sales
into euro at the average exchange rates applicable in 2002, our
net sales would have been
355 million
higher, which would have given rise to a decrease in net sales
of 0.8 percent. Thermoplastic Polymers was down by
5.1 percent to
2,842 million,
mainly because of increased pressure on prices and adverse
currency fluctuations. Rubber Polymers sales dropped by
11.0 percent to
1,971 million
from
2,215 million
in 2002, due also to selling price erosion as well as to
unfavorable economic conditions in Europe. Sales were also lower
as a result of the divestiture in May 2003 of PolymerLatex,
which posted sales of
179 million
in the previous year and
62 million
in 2003 until the date of its divestiture.

Sales in Europe declined by 3.6 percent to
2,337 million.
Disregarding the divestiture of the PolymerLatex business, sales
rose slightly despite economic stagnation in Europe that led to
lower production in most customer industries.

In North America, sales fell by 15.3 percent
to
1,186 million,
particularly because of currency effects. Although sales of
polycarbonates advanced due to higher demand from the
electronics sector, this did not offset the decline in sales of
styrenics and rubber polymers that was due mainly to lower
demand from the automotive industry.

In the Asia/Pacific region, sales in euro terms
were down, dropping by
95 million,
or 8.9 percent, to
975 million.
Sales of polycarbonates increased while other products recorded
lower sales in a volume sufficient to offset the growth in
polycarbonates.

In Latin America, the downswing in the automotive
sector led particularly to lower sales of rubber polymers.

Operating result for the Plastics, Rubber segment
fell to a loss of
666 million
in 2003, due primarily to
463 million
in impairment charges and to
130 million
in other special items, which primarily comprised restructuring
expenses. Operating result before special items fell to a loss
of
73 million.
This was attributable mainly to declining selling prices and
higher raw material and energy costs.

In light of the strategic realignment of the
Bayer Group and the changing business conditions for some parts
of the Plastics, Rubber segment, we determined that it was
necessary to carry out impairment tests on the relevant assets
in accordance with IAS 36. A further reason for reviewing asset
valuations was a further weaker-than-expected performance by
some of the Plastics, Rubber segments businesses that we
now believe will be of lasting effect. The
Acrylonitrile-Butadiene-Styrene business, in particular, was
affected by the ongoing relocation of important customer
industries to Asia. Economic conditions for our European and
North American locations in the field of solid rubber were
characterized by only slow growth. Increased raw material and
energy costs had a further negative impact. Overcapacities in
some markets served by the Plastics, Rubber segment led to
fierce competition, with substantial declines in prices and
margins clouding prospects for future development. The related
impairment charges amounted to
463 million.



| |                        
| | -----------------------
| | 2002 compared with 2001

In 2002, sales of our Plastics, Rubber segment
decreased by 3.4 percent. Thermoplastics Polymers had sales
of
2,995 million,
and Rubber Polymers had sales of
2,215 million
in 2002. The decline in Thermoplastics Polymers sales was mainly
a result of price pressure in Asia and the change in exchange
rates.

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The segments operating result before
special items decreased to
167 million
in 2002, a decline of 41.2 percent from 2001. We attribute
this development primarily to a fall in prices, a decrease in
volume in the Rubber business and idle plant expenses. We
incurred special charges of
91 million.
These charges were primarily due to restructuring of our Butyl
and Polybutadiene businesses.

Polyurethanes, Coatings,
Fibers

|                                               |                            |                     |       |               |  |      |        |               |   |      |       |       |   |  |          |        |   |  |       |       |  
|---------------------------------------------- | -------------------------- | ------------------- | ----- | ------------- |  | ---- | ------ | ------------- | - | ---- | ----- | ----- | - |  | -------- | ------ | - |  | ----- | ----- | -
|                                               |                            |                     |       | Change from   |  |      |        | Change from   |   |     
|                                               |                            |                     |       | Previous Year |  |      |        | Previous Year |   |     
|                                               |                            | 2001                |       | (%)           |  | 2002 |        | (%)           |   | 2003
|                                               |                            |                     |       |               |  |      |        |               |   |     
|                                               |                            |                    
|                                               |                            | (euros in millions)
|Net sales (external), continuing operations    |                            |                     | 5,047 |               |  |      | (0.7   | )             |   |      | 5,014 |       |   |  | (1.9     | )      |   |  | 4,917 |      
|Net sales (external), discontinuing operations |                            |                     | 228   |               |  |      | (12.7  | )             |   |      | 199   |       |   |  | (16.1    | )      |   |  | 167   |      
|                                               |                            |                     |       |               |  |      |        |               |   |      |       |       |   |  |          |        |   |  |       |      
|                                               | Total net sales (external) |                     |       | 5,275         |  |      |        | (1.2          | ) |      |       | 5,213 |   |  |          | (2.5   | ) |  |       | 5,084 |  
|Intersegment sales                             |                            |                     | 138   |               |  |      | (43.5  | )             |   |      | 78    |       |   |  | 165.4    |        |   |  | 207   |      
|Operating result from continuing operations    |                            |                     | 170   |               |  |      |       |               |   |      | (35   | )     |   |  | (1,177.1 | )      |   |  | (447  | )    
|Operating result from discontinuing operations |                            |                     | (17   | )             |  |      | (482.4 | )             |   |      | (99   | )     |   |  | 32.2     |        |   |  | (67   | )    
|                                               |                            |                     |       |               |  |      |        |               |   |      |       |       |   |  |          |        |   |  |       |      
|                                               | Total operating result     |                     |       | 153           |  |      |        |              |   |      |       | (134  | ) |  |          | (283.6 | ) |  |       | (514  | )
|Special items                                  |                            |                     | (85   | )             |  |      | (340.0 | )             |   |      | (374  | )     |   |  | (109.9   | )      |   |  | (785  | )    
|                                               |                            |                     |       |               |  |      |        |               |   |      |       |       |   |  |          |        |   |  |       |      
|Operating result before special items          |                            |                     | 238   |               |  |      | 0.8    |               |   |      | 240   |       |   |  | 12.9     |        |   |  | 271   |      

The primary special items were as follows:

|     |  |                        |  |                     |      |  
|---- |  | ---------------------- |  | ------------------- | ---- | -
|Year |  | Nature of special item |  | Income/charge      
|     |  |                        |  |                    
|     |  |                        |  | (euros in millions)
|2001 |  | Restructuring charges  |  |                     | (39  | )
|2002 |  | Impairment charges     |  |                     | (289 | )
|     |  | Restructuring charges  |  |                     | (36  | )
|2003 |  | Impairment charges     |  |                     | (671 | )



| |                        
| | -----------------------
| | 2003 compared with 2002

Despite growth in volumes, sales of our
Polyurethanes, Coatings, Fibers segment dropped by
2.5 percent in 2003, particularly as a result of the
decline in non-euro currencies against the euro. Sales of
Polyurethane Materials were down by 0.4 percent to
3,184 million,
while Coatings Materials decreased by 5.8 percent to
1,900 million.
Had we translated our non-euro denominated net sales into euro
at the average exchange rates applicable in 2002, our net sales
would have been
450 million
higher, which would have given rise to an increase in net sales
of 6.2 percent.

Sales in Europe failed to meet our expectations,
increasing by only 2.5 percent as a result of the weak
economy. Our net sales of MDI increased more than our TDI and
polyether polyols businesses, benefiting from higher demand for
heat insulating materials.

In North America, sales dropped by
9.7 percent in euros, to
1,526 million,
but increased by 7.2 percent in local currencies. Our MDI
and TDI businesses benefited from strong growth in the
construction, electrical and electronics industries. Sales of
Coatings Materials were down year on year due to the downturn in
the automotive and furniture industries.

Sales in Asia/Pacific were slightly below the
previous year, at
730 million.
In local currencies, however, net sales improved by
10.6 percent, mainly due to the high growth rates of major
customer industries in this region, particularly in Greater
China, which in turn led to considerably higher sales of
polyurethane raw materials.

Operating result for the Polyurethanes, Coatings,
Fibers segment fell to a loss of
514 million.
Before impairment losses and other special items, operating
result climbed by 12.9 percent to
271 million
as a result of higher volumes and the effects of our
restructuring program. Further increases in raw material costs
and the

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continuing low level of selling prices had a
negative effect. The other special items of
114 million
mainly comprised restructuring charges for our polyether, TDI
and fibers businesses.


Impairment tests resulted in the recognition of
671 million
in impairment losses for the Polyurethanes, Coatings, Fibers
segment. Although impairment losses had already been recognized
in 2002, we determined that a further writedown was necessary in
2003 because our economic assumptions had to be revised downward
in light of these businesses long-term perspectives. The
polyols and fibers businesses were impacted by overcapacities
and continuing strong competitive pressure in all regions,
particularly Asia. The resulting decline in prices, combined
with the sustained high level of raw material costs, have
created constant pressure on margins. Our economic expectations
for other businesses have also declined. The solvent-free powder
coatings business that passed to us with the acquisition of
Sybron Chemicals Inc. in 2000 now operates in a difficult
environment marked by low capacity utilization, slow market
growth and low prices. This business was also hurt by high raw
material and energy costs.



| |                        
| | -----------------------
| | 2002 compared with 2001

In 2002, the net sales of the segment decreased
by 1.2 percent. The Polyurethanes Materials business
entities contributed
3,197 million,
a decrease of 2.3 percent from the previous year, while
Coatings Materials contributed
2,016 million,
up 0.7 percent from 2001.

The segments operating result before
special items increased to
240 million
in 2002, essentially unchanged from 2001. We attribute this
development primarily to increased volumes and the success of
our restructuring programs. We incurred net special charges of
374 million.
These charges were primarily for restructuring programs in
Polyether and Powder Coatings, as well as adjustments to
carrying values of our Polyether and Fibers businesses.

Chemicals

|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |  |  |       |       |   |  |       |       |  
|---------------------------------------------- | -------------------------- | ------------------- | ----- | ------------- |  | ---- | ----- | ------------- | - | ---- | ----- | ----- |  |  | ----- | ----- | - |  | ----- | ----- | -
|                                               |                            |                     |       | Change from   |  |      |       | Change from   |   |     
|                                               |                            |                     |       | Previous Year |  |      |       | Previous Year |   |     
|                                               |                            | 2001                |       | (%)           |  | 2002 |       | (%)           |   | 2003
|                                               |                            |                     |       |               |  |      |       |               |   |     
|                                               |                            |                    
|                                               |                            | (euros in millions)
|Net sales (external), continuing operations    |                            |                     | 1,240 |               |  |      | (23.3 | )             |   |      | 951   |       |  |  | (6.7  | )     |   |  | 887   |      
|Net sales (external), discontinuing operations |                            |                     | 3,961 |               |  |      | (14.9 | )             |   |      | 3,371 |       |  |  | (25.5 | )     |   |  | 2,513 |      
|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |  |  |       |       |   |  |       |      
|                                               | Total net sales (external) |                     |       | 5,201         |  |      |       | (16.9         | ) |      |       | 4,322 |  |  |       | (21.3 | ) |  |       | 3,400 |  
|Intersegment sales                             |                            |                     | 456   |               |  |      | (10.3 | )             |   |      | 409   |       |  |  | (9.5  | )     |   |  | 370   |      
|Operating result from continuing operations    |                            |                     | 167   |               |  |      | (76.7 | )             |   |      | 39    |       |  |  | (56.4 | )     |   |  | 17    |      
|Operating result from discontinuing operations |                            |                     | 360   |               |  |      | 182.8 |               |   |      | 1,018 |       |  |  |      |       |   |  | (516  | )    
|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |  |  |       |       |   |  |       |      
|                                               | Total operating result     |                     |       | 527           |  |      |       | 100.6         |   |      |       | 1,057 |  |  |       |      |   |  |       | (499  | )
|Special items                                  |                            |                     | 222   |               |  |      | 286.0 |               |   |      | 857   |       |  |  |      |       |   |  | (541  | )    
|                                               |                            |                     |       |               |  |      |       |               |   |      |       |       |  |  |       |       |   |  |       |      
|Operating result before special items          |                            |                     | 305   |               |  |      | (34.4 | )             |   |      | 200   |       |  |  | (79.0 | )     |   |  | 42    |      

The primary special items were as follows:

|     |  |                                          |  |                     |      |  
|---- |  | ---------------------------------------- |  | ------------------- | ---- | -
|Year |  | Nature of special item                   |  | Income/ charge     
|     |  |                                          |  |                    
|     |  |                                          |  | (euros in millions)
|2001 |  | Gains on divestment of EC Erdölchemie    |  |                     | 316  |  
|     |  | Loss on divestment of ChemDesign         |  |                     | (70  | )
|2002 |  | Gains on divestment of Haarmann & Reimer |  |                     | 933  |  
|     |  | Restructuring charges                    |  |                     | 53   |  
|2003 |  | Impairment charges                       |  |                     | (476 | )

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| |                        
| | -----------------------
| | 2003 compared with 2002

Bayer Chemicals consists of our Chemicals
segment, which, in turn, is comprised of the Chemicals and H.C.
Starck business groups.

The Bayer Chemicals subgroup had sales of
3,400 million
in 2003, a decline of 21.3 percent from the
4,322 million
in net sales in 2002. Adjusted to exclude the net sales in both
2003 and 2002 relating to our disposals of our organic pigments
business and Walothen GmbH in 2003 and the Haarmann &
Reimer group in 2002 (described below), which together accounted
for
47 million
of net sales in 2003 and
783 million
of net sales in 2002, and had non-euro denominated revenues been
translated into euros at the average exchange rates applicable
in 2002, which would have added
216 million
to our net sales in chemicals, our net sales would have
increased by 0.8 percent despite the lack of a recovery in
major customer industries. We sold our organic pigments business
to Sun Chemicals in the first quarter of 2003 and divested
Walothen GmbH to the Wihuri group of Finland in the fourth
quarter of the year.

Sales of the Industrial Chemicals business
entities declined by 2.5 percent in 2003 to
975 million.
In local currencies, however, sales rose by 3.1 percent,
due largely to growth in basic chemicals. Custom
Manufacturings sales were 12.6 percent below the
previous year at
188 million,
mainly because of increased competition from Asian suppliers in
the agrochemicals area and continuing weakness in the
photographic chemicals market. Process Chemicals saw a drop in
sales, particularly in textile chemicals, with sales down by
16.9 percent to
740 million.
Sales of Functional Chemicals remained steady year on year at
514 million.
Had this business units non-euro sales been translated
into euro at 2002 exchange rates, however, sales of this
business unit would have improved by 5.9 percent, with
volume gains posted in industrial biocides and special material
protection products. Sales of Wolff Walsrode decreased by
3.5 percent to
222 million.
Business at H.C. Starck, also hampered by exchange rates,
receded by 7.1 percent to
564 million.
On a currency-adjusted basis as set forth above, however,
H.C. Starcks sales would have increased by
1.1 percent from the previous year.

The decline in sales in all regions is mainly due
to the fact that the previous years figures contained the
business of the Haarmann & Reimer group up to the date of
its divestiture. In Europe, sales decreased by 15.0 percent
to
1,812 million.
Excluding the Haarmann & Reimer group from the previous
years sales, sales would have declined by 1.0 percent
had non-euro denominated sales of the Europe region been
translated into euro at 2002s exchange rates.

In the other regions, there was an additional
negative effect from currency translations. Business in North
America shrank by 29.4 percent to
622 million.
Adjusted for currency effects, sales would have declined by
16.4 percent. The economy of this region weakened
considerably in the first half of the year as a result of the
Iraq war and the high price of oil. In the second half, however,
consumer spending and growth indicators pointed to an upswing.
This overall economic trend was also reflected in the markets
served by Bayer Chemicals, where sales improved late in the year.

Sales in Asia/Pacific fell by 21.6 percent
to
624 million,
almost entirely attributable to the above mentioned currency and
portfolio effects.

Business in the Latin America/Africa/Middle East
region dropped by 33.5 percent to
342 million.
Most of this decrease was due to currency changes and to the
effect of our disposals. Although this region has basically
overcome the recent stagnation phase, the upward trend was
restrained by a lack of demand in domestic markets and economic
weakness in Mexico and Brazil.

In connection with the realignment of the Bayer
Group and the deterioration in business conditions, we reviewed
and adjusted the business plans of all strategic business
entities. Consideration of current and forecasted market and
competitive conditions, along with a fundamental reappraisal of
the long-term return on past investments, resulted in impairment
losses for Chemicals of
476 million.
These write-downs relate particularly to the fine chemicals
business, where there is sustained pressure on margins resulting
from adverse exchange rates, ongoing consolidation in customer
industries, overcapacities in certain market segments and
increased competition, particularly from Asian suppliers. This
was the main reason for the decline in operating income to a
loss of
499 million.
Adjusted to exclude these impairment charges and restructuring
charges, operating result declined by
158 million
to
42 million.

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| |                        
| | -----------------------
| | 2002 compared with 2001

The decline in Bayer Chemicals sales by
16.9 percent to
4,322 million
is largely the result of the sale of our petrochemicals holdings
and our holdings in ChemDesign Corporation and Covexx Films
Walsrode in 2001 and of our holdings in Haarmann &
Reimer in 2002.

Sales in the Chemicals business group were
3,715 million,
which represented a 15.4 percent decline from the previous
years levels. Negative exchange rate developments and the
generally weak condition of the global economy contributed to
this decline. The 25.2 percent sales decline at H.C.
Starck, to
607 million,
was attributable to greatly reduced demand in the electronics
industry and a deterioration in prices.

Operating result before special items decreased
by 34.4 percent to
200 million.
This decline was primarily caused by H.C. Starcks weak
financial results.

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LIQUIDITY AND CAPITAL RESOURCES 2001, 2002 and
2003

Cash Flows

In recent years, our primary source of liquidity
has been cash from operations. We use cash in investing
activities primarily for acquisitions as well as for additions
to property, plant, equipment and investments; these activities
represented our primary liquidity requirements. Nevertheless, in
2003, we generated cash from investing activities because our
gains on disposals exceeded our capital expenditures. We use
cash in financing activities primarily to retire debt and pay
dividends. At December 31, 2003, we had cash, cash
equivalents and net working capital totaling
7.7 billion.
There are no material legal or economic restrictions on the
ability of member companies of the Bayer Group to transfer funds
to Bayer AG.

The following table summarizes our cash flows in
each of the last three years:

|                                                        |                                  |                     |        |               |   |      |        |               |   |      |        |     |   |  |         |       |   |  |        |      |  
|------------------------------------------------------- | -------------------------------- | ------------------- | ------ | ------------- | - | ---- | ------ | ------------- | - | ---- | ------ | --- | - |  | ------- | ----- | - |  | ------ | ---- | -
|                                                        |                                  |                     |        | Change from   |   |      |        | Change from   |   |     
|                                                        |                                  |                     |        | Previous Year |   |      |        | Previous Year |   |     
|                                                        |                                  | 2001                |        | (%)           |   | 2002 |        | (%)           |   | 2003
|                                                        |                                  |                     |        |               |   |      |        |               |   |     
|                                                        |                                  |                    
|                                                        |                                  | (euros in millions)
|Gross operating cash flow                               |                                  |                     | 3,009  |               |   |      | 2.5    |               |   |      | 3,085  |     |   |  | 5.2     |       |   |  | 3,244  |     
|                                                        | thereof discontinuing operations |                     |        | 433           |   |      |        | (3.9          | ) |      |        | 416 |   |  |         | (45.2 | ) |  |        | 228  |  
|Changes in working capital                              |                                  |                     | 871    |               |   |      | 57.6   |               |   |      | 1,373  |     |   |  | (96.4   | )     |   |  | 49     |     
|Net cash provided by operating activities               |                                  |                     | 3,880  |               |   |      | 14.9   |               |   |      | 4,458  |     |   |  | (26.1   | )     |   |  | 3,293  |     
|                                                        | thereof discontinuing operations |                     |        | 850           |   |      |        | (45.8         | ) |      |        | 461 |   |  |         | (92.8 | ) |  |        | 33   |  
|Net cash provided by (used in) investing
    activities |                                  |                     | (2,132 | )             |   |      | (208.2 | )             |   |      | (6,570 | )   |   |  |        |       |   |  | 460    |     
|                                                        | thereof discontinuing operations |                     |        | (184          | ) |      |        |              |   |      |        | 973 |   |  |         |      |   |  |        | (186 | )
|Net cash provided by (used in) financing
    activities |                                  |                     | (1,570 | )             |   |      |       |               |   |      | 2,171  |     |   |  |        |       |   |  | (1,761 | )   
|                                                        | thereof discontinuing operations |                     |        | (148          | ) |      |        | 59.5          |   |      |        | (60 | ) |  |         |      |   |  |        | 153  |  
|Change in cash and cash equivalents                     |                                  |                     | 178    |               |   |      | (66.9  | )             |   |      | 59     |     |   |  | 3,276.3 |       |   |  | 1,992  |     
|Cash and cash equivalents at beginning of period        |                                  |                     | 491    |               |   |      | 46.4   |               |   |      | 719    |     |   |  | 6.7     |       |   |  | 767    |     
|Change in scope of consolidation                        |                                  |                     | 42     |               |   |      | (90.5  | )             |   |      | 4      |     |   |  | (75.0   | )     |   |  | 1      |     
|Exchange rate movements                                 |                                  |                     | 8      |               |   |      |       |               |   |      | (15    | )   |   |  | (73.3   | )     |   |  | (26    | )   
|Cash and cash equivalents at end of year                |                                  |                     | 719    |               |   |      | 6.7    |               |   |      | 767    |     |   |  | 256.5   |       |   |  | 2,734  |     
|Marketable securities and other instruments             |                                  |                     | 52     |               |   |      | (44.2  | )             |   |      | 29     |     |   |  | 344.8   |       |   |  | 129    |     
|Liquid assets as per balance sheet                      |                                  |                     | 771    |               |   |      | 3.2    |               |   |      | 796    |     |   |  | 259.7   |       |   |  | 2,863  |     

Cash from Operating
Activities

Gross operating cash flow was
3.2 billion
in 2003,
3.1 billion
in 2002 and
3.0 billion
in 2001. Gross operating cash flow increased by
5.2 percent, mainly due to the higher income from
operations partially offset by an increase in income tax
payments due to the fact that 2002s income included
tax-free divestment proceeds. Gross operating cash flow
increased 2.5 percent in 2002.

Net cash provided by operating activities
amounted to
3,293 million,
a 26.1 percent decline from the
4,458 million
in 2002. The 2003 figure reflects a disbursement of
231 million
made following a settlement reached with U.S. authorities
in the context of an investigation into pharmaceutical product
prices. Provisions for these payments had been established in
2002. The decline in cash flow from operations was in other
respects due to the high level of cash flow in 2002. We
initiated a program in 2001 to improve our working capital
management by reducing inventories and improving the collection
of receivables. This had the effect of reducing the base levels
of inventory and receivables, freeing up working capital. We
believe that our working capital levels are sufficient to fund
our present requirements. Net operating cash flow increased in
2002 to
4.5 billion,
14.9 percent above the 2001 level.

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Investing Activities

Net cash of
460 million
was provided by investing activities in 2003, as compared with
net cash used in investing activities of
6,570 million
in 2002. We greatly reduced our capital expenditures in 2003,
with the total investment in property, plant and equipment
falling by 26.2 percent from
2,239 million
in 2002 to 1,653
million in 2003 consistent with our objective of ensuring
stricter capital discipline across the group. The reduction in
capital expenditures corresponds to our target of restructuring
the group, with a concomitant concentration of our capital
expenditures budget. We intend to focus our investments in our
pharmaceutical activities to those befitting a mid-size company
in this industry, concentrate our polymers investments in Asia
and improve our Bayer CropScience activities in both the plants
we previously owned and those acquired from Aventis CropScience.
The capital expenditures that we did make in 2003 were more than
offset by cash receipts from sales of property, plant and
equipment. We received cash of
1,185 million
from the divestments of crop science businesses mandated by the
antitrust authorities in connection with the Aventis CropScience
acquisition and
118 million
from the sale of our interest in PolymerLatex. Further cash from
investments of
258 million
was provided by the divestment of our equity stakes in
Millennium Pharmaceuticals and others. Cash was consumed,
however, by the purchase of the remaining 45.5 percent of
the shares of the Bayer Polymers Sheet Europe group (formerly
Makroform GmbH).

By contrast, 2002 was a year of substantial
investments in acquisitions, with the total cash outflow for
investments totaling
7.8 billion.
Cash disbursements in connection with the Aventis CropScience
acquisition used
6,570 million.
These acquisitions were offset to a small extent by the
714 million
in cash inflow from our sale of shares in Agfa-Gevaert N.V. and
by the
933 million
from our sale of Haarmann & Reimer. The total cash
inflow from the sale of equity stakes and from interest and
dividend receipts, including marketable securities amounted to
1.3 billion
in 2002.

Additions to property, plant and equipment and
intangible assets in 2002 resulted in a cash outflow of
2.2 billion,
while sales of property, plant and equipment led to cash inflow
of
2.1 billion.

The net cash outflow for investing activities
amounted to
2.1 billion
in 2001. Additions to property, plant and equipment and
intangible assets resulted in a cash outflow of
2.6 billion.
Cash outflow for acquisitions amounted to
0.5 billion.
Sales of property, plant and equipment led to a cash inflow of
0.5 billion,
while that from investments, interest and dividend receipts and
from marketable securities amounted to
0.5 billion.

Financing Activities

Net cash used in financing activities was
1,761 million
in 2003, compared with net cash provided by financing activities
of
2,171 million
in 2002. The 2003 outflow resulted primarily from
664 million
in dividend payments,
782 million
in interest payments and
315 million
in net debt retirements. Net borrowings amounted to
5,952 million
at December 31, 2003.

In 2002, dividend payments
(662 million)
and interest payments
(704 million)
totaled
1.4 billion.
Net borrowings amounted to
8.9 billion.

Financing activities led to a net cash outflow of
1.5 billion
in 2001, which comprises mainly the
1.0 billion
dividend payment for 2000 and
0.5 billion
in interest payments.

See  Borrowings, below, for a
discussion of the times our existing debt will mature.

We believe that we have sufficient cash to meet
our foreseeable needs. Additionally, we have ample borrowing
capacity available. To provide flexible short- to medium-term
funding, we established a $5 billion global commercial
paper program and a
2 billion
European Medium-Term Note program in 2000, which we increased to
8 billion
each.

At December 31, 2003, we had approximately
5.8 billion
of total lines of credit, of which
0.5 billion
was used and
5.3 billion
was unused and available for borrowing on an unsecured basis.
The majority of these lines of credit are represented by a
multicurrency syndicated credit facility, which we established
in 2003. When drawing under this facility, we are required to
prove that there has been no material adverse change in our

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financial condition. The facility can be
terminated by the lenders if a change of control of
Bayer AG occurs and the majority of the lenders opt to
terminate the facility.


Capital Expenditures

We generally fund our capital expenditures with
cash flow from operations and, if such funds are not sufficient,
through other cash on hand and from the sale of liquid
investments, including cash equivalents and marketable
securities. We fund any further capital expenditures with
borrowings. Capital expenditures amounted to
1.7 billion
in 2003,
2.4 billion
in 2002 and
2.6 billion
in 2001.

We spent a total of
1.7 billion
for intangible assets, property, plant and equipment in 2003. As
in recent years, the main focus of our capital spending was in
our Polymers business.

Our major capital expenditures since 2000
included:

|     |  |                                      |  |                                                                                                                                      
|---- |  | ------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------
|Year |  | Segment                              |  | Description                                                                                                                          
|     |  |                                      |  |                                                                                                                                      
|2001 |  | Pharmaceuticals, Biological Products |  | Construction of a facility for packaging and
    storage of biological products, Berkeley, California                                
|     |  |                                      |  | Construction of research facility in West Haven,
    Connecticut and Kyoto, Japan (completed 2001)                                   
|     |  | Consumer Care, Diagnostics           |  | Expansion of solids plants, Bitterfeld, Germany
    and Lerma, Mexico                                                                
|     |  | CropScience                          |  | Construction of a multi-purpose facility for crop
    protection products, Dormagen, Germany                                         
|     |  |                                      |  | Protection products, Dormagen, Germany                                                                                               
|     |  |                                      |  | Insecticides production facility, Dormagen,
    Germany                                                                              
|     |  | Plastics, Rubber                     |  | Expansion of polycarbonate capacities (production
    of bisphenol A and Makrolon), Map Ta Phut, Thailand and
    Uerdingen, Germany 
|     |  |                                      |  | Expansion of films capacity, Dormagen, Germany                                                                                       
|     |  |                                      |  | Construction of a melt polycarbonate facility,
    Antwerp, Belgium (completed 2001)                                                 
|     |  |                                      |  | Construction of a rubber chemicals facility,
    Brunsbüttel, Germany (completed 2001)                                               
|     |  | Polyurethanes, Coatings, Fibers      |  | Expansion of isocyanate capacities including
    precursors, Uerdingen and Brunsbüttel, Germany                                      
|     |  |                                      |  | Expansion of coating raw materials production,
    Leverkusen, Germany                                                               
|     |  |                                      |  | Expansion of capacity for aqueous dispersions,
    Dormagen, Germany (brought on stream 2001)                                        
|     |  |                                      |  | Expansion of dyestuff production for transparent
    Plastics, Leverkusen, Germany                                                   
|     |  |                                      |  | Construction of a coating raw materials facility,
    Caojing, China                                                                 
|     |  | Chemicals                            |  | Construction of a sulfuric acid facility,
    Leverkusen, Germany                                                                    
|     |  |                                      |  | Expansion/ modification of the electrolysis
    plant, Leverkusen, Germany                                                           
|     |  |                                      |  | Construction of a polyaspartic acid facility,
    Leverkusen, Germany                                                                
|     |  |                                      |  | Expansion of tantalum production, Goslar, Germany
    and Mito, Japan Process technology center, Goslar, Germany
    (completed 2001)
|     |  |                                      |  | Modernization and expansion of the nitrocellulose
    facility, Bomlitz, Germany                                                     
|     |  |                                      |  | Expansion of the molybdenum facility, Laufenburg,
    Germany                                                                        
|2002 |  | Pharmaceuticals, Biological Products |  | Construction of a sterile filling facility for
    Factor VIII, Berkeley, California                                                 

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|     |  |                                 |  |                                                                                                                               
|---- |  | ------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Year |  | Segment                         |  | Description                                                                                                                   
|     |  |                                 |  |                                                                                                                               
|     |  | Consumer Care, Diagnostics      |  | Construction of a small volume facility with
    pilot plant for Aspirin production, Greppin, Germany                         
|     |  | CropScience                     |  | Completion of a multi-purpose facility for crop
    protection products, Dormagen, Germany                                    
|     |  | Plastics, Rubber                |  | Modification of butyl rubber production,
    Zwijndrecht, Belgium and Sarnia, Canada                                          
|     |  |                                 |  | Expansion of capacity for ABS plastics,
    Tarragona, Spain and Map Ta Phut, Thailand                                        
|     |  |                                 |  | Expansion of polycarbonate capacity including
    precursors, Uerdingen, Germany                                              
|     |  | Polyurethanes, Coatings, Fibers |  | Expansion of isocyanate capacity including
    precursors, Brunsbüttel, Dormagen and Uerdingen, Germany
    and Niihama, Japan
|     |  | Chemicals                       |  | Expansion/modification of electrolysis plants,
    Leverkusen, Germany                                                        
|     |  |                                 |  | Efficiency improvement in the integrated
    aromatics production network, Leverkusen, Germany                                
|     |  |                                 |  | Expansion of nitrocellulose production, Bomlitz,
    Germany                                                                  
|2003 |  | Pharmaceuticals,                |  | Addition to capacity solid dosage plant,
    Leverkusen, Germany                                                              
|     |  | Biological Products             |  | Sterile Filling Facility, Berkeley, California                                                                                
|     |  | Consumer Care,                  |  | Lacquering (small-size plant), Greppin, Germany                                                                               
|     |  | Diagnostics                     |  | Elkhart site consolidation, Elkhart, Indiana                                                                                  
|     |  | Animal Health                   |  | Good manufacturing practice upgrade, Panwol,
    South Korea                                                                  
|     |  | CropScience                     |  | Multi-Purpose Plant, Dormagen, Germany                                                                                        
|     |  |                                 |  | Fungicide Plant Extension, Muttenz, Switzerland                                                                               
|     |  |                                 |  | New Research & Development Building, Gent,
    Belgium                                                                        
|     |  | Plastics, Rubber                |  | Modification of butyl rubber production,
    Zwijndrecht, Belgium and Sarnia, Canada                                          
|     |  |                                 |  | Expansion of capacity for ABS plastics,
    Tarragona, Spain                                                                  
|     |  |                                 |  | and Map Ta Phut, Thailand                                                                                                     
|     |  | Polyurethanes, Coatings, Fibers |  | Expansion of isocyanate capacity including
    precursors, Brunsbüttel and Dormagen, Germany                                  
|     |  |                                 |  | Expansion/modification of electrolysis plant,
    Leverkusen, Germany                                                         
|     |  | Chemicals                       |  | Expansion of methylcellulose production,
    Bitterfeld, Germany                                                              
|     |  |                                 |  | Efficiency improvement in the integrated aromatics                                                                            
|     |  |                                 |  | production network, Leverkusen, Germany                                                                                       

Commitments

Off-Balance Sheet
Arrangements

Our unconsolidated entities are not considered
special-purpose entities and do not constitute other off-balance
sheet arrangements.

Contractual Obligations and Commercial
Commitments

The table below summarizes all of the
Groups contractual and commercial obligations. The timing
of payments for collaborative agreements assumes that milestones
or other conditions are met. These cooperations are mostly in
our Pharmaceuticals division and our CropScience subgroup. The
most significant of these, based on payments, are the product
development cooperations with Onyx and Paratek in our
Pharmaceuticals division (see Item 4, Information on the
Company  Business  Bayer
HealthCare  Pharmaceuticals, Biological
Products  Pharmaceuticals 
Collaborations) and with Genoptera in our CropScience
subgroup (see Item 4,

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Information on the Company 
Business  Bayer CropScience  Major
Products  Research and
Development ). We do not foresee any
material payment triggers or milestone payments in our current
collaborative arrangements.


|                                                           |  |                     |        |          |  |             |       |                |  |         |       |  |  |  |       |  |  |  |       | 
|---------------------------------------------------------- |  | ------------------- | ------ | -------- |  | ----------- | ----- | -------------- |  | ------- | ----- |  |  |  | ----- |  |  |  | ----- | 
|                                                           |  |                     |        |          |  | One year to |       | Three years to |  |        
|                                                           |  |                     |        | Under    |  | less than   |       | less than      |  | After  
|Contractual Obligations                                    |  | Total               |        | one year |  | three years |       | five years     |  | 5 years
|                                                           |  |                     |        |          |  |             |       |                |  |        
|                                                           |  |                    
|                                                           |  | (euros in millions)
|Long-term debt, excluding capital leases                   |  |                     | 8,851  |          |  |             | 2,227 |                |  |         | 644   |  |  |  | 3,066 |  |  |  | 2,914 | 
|Capital leases without interest portion                    |  |                     | 575    |          |  |             | 86    |                |  |         | 117   |  |  |  | 55    |  |  |  | 317   | 
|Operating leases                                           |  |                     | 478    |          |  |             | 124   |                |  |         | 169   |  |  |  | 119   |  |  |  | 66    | 
|Purchase obligations                                       |  |                     | 181    |          |  |             | 149   |                |  |         | 32    |  |  |  | 0     |  |  |  | 0     | 
|Other long-term liabilities (collaboration
    agreements) |  |                     | 424    |          |  |             | 129   |                |  |         | 146   |  |  |  | 54    |  |  |  | 95    | 
|Other liabilities(1)                                       |  |                     | 2,459  |          |  |             | 2,361 |                |  |         | 41    |  |  |  | 0     |  |  |  | 57    | 
|                                                           |  |                     |        |          |  |             |       |                |  |         |       |  |  |  |       |  |  |  |       | 
|Total Contractual Obligations                              |  |                     | 12,968 |          |  |             | 5,076 |                |  |         | 1,149 |  |  |  | 3,294 |  |  |  | 3,449 | 
|                                                           |  |                     |        |          |  |             |       |                |  |         |       |  |  |  |       |  |  |  |       | 



---



|    |                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Other liabilities comprise primarily guarantees
    of bills and checks, payment guarantees and indirect financial
    guarantees; commissions to customers and expense reimbursements;
    as well as tax, social security and payroll liabilities and
    other liabilities as set forth in Note 32 to the
    consolidated financial statements.

Payments for guarantees and endorsements of bills
and of warranties of
341 million
have been excluded from the other commercial commitments table
above, as we do not expect to make any payments under these
commercial commitments.

Other Commitments

In 2003, our minimum non-discounted future lease
payments relating to long-term lease and rental arrangements
totaled
1.2 billion,
compared with
1.5 billion
in the previous year. Of this amount,
760 million
represented future payments under financial leases
(899 million
in 2002).

Our financial commitment for orders placed under
purchase agreements relating to planned or ongoing capital
expenditure projects totaled
181 million
in 2003. We expect to pay the majority of this amount in 2004.
In 2002, this figure was
286 million,
and in 2001,
354 million.

Under collective agreements on part-time work
arrangements for certain older employees, we have to accept
applications for such arrangements from a certain quota of the
work force. Other financial obligations that may arise from such
work arrangements in the future cannot be quantified, since the
quota has already been exceeded.

In addition, we have entered into research
agreements with a number of third parties. Under these
agreements, we have agreed to fund various research projects or
to assume other commitments. Our payments under these agreements
are typically based on the achievement of certain milestones or
the fulfillment of other specific conditions by our research
partners. In 2003, the total amount of these commitments was
424 million.
For 2002, the figure was
570 million.

Borrowings

Our consolidated financial statements reflect
borrowings as financial obligations, which include
debentures, liabilities to banks, liabilities under lease
agreements, liabilities from the issuance of promissory notes,
commercial paper and other financial obligations. See the tables
under  Contractual Obligations and Commercial
Commitments above for a summary of our current financial
obligations. See also Note 30 to our consolidated financial
statements.

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Funding and Treasury Policies

We are exposed to interest rate risk. We are also
exposed to currency-related risks such as exchange rate and
translation risk. To hedge our risks, we use primarily
over-the-counter derivative instruments, particularly forward
foreign exchange contracts, option contracts, interest rate
swaps, and interest and principal currency swaps.

Interest rate risk applies mainly to receivables
and payables with maturities of over one year. Items with these
long maturities are not material to our operations but are
relevant to our investments and financial obligations. Here,
derivative financial instruments are our main method of interest
rate hedging. We primarily use interest rate swaps to convert a
portion of our fixed rate borrowings into, in effect, floating
rate borrowings. In a normal interest rate environment,
short-term interest rates are lower than long-term interest
rates. Thus, floating rate debt generally leads to lower
interest costs in the long run. Short-term interest rate hedging
contracts (including interest and principal currency swaps)
totaled a nominal amount of
0.3 billion
in 2003,
0.5 billion
in 2002 and
2.0 billion
in 2001. In 2003, hedges maturing in more than one year
represented a nominal amount of
6.0 billion,
in 2002,
5.3 billion
and in 2001,
2.5 billion.

Because a substantial portion of Bayers
assets, liabilities, sales and earnings are denominated in
currencies other than the euro zone currencies, we have
translation exposure to fluctuations in the values of these
currencies relative to the euro. These currency fluctuations,
especially the fluctuation of the value of the U.S. dollar
relative to the euro, can have a material impact on our results
of operations. For example, an increase in the value of the
U.S. dollar relative to the euro will increase the euro
value of Bayers sales and earnings made in the dollar zone
and increase the competitiveness of its products produced in
Europe against products exported from the United States. The
translation effects of currency fluctuations were negative in
2003, decreasing our sales by
2.5 billion
compared to
1.4 billion
in 2002 and a positive effect of
0.1 billion
in 2001. This effect was mainly due to a decrease of the value
of the U.S. dollar compared to the euro (the average
relative value of one euro in 2003 was $1.13, compared with
average values of $0.95 in 2002 and $0.90 in 2001). Since these
effects do not have an impact on our cash flows, we do not hedge
these risks resulting from currency fluctuations.

We also face transaction risk when our businesses
generate revenue in one currency but incur costs relating to
that revenue in a different currency. We hedge a portion of our
transaction currency risk through the use of derivative
financial instruments, particularly forward foreign exchange
contracts and currency options. Our Corporate Treasury
department has the central responsibility for managing our
currency exposures and using currency derivatives. We establish
the maturity dates of hedging contracts according to the
anticipated cash flows of the Bayer Group. Our policy is to use
a mixture of instruments depending upon our view of market
conditions based on fundamental and technical analysis. As of
December 31, 2003, we had entered into forward foreign
exchange contracts and currency swaps with a total notional
value of
4.0 billion
(excluding cross currency interest rate swaps included in our
6.3 billion
notional amount of interest rate hedging contracts). For further
information on these products, see Item 11, Quantitative
and Qualitative Disclosures about Market Risk.

Our aggregate direct transaction risk from sales
and purchases in foreign currencies before hedging was
approximately
2.0 billion
at December 31, 2003, consisting primarily of dollars
($1.3 billion), Japanese yen (¥66 billion) and
Brazilian real (R1.3 billion).

For more information, see Item 11,
Quantitative and Qualitative Disclosures about Market
Risk.

Inflation, Seasonality and
Cyclicality

Inflation has not had a material effect on our
operating results in recent years. Seasonality does not
materially affect our business as a whole. However, several of
our individual business lines are subject to seasonal effects.
In addition, a number of our business groups are subject to
cyclicality, either directly or because of the effect of
cyclicality on their customers businesses. See the
descriptions of our various business segments in Item 4,
Information on the Company for a discussion of those
businesses subject to seasonal or cyclical effects.

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RESEARCH AND DEVELOPMENT

The following table sets forth our total research
and development expenditures during the last three full years.

|                                      |                            |      |  |               |  |      |  |               |  |      |  |       |  |  |  |      |   |  |  |       | 
|------------------------------------- | -------------------------- | ---- |  | ------------- |  | ---- |  | ------------- |  | ---- |  | ----- |  |  |  | ---- | - |  |  | ----- | 
|                                      |                            |      |  | Change from   |  |      |  | Change from   |  |     
|                                      |                            |      |  | Previous Year |  |      |  | Previous Year |  |     
|                                      |                            | 2001 |  | (%)           |  | 2002 |  | (%)           |  | 2003
|                                      |                            |      |  |               |  |      |  |               |  |     
|Research and development expenditure: |                            |      |  |               |  |      |  |               |  |      |  |       |  |  |  |      |   |  |  |      
|                                      | Amount (euros in millions) |      |  | 2,559         |  |      |  | 0.7           |  |      |  | 2,577 |  |  |  | (6.3 | ) |  |  | 2,414 | 
|                                      | As a percentage of sales   |      |  | 8.5           |  |      |  |              |  |      |  | 8.7   |  |  |  |      |   |  |  | 8.5   | 

We typically allocate the largest portion of our
research and development expenses to our HealthCare businesses,
primarily in the Pharmaceuticals, Biological Products segment.
In 2003, Pharmaceuticals, Biological Products accounted for
40.0 percent of our total research and development spending
(2002: 41.6 percent; 2001: 48.5 percent).

For a more detailed discussion of our research
and development activities and policies, see the descriptions of
each business groups research and development activities
in Item 4, Information on the Company 
Business. We discuss our patents and other intellectual
property protection in Item 4, Information on the
Company  Intellectual Property Protection.




BASIS OF PRESENTATION

We prepared the consolidated financial statements
that appear elsewhere in this annual report in accordance with
IFRS. See Note 44 to our consolidated financial statements
for a reconciliation of the significant differences between IFRS
and U.S. GAAP.

New Accounting Standards

The Consolidated Financial Statements reflect the
application of IAS 41, Agriculture, a new accounting standard of
the International Accounting Standards Board (IASB). This
standard sets forth the financial statement presentation and
disclosure applicable in connection with agricultural
activities. The standard addresses, among other things, the
accounting treatment of biological assets during the periods of
their growth, degeneration, fertilization and reproduction and
the initial valuation of agricultural products at the point of
harvest. Biological assets are to be valued at fair market value
less point-of-sale costs, if this can reliably be determined.
Agricultural products that are harvested from these biological
assets are also to be valued at fair market value at the time of
harvest, less point-of-sale costs.

The application of this new standard has not had
any material effect on the presentation of the financial
condition or results of operations of our group in 2003 or
affected comparability among our 2003, 2002 and 2001 financial
statements.

In December 2003, the IASB released revised
IAS 32, Financial Instruments: Disclosure and Presentation
and IAS 39, Financial Instruments: Recognition and Measurement.
These standards replace IAS 32 (revised 2000), and supersede
IAS 39 (revised 2000) and are to be applied for annual
periods beginning on or after January 1, 2005. The Group is
currently evaluating whether to adopt the standards earlier and
what impact they will have on the Groups
shareholders equity, financial position and results of
operations.

In December 2003, as part of the IASBs
project to improve International Financial Reporting Standards,
the IASB released revisions to the following standards that
supersede the previously released versions of those
standards: IAS 1, Presentation of Financial
Statements; IAS 2, Inventories; IAS 8, Accounting
Policies, Changes in Accounting Estimates and Errors;
IAS 10, Events after Balance Sheet Date; IAS 16,
Property, Plant and Equipment; IAS 17, Leases; IAS 21,
The Effects of Changes in Foreign Exchange Rates; IAS 24,
Related Party Disclosures; IAS 27, Consolidated and
Separate Financial Statements; IAS 28, Investments in
Associates; IAS 31, Interests in Joint Ventures;
IAS 33, Earnings per Share and IAS 40, Investment
Property. The revised standards should be applied for annual
periods beginning on or after January 1, 2005. The Group is
currently

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evaluating whether to adopt the standards earlier
and what impact they will have on the Groups
shareholders equity, financial position and results of
operations.


In February 2004, the IASB issued International
Financial Reporting Standard (IFRS) 2, Share-based Payment,
on accounting for share-based payment transactions, including
grants of share options to employees. IFRS 2 specifies the
financial reporting by an entity when it undertakes a
share-based payment transaction and requires an entity to
reflect in its profit or loss and financial position the effects
of share-based payment transactions, including expenses
associated with transactions in which share options are granted
to employees. IFRS 2 is to be applied for fiscal years
starting on or after January 1, 2005. The Bayer Group is
currently evaluating the impact the standard will have on the
Groups shareholders equity, financial position and
results of operations.

In March 2004, the IASB issued IFRS 3, Business
Combinations, replacing IAS 22, Business Combinations. IFRS 3
specifies that all business combinations are to be accounted for
by applying the purchase method of accounting, and as such,
eliminating the pooling method. Identifiable assets, liabilities
and contingent liabilities are to be recognized at their fair
value at the acquisition date. It requires that goodwill no
longer be amortized but tested annually for impairment. IFRS 3
is to be applied to business combinations for which the
agreement date is on or after March 31, 2004. For goodwill
and intangible assets acquired in a business combination for
which the agreement date was prior to March 31, 2004, the
standard must be applied prospectively from the beginning of the
first annual period beginning on or after March 31, 2004.
The Bayer Group is currently evaluating the impact the standard
will have on the Groups shareholders equity,
financial position and results of operations.

In March 2004, the IASB issued IFRS 4, Insurance
Contracts. This standard applies to virtually all insurance
contracts (including reinsurance contracts) that an entity
issues and to reinsurance contracts that it holds. IFRS 4 is to
be applied for annual periods beginning on or after
January 1, 2005. The Bayer Group is currently evaluating
the impact the standard will have on the Groups
shareholders equity, financial position and results of
operations.

In March 2004, the IASB issued IFRS 5,
Non-current Assets Held for Sale and Discontinued Operations.
IFRS 5 requires that assets that are intended for disposal be
recorded at the lower of the assets carrying amounts or
fair value less selling costs. The standard also addresses when
certain operating segments of a business should be classified as
discontinued operations. IFRS 5 is effective for periods
beginning on or after January 1, 2005. The Bayer Group is
currently evaluating the impact the standard will have on the
Groups shareholders equity, financial position and
results of operations.

In March 2004, the IASB issued an amendment to
IAS 39, Financial Instruments: Recognition and Measurement on
Fair Value Hedge Accounting for a Portfolio Hedge of Interest
Rate Risk. The amendment simplifies the implementation of IAS 39
by enabling fair value hedge accounting to be used more readily
for portfolio hedging of interest rate risk than under previous
versions of IAS 39. The amendments to the standard are effective
for annual periods beginning on or after January 1, 2005.
An entity shall apply the amendments to an earlier period if it
applies IAS 39 (as revised in 2003) and IAS 32, Financial
Instruments: Disclosure and Presentation, (as revised in 2003)
to that period. The Bayer Group is currently evaluating the
impact the amended standard will have on the Groups
shareholders equity, financial position and results of
operations.

In March 2004, in connection with the issuance of
IFRS 3, the IASB revised IAS 36, Impairment of Assets, and IAS
38, Intangible Assets. The main revisions require goodwill and
intangible assets with an indefinite useful life to be tested
for impairment annually, or more frequently if events or changes
in circumstances indicate a possible impairment, prohibit
reversal of impairment losses for goodwill, require an
intangible asset to be treated as having an indefinite life when
there is no foreseeable limit on the period over which the asset
is expected to generate net cash inflows for the entity, and
prohibits the amortization of such intangible assets. The
revised standards are effective for goodwill and intangible
assets acquired in business combinations for which the agreement
date is after March 31, 2004 and all other goodwill and
intangible assets for annual periods beginning on or after
March 31, 2004. The Bayer Group is currently evaluating the
impact the amended standards will have on the Groups
shareholders equity, financial position and results of
operations.

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U.S. GAAP

In June 2001, the Financial Accounting Standards
Board (FASB) approved Statement of Financial
Accounting Standards (SFAS) 143,
Accounting for Obligations Associated with the Retirement
of Long-Lived Assets (SFAS 143), which
requires that the fair values of an obligation associated with
the retirement of long-lived assets be recognized in the period
in which such obligation is incurred if a reasonable estimate of
fair value can be made. When the liability is recorded, the
Group must capitalize the costs of the liability by increasing
the carrying amount of the long-lived asset. Over the estimated
life of the asset, the liability is accreted to its present
value and the related capitalized charge is depreciated over the
useful life of an asset. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15,
2002. The Group adopted the provisions of SFAS 143 as of
January 1, 2003, which did not have a material impact on
our financial position, results of operations or cash flows.

In April 2002, SFAS 145, Rescission of
FASB Statements no. 4, 44 and 64, Amendment of FASB
Statement no. 13 and Technical Corrections
(SFAS 145) was issued. The statement updates,
clarifies and simplifies existing accounting standards related
to the presentation of gains and losses from certain
extinguishments of debt, the accounting for certain intangible
assets and the accounting for certain sale-leaseback
transactions. Significant provisions of this statement
applicable to Bayer are effective for our 2003 fiscal year. The
adoption of SFAS 145 did not have a material impact on our
financial position, results of operations or cash flows.

SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities
(SFAS 146), was issued in June 2002.
SFAS 146, which rescinds Emerging Issues Task Force
(EITF) Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring), requires a liability for costs associated
with exit or disposal activities to be recognized and measured
initially at fair value only when those costs are incurred,
rather than at the date of a commitment to an exit or disposal
plan. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The
Group adopted the provisions of SFAS 146 as of
January 1, 2003, which did not have a material impact on
our financial position, results of operations or cash flows.

In November 2002, the FASB published FASB
Interpretation no. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(FIN 45). FIN 45 expands on the accounting
guidance of other SFASs by extending the disclosures to be made
by a guarantor in its financial statements about its obligations
under certain guarantees, and it requires the guarantor to
recognize a liability for the fair value of an obligation
assumed under a guarantee. The disclosure requirements are
effective for financial years ending after December 15,
2002, and require disclosure of the nature of the guarantee, the
maximum potential amount of future payments that the guarantor
could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantors
obligations under the guarantee. FIN 45s provisions
for initial recognition and measurement should be applied
prospectively to guarantees issued or modified after
December 31, 2002. The Group adopted the provisions of
FIN 45 as of January 1, 2003, which did not have a
material impact on our financial position, results of operations
or cash flows.

In May 2003, the FASB published SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
This statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is
effective at the first interim period beginning after
June 15, 2003. The FASB issued FASB Staff Position
(FSP) 150-3 on November 7, 2003 to defer
the effective date for applying the provisions of SFAS 150
for certain mandatorily redeemable non-controlling interests.
The Group adopted the provisions of FIN 150, and the
related FSPs, in 2003, which did not have a material impact on
our financial position, results of operations or cash flows.

In May 2003, the FASB EITF published
Issue 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which it will perform multiple
revenue generating activities. The Issue is effective for
revenue arrangements entered into for fiscal periods beginning
after June 15, 2003. The Group adopted the provisions of
EITF

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Issue 00-21 effective in the third quarter
of 2003, which did not have a material impact on our financial
position, results of operations or cash flows.


In April 2003, the FASB issued SFAS 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities (SFAS 149). This
Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under
SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 149 is to be applied
prospectively to contracts entered into or modified after
June 30, 2003 and for hedging relationships designated
after June 30, 2003. The Group adopted the provisions of
SFAS 149 effective in the third quarter of 2003, which did
not have a material impact on our financial position, results of
operations or cash flows.

In January 2003, the FASB published FASB
Interpretation no. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46
addresses the consolidation of entities for which control is
achieved through means other than through voting rights (such
entities are designated variable interest entities
or VIE) by clarifying the application of ARB
No. 51, Consolidated Financial Statements to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. The primary objective of this interpretation
is to provide guidance on how to identify a VIE and to determine
when a VIEs assets, liabilities, noncontrolling interests
and result of operations need to be included in a companys
consolidated financial statements. For VIEs created after
January 31, 2003, the Group is required to apply the
measurement principles of FIN 46 in its 2003 financial
statements. For VIEs created or acquired before February 1,
2003, the measurement principles of FIN 46 become effective
for the Group as of January 1, 2004. In December 2003, the
FASB issued FIN 46-R, Consolidation of Variable
Interest Entities (FIN 46-R), in which a
partial deferral of FIN 46, as well as various other
amendments to FIN 46, were approved. The Group will adopt
FIN 46-R in our 2004 fiscal year reporting. We do not
believe that the implementation of FIN 46-R will have a
material impact on our financial position, results of operations
or cash flows.

In May 2003, the FASB ratified the consensi
reached by the Emergency Issue Task Force on EITF
Issue 01-08, Determining Whether an Arrangement is a
Lease (EITF 01-08). EITF 01-08
provides guidance in determining whether an arrangement should
be considered a lease subject to the requirements of FASB
Statement 13, Accounting for Leases. The
consensus of this EITF is to be applied to arrangements agreed
or committed to, modified, or acquired in business combinations
initiated after the beginning of the next reporting period
beginning after May 28, 2003. The Group will adopt this
standard effective January 1, 2004. We do not believe the
adoption of this standard will have a material impact on our
financial position, results of operations or cash flows.

In August 2003, the FASB ratified the consensus
reached by the Emergency Issue Task Force on EITF
Issue 03-11, Reporting Realized Gains and Losses on
Derivative Instruments That Are Subject to FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging
Activities, and Not Held for Trading Purposes as
Defined in EITF Issue No. 02-3, Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes
and Contracts Involved in Energy Trading and Risk Management
Activities (EITF 03-11).
EITF 03-11 addresses whether realized gains and losses
should be shown gross or net in the income statement for
contracts that are not held for trading purposes, but are
derivatives subject to SFAS 133. The consensus of this EITF
is to be applied to derivative instruments entered into after
the beginning of the next reporting period beginning after
August 13, 2003. The Group will adopt this standard
effective January 1, 2004. We do not believe the adoption
of this standard will have a material impact on our financial
position, results of operations or cash flows.

In December 2003, the AICPA issued SOP 03-3,
Accounting for Loans or Certain Debt Securities Acquired
in a Transfer (SOP 03-3). SOP 03-3
proposes guidance on accounting for differences between
contractual and expected cash flows from an investors
initial investment in loans or debt securities acquired in a
transfer if those differences are attributable, at least in
part, to credit quality. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 15, 2004.
The Group will adopt this standard effective

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January 1, 2005. We do not believe the
adoption of this standard will have a material impact on our
financial position, results of operations or cash flows.


In December 2003, the Medicare Prescription Drug,
Improvements and Modernization Act of 2003 (the Medicare
Act) was approved in the United States. The Medicare Act
provides for two new prescription drug benefit features under
Medicare. The Group provides post-retirement benefits to its
United States employees; the benefits provided are impacted by
the Medicare Act. SFAS 106, Employers
Accounting for Postretirement Benefits Other Than Pensions
(SFAS 106), requires that enacted changes in
the law that take effect in future periods and that will affect
the future level of benefit coverage be considered in the
current period measurement for benefits expected to be provided
in those future periods. In response to the Medicare Act and the
requirements of SFAS 106, the Financial Accounting
Standards Board (FASB) released FASB Staff Position
No. 106-1, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (FSP 106-1).
FSP 106-1 provides a one-time election to defer accounting
for the effects of the Medicare Act until further guidance on
the accounting for the new Medicare features is released. The
Group has elected to defer the accounting for the effects of the
Medicare Act. Accordingly, the Groups consolidated
financial statements and the accompanying notes as of and for
the year ended December 31, 2003 do not reflect the effects
of the Medicare Act. Further guidance, when issued, could
require the Group to change previously reported information.

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|        |                                               
|------- | ----------------------------------------------
|Item 6. | Directors, Senior Management and
    Employees

Directors and Senior Management

In accordance with the German Stock Corporation
Act (Aktiengesetz), Bayer AG has both a Board of
Management (Vorstand) and a Supervisory Board
(Aufsichtsrat). The Board of Management is responsible
for the management of our business; the Supervisory Board
supervises the Board of Management and appoints its members. The
two boards are separate, and no individual may simultaneously be
a member of both boards.

Members of both the Board of Management and the
Supervisory Board owe a duty of loyalty and care to Bayer AG. In
exercising their duties, the applicable standard of care is that
of a diligent and prudent businessperson. Members of both boards
must take into account a broad range of considerations when
making decisions, including the interests of Bayer AG and its
shareholders as well as of employees and creditors.

The members of the Board of Management and the
Supervisory Board may be held personally liable to Bayer AG for
breaches of their duties of loyalty and care. Bayer AG must
bring an action for breach of duty against the Board of
Management or Supervisory Board upon a resolution of the
shareholders meeting passed by a simple majority of votes
cast, or upon the request of shareholders holding, as a group,
at least 10 percent of the outstanding share capital. With
the exception of shareholders of companies that (unlike Bayer
AG) are under the control of another company, individual
shareholders of German companies cannot sue directors on behalf
of the company in a manner analogous to a shareholders
derivative action under U.S. law. Under German law,
directors may be liable for breach of duty to shareholders (as
opposed to a duty to the company itself) only where a breach of
duty to the company also constitutes a breach of a statutory
provision enacted specifically for the protection of
shareholders. As a practical matter, shareholders are able to
assert liability against directors for breaches of this sort
only in unusual circumstances.

Board of Management

The Board of Management is responsible for
managing the business of Bayer AG in accordance with the German
Stock Corporation Act and Bayer AGs Articles of
Association. It also represents Bayer AG in its dealings with
third parties and in court. According to the Articles of
Association, the Board of Management consists of a minimum of
two members. The Supervisory Board determines the number of and
appoints the members of the Board of Management. Members of the
Board of Management are appointed for a maximum term of five
years and are eligible for reappointment after the completion of
their term in office.

Bayer AG is legally represented by two members of
the Board of Management acting together, or by one member of the
Board of Management together with a person possessing a special
power of attorney (Prokura).

The Board of Management must report regularly to
the Supervisory Board, particularly on proposed business policy
and strategy, on profitability and on the current business of
Bayer AG, as well as on any exceptional matters that may arise
from time to time. If not otherwise required by law, the Board
of Management decides with a simple majority of the votes cast.
In case of deadlock, the vote of the chairman is the relevant
vote.

Under certain circumstances, such as a serious
breach of duty or a vote of no confidence by the shareholders in
an annual meeting, a member of the Board of Management may be
removed by the Supervisory Board prior to the expiration of his
term. A member of the Board of Management may not deal with, or
vote on, matters relating to proposals, arrangements or
contracts between him/herself and Bayer AG.

Individual Board members serve as representatives
with primary responsibility for our various corporate functions
and as representatives for the various geographic regions in
which we operate.

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The following table shows the members of our
current Board of Management, their ages, positions and the years
in which their current terms expire.

|                      |  |          |          |                      |  |  |      | 
|--------------------- |  | -------- | -------- | -------------------- |  |  | ---- | 
|Name and Age(1)       |  | Position |          | Current term expires
|                      |  |          |          |                     
|Werner Wenning (57)   |  |          | Chairman |                      |  |  | 2007 | 
|Dr. Udo Oels (60)     |  |          | Member   |                      |  |  | 2006 | 
|Klaus Kühn (52)       |  |          | Member   |                      |  |  | 2007 | 
|Dr. Richard Pott (49) |  |          | Member   |                      |  |  | 2007 | 



---



|    |                                                                                      
|--- | -------------------------------------------------------------------------------------
|(1) | Werner Spinner resigned from the Board of
    Management effective February 28, 2003.

Werner Wenningbecame chairman of our Board of Management in April 2002. He has
served on the Board since 1997. Prior to becoming chairman, he
served as chief financial officer and was a member of the
Corporate Coordination and Human Resources Committees. From 1996
until he joined the Board in 1997, Mr. Wenning was head of
Corporate Planning and Controlling. In addition to his
responsibilities on the Board, he is a member of the supervisory
boards of Gerling-Konzern Versicherungs-Beteiligungs AG and
Henkel KGaA.

Dr. Udo Oelsjoined the Board of Management in 1996 and currently is
responsible for the corporate functions innovation, technology
and environment. In addition to his responsibilities on the
Board, he is a member of the supervisory boards of Bayer
Chemicals AG and ThyssenKrupp Services AG.

Klaus Kühnis
Bayers chief financial officer. Prior to joining the Board
in May 2002, Mr. Kühn was head of Bayers Finance
Division. Prior to that appointment, he oversaw the spin-off of
Bayers former Agfa division. Before joining Bayer in 1998,
Mr. Kühn worked with Schering AG, most recently as
head of finance. He is also the vice president of the Deutsches
Aktieninstitut e.V. In addition to his responsibilities on the
Board, he is chairman of the supervisory board of Bayer
CropScience AG.

Dr. Richard
Pottjoined the Board in May 2002. He
had previously served as General Manager of our Specialty
Products business group. Before assuming responsibility for
Specialty Products, he served Bayer in a number of positions,
most recently as head of the Strategic Planning Department and
then as head of Corporate Planning and Controlling.
Dr. Pott oversees strategy and human resources and serves
as Arbeitsdirektor. In addition to his responsibilities
on the Board, he is a member of the supervisory board of Bayer
HealthCare AG.

Supervisory Board

Under the German Stock Corporation Act, the
German Co-Determination Act (Mitbestimmungsgesetz) of
1976 and our Articles of Association, the Supervisory Board
consists of 20 members. The principal function of the
Supervisory Board is to supervise the Board of Management and to
appoint its members. The Supervisory Board oversees our business
policy, corporate planning and strategy. It also approves the
annual budget and the financial statements of Bayer AG and of
the Bayer Group. The Supervisory Board may not make management
decisions, but the Board of Managements Standard Operating
Procedures (Geschäftsordnung) may require the prior
consent of the Supervisory Board for specified transactions
above a specified threshold, including:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the acquisition or disposition of assets;                                                                                                            
|
| |  | the acquisition, disposition or encumbrance of
    real property;                                                                                    
|
| |  | the creation of new business units or the
    disposition of existing units; and                                                                     
|
| |  | the issuance of bonds, entering into of credit
    agreements, or grant of guaranties, sureties
    (Bürgschaften) and loans, except to subsidiaries.

Our shareholders elect ten members of the
Supervisory Board at the annual meeting of shareholders.
Pursuant to the Co-Determination Act of 1976, our employees
elect the remaining ten members. The term of a Supervisory Board
member expires at the end of the annual meeting of shareholders
in which the shareholders discharge Supervisory Board members
for the fourth fiscal year following the year in which the
member was elected. There is no compulsory retirement age for
members of the Supervisory Board. However, in accordance

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with the German Corporate Governance Codex,
Supervisory Board members are encouraged to retire at the Annual
Shareholders Meeting following the members 72nd birthday.


Any member elected by the shareholders at the
annual meeting of shareholders may be removed by a majority of
three quarters of the votes cast by the shareholders in such
meeting. Any member elected by the employees may be removed by a
majority of three quarters of the votes cast by the employees.
Unless otherwise required by law or by the Articles of
Association of Bayer AG, resolutions of the Supervisory Board
are passed by simple majority of the votes cast. According to
the Articles of Association, in the case of a deadlock, a second
vote is held in which the chairman of the Supervisory Board is
entitled to one additional vote. In order to constitute a
quorum, at least half of the total members of the Supervisory
Board must participate in the voting.

All of the current shareholder representatives on
the Supervisory Board were elected by the shareholders at the
annual meeting of shareholders held on April 26, 2002, with
the exception of Dr. Jürgen Weber, who was elected on
April 25, 2003.

The following table shows the current members of
our Supervisory Board, their principal occupations and the year
in which they were first elected or appointed. Employee
representatives are identified by an asterisk.

|                                          |  |               |  |                                                                                      |  |               |      | 
|----------------------------------------- |  | ------------- |  | ------------------------------------------------------------------------------------ |  | ------------- | ---- | 
|Name(1)                                   |  | Position      |  | Principal occupation                                                                 |  | First elected
|                                          |  |               |  |                                                                                      |  |              
|Dr. Manfred Schneider                     |  | Chairman      |  | Former chairman of the management board, Bayer AG                                    |  |               | 2002 | 
|*Erhard Gipperich                         |  | Vice Chairman |  | Chairman of the Group and Central Works Councils
    of Bayer AG, Leverkusen         |  |               | 1998 | 
|Dr. Paul Achleitner                       |  | Member        |  | Member of the management board, Allianz AG                                           |  |               | 2002 | 
|Dr. Josef Ackermann                       |  | Member        |  | Chairman of the management board, Deutsche Bank AG                                   |  |               | 2002 | 
|*Karl-Josef Ellrich                       |  | Member        |  | Chairman of the Works Council, Dormagen Site                                         |  |               | 2000 | 
|Prof. Dr.-Ing. e.h. Hans-Olaf Henkel      |  | Member        |  | President of the Leibniz Association                                                 |  |               | 2002 | 
|*Thomas Hellmuth                          |  | Member        |  | Agricultural Engineer                                                                |  |               | 2002 | 
|Dr. h.c. Martin Kohlhaussen               |  | Member        |  | Chairman of the supervisory board, Commerzbank AG                                    |  |               | 1992 | 
|John Christian Kornblum                   |  | Member        |  | Chairman of Lazard & Co.                                                             |  |               | 2002 | 
|*Petra Kronen                             |  | Member        |  | Chairman of the Works Council, Uerdingen Site                                        |  |               | 2000 | 
|Dr. Heinrich von Pierer                   |  | Member        |  | President and Chief Executive Officer of Siemens
    AG                              |  |               | 1993 | 
|*Wolfgang Schenk                          |  | Member        |  | Engineer                                                                             |  |               | 2002 | 
|*Hubertus Schmoldt                        |  | Member        |  | Chairman of German Mine, Chemical and Power
    Workers Union                       |  |               | 1995 | 
|*Dieter Schulte                           |  | Member        |  | Former Chairman of German Unions Federation                                          |  |               | 1997 | 
|Dipl.-Ing. Dr.-Ing. e.h. Jürgen Weber     |  | Member        |  | Chairman of the supervisory board, Deutsche
    Lufthansa AG                         |  |               | 2003 | 
|*Siegfried Wendlandt                      |  | Member        |  | North Rhine District Secretary of German Mine,
    Chemical and Power Workers Union |  |               | 2001 | 
|*Reinhard Wendt                           |  | Member        |  | Printer                                                                              |  |               | 2002 | 
|*Thomas de Win                            |  | Member        |  | Commercial Clerk                                                                     |  |               | 2002 | 
|Prof. Dr. Dr. h.c. Ernst-Ludwig Winnacker |  | Member        |  | University Professor, Bonn; President of the
    German Research Association, Bonn   |  |               | 1997 | 
|Dr. Hermann Wunderlich                    |  | Member        |  | Former Vice Chairman of the Management Board,
    Bayer AG                           |  |               | 1996 | 



---



|    |                                                                                       
|--- | --------------------------------------------------------------------------------------
|(1) | Dr. Wolfgang Reitzle resigned from the
    Supervisory Board effective April 25, 2003.

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Supervisory Board Committees

Currently, the Supervisory Board has the
following committees:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Presidium was established pursuant to
    § 27 (3) of the Co-Determination Act and consists
    of the chairman and vice chairman of the Supervisory Board, as
    well as of one shareholder representative and one employee
    representative. It serves as our nomination committee
    (Vermittlungsausschuss). The purpose of this committee is
    to nominate members of the Board of Management for election by a
    simple majority of the votes of the Supervisory Board in the
    event that the Supervisory Board is unable to appoint members of
    the Board of Management with the votes of at least a two thirds
    majority of the Supervisory Board. Pursuant to § 9
    (2) of the Standard Operating Procedures
    (Geschäftsordnung) of the Supervisory Board, the
    Presidium also prepares the general meetings of the full
    Supervisory Board. The current members of the Presidium are
    Mr. Schneider (chairman), Mr. Gipperich, Mr. von
    Pierer and Mr. Schmoldt.                                                                                              
|
| |  | The personnel committee
    (Personalausschuss) was established pursuant to
    § 10 of the Standard Operating Procedures of the
    Supervisory Board. The personnel committee consists of four
    members of the Supervisory Board. The chairman of the
    Supervisory Board acts as chairman of the personnel committee.
    The main responsibility of the personnel committee is the
    determination of the salary and further conditions of the
    employment of Board of Management members, the legal
    representation of the Company in affairs with Board of
    Management members pursuant to § 112 of the German
    Stock Corporation Act, the approval of agreements with
    Supervisory Board members pursuant to § 114 of the
    German Stock Corporation Act and the approval of loans granted
    to Supervisory Board and Board of Management members and other
    persons pursuant to § 89 and § 115 of the
    German Stock Corporation Act. The current members of the
    personnel committee are Mr. Schneider (chairman),
    Mr. Kohlhaussen, Mr. Ellrich and Ms. Kronen.
|
| |  | The audit committee
    (Prüfungsausschuss) was established pursuant to
    § 11 of the Standard Operating Procedures of the
    Supervisory Board. The audit committee consists of six members
    of the Supervisory Board. The chairman of the Supervisory Board
    acts as chairman of the audit committee. The main
    responsibilities of the audit committee are oversight of
    financial accounting, risk management, the preparation of the
    resolutions of the Supervisory Board with respect to the annual
    financial statements, the review of all non-audit services to be
    performed by the independent auditor, oversight over the
    independent auditors including scope of services, fees and
    schedules, the direct receipt of the audit reports, and the
    direct receipt of reports of accounting irregularities. The
    current members of the audit committee are Mr. Kohlhaussen
    (chairman), Mr. Schneider, Mr. Henkel,
    Mr. Schenk, Mr. Wendlandt and Mr. de Win.                                                                                         

Share Ownership

Because the shares of Bayer AG are in bearer
form, we cannot obtain precise information as to their holders.
To the best of our knowledge, however, no member of the
Supervisory Board or the Board of Management beneficially owns
shares of Bayer AG totaling one percent or more of all
outstanding shares.

Compensation

The members of our Board of Management receive a
base salary, a fixed supplement and a variable bonus. Beginning
in 2003, the variable bonus for a given year is tied to the
attainment of our Group gross cash flow target. In addition, the
members of our Board of Management may participate in a
cash-settlement-based stock option program if they place shares
of their own into a special deposit account. In 2003, we paid
salary and bonus compensation totaling
4,590,646 (2002:
5,700,737) to
the members of our Board of Management. Of this amount,
4,431,023 was
paid to members who were active on the Board as of
December 31, 2003. With respect to their periods of active
membership, an additional
159,623 was paid
to members of the Board who resigned. Of the amount paid to
members who were active on the Board as of December 31,
2003, 2,248,676
represented base salary and fixed supplement and
2,081,169
represented variable bonus. The Board members who were

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active as of December 31, 2003 also received
remuneration in kind totaling
101,178 and
consisting mainly of amounts such as the value assigned to the
use of a company car for taxation purposes.


Emoluments to retired members of the Board of
Management and their surviving dependents amounted to
10,184,254
(2002:
14,383,353). We
pay former and retired members of the Board of Management a
monthly pension equal to 80 percent of the last monthly
base salary received while in service. If we increase the base
salary of current members of the Board of Management, we adjust
the pension payments to retired members accordingly. These
amounts are in addition to any amounts they receive as a result
of their participation in the Bayer pension plan described
below. See  Employee Pension Plan.

In 2000, we implemented our Stock Option Program,
under which we may grant option rights to members of
the Board of Management. The cash value that these option rights
entitle holders to receive will vary substantially depending on
certain performance benchmarks; if minimum benchmarks are not
reached, the holder is not entitled to exercise the option
rights. From the 2003 tranche of the Stock Option Program, the
members of the Board of Management received a total of 30,300
option rights on the basis of their own investments. These
rights are initially blocked for three years, followed by a
two-year exercise period. See below,  Employee
option plans  Stock Option Program.

The following table shows the remuneration paid
to those individual members of our Board of Management who were
active on the Board as of December 31, 2003.

Remuneration of the Members of the Board of
Management

|                 |  |         |                |        |  |            |         |          |  |       |         |                |  |  |         |  |  |  |           |  |  |  |        | 
|---------------- |  | ------- | -------------- | ------ |  | ---------- | ------- | -------- |  | ----- | ------- | -------------- |  |  | ------- |  |  |  | --------- |  |  |  | ------ | 
|                 |  |         |                |        |  |            |         |          |  |       |         | Stock         
|                 |  |         |                | Base   |  | Fixed      |         | Variable |  |       |         | option rights 
|                 |  | Period  |                | Salary |  | supplement |         | bonus    |  | Total |         | (2003 tranche)
|                 |  |         |                |        |  |            |         |          |  |       |         |               
|                 |  |        
|                 |  | (euros)
|Klaus Kühn       |  |         | Jan.-Dec. 2003 |        |  |            | 409,144 |          |  |       | 63,870  |                |  |  | 436,590 |  |  |  | 909,604   |  |  |  | 6,450  | 
|Dr. Udo Oels     |  |         | Jan.-Dec. 2003 |        |  |            | 413,560 |          |  |       | 63,870  |                |  |  | 436,590 |  |  |  | 914,020   |  |  |  | 6,450  | 
|Dr. Richard Pott |  |         | Jan.-Dec. 2003 |        |  |            | 408,712 |          |  |       | 63,870  |                |  |  | 436,590 |  |  |  | 909,172   |  |  |  | 6,450  | 
|Werner Wenning   |  |         | Jan.-Dec. 2003 |        |  |            | 713,877 |          |  |       | 111,773 |                |  |  | 771,399 |  |  |  | 1,597,049 |  |  |  | 10,950 | 

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The following table shows the remuneration paid
to individual members of the Supervisory Board who were active
on the Board as of December 31, 2003. Employee
representatives, who receive salaries from us unrelated to their
work on the Supervisory Board, are identified by an asterisk.
The aggregate amount of the salaries they received in 2003 in
their capacities other than as members of the Supervisory Board
is 574,823.

Remuneration of the Members of the
Supervisory Board

|                                          |  |              |        |              |  |        |        |  |  |  |        | 
|----------------------------------------- |  | ------------ | ------ | ------------ |  | ------ | ------ |  |  |  | ------ | 
|                                          |  | Basic        |        | Variable     |  |       
|                                          |  | remuneration |        | remuneration |  | Totals
|                                          |  |              |        |              |  |       
|                                          |  |              |        | (euros)      |  |       
|Dr. Paul Achleitner                       |  |              | 5,000  |              |  |        | 24,500 |  |  |  | 29,500 | 
|Dr. Josef Ackermann                       |  |              | 5,000  |              |  |        | 24,500 |  |  |  | 29,500 | 
|*Karl-Josef Ellrich                       |  |              | 6,250  |              |  |        | 30,625 |  |  |  | 36,875 | 
|*Erhard Gipperich                         |  |              | 8,750  |              |  |        | 42,875 |  |  |  | 51,625 | 
|*Thomas Hellmuth                          |  |              | 5,000  |              |  |        | 24,500 |  |  |  | 29,500 | 
|Prof. Dr.-Ing. e.h. Hans-Olaf Henkel      |  |              | 6,250  |              |  |        | 30,625 |  |  |  | 36,875 | 
|Dr. h.c. Martin Kohlhaussen               |  |              | 8,750  |              |  |        | 42,875 |  |  |  | 51,625 | 
|John Christian Kornblum                   |  |              | 5,000  |              |  |        | 24,500 |  |  |  | 29,500 | 
|*Petra Kronen                             |  |              | 6,250  |              |  |        | 30,625 |  |  |  | 36,875 | 
|Dr. Heinrich von Pierer                   |  |              | 6,250  |              |  |        | 30,625 |  |  |  | 36,875 | 
|*Wolfgang Schenk                          |  |              | 6,250  |              |  |        | 30,625 |  |  |  | 36,875 | 
|Hubertus Schmoldt                         |  |              | 6,250  |              |  |        | 30,625 |  |  |  | 36,875 | 
|Dr. Manfred Schneider                     |  |              | 15,000 |              |  |        | 73,500 |  |  |  | 88,500 | 
|Dieter Schulte                            |  |              | 5,000  |              |  |        | 24,500 |  |  |  | 29,500 | 
|Dipl.-Ing. Dr.-Ing. e.h. Jürgen Weber     |  |              | 3,403  |              |  |        | 16,674 |  |  |  | 20,077 | 
|Siegfried Wendlandt                       |  |              | 6,250  |              |  |        | 30,625 |  |  |  | 36,875 | 
|*Reinhard Wendt                           |  |              | 5,000  |              |  |        | 24,500 |  |  |  | 29,500 | 
|*Thomas de Win                            |  |              | 6,250  |              |  |        | 30,625 |  |  |  | 36,875 | 
|Prof. Dr. Dr. h.c. Ernst-Ludwig Winnacker |  |              | 5,000  |              |  |        | 24,500 |  |  |  | 29,500 | 
|Dr. Hermann Wunderlich                    |  |              | 5,000  |              |  |        | 24,500 |  |  |  | 29,500 | 

There were no loans to members of the Board of
Management or to members of the Supervisory Board outstanding as
of December 31, 2003.

Board of Management severance
plan

Beginning in 2001, we established a severance
plan for the members of Bayer AGs Board of Management.
This plan provides for payments to Board members if their
relationship with Bayer AG is terminated following a change of
control. Change of control, for the purposes of this
plan, is defined as the acquisition by a third party of
25 percent or more of Bayer AGs outstanding shares or
transactions that would have a similar effect. A Board member is
generally eligible for payment under the plan if his or her
relationship with Bayer AG ends within 12 months of the
change of control, other than in the case of termination for
cause or termination of a Board member aged 62 or more at
the time of termination.

Under the plan, former Board members are entitled
to receive the present value of the compensation they would have
received through the normal expiration date of their employment
contracts, discounted by 25 percent for a duration of more
than three years. In addition, they are entitled to receive a
severance payment equal to the sum of two to four years
annual compensation. The basic amount of these severance
payments is equal to two years compensation. If the former
Board member is 50 or older at the time of termination, the
payment increases by one years compensation or by two
years compensation if, in addition, the former Board
members length of service with the company was at least
30 years or his or her tenure on the Board was at least ten
years. Total payments under the plan are, however, capped at an
amount equal to five times the former Board members annual
compensation. In addition, the former Board member retains full
pension rights.

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Employee option plans

In May 2000, we implemented a three-tier program
to provide employees and management with an opportunity to earn
Bayer AG shares. We offer the stock option program for
members of the Board of Management and senior executives, the
stock incentive program for middle management and
equivalent employees and the stock participation program
for junior management and other employees.

To make use of the stock option program, the
stock incentive program and Module 1 of the stock
participation program (described below), participants must place
Bayer AG shares of their own into a special deposit
account. Participants do not pay an exercise price for the
shares they receive under these programs. Rather, they receive
the shares as bonus shares or as cash payments or, in the case
of Module 2 of the stock participation program, have the
opportunity to purchase shares at a discounted price.

We may implement our employee option programs in
annual tranches. Each tranche has separate terms, holding
periods and other key parameters as described below for 2003, in
each case keyed to the starting date of that tranche.

Stock Option Program

Members of the Board of Management and senior
executives who wish to participate in the stock option program
must place Bayer AG shares of their own in a special
deposit account. We determine on an individual basis the maximum
number of shares each participant may deposit; the participant
receives between one and three option rights for each share
deposited. The exact number of option rights per share is
dependent on relative performance of the company or the
subgroups, in comparison to selected competitors during the
three years preceding the tranche, as well as on the
participants individual performance. These deposited
shares are locked up, meaning that the participant
may not sell them during the following three-year holding
period. After the end of these three years, a two-year exercise
period begins. During this period, the participant may exercise
the option rights if the performance criteria are fulfilled. Any
unexercised option rights expire at the end of this two-year
period.

We apply two criteria, one based on performance
and one based on outperformance, to determine whether the
participant is eligible to exercise option rights granted in any
given tranche and, if so, the cash value to be received upon
exercise. These criteria measure the absolute and relative
performance of the Bayer AG share.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Share Performance Criterion: If the Bayer AG
    share price has increased at least 25 percent from the
    starting date of the tranche, each option right entitles the
    participant to have the cash value of one Bayer share for each
    option exercised added to the calculation. This amount will then
    be multiplied by the weighting for the share performance
    criterion (this factor is currently 1, set at the beginning and
    valid throughout the term of the tranche).                                                                                                                                                                                                                                                   
|
| |  | Share Outperformance Criterion: Outperformance is
    the difference between the percentage change in the price of the
    Bayer share and the percentage change in the Dow Jones EURO
    STOXX 50(SM) price index from the start of the
    program to the time the option is exercised. If the Bayer share
    has outperformed the index, the participant will, for each
    option exercised, have the cash value of one Bayer share at the
    start of the program added to the calculation, multiplied by the
    share outperformance. This amount is then multiplied by the
    weighting for the share outperformance criterion (this factor is
    currently 3, set at the beginning and valid throughout the term
    of the tranche).

The weighting for each of the two criteria is set
such that the market values of both components are equal at the
start of the tranche. We multiply the contributions resulting
from both the Performance and the Outperformance criterion by
the respective weighting factors. The sum of both products is
the cash value to which the participant is entitled.

In 2003, participants in our stock option program
received a total of 196,987 option rights. The current tranche
started on August 31, 2003. Based on this start date, an
outset value was calculated at
19.75 by
averaging the Bayer share price over the ten trading days
immediately preceding August 31, 2003. Based hereon, the
performance criterion will start to pay off at a price of
24.69
(19.75 +
25 percent).

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Stock Incentive Program

Like the stock option program, our stock
incentive program for middle management requires participants to
deposit Bayer AG shares in a special deposit account. In any
given annual tranche, a participant may deposit shares with a
maximum aggregate value of half of his or her
performance-related bonus for the preceding fiscal year. The
amount of incentive payment the participant receives depends on
the number of Bayer AG shares deposited at the start of the
tranche as well as on the price performance of the Bayer AG
share. Unlike the stock option program, the stock incentive
program does not lock up deposited shares.
Participants may sell their deposited shares during the term of
the tranche, but any deposited shares they sell are no longer
counted in calculating the number of incentive shares for
subsequent distribution dates. In the 2003 fiscal year,
participants were allowed to deposit shares in a maximum
aggregate value equal to 50 percent of their
performance-related bonus for the 2002 fiscal year.

Each tranche of the stock incentive program has a
ten-year term. There are three incentive payment distribution
dates during this period. On these dates, the participant
receives an incentive payment based on the price (at that time)
of a defined number of Bayer AG shares as follows:

|                            |  |                             |   | 
|--------------------------- |  | --------------------------- | - | 
|                            |  | Incentive payments received
|Distribution date at end of |  | (per 10 deposited shares)  
|                            |  |                            
|Second year                 |  |                             | 2 | 
|Sixth year                  |  |                             | 4 | 
|Tenth year                  |  |                             | 4 | 

Participants receive incentive payments only if
the price increase of the Bayer AG share has outperformed the
Dow Jones EURO STOXX 50(SM) price index on the
relevant distribution date, as calculated from the starting date
of the tranche.

Based on the number of Bayer AG shares that
participants in the stock incentive program deposited in the
tranche for 2003, participants are eligible to receive a total
of 32,010 shares on the tranches future distribution
dates, assuming satisfaction of the performance criterion on
each such date and assuming that these participants do not
remove any shares from deposit during the term of the tranche.

Stock Participation Program

Our stock participation program has two
components, Module 1 and Module 2. Employees not covered by the
stock option program or stock incentive program may generally
participate in both Module 1 and Module 2.

The Module 1 program, like the stock incentive
program, requires participants to deposit Bayer AG shares in a
special account. As with the stock incentive program,
participants in the stock participation program may sell their
deposited Bayer AG shares during the term of the tranche; any
shares they sell are no longer counted in calculating the amount
of incentive payments on subsequent distribution dates for that
tranche. Participants may deposit shares in a total value equal
to half their performance-related bonus for the previous year.
In the 2003 fiscal year, junior management participants were
allowed to deposit shares in a maximum aggregate value equal to
50 percent of their performance-related bonus for the 2002
fiscal year.

Each tranche of Module 1 has a term of ten years
and entitles the participant to receive incentive payments on
three distribution dates based on the number of shares he or she
has deposited. Unlike the stock incentive program, Module 1 does
not impose a share performance criterion. The participant
receives an incentive payment based on the price (at that time)
of a defined number of Bayer AG shares as follows on the
distribution dates:

|                            |  |                             |   | 
|--------------------------- |  | --------------------------- | - | 
|                            |  | Incentive payments received
|Distribution date at end of |  | (per 10 deposited shares)  
|                            |  |                            
|Second year                 |  |                             | 1 | 
|Sixth year                  |  |                             | 2 | 
|Tenth year                  |  |                             | 2 | 

Based on the number of Bayer AG shares that
participants in Module 1 of the stock participation program have
deposited in the tranche for 2003, participants are eligible to
receive the financial equivalent of a total of

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307,230 shares on the future distribution dates,
assuming that these participants do not remove any shares from
deposit during the term of the tranche.


In addition, under the 2003 tranche of
Module 2, each participant may purchase 20 Bayer AG shares
per year at a tax-free discount of
7.70 per share
under the then market price. These shares may not be sold until
December 31, 2004. Participants may not include shares that
they purchase under Module 2 among the shares they deposit under
Module 1.

Employees

The following tables set forth the average number
of employees in continuing operations during 2003, 2002 and 2001
by area of primary activity and an approximate breakdown of
employees as of December 31, 2003, 2002 and 2001 by
geographical region:

|               |  |                       |         |      |  |                     |         |  |  |      |         |      |  |                       |  |  |        |  |  |  |        |  |  |  |        | 
|-------------- |  | --------------------- | ------- | ---- |  | ------------------- | ------- |  |  | ---- | ------- | ---- |  | --------------------- |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|               |  |                       |         |      |  |                    
|               |  | Employees by Activity |         |      |  | Breakdown by Region
|               |  |                       |         |      |  |                    
|               |  |                       |         |      |  |                    
|               |  | Average for           |         |      |  | As of December 31, 
|               |  |                       |         |      |  |                    
|               |  | 2001                  |         | 2002 |  | 2003                |         |  |  | 2001 |         | 2002 |  | 2003                 
|               |  |                       |         |      |  |                     |         |  |  |      |         |      |  |                      
|Technology     |  |                       | 61,055  |      |  |                     | 66,051  |  |  |      | 62,850  |      |  | Europe                |  |  | 67,800 |  |  |  | 70,100 |  |  |  | 66,100 | 
|Marketing      |  |                       | 33,875  |      |  |                     | 35,985  |  |  |      | 34,765  |      |  | North America         |  |  | 24,000 |  |  |  | 24,600 |  |  |  | 23,300 | 
|Administration |  |                       | 9,091   |      |  |                     | 10,035  |  |  |      | 9,063   |      |  | Asia/Pacific          |  |  | 13,000 |  |  |  | 15,400 |  |  |  | 13,900 | 
|               |  |                       |         |      |  |                     |         |  |  |      |         |      |  | Latin America/Africa/ |  |  |        |  |  |  |        |  |  |  |        | 
|Research       |  |                       | 11,206  |      |  |                     | 12,521  |  |  |      | 11,602  |      |  | Middle East           |  |  | 11,500 |  |  |  | 12,000 |  |  |  | 11,500 | 
|               |  |                       |         |      |  |                     |         |  |  |      |         |      |  |                       |  |  |        |  |  |  |        |  |  |  |        | 
|Total          |  |                       | 115,227 |      |  |                     | 124,592 |  |  |      | 118,280 |      |  | Corporate             |  |  | 600    |  |  |  | 500    |  |  |  | 600    | 
|               |  |                       |         |      |  |                     |         |  |  |      |         |      |  |                       |  |  |        |  |  |  |        |  |  |  |        | 

Labor Relations

The union-organized employees at our German
facilities belong to several unions, the most important of which
is IG BCE, the German Mining, Chemical and Energy Industrial
Union. We do not negotiate collective bargaining agreements
directly with these unions to cover our employees. Instead, in
accordance with German practice, unions negotiate agreements
with industry-wide employers associations, in our case,
the German Chemical Industry Association.

In Germany, employers associations and
unions typically negotiate collective bargaining agreements
annually. However, collective bargaining agreements may be
entered into for longer term. The current agreement that covers
our employees has a term of 13 months, beginning April
2003. It grants employees a lump-sum payment of
40 in the first
month of the agreement and a subsequent 2.6 percent pay
increase over the life of the agreement. A German collective
bargaining agreement governs the employment of all employees up
to a certain level organized in the relevant union. At Bayer,
for these employee groups, even the employees who are not union
members are granted rights under the collective bargaining
agreements by way of individual agreement.

There are 13 pay grades, based on job
description, for our employees in positions governed by
collective bargaining agreements. Our management employees, who
have individual employment or service contracts, are organized
in six contract levels. The Chemical Industry has a union for
academics (Verband der angestellten Akademiker (VAA)). Apart
from a specific collective bargaining agreement for young
academics at entry level, management contracts are not subject
to collective bargaining agreements.

Each Bayer facility in Germany has a works
council (Betriebsrat), elected by all non-management
employees. Members serve a four-year term; the last elections
took place in March 2002. The works councils facilitate
communications between management and staff at the facility
level. A joint works council (Gesamtbetriebsrat) serves a
similar purpose at the company-wide level and the same applies
to the Group works council (Konzernbetriebsrat) at Group
level, Germany-wide. The rights and responsibilities of works
councils are set forth in the German Works Council Constitution
Act (Betriebsverfassungsgesetz). Within the given
framework

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of laws and collective bargaining agreements,
works councils have participatory rights on site and company
level with respect to managing staff-related issues as well as
such working conditions as:




| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | working hours (namely, beginning and end of daily
    working hours);
|
| |  | vacation guidelines;                                                 
|
| |  | social services (e.g., subsidized
    cafeterias); and               
|
| |  | distribution guidelines for performance-related
    bonuses.         

A works council has generally no authority,
however, to negotiate with an employer on wage and salary
compensation or other issues included in or typically included
in collective bargaining agreements between employers
associations and labor unions, unless the relevant collective
bargaining agreement provides otherwise. Under German labor law,
employees may not legitimately strike during the term of the
collective bargaining agreements. The provisions of the
applicable collective bargaining agreements determine whether
the right to strike in request of issues not covered by the
applicable collective bargaining agreements is also excluded
during such term. Works councils generally have no legal
authority to call a work stoppage. On the European level, we put
in practice a customized procedure for information and
consultation of employee representatives based on a voluntary
agreement between Bayer AG and the Group works council
(Europaforum).

Associated with restructuring measures within the
Bayer Group, on November 7, 2003, the Board of Management
and the employee representatives of the Supervisory Board
agreed, subject to the approval of the competent employee
representative bodies, upon principles for the extension of the
existing agreement with the joint works council dated
December 12, 2000 for safeguarding employment at several of
our major German sites, taking effect January 1, 2004.
Under these principles, an act of solidarity by all employees at
German Bayer locations allows us to maintain 1,000 full time
equivalent (FTE) positions more than previously planned. By
reducing the performance-related variable income by up to
10 percent, personnel costs of those employees who are
temporarily unassigned are covered. On this basis, we agreed
that we would not, except in exceptional circumstances, lay off
employees at our Leverkusen, Dormagen, Uerdingen, Elberfeld and
Brunsbüttel sites for operational reasons before
December 31, 2007. If exceptional circumstances arise that
are beyond our control and lead to an overcapacity of employees,
we have agreed to negotiate with the joint works council in
order to find a solution that will serve the interests of the
company and the employees to the greatest possible extent.

Employee Pension Plan

All employees who have not reached the age of 55
before entering into employment with Bayer AG must join Bayer
AGs pension fund (Bayer-Pensionskasse). As a member
of the Pensionskasse, an employee makes a monthly
contribution of 2 percent of his or her monthly salary (up
to the threshold for the statutory pension insurance
(gesetzliche Rentenversicherung), which for 2003 is
5,100 per month
or 61,200 per
year) to the pension fund. These contributions are withheld from
the members salary. Bayer AG also contributes to the
Pensionskasse. Upon retirement, the employee is entitled
to receive a monthly basic pension payment (Grundrente)
from the Pensionskasse if the employee was employed by
Bayer AG, or was a member of the Pensionskasse, for at
least five years. Employees whose annual salary exceeds the
annual salary threshold for statutory pension insurance
(gesetzliche Rentenversicherung) as set forth above by up
to 45,700 are
entitled to receive an additional monthly pension payment from
an additional pension plan (Zusatzrente), for which book
reserves are included in the balance sheet. Employees whose
annual earnings exceed the total of
61,200 plus
45,700 may
become eligible for the grant of an individual pension promise.
Bayer AG includes these individual pension entitlements also as
book reserves in the balance sheet.

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|        |                                                      
|------- | -----------------------------------------------------
|Item 7. | Major Shareholders and Related Party
    Transactions

Major Shareholders

Under our Articles of Association, each of our
ordinary shares represents one vote. Major shareholders do not
have different voting rights.

Under the German Securities Trading Act
(Wertpapierhandelsgesetz), holders of voting securities
of a listed German company must notify that company of the level
of their holding whenever it reaches, exceeds or falls below
specified thresholds. These thresholds are 5, 10, 25, 50 and
75 percent of the companys outstanding voting
securities. One shareholder, Allianz AG, has informed the SEC
via filing with the SEC on February 13, 2004 that it holds
41,877,321 ordinary shares of Bayer AG, which represents
5.7 percent of our outstanding shares. No other shareholder
has notified us that it has crossed any of the Securities
Trading Acts thresholds. Allianz AG does not have
different voting rights.

Because the shares of Bayer AG are in bearer
form, we cannot obtain precise information as to the identity of
shareholders or the distribution of the shares among them. From
time to time, however, we conduct surveys, using the assistance
of banks, to form estimates as to Bayer AGs shareholder
base. Our last such survey measured our shareholder structure as
of June 1, 2001. The survey recorded responses with respect
to 95.6 percent of our approximately 500,000 shareholders.
Of this number, 94 percent were individuals, who together
owned 24 percent of the shares. Approximately 55,000, or
12 percent, of the individual shareholders were Bayer
employees, who together held approximately 2 percent of
Bayer AGs outstanding shares. Institutional investors
(e.g., banks, insurance companies and investment funds)
held another 67 percent of the shares. Shareholders in
Germany numbered approximately 437,000 and owned 61 percent
of the shares. Approximately 59,000 shareholders in 135 other
countries held 39 percent of the shares. Of this group,
British shareholders held approximately 10 percent, and
U.S. shareholders about 8 percent, of the shares.

To our knowledge, we are not directly or
indirectly owned or controlled by another corporation or by any
government, and there are no arrangements which may result in a
change of control.

See also Item 6, Directors, Senior
Management and Employees  Share Ownership.

Related Party Transactions

In the ordinary course of business, we purchase
materials, supplies and services from numerous companies
throughout the world. Members of Bayer AGs Supervisory
Board are affiliated with some of these companies. We conduct
our transactions with such companies on an arms length
basis. We do not consider the amounts involved in such
transactions to be material to our business and believe that
these amounts are not material to the business of the companies
involved.

During our three most recent complete financial
years and through the date of this annual report, we have not
been involved in, and we do not currently anticipate becoming
involved in, any transactions that are material to us or any of
our related parties and that are unusual in their nature or
conditions. We have not made any outstanding loans to or for the
benefit of:



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | enterprises that, directly or indirectly, control
    or are controlled by, or are under common control with us
    (except at arms length conditions in the ordinary course
    of business);
|
| |  | enterprises in which we have significant
    influence or which have significant influence over us (except at
    arms length conditions in the ordinary course of business);                 
|
| |  | shareholders beneficially owning a
    10 percent or greater interest in our voting power;                                                                                                     
|
| |  | key management personnel; or                                                                                                                                                                   
|
| |  | enterprises in which persons described above own,
    directly or indirectly, a substantial interest in the voting
    power.                                                                  

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Interests of Experts and Counsel

Not applicable.






|        |                      
|------- | ---------------------
|Item 8. | Financial Information

Consolidated Financial Statements and Other
Financial Information

See Item 18.

Legal Proceedings

Bayer is involved in a number of legal
proceedings. As a global company active in a wide range of life
sciences and chemical activities, we may in the normal course of
our business become involved in proceedings relating to such
matters as:



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | product liability;                                                              
|
| |  | patent validity and infringement disputes;                                      
|
| |  | tax assessments;                                                                
|
| |  | competition and antitrust; and                                                  
|
| |  | past waste disposal practices and release of
    chemicals into the environment.

We cannot predict with certainty the outcome of
any proceedings in which we are or may become involved. An
adverse decision in a lawsuit seeking damages from us, or our
decision to settle certain cases, could result in a monetary
award to the plaintiff and, to the extent not covered by our
insurance policies, could significantly harm our business or the
result of our operations, financial positions or cash flows. If
we lose a case in which we seek to enforce our patent rights, we
could sustain a loss of future revenue as other manufacturers
begin to market products we developed. In the remainder of this
subsection, we describe what we believe to be the most
significant of the proceedings in which Bayer AG or its
subsidiaries are currently involved. The list of cases is not an
exhaustive list of all of the claims that have been made against
Bayer AG or its subsidiaries or of the proceedings in which they
are involved, and subsequent developments in any pending matter,
as well as additional claims that may arise from time to time,
including additional claims similar to those described below,
could become significant to Bayer.

Patent validity challenges and infringement
proceedings; patent-related antitrust actions

In the United States, Bayer AG and its
U.S. subsidiaries are and have been plaintiffs or
coplaintiffs in a number of patent infringement actions against
generic drug manufacturers. The lawsuits arose because these
manufacturers filed applications in the United States for
regulatory approval of generic versions of products marketed by
Bayer or its licensees. Some of these actions have, in turn,
given rise to lawsuits alleging that Bayer AG, Bayer Corporation
and other parties violated federal and state antitrust and
similar statutes.

Generic drug manufacturers may receive approval
to market formerly patented products after all applicable patent
protections have expired. A generic drug manufacturer may,
however, attempt to avoid a patent prior to its scheduled expiry
by attacking its validity or enforceability. In the United
States, the Federal Food, Drug and Cosmetics Act (the
Act) enables generic manufacturers wishing to market
a bio-equivalent version of another manufacturers product
to seek regulatory approval by filing an Abbreviated New Drug
Application (ANDA). In its ANDA, the applicant must state the
basis on which it seeks to avoid any applicable patents.

One basis for seeking approval is a claim that
the applicants product does not infringe existing patent
rights or that the patent is invalid or unenforceable. This
claim is commonly known as a paragraph IV
certification or ANDA (IV). Under the Act, the
filing of a paragraph IV certification is deemed an
infringement of patent rights. The Act permits the holder of the
patent rights to file an infringement action against the ANDA
applicant within 45 days of receiving notice of the
paragraph IV certification. If the holder of the patent
rights chooses not to file suit within this period, the FDA may
approve the ANDA immediately. The filing of a suit, however,
stays

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final FDA approval of the ANDA for a period of
30 months. The court may shorten or extend this period. If
the court rules that the applicants product will not
infringe the patent or that the patent is invalid or
unenforceable, the FDA may grant approval immediately. If, on
the other hand, the court rules that the product will infringe
the patent, the FDA may not grant final approval until the
original patent has expired.


Ciprofloxacin-related actions

Patent-related actions.In January 1997, Bayer AG and Bayer
Corporation settled a patent infringement suit against Barr
Laboratories, Inc. This suit arose when Barr filed an ANDA
(IV) seeking regulatory approval of a generic form of
Bayers ciprofloxacin anti-infective product, which we sell
in the United States under the trademark Cipro. Under the
settlement agreement, Barr and Rugby Laboratories Inc., another
generic manufacturer that supported Barr during the infringement
suit, agreed to dismiss the litigation, acknowledging the
validity and enforceability of Bayers patent rights, and
we agreed to pay each company $24.5 million. The agreement
gave us the option, until our patent expired in 2003, to supply
Barr and Rugbys then parent company Hoechst Marion Roussel
Inc. with ciprofloxacin products, which they could then market
under a license from Bayer using a single trade name, or
alternatively to make quarterly cash payments. Since concluding
the settlement agreement, we have opted to make payments. As of
June 9, 2003, Barr began selling ciprofloxacin
hydrochloride tablets in the United States using licensed
product purchased from Bayer. These purchases are being made
pursuant to a separate obligation of Bayer under the settlement
agreement to supply such product to Barr during the six-month
period immediately preceding the December 2003 expiration of the
patent protecting the sale of Cipro in the United States. Bayer
has received pediatric exclusivity for Cipro from the FDA, which
will delay the introduction of generic versions of ciprofloxacin
for six months beyond expiration of the patent. The agreement
term has been extended to include the additional six-month
pediatric exclusivity period. Shortly after settling this suit,
we applied to the U.S. Patent and Trademark Office for a
re-examination of our patent. The Patent and Trademark Office
reissued the patent in February 1999. See below, 
Antitrust actions.

Antitrust actions.Since July 2000, Bayer Corporation has
been named as a defendant in 39 putative class action lawsuits,
one individual lawsuit and one consumer protection group lawsuit
filed in a number of state and federal courts in the United
States. Bayer AG has also been named as a defendant in 20 of
those cases, including the individual lawsuit and the consumer
protection group lawsuit; however, to date it has only been
served with process in the individual lawsuit and twelve of the
putative class action lawsuits. In addition, Barr Laboratories,
Inc., Aventis S.A., Hoechst Marion Roussel, Inc., Rugby
Laboratories, Inc. and Watson Pharmaceuticals, Inc. have each
been named as a defendant in one or more of these lawsuits. The
plaintiffs in these suits allege that they are direct or
indirect purchasers of Cipro who were damaged because
Bayers settlement of the Barr ANDA (IV) litigation
prevented generic manufacturers from selling a generic version
of Cipro. The plaintiffs allege that the settlement violates
various federal antitrust and state business, antitrust, unfair
trade practices and consumer protection statutes, and seek
treble damages and injunctive relief.

The Judicial Panel for Multidistrict Litigation
(or MDL Panel) transferred 35 of these cases to the
U.S. District Court for the Eastern District of New York
for coordinated pre-trial proceedings. The district court later
remanded nine of those cases to various state courts.

On January 25, 2002, Bayer filed a motion to
dismiss all of the cases pending in the District Court for the
Eastern District of New York, and the plaintiffs filed motions
for partial summary judgment that the conduct alleged in the
complaints constitutes an agreement that is unlawful on its
face. On May 20, 2003, the district court denied the
plaintiffs motions for partial summary judgment,
concluding that the alleged conduct was not per se
anticompetitive under U.S. antitrust laws. The district
court also denied Bayers motion to dismiss, except as to
the consumer protection group lawsuit.

Nine cases have been consolidated and are
currently pending in a California state court. The California
state court certified a class of certain indirect purchasers on
December 1, 2003 and the defendants appealed that decision
on January 9, 2004. No other court has certified a class.
Bayer is also involved in state court proceedings in Florida,
New York, Kansas, Tennessee and Wisconsin. The New York and
Wisconsin cases have been dismissed and plaintiffs have appealed
the dismissal in Wisconsin.

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The Barr settlement is also the subject of an
ongoing antitrust investigation by the U.S. Federal Trade
Commission and a number of state attorneys general.

Because these cases, which may involve joint and
several liability among the defendants, in the aggregate allege
substantial unquantified damages and also seek treble and
punitive damages and penalties, it is possible that the ultimate
liability for us could materially adversely affect our results
of operations or cash flows. Although we cannot predict the
outcome of these cases with certainty, we believe that we have
meritorious defenses to the antitrust allegations and intend to
defend them vigorously. Additionally, due to the considerable
uncertainty associated with these proceedings, it is currently
not possible to accurately estimate potential liability.
Depending on the progress of the litigation, we will continue to
reconsider the need to establish provisions, which may have a
negative effect on our results of operations, financial position
or cash flows.

Moxifloxacin-related actions

In February 2004, Bayer AG and Bayer Corporation
received separate ANDA (IV)s from two generic manufacturers
seeking regulatory marketing approval for allegedly
bio-equivalent versions of our respiratory tract anti-infective
product with the brand name
Avelox®/Avalox®. Both manufacturers seek
the approval prior to the expiry of the Bayer patents that,
among other things, protect moxifloxacin, the active ingredient
of Avelox®. Bayer intends to take all appropriate
legal action to enforce its legal rights.

Nifedipine-related actions

Patent-related actions.Since 1997, Bayer AG and Bayer
Corporation have been involved in a number of patent
infringement actions arising from ANDA (IV)s filed by generic
manufacturers seeking regulatory marketing approval for
allegedly bio-equivalent versions of our brand-name product
Adalat CC and Pfizer, Inc.s brand-name product Procardia
XL. The active ingredient of these products is nifedipine. We
own patent rights related to nifedipine drug product
formulations. In addition, because Pfizer markets Procardia XL
under a license from Bayer, Bayer AG and Bayer Corporation
became Pfizers co-plaintiffs in the infringement actions
relating to that product. We have satisfactorily concluded these
cases related to nifedipine with all of the defendants.

Antitrust actions.Biovail filed an antitrust lawsuit
against Bayer AG, Bayer Corporation and Pfizer in the
U.S. District Court for the District of Western
Pennsylvania in April 1998. Biovail was seeking a declaratory
judgment that Bayers nifedipine patents are invalid.
Biovail was also seeking damages under federal and state
antitrust statutes alleging, among other things, that Bayer
illegally asserted its patent rights. The district court stayed
this litigation pending resolution of the nifedipine-related
patent infringement actions against Biovail. This suit has been
dismissed.

Vardenafil-related actions

On October 22, 2002, a lawsuit (Declaratory
Judgment of Infringement of Pfizers U.S. Patent
number 6,469,012) was filed by Pfizer alleging that Bayer and
GlaxoSmithKline Inc. had and were engaging in activities
directed toward infringement of Pfizers patent, including
seeking FDA approval to market their co-promoted product,
Levitra®. The FDA approved
Levitra® for marketing in the U.S. on
August 19, 2003. Bayer and SmithKline Beecham Corporation
launched the product in the U.S. shortly thereafter. On
September 22, 2003, Bayer AG and Bayer Corporation and
SmithKline Beecham Corporation were sued by Pfizer Inc. and
certain of its affiliates in the U.S. District Court for
the District of Delaware in conjunction with Pfizers
earlier patent infringement lawsuit against the same Bayer
companies and two different GlaxoSmithKline companies. In this
action, Pfizer alleged that Bayer and GlaxoSmithKline were
infringing the patent by, inter alia, marketing their
co-promoted product, Levitra®, for the
treatment of erectile dysfunction. In both, now consolidated,
lawsuits, we and GlaxoSmithKline/ SmithKline Beecham denied the
allegations raised by Pfizer and filed a counterclaim that
Pfizers patent is invalid. We believe that we have
meritorious defenses in these actions and intend to defend them
vigorously. In September 2003, the U.S. Patent and
Trademark Office initiated a re-examination of the Pfizer patent
based on questions of patentability in light of prior art. The
litigation has been stayed pending resolution of the
re-examination.

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In some other countries further proceedings are
pending, in part infringement actions initiated by Pfizer, in
part patent nullity proceedings initiated by Bayer. In October
2001, the equivalent European Patent held by Pfizer was revoked
by the European Patent Office. Pfizer has appealed against the
decision of the European Patent Office. The proceeding is
pending. We do not expect a final decision before the end of
2004.

Aventis Behring actions

Nattermann & Cie GmbH and Aventis Behring LLC
filed a suit on April 11, 2003 against Bayer Corporation
and Bayer HealthCare LLC in the U.S. District Court
for the Eastern District of Pennsylvania alleging that
Bayers Kogenate® FS composition
containing recombinant Factor VIII, which is used to treat
hemophilia, infringes upon the U.S. patent owned by either
Nattermann & Cie or Aventis Behring. Bayer
counterclaimed, seeking, inter alia, a declaration of
patent invalidity and non-infringement, and asserting that
Bayers use of the patented process is pursuant to a
license. The proceedings are at an early stage. We believe that
we have meritorious defenses in these actions and intend to
defend them vigorously.

Aventis Behring LLC filed a suit on
December 4, 2003 against Bayer Corporation and Bayer
HealthCare LLC in the Court of Common Pleas of Montgomery
County, Pennsylvania, alleging that Aventis Behring has been
damaged as a result of Bayers breach of a contract to
supply Aventis Behring with agreed-upon quantities of
recombinant Factor VIII. At the outset, we brought this
state court action to the attention of the federal district
court hearing the Nattermann action described above, arguing
this breach of contract claim is a compulsory counterclaim in
the Nattermann action and should be deemed waived since the
deadline for filing such claims in that action has passed, or
alternatively, that Aventis Behring should be required to bring
this claim in the Nattermann action, rather than as an
independent action in state court. In response to federal court
directions, the parties have filed briefs on this issue. We
believe we have meritorious defenses and claims in this action
and intend to defend it vigorously. Due to the considerable
uncertainty associated with these proceedings, it is currently
not possible to estimate the potential liability.

Product liability proceedings

HIV/HCV-related actions.During the past decade, Bayer
Corporation, as well as other fractionators of plasma products,
have been involved in lawsuits alleging that hemophiliacs became
infected with the human immunodeficiency virus (HIV), or
ultimately developed AIDS, by using clotting factor concentrates
derived from human plasma. Plaintiffs have brought actions on
these grounds in the United States, Ireland, Italy, Taiwan,
Argentina, Canada, Japan and Germany.

In the United States, a class action against
Bayer Corporation and three other defendants consolidated the
HIV-related claims of more than 6,000 claimants and
claimant groups. The parties resolved this class action through
a $600 million settlement. Bayer Corporations share
of this settlement was approximately $290 million. Bayer
Corporation has settled nearly 400 lawsuits by plaintiffs
who opted out of the class action. Two suits remain pending in
the United States. Although Bayer Corporation has prevailed in
the majority of cases that have proceeded to trial, plaintiffs
were successful in three cases. The juries in each of these
cases awarded damages not exceeding $2 million. In
addition, in 1999, a Louisiana jury awarded a plaintiff damages
of $35 million. However, the trial court set this award
aside, and an appellate court upheld this decision. Bayer
Corporation has since settled this matter in the context of a
group settlement of nearly 100 Louisiana cases, of which Bayer
Corporations share was less than $50 million. Bayer
Corporation intends to defend aggressively the remaining
HIV-related lawsuits in various countries. We have made what we
believe to be appropriate provisions should these suits result
in judgments in favor of the plaintiffs.

In June 2003, a U.S. law firm filed a
putative class action against Bayer Corporation and other
manufacturers on behalf of non-U.S. residents claiming
compensation for HIV/HCV infections allegedly acquired through
blood plasma products manufactured in the U.S. In September
2003, plaintiffs amended the complaint to include class action
allegations on behalf of U.S. residents claiming
compensation for HCV, hepatitis C virus, infections. The case
has been transferred from the Northern District of California to
the U.S. District Court for the Northern District of
Illinois for coordinated discovery and other pre-trial
proceedings. In addition to the June 2003 matter,
non-U.S. residents have filed five and served three
additional cases claiming compensation for HIV/HCV

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infections allegedly acquired through blood
plasma products manufactured in the U.S. Two of these
matters have been transferred to the Northern District of
Illinois. These matters are at an early stage. We believe that
we have meritorious defenses to these actions and intend to
defend them vigorously. Due to the considerable uncertainty
associated with these proceedings, it is currently not possible
to estimate the potential liability.


Cerivastatin-related
actions.In August 2001, Bayer
voluntarily ceased marketing Baycol, the cerivastatin
anticholesterol product, in response to reports of serious side
effects in some patients. As of March 5, 2004, 9,948
lawsuits are pending in both federal and state courts, including
putative class actions. The actions in the United States have
been based primarily on theories of product liability, consumer
fraud, medical monitoring, predatory pricing and unjust
enrichment. These lawsuits seek remedies including compensatory
and punitive damages, disgorgement of funds received from the
marketing and sale of cerivastatin and the establishment of a
trust fund to finance the medical monitoring of former
cerivastatin users. The federal cases were transferred to the
U.S. District Court for the District of Minnesota for
coordinated discovery and other pre-trial proceedings. A motion
for certification of nationwide personal injury, medical
monitoring and economic refund classes was denied by this court
on September 17, 2003. Similarly, on December 15,
2003, the Circuit Court of Cook County, Illinois denied a motion
to certify a class action. On June 16, 2002, the Oklahoma
District Court of Pottawatomie County certified a class of all
Oklahoma residents who took cerivastatin and sustained
muscular/skeletal injuries as a result. Bayer appealed this
ruling to the Oklahoma Court of Appeals, which affirmed the
lower courts class certification ruling on June 20,
2003. On November 3, 2003, the Oklahoma Supreme Court
denied Bayers motion for a writ of certiorari. On
March 19, 2004, the Philadelphia County Court of Common
Pleas in Pennsylvania certified a medical monitoring class of
persons in Pennsylvania who took cerivastatin and have not been
diagnosed with the diseases specified in the certification
order. We believe that we have meritorious defenses against
class certification and intend to appeal this ruling. The
certification of a class is unrelated to a determination of our
liability. As of March 5, 2004, 93 actions have been
initiated against other companies of the Bayer Group in other
countries, including class actions in Canada. In August 2003,
the Supreme Court of British Columbia certified a class of all
persons resident in British Columbia who ingested cerivastatin.
Bayer appealed this ruling and a settlement agreement has been
signed in this matter. Subject to court approval, the settlement
agreement provides for a decertification of the class proceeding
for all persons included in the original class who did not
suffer from rhabdomyolysis. Bayer expects additional lawsuits to
be filed in the United States and elsewhere. Three
U.S. cases have been tried to date, all of which resulted
in a verdict in our favor.

In negotiations with the insurance companies
concerning the cerivastatin litigation, an agreement was reached
with the majority of the insurers. The insurers had previously
proceeded only on a provisional basis under a customary
reservation of rights. The insurers that are parties to this
agreement have now withdrawn the reservations of rights. Thus,
Bayer expects the insurance coverage for cerivastatin to be
approximately $1.2 billion. Based on the agreement reached
with the insurers and in consideration of further expected
settlements and further defense costs, the Company has taken
accounting measures, which resulted in a charge to income of
300 million
for the fiscal year 2003.

Due to the considerable uncertainty associated
with these proceedings, it is currently not possible to estimate
the potential liability and thus no provisions exceeding the
expected insurance coverage and the above referenced accounting
measures already taken have been made. Depending on the progress
of the litigation, Bayer may face payments that exceed our
expected insurance coverage and the above referenced accounting
measures and will continue to reconsider the need to establish
additional provisions, which may have a negative effect on the
results of our operations, financial positions or cash flows.
Without acknowledging any liability, we have settled 2,224 cases
in the United States as of March 5, 2004, resulting in
settlement payments of approximately $842 million.

In January and March 2004, Bayer signed
settlement agreements with lawyers representing plaintiffs in
Baycol litigation pending in Canada. The agreements
together establish a procedure to settle claims of
rhabdomyolysis for all Canadian residents. To facilitate an
efficient implementation of the agreement, the parties have
agreed to a settlement class which is subject to approval by the
courts. Bayer will continue to offer fair compensation to people
who experienced serious side effects while taking cerivastatin
on a voluntary basis and without concession of liability. In
cases where an examination of the facts indicates that
Baycol played no part in the patients medical
situation, or where a settlement is not achieved, Bayer will
continue to defend itself vigorously. Bayer believes it has
meritorious defenses in these actions. In some countries,
criminal proceedings

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have been initiated by the relevant authorities.
In the United States, Bayer co-promoted this product with
SmithKline Beecham Corporation. SmithKline Beecham Corporation
and Bayer Corporation have signed an allocation agreement under
which SmithKline Beecham has agreed to pay 5 percent of all
settlements and compensatory damage judgments arising out of
actions based on the sale or distribution of cerivastatin in the
United States, with each party responsible for paying its own
attorneys fees.


In January 2004, Bayer Corporation received a
subpoena for documents principally relating to cerivastatin from
the Defense Criminal Investigative Service of the
U.S. Department of Defense Inspector General. Prior to the
withdrawal, Bayer had a contract with the Department to provide
it with a supply of cerivastatin. Preliminary conversations with
the Justice Department indicate that this is a joint Department
of Defense/Food and Drug Administration investigation relating
to cerivastatin. Bayer is not aware of any charges or complaints
filed in connection with this inquiry. Bayer believes it has
acted responsibly and fulfilled its responsibilities to the
U.S. government, and will work cooperatively to provide the
information requested.

Phenylpropanolamine (PPA)
actions.In late 2000, Bayer
voluntarily discontinued marketing over-the-counter cough and
cold remedies containing PPA in the United States in response to
a recommendation from the FDA that manufacturers voluntarily
discontinue marketing products containing PPA. Bayer also
voluntarily discontinued marketing products containing PPA in
Canada and in various Latin American countries in late 2000 and
in Spain in 2001. The FDA issued this recommendation after one
epidemiological study of a small number of patients suggested a
possible association between PPA and hemorrhagic stroke in women
of certain ages. As of March 5, 2004, approximately 1,500
lawsuits are pending in the United States against Bayer
Corporation. Of these, approximately 850 cases name Bayer as the
only manufacturing defendant. In the remaining 650 cases, one or
more other manufacturers are also defendants. As of
March 5, 2004, Bayer AG has been named as a defendant in 43
of these individual cases; however, plaintiffs have agreed not
to actively pursue their claims against Bayer AG at this time.
The MDL Panel has assigned management of the federal court cases
to the U.S. District Court for the Western District of
Washington. Additionally, two purported class action suits
against Bayer Corporation are currently pending in Pennsylvania
and New Jersey. There has been little activity in these cases
since they were filed in 2001. Class certification was denied in
a total of twelve cases. A class certification was denied in an
economic injury case brought in California. Plaintiffs appealed
but later voluntarily dismissed their appeal, which the court
approved in September of 2003. In another economic injury class
action case, which was part of the multi-district litigation
proceeding, class certification was denied and that decision
affirmed on appeal.

The claims primarily relate to compensation for
alleged damage to health and personal injury, breach of
warranty, negligent and reckless misrepresentation, entitlement
to subsequent monitoring and reimbursement of the purchase
price, and conspiracy to defraud and fraudulently conceal.
Claims for punitive damages have also been filed. It is probable
that additional actions will be initiated in the United States
or in other jurisdictions where products containing PPA were
marketed. Bayer believes it has meritorious defenses to these
actions and intends to defend them vigorously. Bayer will, at
times, consider the option of settling litigation on a
case-by-case basis and, without acknowledging any liability, has
recently settled a number of cases.

Due to the considerable uncertainty associated
with these proceedings, it is currently not possible to estimate
potential liability and thus no provisions for such potential
liabilities have yet been made. Depending on the progress of the
litigation, Bayer may face payments that exceed our insurance
coverage and will continue to reconsider the need to establish
provisions, which may have a negative effect on the results of
our operations, financial positions or cash flows.

Thimerosal actions

As of March 12, 2004, Bayer Corporation has
been served in 24 lawsuits filed in various state and
U.S. federal courts by or on behalf of persons alleging
injuries from use of Bayer products containing thimerosal or
phenylmercuric acetate, specifically immunoglobulin injectable
products and over-the-counter nasal sprays. Many of these cases
involve multiple unrelated plaintiffs. Numerous manufacturers
used mercury-containing compounds as preservative agents in
vaccines and other medical and over-the-counter products.
Plaintiffs allege that use of products containing these
compounds has caused autism, neurodevelopmental disorders and
other injuries. They are requesting various remedies for the
alleged resulting injuries including compensatory, punitive

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and statutory damages and funding for medical
monitoring and research. Additional cases may be filed in the
future against Bayer and other companies that sold products
using mercury-containing compounds. The cases against Bayer are
at an early stage, and Bayer is contesting them on both
procedural and substantive grounds. Bayer believes it has
meritorious defenses in these actions and intends to defend them
vigorously. Due to the considerable uncertainty associated with
these proceedings, it is currently not possible to estimate the
potential liability.


Everest litigation

The purchaser of Bayer CropSciences global
Everest herbicide business, Arvesta, has filed a lawsuit in
California demanding rescission of the asset purchase agreement
in connection with the purchase of Everest and return of the
purchase price or, alternatively, monetary damages. Arvesta
alleges that Bayer CropScience withheld material information
concerning the value of certain claims resulting from Everest
use in Idaho and that Bayer CropScience misled Arvesta about the
amount of Everest that had been used in Canada in 2002 and
perhaps other years. Bayer CropScience is currently preparing
its responsive pleadings.

Imidacloprid actions

The French registration on Maize of the Bayer
CropScience product containing imidacloprid,
Gaucho®, is being challenged by the Union
Nationale de lApiculture Francaise (UNAF), a national
association of beekeepers in France, due to alleged bee
toxicity. The French Ministry of Agriculture refused to withdraw
the registration in January 2003 and UNAF appealed. An adverse
decision could adversely affect results of operations and cash
flows. The French Ministry of Agriculture has recently requested
an additional review of imidacloprid product registrations,
which is currently ongoing. No new adverse findings have been
presented to date.

In the United States, owners of honeybees and
honeybee hives have filed a purported class action against Bayer
in federal court in Pennsylvania as well as a corresponding
action in Pennsylvania state court alleging that imidacloprid
caused damage to their honeybees, to the honey as well as to the
wax. The federal court dismissed without prejudice
plaintiffs motion to certify a class. These proceedings
are at various preliminary stages. It is not possible to
estimate potential liability in these cases. Bayer believes it
has meritorious defenses in these actions and intends to defend
them vigorously.

BASF Fipronil Claim

BASF has notified Bayer CropScience AG of a
claim, which is based on the allegation that Bayer CropScience
AG in connection with the sale of its fipronil business to BASF
willfully misled BASF by not disclosing updated business
developments with respect to fipronil in Brazil and Korea in the
third quarter of 2002 and not disclosing updated business
expectations for 2003 and the following years. Discussions
between the parties are ongoing. Bayer believes it has
meritorious defenses in this action and intends to defend it
vigorously. Due to the considerable uncertainty associated with
these proceedings, it is currently not possible to estimate the
potential liability.

Average wholesale price manipulation
proceedings

Sixteen pending lawsuits allege that a number of
pharmaceutical companies, including Bayer Corporation,
manipulated the average wholesale price (AWP) and/or
Medicaid best price of their products. The suits allege that
this manipulation resulted in overcharges to Medicare
beneficiaries, Medicaid recipients, state governmental health
programs, and private health plans. These suits generally seek
damages, treble damages, disgorgement of profits, restitution
and attorneys fees. Ten of the sixteen actions are private
class actions alleging injury to patients or payors. The
remaining six are brought by government entities. All of the
state court actions have been removed to federal court; two of
the cases have been remanded back to state court in Arizona and
Nevada.

The thirteen cases pending in the federal courts
have been consolidated in the U.S. District Court for the
District of Massachusetts for coordinated pre-trial proceedings.
One of the federal suits names Bayer AG together with Bayer
Corporation as defendants.

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In June 2003, plaintiffs filed an Amended Master
Consolidated Complaint governing most of the private party class
actions pending against Bayer. Bayer, along with other
defendants, moved to dismiss that complaint. On
February 24, 2004, the court granted the defendants
motion in part and denied it in part, dismissing the first count
of the ten-count complaint. Bayer anticipates commencing
discovery in the near future.

Due to the considerable uncertainty associated
with these proceedings, it is not possible to estimate potential
liability. Depending on the progress of the proceedings, we will
continue to reconsider the need to establish provisions, which
may have a negative effect on the results of our operations,
financial positions or cash flows.

Rubber-related actions

Bayer AG and certain of its subsidiaries are
the subjects of criminal and civil investigations being
conducted by the Antitrust Division of the U.S. Department
of Justice (DOJ), the Directorate General for
Competition of the European Commission (EC), and the
Canadian Competition Bureau (CCB, and, collectively,
the Competition Authorities). The Competition
Authorities are investigating potential violations of their
respective antitrust or competition laws involving certain of
Bayers rubber-related lines of business.

Since September 2002, the DOJ has undertaken
criminal grand jury investigations of potential antitrust
violations involving Bayers rubber chemicals, ethylene
propylene diene monomer (EPDM) synthetic rubber, and
acrylonitrile butadiene rubber (NBR) synthetic
rubber lines of business. The EC is conducting civil
investigations of potential violations of European competition
laws involving Bayers rubber chemicals, EPDM and NBR lines
of business. The CCB is conducting criminal investigations of
potential violations of Canadian competition laws involving
Bayers rubber chemicals, EPDM and NBR lines of business.

Bayer and certain of its subsidiaries have been
named, among others, as defendants in multiple putative class
action lawsuits in various state courts in the United States and
as defendants in lawsuits pending before various federal courts
in the United States. In each state court action, the plaintiffs
have alleged violations based on the defendants alleged
participation in a conspiracy to fix prices. The state court
plaintiffs seek damages as indirect purchasers of the allegedly
affected products. In the federal court actions, the plaintiffs
allege the defendants participation in a conspiracy to fix
the prices and/or to allocate markets and customers for the sale
of the allegedly affected products and seek damages as direct
purchasers of those products. These proceedings are at various
preliminary stages.

Bayer is aware that its competitors are subject
to investigations by the Competition Authorities involving
potential violations of antitrust or competition laws related to
additional rubber-related products. Private civil lawsuits may
arise out of these investigations, which may involve Bayer and
its competitors.

Because these cases, which may involve joint and
several liability among the defendants, in the aggregate allege
substantial, unquantified damages and also seek treble and
punitive damages and penalties, it is possible that the ultimate
liability could be materially adverse to our results of
operations, financial position or cash flows in one or more
periods. Additionally, due to the considerable uncertainty
associated with these proceedings, it is currently not possible
to estimate potential liability. Depending on the progress of
the litigation, we will continue to reconsider the need to
establish or adjust provisions, which may have a negative effect
on the results of our operations, financial positions or cash
flows.

Polyester polyols
investigation

Bayers U.S. subsidiary, Bayer Corporation,
is the subject of a criminal antitrust investigation by the
Antitrust Division of the DOJ. The Division is investigating
potential antitrust violations involving certain of Bayer
Corporations polyester polyols lines of business. This
matter is at an early stage. It is not possible to estimate
potential liability in this matter.

Securities litigation

Bayer AG, along with certain of its current
and former officers and members of the Bayer AG Board of
Management, and Bayer Corporation have been named as defendants
in a purported class action lawsuit pending in the
U.S. District Court for the Southern District of New York.
The class action alleges violations of the

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U.S. securities laws and asserts that the
defendants made false and misleading statements and omissions
with respect to the commercial prospects, safety and efficacy of
our cerivastatin anticholesterol products and with respect to
the extent of the potential product liability exposure following
our voluntary decision to cease marketing and to withdraw these
products in August 2001. The case seeks damages on behalf of
class members who allegedly purchased Bayer securities at
inflated prices. The case results from court consolidation on
June 27, 2003 of seven purported class action lawsuits that
had been filed on related grounds. In consolidating the seven
cases, the court appointed a lead plaintiff and lead
plaintiffs counsel. On October 31, 2003, the lead
plaintiff filed a consolidated amended complaint seeking
unspecified damages on behalf of a class of all persons who
purchased Bayer AG stock (including Bayer AG American
Depository Receipts) between March 6, 1998 and
February 21, 2003. Defendants filed a motion to dismiss the
consolidated amended complaint on January 15, 2004. The
court has not yet ruled on this motion. Bayer AG, as do the
other defendants, denies liability, believes that it has
meritorious defenses to this action and intends to defend itself
vigorously. Due to the considerable uncertainty associated with
these proceedings, it is currently not possible to estimate the
potential liability.


German shareholder lawsuit

In June 2003, a shareholder of Bayer AG
filed a lawsuit in the regional court of Cologne, Germany
(Landgericht Köln) challenging certain resolutions
approved by the shareholders meeting of April 25,
2003, including the financial statements of Bayer AG (not
the consolidated financial statements) and consequently the
distribution of profits. In effect, the plaintiff sought to
prevent the implementation of our planned new corporate
structure. The lawsuit was withdrawn by the shareholder in July
2003.

Asbestos litigation

We are currently involved in asbestos litigation
in the United States, primarily as a premises defendant,
predominantly in the states in which Bayer has industrial sites.
The overwhelming majority of cases involving Bayer have been
filed in West Virginia and Texas and involve allegations of
exposure at Bayers sites. There are also some asbestos
cases pending against Bayer in Indiana and California. Texas law
and West Virginia law permit consolidated asbestos actions in
which multiple plaintiffs can sue multiple defendants for
asbestos-related conditions without specifying which plaintiff
has a claim against which defendant. While Bayer may be named as
a defendant, each plaintiff does not have to assert a claim
against Bayer.

The allegations as to Bayer and numerous other
premises defendants are that Bayer employed many contractors on
our industrial sites, yet failed to warn them or protect them
from the known hazards of asbestos exposure throughout the
1960s, 1970s and 1980s. Since premises owners
now form a new group of targeted corporate defendants in these
litigations, these types of actions may have an adverse impact
on our results of operations, financial position or cash flows.

One of our U.S. subsidiaries, Bayer
CropScience, Inc., is the legal successor to entities that sold
asbestos-containing products from the 1940s until 1976 and
is named as a defendant in asbestos-related litigation. Bayer
CropScience is and has been fully indemnified for its costs and
exposure in relation to this litigation by Union Carbide. Union
Carbide continues to accept Bayer CropSciences tender of
these cases, and it defends and settles them in Bayer
CropSciences name, in its own name and in the name of the
several predecessor companies to Bayer CropScience.

We believe that we have meritorious defenses in
these actions and are defending them vigorously. Without
acknowledging any liability, we have settled a number of these
cases in the past. We may, on a case-by-case basis, settle
additional cases for reasonable amounts when, in our judgment,
settlement is economically feasible given the risks and costs
inherent in the litigation. We have made what we believe to be
appropriate provisions should these suits result in judgments in
favor of the plaintiffs.

Plant Genetic Systems
litigation

Former shareholders of Plant Genetic Systems NV
(PGS) have initiated arbitration proceedings in the
Netherlands against AgrEvo, now Bayer CropScience GmbH.
Claimants sought damages of up to $400 million based on
alleged violations of a confidentiality agreement in connection
with the acquisition of PGS by AgrEvo

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in 1996, which allegedly prevented claimants from
obtaining a higher purchase price. By judgment of August 1,
2003, the Arbitration Court finally and completely rejected all
claims by former PGS shareholders.


Dividend Policy and Liquidation
Proceeds

Our shareholders may declare dividends at an
ordinary general shareholders meeting, which must be held
within the first eight months of each fiscal year.

Under German law, Bayer AG may pay dividends
only from balance sheet profits reflected in its unconsolidated
financial statements (as opposed to the consolidated financial
statements of the Bayer Group), as adopted and approved by the
Board of Management and the Supervisory Board. In determining
the balance sheet profits that may be distributed as dividends,
the Board of Management may under German law and the provisions
of our Articles of Association allocate to other retained
earnings (andere Gewinnrücklagen) the net income of
Bayer AG for the fiscal year that remains after deducting
amounts to be allocated to legal and statutory reserves
(gesetzliche Rücklagen) and losses carried forward.
More than 50 percent of the net income may be allocated to
other retained earnings only if such retained earnings would
then not exceed 50 percent of our capital stock. The Board
of Management may also increase balance sheet profits when
preparing the financial statements with funds withdrawn from
retained earnings.

Our shareholders, in their resolution on the
appropriation of balance sheet profits, may carry forward
balance sheet profits in part or in full and may allocate
additional amounts to retained earnings. Profits carried forward
will be automatically incorporated in the balance sheet profits
of the next fiscal year and may be used in their entirety to pay
dividends in the next fiscal year. Amounts allocated to the
retained earnings are available for dividends only if and to the
extent the retained earnings have been dissolved by the Board of
Management when preparing the financial statements, thereby
increasing the balance sheet profits.

Dividends approved at an ordinary general
shareholders meeting are payable promptly after the
meeting, unless otherwise decided at the meeting. Because all of
Bayer AGs shares are in book-entry form represented
by a global certificate deposited with Clearstream
Banking AG in Frankfurt am Main, Germany, shareholders
receive dividends through Clearstream for credit to their
deposit accounts. Additionally, the ordinary general
stockholders meeting may decide to distribute the balance
sheet profit partly or in total to the stockholders by way of
distribution in kind.

We expect to continue to pay dividends, although
we can give no assurance as to the payment of a dividend for any
particular year or as to the particular amounts that we may pay
from year to year.

Apart from liquidation as a result of insolvency
proceedings, Bayer AG may be liquidated only with a
combined majority of the votes cast and three-quarters of the
share capital present or represented at a shareholders
meeting at which the vote is taken. In accordance with the
German Stock Corporation Act, upon a liquidation of
Bayer AG, any liquidation proceeds remaining after paying
off all of Bayer AGs liabilities would be distributed
among the shareholders in proportion to the total number of
shares held by each shareholder.

See also Item 3, Key
Information  Dividends.

Significant Changes

Except as discussed elsewhere in this annual
report, no significant change has occurred since the date of the
annual financial statements included in this annual report.

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Item 9. The Listing

Listing Details

American Depository Shares (ADSs), each
representing one share, are listed on the New York Stock
Exchange and trade under the symbol BAY. The depositary for the
ADSs is The Bank of New York.

The principal trading market for our ordinary
shares is the Frankfurt Stock Exchange. Our shares are traded on
Xetra, a computerized trading system operated by Deutsche
Börse AG, in addition to being traded on the auction
market (floor). Our shares are also listed on the other German
stock exchanges, including Berlin/ Bremen, Düsseldorf,
Hamburg, Hannover, Stuttgart and Munich. In addition, our shares
are listed on the Paris, Barcelona, Madrid, Antwerp, Brussels,
Amsterdam, London, Milan, Zurich, Luxembourg and Tokyo stock
exchanges.

The table below sets forth, for the periods
indicated, the reported high and low closing prices for our
shares on the Frankfurt Stock Exchange (Xetra) and on the New
York Stock Exchange.

|                     |                  |                |       |                |  |      |       |       |  |  |       |       |  |  |       |       | 
|-------------------- | ---------------- | -------------- | ----- | -------------- |  | ---- | ----- | ----- |  |  | ----- | ----- |  |  | ----- | ----- | 
|                     |                  |                |       |               
|                     |                  | Frankfurt      |       | New York      
|                     |                  | Stock Exchange |       | Stock Exchange
|                     |                  |                |       |               
|                     |                  | High           |       | Low            |  | High |       | Low  
|                     |                  |                |       |                |  |      |       |      
|                     |                  |                |       |               
|                     |                  | (in euros)     |       | (in dollars)  
|1999                 |                  |                | 47.65 |                |  |      | 29.74 |       |  |  |      |       |  |  |      |      
|2000                 |                  |                | 56.50 |                |  |      | 38.52 |       |  |  |      |       |  |  |      |      
|2001                 |                  |                | 58.00 |                |  |      | 23.90 |       |  |  |      |       |  |  |      |      
|2002:                |                  |                |       |                |  |      |       |       |  |  |       |       |  |  |       |      
|                     | First quarter(1) |                |       | 40.80          |  |      |       | 33.30 |  |  |       | 36.00 |  |  |       | 28.91 | 
|                     | Second quarter   |                |       | 40.10          |  |      |       | 30.90 |  |  |       | 33.45 |  |  |       | 30.20 | 
|                     | Third quarter    |                |       | 33.27          |  |      |       | 17.45 |  |  |       | 32.25 |  |  |       | 17.60 | 
|                     | Fourth quarter   |                |       | 23.66          |  |      |       | 17.59 |  |  |       | 23.74 |  |  |       | 17.30 | 
|Full year 2002       |                  |                | 40.80 |                |  |      | 17.45 |       |  |  | 36.00 |       |  |  | 17.30 |      
|2003:                |                  |                |       |                |  |      |       |       |  |  |       |       |  |  |       |      
|                     | First quarter    |                |       | 22.42          |  |      |       | 10.28 |  |  |       | 23.38 |  |  |       | 11.24 | 
|                     | Second quarter   |                |       | 20.60          |  |      |       | 12.47 |  |  |       | 24.03 |  |  |       | 13.60 | 
|                     | Third quarter    |                |       | 21.28          |  |      |       | 18.55 |  |  |       | 23.93 |  |  |       | 21.43 | 
|                     | Fourth quarter   |                |       | 23.58          |  |      |       | 17.97 |  |  |       | 29.41 |  |  |       | 21.21 | 
|Full year 2003       |                  |                | 23.58 |                |  |      | 10.28 |       |  |  | 29.41 |       |  |  | 11.24 |      
|Previous six months: |                  |                |       |                |  |      |       |       |  |  |       |       |  |  |       |      
|                     | October 2003     |                |       | 20.67          |  |      |       | 17.97 |  |  |       | 23.97 |  |  |       | 21.21 | 
|                     | November 2003    |                |       | 22.71          |  |      |       | 20.72 |  |  |       | 27.08 |  |  |       | 23.79 | 
|                     | December 2003    |                |       | 23.58          |  |      |       | 22.12 |  |  |       | 29.41 |  |  |       | 27.17 | 
|                     | January 2004     |                |       | 25.39          |  |      |       | 23.74 |  |  |       | 31.94 |  |  |       | 29.98 | 
|                     | February 2004    |                |       | 24.32          |  |      |       | 22.55 |  |  |       | 30.88 |  |  |       | 28.31 | 
|                     | March 2004       |                |       | 23.63          |  |      |       | 19.49 |  |  |       | 29.14 |  |  |       | 23.79 | 



---



|    |                                                        
|--- | -------------------------------------------------------
|(1) | From January 24, 2002, for New York Stock
    Exchange.

On March 31, 2004, the closing sales price
per Bayer AG ordinary share on Xetra was
19.81 and on the
New York Stock Exchange US $24.40.

The average daily volume of Bayer shares traded
on the Frankfurt Stock Exchange (Xetra and floor) for the years
2003, 2002 and 2001 was 5,405,362, 3,807,568 and 3,495,113,
respectively. The average daily trading volume in 2003 and 2002
was 213,972 and 64,907 on the New York Stock Exchange.

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Item 10. Additional
Information

Description of Share Capital

For a description of material provisions of
Bayer AGs Articles of Association (Satzung),
including a discussion of the voting, dividend and other rights
of shareholders, see Exhibit 1.1.

The Board of Management is authorized to
repurchase shares for such purposes as distribution to members
of the management who are not Board members and to employees of
Bayer Group companies in connection with share option programs.
This authorization has been extended to October 24, 2004.
See Item 6, Directors, Senior Management and
Employees  Compensation  Employee option
plans.

Material contracts

We are not a party to any contracts that we
regard as material to our business or financial position.

Exchange controls

There are currently no German foreign exchange
control restrictions on the payment of dividends on the shares
or the conduct of our operations.

Taxation

The following is a discussion of the material
U.S. federal income and German tax consequences to you as a
Qualified Holder of Bayer AG shares. This discussion is
based upon existing U.S. federal income and German tax law,
including legislation, regulations, administrative rulings and
court decisions, as in effect on the date of this annual report,
all of which are subject to change, possibly with retroactive
effect.

For the purposes of this discussion, you are a
Qualified Holder if you are the beneficial owner of
ordinary Bayer AG shares and (1) are a resident of the
United States for purposes of the Convention Between the United
States of America and the Federal Republic of Germany for the
Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and Capital, as amended
(the Income Tax Treaty), which generally includes an
individual U.S. resident, a corporation created or
organized under the laws of the United States, any state thereof
or the District of Columbia and a partnership, estate or trust,
to the extent its income is subject to taxation in the United
States as the income of a U.S. resident, either in its
hands or in the hands of its partners or beneficiaries,
(2) do not hold Bayer AG shares as part of the
business property of a permanent establishment located in
Germany or as part of a fixed base located in Germany and used
for the performance of independent personal services and
(3) if you are not an individual, are not subject to the
limitation on benefits restrictions in the Income Tax Treaty.
This discussion assumes that you hold Bayer AG shares as a
capital asset. This discussion does not address all aspects of
U.S. federal income and German taxation that may be
relevant to you in light of your particular circumstances. For
example, this discussion does not apply to Qualified Holders
whose shares were acquired pursuant to the exercise of an
employee share option or otherwise as compensation or who are
subject to special treatment under U.S. federal income tax
laws such as financial institutions, insurance companies,
tax-exempt organizations, holders of 10 percent or more of
Bayer AG shares, broker-dealers in securities or
currencies, persons that hold Bayer AG shares as part of a
hedging or a conversion transaction or
as a position in a straddle, and persons whose
functional currency is other than the U.S. dollar. This
discussion also does not address any aspects of state, local or
non-U.S. (other than certain German) tax law. If a partnership
holds Bayer AG shares, the tax treatment of a partner
generally will depend upon the status of the partner and the
activities of the partnership. If a Qualified Holder is a
partner in a partnership that holds Bayer AG shares, the
Holder is urged to consult its own tax advisor regarding the
specific tax consequences of the purchase, ownership and
disposition of the Bayer AG shares.

In general, for U.S. federal income tax
purposes, if you are a Qualified Holder of ADRs evidencing ADSs,
you will be treated as the owner of the Bayer AG shares
represented by such ADSs. Unless the context requires otherwise,
all references in this section to Bayer shares are
deemed to refer likewise to ADSs evidencing an ownership
interest in Bayer AG shares.

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We urge you to consult your tax advisor as to
the U.S. federal income and German tax consequences of
holding Bayer AG shares, including the particular facts and
circumstances that may be unique to you, and as to any other tax
consequences of holding Bayer AG shares.

Taxation of Dividends

We are required to withhold tax on dividends in
respect of the 2003 fiscal year in an amount equal to
20 percent of the gross amount paid to resident and
non-resident shareholders. As a Qualified Holder, you are
eligible to receive a partial refund of this withholding tax
under the Income Tax Treaty (subject to certain limitations),
effectively reducing the withholding tax to 15 percent of
the gross amount of the dividend. Thus, for each $100 of gross
dividend paid by Bayer AG to you, the dividend will be
subject to a German withholding tax of $15 under the Income Tax
Treaty. The cash received per $100 of gross dividend will thus
be $85. For U.S. federal income tax purposes, the gross
amount of the dividend, including German withholding tax, will
be includible in your gross income. You will not be entitled to
the dividends received deduction with respect to any dividends
we pay.

A surtax on the German withholding tax is
currently levied on dividend distributions paid by a German
resident company. The rate of this surtax is 5.5 percent on
the withholding tax due. The surtax will equal 1.1 percent
(5.5 percent x 20 percent) of the gross dividend.
Under the Income Tax Treaty, you will be entitled to a full
refund of this surtax.

Dividends paid to you in euros will be included
in income in a U.S. dollar amount, calculated by reference
to the exchange rate in effect on the date the dividends are
received or treated as received by you. Subject to certain
exceptions for positions that are hedged or held for less than
61 days, an individual U.S. holder generally will be
subject to U.S. taxation at a maximum rate of
15 percent in respect of dividends received after 2002 and
before 2009. If you convert dividends paid in euros into
U.S. dollars on the date received or treated as received,
you generally should not be required to recognize foreign
currency gain or loss in respect of such dividend.

Refund Procedures

To claim the refund reflecting the reduction of
the German withholding tax from 20 percent to
15 percent and the refund of the 5.5 percent German
surtax, when applicable, you must submit (either directly, or,
as described below, through our U.S. transfer agent or the
Depository Trust Company) a claim for refund to the German tax
authorities, with the original bank voucher (or a certified copy
thereof) issued by the paying entity documenting the tax
withheld within four years from the end of the calendar year in
which the dividend is received. Claims for refunds are made on a
special form, which must be filed with the German tax
authorities at the following address: Bundesamt für
Finanzen, 53221 Bonn-Beuel, Germany. A refund claim form
may be obtained from the German tax authorities at the same
address as where applications are filed, from the Embassy of the
Federal Republic of Germany, 4645 Reservoir Road, N.W.,
Washington, D.C. 20007-1998 or from the Office of
International Operations, Internal Revenue Service,
1325 K Street, N.W., Washington, D.C. 20225,
Attention: Taxpayer Service Division, Room 900. It can also
be downloaded from the following web site:
http://www.bff-online.de/Steuer__Vordrucke/KSt__KapSt/
ClaimRefundWithholdingTaxesDividends__Interests.pdf.

You must also submit to the German tax
authorities certification of your last filed U.S. federal
income tax return (IRS Form 6166). You can obtain this
certification from the office of the Director of the Internal
Revenue Service Center by filing a request for certification
(generally IRS Form 8802) with the Internal Revenue Service
Center in Philadelphia, Pennsylvania, Foreign Certificate
Request, P.O. Box 16347, Philadelphia, PA 19114-0447.
Requests for certification must be made in writing and must
include your name, social security number or employer
identification number, tax return form number and tax period for
which you are requesting certification. This certification is
valid for three years and need only be resubmitted in a fourth
year in the event of a subsequent application for refund. IRS
Publication 686 describes the certification procedure in more
detail.

Our U.S. transfer agent will perform
administrative functions necessary to claim the refund
reflecting the reduction in German withholding tax from
20 percent to 15 percent and the refund of the
5.5 percent German surtax, when applicable, for you.
However, these arrangements may be amended or revoked at any
time in the future. Under the current procedure, the
U.S. transfer agent will prepare the German claim for
refund forms on

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your behalf and file them with the German tax
authorities. In order for the U.S. transfer agent to file
the claim for refund forms, the U.S. transfer agent will
prepare and mail to you, and will ask that you sign and return
to the U.S. transfer agent, (1) a statement
authorizing the U.S. transfer agent to perform these
procedures and agreeing that the German tax authorities may
inform the Internal Revenue Service of any refunds of German
taxes and (2) a written authorization to remit the refund
of withholding to an account other than yours. The
U.S. transfer agent will also require certification of your
last filed United States federal income tax return (IRS
Form 6166). The U.S. transfer agent will attach the
signed statement, the IRS Form 6166 and the documentation
issued by the paying agency documenting the dividend paid and
the tax withheld to the claim for refund form and file them with
the German tax authorities.


A simplified refund procedure will be available
to you if your Bayer AG shares are registered with brokers
participating in the Depository Trust Company. Under this
simplified refund procedure, the Depository Trust Company will
provide the German tax authorities with electronic certification
of your U.S. taxpayer status based on information it
receives from its broker participants, and will claim a refund
on your behalf. If approved by the German tax authorities, a
similar simplified refund procedure may also be implemented by
the U.S. transfer agent in the future. Under such a
simplified refund procedure, following each dividend payment,
the U.S. transfer agent would file a claim for refund
automatically on your behalf if you have instructed the
U.S. transfer agent in writing to file on your behalf.

The German tax authorities will issue refunds
denominated in euro. The refunds will be issued in the name of
the U.S. transfer agent or the Depository Trust Company, as
the case may be, which will then convert the refunds to dollars
and make corresponding refund payments to you or your broker.
This broker, in turn, will remit corresponding refund amounts
to you.

If you receive a refund attributable to reduced
withholding taxes under the Income Tax Treaty, you may be
required to recognize foreign currency gain or loss, which will
be treated as ordinary income or loss to the extent that the
dollar value of the refund received or treated as received by
you differs from the U.S. dollar equivalent of the refund
on the date the dividend on which such withholding taxes were
imposed was received or treated as received by you.

Taxation of Capital Gains

Under the Income Tax Treaty, you will not be
liable for German tax on capital gains realized or accrued on
the sale or other disposition of Bayer AG shares.

Upon a sale or other disposition of Bayer AG
shares, you will recognize capital gain or loss for
U.S. federal income tax purposes equal to the difference
between the amount realized and your adjusted tax basis in the
Bayer AG shares. This gain or loss generally will be
U.S. source gain or loss, and will be treated as long-term
capital gain or loss if your holding period in the Bayer AG
shares exceeds one year. The net amount of long-term capital
gain recognized by an individual U.S. holder generally is
subject to taxation at a maximum rate of 20 percent;
however, net long-term capital gain recognized by an individual
U.S. holder after May 5, 2003 and before
January 1, 2009 is generally subject to a taxation at a
maximum rate of 15 percent. The deductibility of capital
losses is subject to significant limitations.

Passive Foreign Investment Company
Status

We believe that we will not be classified as a
passive foreign investment company (a PFIC) for
U.S. federal income tax purposes for our current taxable
year or any future taxable year. However, as this is a factual
matter that must be determined annually at the close of each
taxable year, there can be no certainty as to our actual PFIC
status in any particular year until the close of the taxable
year in question.

German Gift and Inheritance
Taxes

The Convention between the United States of
America and the Federal Republic of Germany for the Avoidance of
Double Taxation with Respect to Taxes on Estates, Inheritances
and Gifts, as amended (the Estate Tax Treaty),
provides that an individual whose domicile is determined to be
in the United States for purposes of

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such treaty will not be subject to German
inheritance and gift tax (the equivalent of the
U.S. federal estate and gift tax) on the individuals
death or making of a gift unless the Bayer AG shares
(1) are part of the business property of a permanent
establishment located in Germany or (2) are part of the
assets of a fixed base of an individual located in Germany and
used for the performance of independent personal services. An
individuals domicile in the United States, however, does
not prevent imposition of German inheritance and gift tax with
respect to an heir, donee or other beneficiary who is domiciled
in Germany at the time the individual died or the gift
was made.


The Estate Tax Treaty also provides a credit
against U.S. federal estate and gift tax liability for the
amount of inheritance and gift tax paid in Germany, subject to
certain limitations, in a case where the shares are subject both
to German inheritance or gift tax and U.S. federal estate
or gift tax.

German Capital Tax
(Vermögensteuer)

The Income Tax Treaty provides that you will not
be subject to German capital tax (Vermögensteuer)
with respect to the Bayer AG shares. As a result of a
judicial decision, the German capital tax
(Vermögensteuer) presently is not imposed.

Other German Taxes

There are no German transfer, stamp or other
similar taxes that would apply to you upon receipt, purchase,
holding or sale of Bayer AG shares.

U.S. Information Reporting and Backup
Withholding

Dividends on Bayer AG shares and payments of
the proceeds of a sale of Bayer AG shares paid within the
United States or through certain U.S.-related financial
intermediaries are subject to information reporting and may be
subject to backup withholding unless you (1) are a
corporation or other exempt recipient or (2) provide a
taxpayer identification number and certify that no loss of
exemption from backup withholding has occurred.
U.S. persons who are required to establish their exempt
status generally must file IRS Form W-9 (Request for
Taxpayer Identification Number and Certification). Non-U.S.
holders generally will not be subject to U.S. information
reporting or backup withholding. However, these holders may be
required to provide certification of non-U.S. status (generally
on IRS Form W-8BEN) in connection with payments received in
the United States or through certain U.S.-related financial
intermediaries.

Backup withholding is not an additional tax.
Amounts withheld as backup withholding may be credited against
your U.S. federal income tax liability. You may obtain a
refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund
with the Internal Revenue Service and furnishing any required
information.

Documents on display

You can inspect the documents concerning
Bayer AG mentioned in this annual report during normal
business hours at Bayer AGs headquarters at the
Bayerwerk, 51368 Leverkusen, Germany, as well as at the
headquarters of Bayer AGs U.S. subsidiary, Bayer
Corporation, 100 Bayer Road, Pittsburgh, PA 15205-9741.

Memorandum and Articles of
Association

For a description of certain provisions of our
Articles of Association, please refer to Item 10 of our
registration statement on Form 20-F/A, filed on
January 15, 2002, which is incorporated herein by reference.

132



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Item 11. Quantitative and
Qualitative Disclosures about Market Risk

Market Risk

The global nature of our business exposes our
operations, financial results and cash flows to a number of
risks, including those listed below.



| |   |                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Currency exchange rate
    fluctuations.We are exposed to
    fluctuations between the euro and other major world currencies.
    The majority of our currency fluctuation risk is between the
    euro and the U.S. dollar. In addition, we are exposed to
    fluctuations between the euro and the Japanese yen and
    fluctuations between the U.S. dollar and the Brazilian real.
|
| |  | Interest rate
    fluctuations.We are exposed to
    changes in interest rates. Our primary interest rate exposure is
    to fluctuations in short- and long-term European and
    U.S. interest rates.                                                                                                                                                                                
|
| |  | Credit risk.We are
    exposed to credit risk with respect to the counterparties in our
    transactions.                                                                                                                                                                                                                                                                              
|
| |  | Raw material price
    fluctuations.We are exposed to
    possible increases in raw material prices. We may not be able to
    pass any such increases on to our customers.                                                                                                                                                                                                            

Any of these risks could harm our operating
results and financial condition.

From time to time, we enter into hedging
arrangements to mitigate our exposure to currency and interest
risks. Our primary tools for hedging financial risks are
over-the-counter derivative instruments, particularly forward
foreign exchange contracts, option contracts, interest rate
swaps and interest and principal currency swaps. As a matter of
policy, we enter into these transactions only with
counterparties of high credit standing. We have established
uniform guidelines and internal controls for the use of these
derivatives. We use these instruments only to economically hedge
risks arising from our business operations and from related
investments and financing transactions. We do not use
derivatives for speculative purposes. Because we believe that
the limited liquidity of hedges against changes in raw materials
prices makes these hedges unreasonably expensive, we have used
them in the past only to a small extent. To some degree, we make
use of such derivative financial instruments to participate in
commodity market fluctuations according to our own assessments
of the relevant markets. Such trades are monitored closely and
require authorization by our head of finance. A total loss limit
of
2 million
per year is imposed on these positions. This limit can be
increased to
20 million
per year on authorization by our risk committee, which consists
of the head of Group finance and the heads of finance of the
individual divisions.

Sensitivity Analysis

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 market sensitive instruments resulting from one or
more selected hypothetical changes in interest rates, foreign
currency rates, and other market rates or prices over a selected
time. We use sensitivity analysis because it provides reasonable
risk estimates using straightforward assumptions (for example,
an increase in interest rates). The risk estimates we provided
below assume:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | A simultaneous, parallel foreign exchange rates
    shift in which the euro appreciates against all currencies by
    10%, and
|
| |  | A parallel shift of 100 basis points of the
    interest rate yield curves in all currencies.                                 

We use our business experience, 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 our managers, shareholders, employees, suppliers and
customers to appreciate an approximation of the effect changing
market conditions could have on our business. Additionally, it
allows our management after becoming aware of the impact of
immediate and substantial changes to take the necessary steps to
address such risks.

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Sensitivity analysis is subject to certain
limitations, such as the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The risk-mitigating effects caused by correlation
    and diversification among different currencies and interest rate
    areas or between these different risk exposures are not taken
    into account. This may lead to an overestimation of risk, since
    a simultaneous adverse shift in all currencies and yield curves
    is highly unlikely.                                                                                                                                                                                                                                           
|
| |  | Unlike other more complex risk modeling concepts,
    it applies only two shifts (up or down) in each risk category
    with the direction causing the adverse outcome chosen. While it
    is possible to apply more sophisticated risk measurement
    techniques, it is our view that sensitivity analysis gives
    decision makers in our non-financial businesses a sufficient
    warning of potential losses. We may apply further detailed
    analyses using the specific facts of a given situation to
    determine if appropriate corrective actions are needed.                      
|
| |  | Sensitivity analyses offer a snapshot
    of exposures at and between specific dates in time. However,
    there is continuous change in the Other Than Trading Portfolio.
    For example, positions are continually being opened and closed,
    assets and liabilities mature or new interest rates take effect.
    We accept this limitation and whenever we believe that more
    current information is required, produce either updated
    sensitivity analyses or utilize other management reporting
    options to understand in detail the effects of changing market
    conditions.
|
| |  | Sensitivity analyses do not provide an answer to
    the question of how long a sharp rise or fall of
    market rates will continue. Accordingly, we develop our own
    market direction projections and obtain other professional
    predictions that we then use in our financial planning and in
    modeling earnings impacts.                                                                                                                                                                                                                                                            

We continually refine our risk measurement and
reporting procedures including a periodic re-examination of the
underlying assumptions and parameters utilized. Compared to last
fiscal year, there have not been any changes that have resulted
in a material alteration of the risk estimates provided. The
differences between periods principally reflect changes in our
exposures and the market rates and prices only.

The sensitivity analyses included in the risk
sections below present the hypothetical loss in cash flows of
financial instruments and derivative financial instruments that
we held as of December 31, 2003 and 2002. These instruments
were subject to changes in foreign exchange rates and interest
rates. The range of sensitivities that we chose for these
analyses reflects our view of changes reasonably possible over a
one-year period.

Interest Rate Risk

Interest rate risk is the possibility that the
total return (all changes in fair value and interest rate
performance) of a financial instrument will change due to
movements in market rates of interest. This risk primarily
affects debt with maturities of more than one year. Items with
these long maturities are not of material significance to our
operations, but are relevant to our financial obligations.

We sometimes make loans to employees. Although a
small proportion of these loans are interest-free, they
generally bear interest at market-oriented, fixed rates. More
than three quarters of our loans to employees have terms of over
five years. All of these loans are real estate related, many of
them secured by real estate. None of these loans were provided
to any of the members of our Board of Management.

Derivative financial instruments

Derivative financial instruments are our main
method of interest rate hedging. We use interest rate swaps to
convert a portion of our fixed rate borrowings into, in effect,
floating rate debt. We do this because, in a normal interest
rate environment, short-term interest rates are lower than
long-term interest rates. Thus, floating debt leads to lower
interest costs in the long-run. The derivatives we use to hedge
interest rate risk are primarily over-the-counter instruments,
particularly forward rate agreements, option and future
contracts, interest rate swaps, and interest and principal
currency swaps. Our Corporate Treasury department has central
responsibility for managing our interest rate exposures and
using interest rate derivatives.

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The notional amount of these
derivatives is the total nominal value of the underlying
transactions. The fair value of these derivatives is
their repurchase value, based on quoted prices or, in the case
of contracts not publicly traded, their values as determined by
standard methods, as of a given closing date. The table below
shows the notional amount and fair value of the interest rate
derivatives we held as of December 31, 2003 and 2002; the
fair values quoted disregard any compensating movements in the
values of the underlying transactions.

|                                |  |                     |       |              |  |      |       |      |  |  |     |  |  |  |     | 
|------------------------------- |  | ------------------- | ----- | ------------ |  | ---- | ----- | ---- |  |  | --- |  |  |  | --- | 
|                                |  |                     |       |             
|                                |  | Notional amount     |       | Fair value  
|                                |  | As of               |       | As of       
|                                |  | December 31,        |       | December 31,
|                                |  |                     |       |             
|                                |  | 2002                |       | 2003         |  | 2002 |       | 2003
|                                |  |                     |       |              |  |      |       |     
|                                |  |                    
|                                |  | (euros in millions)
|Interest rate hedging contracts |  |                     | 5,799 |              |  |      | 6,331 |      |  |  | 365 |  |  |  | 485 | 

At December 31, 2003, the notional amount of
our short-term interest rate hedging contracts (including
interest and principal currency swaps) totaled
0.3 billion
(2002:
0.5 billion);
those maturing after more than one year totaled
6.0 billion
(2002:
5.3 billion).

Sensitivity Analysis

Based on our variable interest rate debt position
at year-end 2003, a hypothetical increase of 100 basis points,
or one percent per year, of the interest rates applicable to our
debt denominated in all currencies (holding currency rates
constant), effective beginning January 1, 2004, would have
resulted in an increase in our interest expense for the year
ended December 31, 2003 of
58 million
(2003 (based on year-end 2002 debt levels):
39 million).

Currency Risk

Because we conduct our operations in many
currencies, we face a variety of risks associated with
fluctuations in the relative values of these currencies. The
primary currencies with respect to which we have material
exchange rate risk are the U.S. dollar, Japanese yen and
Brazilian real. In general, appreciation of the euro in relation
to another currency has an adverse effect on our reported
revenues and results, and depreciation of the euro has a
positive effect.

Transaction Risk

We face transaction risk when our businesses
generate revenue in one currency but incur costs relating to
that revenue in a different currency. Because we enter into
foreign exchange transactions for a significant portion of our
contracted and forecasted operational foreign exchange
exposures, we believe that a significant increase or decrease in
the exchange rate of the euro relative to other major world
currencies would not, in the short term, materially affect our
future cash flows. Over time, however, to the extent that we
cannot reflect these exchange rate movements in the pricing of
our products in local currency, they could harm our cash flows.

Translation Risk

Many of the companies of the Bayer Group are
located outside the euro zone. Because the euro is our financial
reporting currency, we translate the financial statements of
these subsidiaries into euro for inclusion in our consolidated
financial statements. Period-to-period changes in the average
exchange rate for a particular countrys currency can
significantly affect the translation into euro of both revenues
and operating income denominated in that currency. Unlike the
effect of exchange rate fluctuations on transaction exposure,
the effect of exchange rate translation exposure does not affect
our local currency cash flows. See Note 38 to the
consolidated financial statements.

Outside the euro zone, we hold significant
assets, liabilities and operations denominated in local
currencies, most importantly the U.S. dollar, the Japanese
yen and the Brazilian real. Although we regularly assess and
evaluate the long-term currency risk inherent in these
investments, we generally undertake foreign exchange
transactions addressing this type of risk only when we are
considering withdrawal from a specific venture and

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repatriating the funds that our withdrawal
generates. However, we reflect effects from currency
fluctuations on the translation of net asset amounts into euro
in our equity position.


Derivative financial instruments

To mitigate the impact of currency exchange
fluctuations, we regularly assess our transaction exposure to
currency risks and hedge a portion of those risks with
derivative financial instruments. Our Corporate Treasury
department has central responsibility for managing our currency
exposures and using currency derivatives.

We relate the maturity dates of hedging contracts
to the anticipated cash flows of the Bayer Group. Our policy is
generally to use forward hedges and in some cases options
depending upon our view of market conditions based on
fundamental and technical analysis.

The table below shows the notional amounts and
fair values of the currency derivatives (excluding cross
currency interest rate swaps included in our notional amount of
interest rate hedging contracts, see  Interest
Rate Risk) we held as of December 31, 2003 and 2002:

|                                              |  |                     |       |              |  |      |       |      |  |  |     |  |  |  |     | 
|--------------------------------------------- |  | ------------------- | ----- | ------------ |  | ---- | ----- | ---- |  |  | --- |  |  |  | --- | 
|                                              |  |                     |       |             
|                                              |  | Notional amount     |       | Fair value  
|                                              |  | As of               |       | As of       
|                                              |  | December 31,        |       | December 31,
|                                              |  |                     |       |             
|                                              |  | 2002                |       | 2003         |  | 2002 |       | 2003
|                                              |  |                     |       |              |  |      |       |     
|                                              |  |                    
|                                              |  | (euros in millions)
|Forward exchange contracts and currency swaps |  |                     | 2,979 |              |  |      | 3,984 |      |  |  | 105 |  |  |  | 143 | 
|Currency options                              |  |                     | 239   |              |  |      | 266   |      |  |  | 9   |  |  |  | 11  | 

At December 31, 2003, we estimated that our
aggregate annual direct net transaction risk from sales and
purchases in foreign currencies was approximately
2.0 billion,
which consisted primarily of U.S. dollars
($1.3 billion), Japanese yen (¥66 billion) and
Brazilian real (R1.3 billion). We do not anticipate a
significant change in these levels of risk with respect to our
current business operations during 2004.

Sensitivity Analysis

We applied a hypothetical adverse change of
10 percent in foreign currency exchange rates, where the
U.S. dollar, Japanese yen and Brazilian real simultaneously
weakened against the euro using the year-end exchange rates of
these currencies as a basis. The estimated hypothetical loss in
cash flows of derivative and non-derivative financial
instruments as at December 31, 2003 would be
29 million
(2002: 43 million). Of these
29 million,
22 million
are related to the U.S. dollar,
5 million
to the Japanese yen and
2 million
to the Brazilian real.

Credit Risk

Credit risk is the possibility that the value of
our assets may become impaired if counterparties cannot meet
their obligations in transactions involving financial
instruments. Since we do not conclude master netting
arrangements with our customers, the total of the amounts
recognized in assets represents our maximum exposure to credit
risk.

Raw Materials and Commodity Price
Risks

We operate in markets in which economic
cyclicality often affects raw material and product prices.
Fluctuations in prices and availability of raw materials and
commodities affect some of our businesses. In order to secure
our supply of raw materials, we are party to long-term supply
contracts, buy additional quantities on the spot markets, and
enter into swap agreements to manage our supply/ demand as
needed. The most important of our raw materials affected by
price fluctuations are:



| |   |               
| | - | --------------
| |  | 1.3-butadiene;
|
| |  | ACN;          
|
| |  | Benzene;      

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| |   |                 
| | - | ----------------
| |  | Cyclohexane;    
|
| |  | Phenol;         
|
| |  | Propylene oxide;
|
| |  | Styrene; and    
|
| |  | Toluene.        

These products are derived from crude oil,
therefore their prices are affected by the volatility in the
crude oil market.

We typically use the following measures to avoid
and manage pricing risk in purchasing raw materials:



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Coverage of recurrent requirements with long-term
    contracts to reduce the price volatility of purchases on the
    spot markets;                            
|
| |  | incorporating pricing formulas linked to economic
    indices and pre-products into our contracts, rather than using
    published prices; and                  
|
| |  | stock-keeping, flexibility in supply sources and,
    whereever possible, other alternative production plants to limit
    risks from raw material availability.

Facing increasing volatility in energy markets,
we started a price risk management program in 2003 designed to
reduce the variability of our expenditures for energy purchases
by entering into financial swaps, collars and options on the
over-the-counter markets. The gas and steam contracts for our
major European sites are linked to liquidly traded fuel oil and
gas oil indices; the U.S. contracts are based on different
U.S. natural gas indices. All these contracts are treated
as trading instruments for accounting purposes.

The strategy for economically hedging energy
price risks is based on contracts with a maturity of up to three
years. It is designed in such a way that it takes advantage of
the backwardation in the energy forward markets. In addition, a
cost average effect is aimed at by building up a pre-defined
hedge position over time.






|         |                                                           
|-------- | ----------------------------------------------------------
|Item 12. | Description of Securities Other Than Equity
    Securities

Not applicable.

137



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PART II






|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Defaults, Dividend Arrearages and
    Delinquencies

None.






|         |                                                                                 
|-------- | --------------------------------------------------------------------------------
|Item 14. | Material Modifications to the Rights of
    Security Holders and Use of Proceeds

None.






|         |                        
|-------- | -----------------------
|Item 15. | Controls and Procedures

As required by Rule 13a-15 under the
Securities Exchange Act of 1934, the chairman of our Board of
Management and our chief financial officer, assisted by other
members of our management, have evaluated our disclosure
controls and procedures as of December 31, 2003. Based on
this evaluation, they have concluded that our disclosure
controls and procedures are effective to ensure that the
information we are required to disclose in this annual report is
recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and
Exchange Commission. There were no significant changes in our
internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation.
We identified no significant deficiencies or material weaknesses
that required corrective action.






|         |           
|-------- | ----------
|Item 16. | [Reserved]






|          |                                 
|--------- | --------------------------------
|Item 16A. | Audit Committee Financial Expert

Our Supervisory Board has determined that
Dr. Schneider is an audit committee financial expert, as
that term is defined in Item 16A(b) of Form 20-F.






|          |               
|--------- | --------------
|Item 16B. | Code of Ethics

We have adopted a code of ethics, as that term is
defined by Item 16B(b) of Form 20-F, that is
applicable to all of our employees, including our principal
executive officer, principal financial officer and principal
accounting officer. Our code of ethics is available on our
website at http://www.bayer.com/aboutbayer/
corporatepolicy/
principlesofcorporatepolicy/
legalcompliance/page1134.htm. (Reference to this
uniform resource locator or URL is made
as an inactive textual reference for informational purposes
only. The information found at this website is not incorporated
by reference into this document.)






|          |                                           
|--------- | ------------------------------------------
|Item 16C. | Principal Accountant Fees and
    Services

Independent Auditor Fees

In January 2003, the U.S. Securities and
Exchange Commission adopted rules requiring disclosure of fees
billed by a public companys accountants in each of the
companys two most recent fiscal years.

Fees billed to the Company for professional
services by its principal accountant, PwC, during the fiscal
years 2002 and 2003 were as follows:

|                   |  |           |    |      |  |  |    | 
|------------------ |  | --------- | -- | ---- |  |  | -- | 
|Type of fees       |  | 2002      |    | 2003
|                   |  |           |    |     
|                   |  |          
|                   |  | (euros in
|                   |  | millions)
|Audit fees         |  |           | 28 |      |  |  | 23 | 
|Audit-related fees |  |           | 1  |      |  |  | 3  | 
|Tax fees           |  |           | 1  |      |  |  | 1  | 
|All other fees     |  |           |   |      |  |  |   | 
|                   |  |           |    |      |  |  |    | 
|Total              |  |           | 30 |      |  |  | 27 | 
|                   |  |           |    |      |  |  |    | 

138



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The audit-related services PwC provided related
to acquisition/disposition due diligence, an audit of a
carve-out statement, reviews of Bayers information system
unrelated to audit and audits of employee benefit plans. No
services falling under the de minimis exception of
paragraph (c)(7)(i)(c) of Rule 2-01 of
Regulation S-X were provided to the Company by PwC in 2003.
During 2002, PwC also billed the Company
21 million
for management and human resources consulting services, which
were transferred to IBM and Mellon Financial Services,
respectively, on October 2, 2002. The
21 million
represented fees charged by PwC until the date of the transfer.

Audit Committee Pre-Approval
Policies

All services provided by our auditor and
companies affiliated with our auditor must be pre-approved by
the audit committee of our Supervisory Board
(Aufsichtsrat). The annual contract conditions and fees
relating to the audit of the financial statements of the Bayer
Group and Bayer AG must be approved by the audit committee on a
case-by-case basis. Other services may be pre-approved by the
audit committee within the authorities the audit committee has
adopted; if they fall outside these authorities, they require
case-by-case approval. Our policies for these pre-approvals
grant authority to management to engage our auditor and
companies affiliated with our auditor for:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Audit services up to an annual aggregate, which
    was
    26 million
    in 2003 for Bayer Group and Bayer AG and which include the audit
    of the consolidated financial statements of Bayer and its
    affiliates; services necessary to provide audit opinions;
    services in connection with the submission of reports to the
    SEC; attest services for reports prepared on Bayers
    internal control system and review of Bayers information
    systems; accounting and disclosure advice in connection with the
    annual audit; and audit services relating to the audit of
    restated prior-year figures, if any.
|
| |  | Audit-related services, which include
    acquisition/ disposition due diligence; audits of material
    companies acquired or to be acquired, of carve-out statements
    relating to acquisitions or dispositions, of closing balances
    for dispositions and of employee benefit plans; procedures
    necessary to meet finance, accounting or other regulatory
    reporting requirements; advice on internal control systems;
    reviews of Bayers information systems unrelated to audit;
    assistance in interpreting SEC requirements; and evaluation of
    risk management.                                                
|
| |  | Tax advisory services, provided that the auditor
    or affiliate does not act as a representative of Bayer and did
    not recommend the transaction to which the tax advisory services
    relate; these include tax planning and advice; assistance with
    tax compliance; reviewing tax declarations; assistance in tax
    audits and appeals; and tax appraisals.                                                                                                                                                                                                                                                                   
|
| |  | Other services, which include other risk
    management advice; other financial advice; valuation services;
    consultations and recommendations relating to valuation methods;
    non-audit appraisals of valuations; analysis or review of
    business plans or planning processes (but not design or
    implementation thereof); and preparation of financial statements
    if it is reasonably certain that the statements will not
    subsequently be audited by the auditor or an affiliate.                                                                                                                                    

Pre-approval for the audit-related services, tax
advisory services and other services categories is only valid if
these services together aggregate below 66 percent of the
annual budget set for audit services. Any requests for services
to be provided by the auditor or an affiliate must be made
through Bayers accounting department, which will, if
necessary, prepare the individual approval applications. The
accounting department also notifies the audit committee of
services provided pursuant to the pre-approval policies,
monitors the pre-approval budget, notifies the chairman of the
audit committee once the 66 percent pre-approval threshold
has been reached and maintains records of all services provided
by the auditor and its affiliates.

139



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|          |                                                               
|--------- | --------------------------------------------------------------
|Item 16D. | Exemptions from the Listing Standards for
    Audit Committees

Not applicable.






|          |                                                                           
|--------- | --------------------------------------------------------------------------
|Item 16E. | Purchases of Equity Securities by the Issuer
    and Affiliated Purchasers

Not applicable.




PART III






|         |                     
|-------- | --------------------
|Item 17. | Financial Statements

We have responded to Item 18 in lieu of
responding to this item.






|         |                     
|-------- | --------------------
|Item 18. | Financial Statements

See pages F-1 through F-98, incorporated
herein by reference.






|         |         
|-------- | --------
|Item 19. | Exhibits

Documents filed as exhibits to this annual report:

|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 1.1* |  | Articles of Association (Satzung) of Bayer
    AG, as amended to the date of the original filing, in English
    translation.                                                                                                                                                                                                                                                                                                                                              
|Exhibit 2.1  |  | The total amount of long-term debt securities
    Bayer AG authorized under any instrument does not exceed
    10 percent of the total assets of the Company. Bayer AG
    agrees to furnish to the Securities and Exchange Commission,
    upon its request, a copy of any instrument defining the rights
    of holders of long-term debt of Bayer AG or its subsidiaries for
    which consolidated or unconsolidated financial statements are
    required to be filed.
|Exhibit 4.1* |  | Summary of Employment Arrangements between Bayer
    AG and Werner Wenning.                                                                                                                                                                                                                                                                                                                                                                                                
|Exhibit 4.2* |  | Summary of Employment Arrangements between Bayer
    AG and Dr. Udo Oels.                                                                                                                                                                                                                                                                                                                                                                                                  
|Exhibit 4.3* |  | Summary of Employment Arrangements between Bayer
    AG and Klaus Kühn.                                                                                                                                                                                                                                                                                                                                                                                                    
|Exhibit 4.4* |  | Summary of Employment Arrangements between Bayer
    AG and Dr. Richard Pott.                                                                                                                                                                                                                                                                                                                                                                                              
|Exhibit 8.1  |  | Significant subsidiaries as of the end of the
    year covered by this report as defined in rule 1-02(w) of
    Regulation S-X: See Item 4, Information on the
    Company  Organizational Structure.                                                                                                                                                                                                                                                                     
|Exhibit 12.1 |  | Certification of the Principal Executive Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                            
|Exhibit 12.2 |  | Certification of the Principal Financial Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                            
|Exhibit 13.1 |  | Certification in accordance with 18 U.S.C.
    § 1350 as adopted by § 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                           



---



|  |                                                           
|- | ----------------------------------------------------------
|* | Previously filed and incorporated by reference
    herein.

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SIGNATURES

The registrant hereby certifies that it meets all
of the requirements for filing on Form 20-F and that it has
duly caused and authorized the undersigned to sign this annual
report on its behalf.



| |                                                 
| | ------------------------------------------------
| | BAYER AG                                        
|
| | /s/ WERNERWENNING                               
| |                                                 
| | Name:  Werner Wenning                           
| | Title:   Chairman of the Board of
    Management
|
| | /s/
    DR.ROLANDHARTWIG                        
| |                                                 
| | Name:  Dr. Roland Hartwig                       
| | Title:   General Counsel                        

Date: May 24, 2004

141



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##### Table of Contents



BAYER GROUP

Index to Consolidated Financial
Statements

|                                               |                                                                                                                         |      |     |     | 
|---------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ---- | --- | --- | 
|                                               |                                                                                                                         | Page
|                                               |                                                                                                                         |     
|Report of Independent Auditors                 |                                                                                                                         |      | F-2 |    
|Consolidated Financial Statements:             |                                                                                                                         |      |     |    
|                                               | Consolidated Statements of Income for the years
    ended December 31, 2001, 2002 and 2003                              |      |     | F-3 | 
|                                               | Consolidated Balance Sheets as of
    December 31, 2002 and 2003                                                        |      |     | F-4 | 
|                                               | Consolidated Statements of Changes in
    Stockholders Equity for the years ended
    December 31, 2001, 2002 and 2003 |      |     | F-5 | 
|                                               | Consolidated Statements of Cash Flows for the
    years ended December 31, 2001, 2002 and 2003                          |      |     | F-6 | 
|Notes to the Consolidated Financial Statements |                                                                                                                         |      | F-7 |    

F-1



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##### Table of Contents



Report of Independent Auditors

To the Board of Directors

and Stockholders of Bayer AG


We have audited the accompanying consolidated
balance sheets of Bayer AG and its subsidiaries (the
Group) as of December 31, 2003 and 2002, and
the related consolidated statements of income,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2003. These
financial statements are the responsibility of the Groups
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of the Group at
December 31, 2003, and 2002, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2003 in conformity with
International Financial Reporting Standards.

International Financial Reporting Standards vary
in certain significant respects from accounting principles
generally accepted in the United States of America. Information
relating to the nature and effect of such differences is
presented in Note 44 to the consolidated financial
statements.

Essen, Germany

March 11, 2004, except for Note 45, as
to which the date is March 31, 2004


PwC Deutsche Revision

Aktiengesellschaft


Wirtschaftsprüfungsgesellschaft


|                                                          |  |                                                    
|--------------------------------------------------------- |  | ---------------------------------------------------
|/s/ ALBRECHTP. Albrecht
    (Certified Public Accountant) |  | /s/ LINKEV. Linke
    (Certified Public Accountant)

F-2



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##### Table of Contents



Bayer Group

Consolidated Statements of Income

|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|-------------------------------------------------------------------- |  | ---- | ---- | ----------- |  | ---- | ------- | ---- |  |  | ------- | - |  |  | ------- | -
|                                                                     |  | Note |      | 2001        |  | 2002 |         | 2003
|                                                                     |  |      |      |             |  |      |         |     
|                                                                     |  |      |      |            
|                                                                     |  |      |      | ( million)
|Net sales                                                            |  |      | [1]  |             |  |      | 30,275  |      |  |  | 29,624  |   |  |  | 28,567  |  
|of which discontinuing operations                                    |  |      | [6]  |             |  |      | 8,573   |      |  |  | 7,586   |   |  |  | 6,389   |  
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Cost of goods sold                                                   |  |      |      |             |  |      | (17,424 | )    |  |  | (17,680 | ) |  |  | (16,834 | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Gross profit                                                         |  |      |      |             |  |      | 12,851  |      |  |  | 11,944  |   |  |  | 11,733  |  
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Selling expenses                                                     |  |      | [2]  |             |  |      | (7,221  | )    |  |  | (6,933  | ) |  |  | (6,484  | )
|Research and development expenses                                    |  |      | [3]  |             |  |      | (2,559  | )    |  |  | (2,577  | ) |  |  | (2,414  | )
|General administration expenses                                      |  |      |      |             |  |      | (1,040  | )    |  |  | (1,460  | ) |  |  | (1,690  | )
|Other operating income                                               |  |      | [4]  |             |  |      | 885     |      |  |  | 2,706   |   |  |  | 1,158   |  
|Other operating expenses                                             |  |      | [5]  |             |  |      | (1,240  | )    |  |  | (2,070  | ) |  |  | (3,506  | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Operating result                                                     |  |      | [7]  |             |  |      | 1,676   |      |  |  | 1,610   |   |  |  | (1,203  | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|of which discontinuing operations                                    |  |      | [6]  |             |  |      | 210     |      |  |  | 760     |   |  |  | (1,652  | )
|Income (Expenses) from investments in affiliated
    companies  net |  |      | [8]  |             |  |      | 54      |      |  |  | 223     |   |  |  | (93     | )
|Interest expense  net                                               |  |      | [9]  |             |  |      | (349    | )    |  |  | (449    | ) |  |  | (353    | )
|Other non-operating expenses  net                                   |  |      | [10] |             |  |      | (266    | )    |  |  | (428    | ) |  |  | (345    | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Non-operating results                                                |  |      |      |             |  |      | (561    | )    |  |  | (654    | ) |  |  | (791    | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Income/loss before income taxes                                      |  |      |      |             |  |      | 1,115   |      |  |  | 956     |   |  |  | (1,994  | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Income taxes                                                         |  |      | [11] |             |  |      | (154    | )    |  |  | 107     |   |  |  | 645     |  
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Income/loss after taxes                                              |  |      |      |             |  |      | 961     |      |  |  | 1,063   |   |  |  | (1,349  | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Minority Stockholders interest                                      |  |      | [13] |             |  |      | 4       |      |  |  | (3      | ) |  |  | (12     | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Net income/loss                                                      |  |      |      |             |  |      | 965     |      |  |  | 1,060   |   |  |  | (1,361  | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Basic and diluted earnings/loss per share
    ()                    |  |      | [14] |             |  |      | 1.32    |      |  |  | 1.45    |   |  |  | (1.86   | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  

The accompanying notes are an integral part of
the financial statements

F-3



---



##### Table of Contents



Bayer Group

Consolidated Balance Sheets

|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |        |  
|-------------------------------------------------------------- | ---------------------------------- | ---- | ---- | ------------- |  | ------------- | ------ | ----- | - |  | ------ | ------ | -
|                                                               |                                    | Note |      | Dec. 31, 2002 |  | Dec. 31, 2003
|                                                               |                                    |      |      |               |  |              
|                                                               |                                    |      |      |              
|                                                               |                                    |      |      | ( million)  
|ASSETS                                                        
|Noncurrent assets                                              |                                    |      |      |               |  |               |        |       |   |  |        |       
|Intangible assets                                              |                                    |      | [18] |               |  |               | 8,879  |       |   |  | 6,514  |       
|Property, plant and equipment                                  |                                    |      | [19] |               |  |               | 12,436 |       |   |  | 9,937  |       
|Investments                                                    |                                    |      | [20] |               |  |               | 2,198  |       |   |  | 1,781  |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|                                                               |                                    |      |      |               |  |               | 23,513 |       |   |  | 18,232 |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|Current assets                                                 |                                    |      |      |               |  |               |        |       |   |  |        |       
|Inventories                                                    |                                    |      | [21] |               |  |               | 6,342  |       |   |  | 5,885  |       
|Receivables and other assets                                   |                                    |      |      |               |  |               |        |       |   |  |        |       
|                                                               | Trade accounts receivable          |      |      | [22]          |  |               |        | 5,542 |   |  |        | 5,071  |  
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|                                                               | Other receivables and other assets |      |      | [23]          |  |               |        | 4,210 |   |  |        | 3,854  |  
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|                                                               |                                    |      |      |               |  |               | 9,752  |       |   |  | 8,925  |       
|Liquid assets                                                  |                                    |      | [24] |               |  |               |        |       |   |  |        |       
|Marketable securities and other instruments                    |                                    |      |      |               |  |               | 29     |       |   |  | 129    |       
|Cash and cash equivalents                                      |                                    |      |      |               |  |               | 767    |       |   |  | 2,734  |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|                                                               |                                    |      |      |               |  |               | 796    |       |   |  | 2,863  |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|                                                               |                                    |      |      |               |  |               | 16,890 |       |   |  | 17,673 |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|Deferred taxes                                                 |                                    |      | [11] |               |  |               | 967    |       |   |  | 1,298  |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|Deferred charges                                               |                                    |      | [25] |               |  |               | 322    |       |   |  | 242    |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|Total assets                                                   |                                    |      |      |               |  |               | 41,692 |       |   |  | 37,445 |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|of which discontinuing operations                              |                                    |      | [35] |               |  |               | 6,904  |       |   |  | 5,655  |       
|STOCKHOLDERS EQUITY AND
    LIABILITIES                      
|Stockholders equity                                           |                                    |      |      |               |  |               |        |       |   |  |        |       
|Capital stock of Bayer AG                                      |                                    |      |      |               |  |               | 1,870  |       |   |  | 1,870  |       
|Capital reserves of Bayer AG                                   |                                    |      |      |               |  |               | 2,942  |       |   |  | 2,942  |       
|Retained earnings                                              |                                    |      |      |               |  |               | 10,076 |       |   |  | 10,479 |       
|Net income                                                     |                                    |      |      |               |  |               | 1,060  |       |   |  | (1,361 | )     
|Other Comprehensive Income                                     |                                    |      |      |               |  |               |        |       |   |  |        |       
|                                                               | Currency translation adjustment    |      |      |               |  |               |        | (593  | ) |  |        | (1,699 | )
|                                                               | Miscellaneous items                |      |      |               |  |               |        | (20   | ) |  |        | (18    | )
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|                                                               |                                    |      | [26] |               |  |               | 15,335 |       |   |  | 12,213 |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|Minority Stockholders interest                                |                                    |      | [27] |               |  |               | 120    |       |   |  | 123    |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|Liabilities                                                    |                                    |      |      |               |  |               |        |       |   |  |        |       
|Long-term liabilities                                          |                                    |      |      |               |  |               |        |       |   |  |        |       
|Long-term financial obligations                                |                                    |      | [30] |               |  |               | 7,318  |       |   |  | 7,113  |       
|Miscellaneous long-term liabilities                            |                                    |      | [32] |               |  |               | 92     |       |   |  | 98     |       
|Provisions for pensions and other post-employment
    benefits |                                    |      | [28] |               |  |               | 4,925  |       |   |  | 5,072  |       
|Other long-term provisions                                     |                                    |      | [29] |               |  |               | 1,215  |       |   |  | 1,343  |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|                                                               |                                    |      |      |               |  |               | 13,550 |       |   |  | 13,626 |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|Short-term liabilities                                         |                                    |      |      |               |  |               |        |       |   |  |        |       
|Short-term financial obligations                               |                                    |      | [30] |               |  |               | 2,841  |       |   |  | 2,313  |       
|Trade accounts payable                                         |                                    |      | [31] |               |  |               | 2,534  |       |   |  | 2,265  |       
|Miscellaneous short-term liabilities                           |                                    |      | [32] |               |  |               | 2,138  |       |   |  | 2,361  |       
|Short-term provisions                                          |                                    |      | [29] |               |  |               | 2,257  |       |   |  | 2,448  |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|                                                               |                                    |      |      |               |  |               | 9,770  |       |   |  | 9,387  |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|                                                               |                                    |      |      |               |  |               | 23,320 |       |   |  | 23,013 |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|of which discontinuing operations                              |                                    |      | [35] |               |  |               | 2,769  |       |   |  | 2,933  |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|Deferred taxes                                                 |                                    |      | [11] |               |  |               | 2,453  |       |   |  | 1,462  |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|Deferred income                                                |                                    |      | [34] |               |  |               | 464    |       |   |  | 634    |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       
|Total stockholders equity and
    liabilities                 |                                    |      |      |               |  |               | 41,692 |       |   |  | 37,445 |       
|                                                               |                                    |      |      |               |  |               |        |       |   |  |        |       

The accompanying notes are an integral part of
the financial statements

F-4



---



##### Table of Contents



Bayer Group

Consolidated Statements of Changes in
Stockholders Equity

|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |        |  
|---------------------------------------------------------------------------------------------- | -------------------------------- | ------------------------------ | ----------- | -------- |  | ----------- | ----- | -------- |  | ------- | ----- | ----------- |  | ------------------- | ------ | ------ |  | ------------- | ------ | ------ | - |  | ------ | ------ | - |  | ----- | ---- | - |  | ---- | ---- | - |  | ------ | ------ | -
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  | Miscellaneous items |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |       
|                                                                                               |                                  |                                |             | Capital  |  | Capital     |       |          |  | Net     |       | Currency    |  | Fair-value          |        | Cash   |  | Total        
|                                                                                               |                                  | Number                         |             | stock of |  | reserves of |       | Retained |  | income/ |       | translation |  | remeasurement       |        | flow   |  | Stockholders
|                                                                                               |                                  | of shares                      |             | Bayer AG |  | Bayer AG    |       | earnings |  | loss    |       | adjustment  |  | of securities       |        | hedges |  | equity       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |              
|                                                                                               |                                  |                               
|                                                                                               |                                  | ( million, except share data)
|Jan. 1, 2001                                                                                   |                                  |                                | 730,341,920 |          |  |             | 1,870 |          |  |         | 2,942 |             |  |                     | 9,047  |        |  |               | 1,816  |        |   |  | 465    |        |   |  | 1,339 |      |   |  | 95   |      |   |  | 17,574 |       
|Changes in stockholders equity resulting
    from capital contributions and dividend payments |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Dividend payments                |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        | (1,022 | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | (1,022 | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               | (1,022 | )      |   |  |        |        |   |  |       |      |   |  |      |      |   |  | (1,022 | )     
|Other changes in stockholders equity not
    recognized in income                             |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Exchange differences             |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        | 294    |   |  |       |      |   |  |      |      |   |  |        | 294    |  
|                                                                                               | Other differences                |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       | (785 | ) |  |      | (104 | ) |  |        | (889   | )
|                                                                                               | of which realized (gains) losses |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       | (25  | ) |  |      | (68  | ) |  |        | (93    | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  | 294    |        |   |  | (785  | )    |   |  | (104 | )    |   |  | (595   | )     
|Changes in stockholders equity
    recognized in income                                       |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Allocation to retained earnings  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        | 794    |  |               |        | (794   | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | 0      |  
|                                                                                               | Income after taxes for 2001      |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        | 965    |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        | 965    |  
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     | 794    |        |  |               | 171    |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  | 965    |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|Dec. 31, 2001                                                                                  |                                  |                                | 730,341,920 |          |  |             | 1,870 |          |  |         | 2,942 |             |  |                     | 9,841  |        |  |               | 965    |        |   |  | 759    |        |   |  | 554   |      |   |  | (9   | )    |   |  | 16,922 |       
|Changes in stockholders equity resulting
    from capital contributions and dividend payments |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Dividend payments                |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        | (657   | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | (657   | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               | (657   | )      |   |  |        |        |   |  |       |      |   |  |      |      |   |  | (657   | )     
|Other changes in stockholders equity not
    recognized in income                             |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Exchange differences             |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        | (1,352 | ) |  |       |      |   |  |      |      |   |  |        | (1,352 | )
|                                                                                               | Other differences                |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       | (561 | ) |  |      | (4   | ) |  |        | (565   | )
|                                                                                               | of which realized (gains) losses |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       | (154 | ) |  |      | 9    |   |  |        | (145   | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  | (1,352 | )      |   |  | (561  | )    |   |  | (4   | )    |   |  | (1,917 | )     
|Changes in stockholders equity
    recognized in income                                       |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Allocation to retained earnings  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        | 235    |  |               |        | (308   | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | (73    | )
|                                                                                               | Income after taxes for 2002      |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        | 1,060  |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        | 1,060  |  
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     | 235    |        |  |               | 752    |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  | 987    |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|Dec. 31, 2002                                                                                  |                                  |                                | 730,341,920 |          |  |             | 1,870 |          |  |         | 2,942 |             |  |                     | 10,076 |        |  |               | 1,060  |        |   |  | (593   | )      |   |  | (7    | )    |   |  | (13  | )    |   |  | 15,335 |       
|Changes in stockholders equity resulting
    from capital contributions and dividend payments |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Dividend payments                |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        | (657   | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | (657   | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               | (657   | )      |   |  |        |        |   |  |       |      |   |  |      |      |   |  | (657   | )     
|Other changes in stockholders equity not
    recognized in income                             |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Exchange differences             |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        | (1,106 | ) |  |       |      |   |  |      |      |   |  |        | (1,106 | )
|                                                                                               | Other differences                |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       | 20   |   |  |      | (18  | ) |  |        | 2      |  
|                                                                                               | of which realized (gains) losses |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       | 1    |   |  |      | 3    |   |  |        | 4      |  
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  | (1,106 | )      |   |  | 20    |      |   |  | (18  | )    |   |  | (1,104 | )     
|Changes in stockholders equity
    recognized in income                                       |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Allocation to retained earnings  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        | 403    |  |               |        | (403   | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | 0      |  
|                                                                                               | Income after taxes for 2003      |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        | (1,361 | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | (1,361 | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     | 403    |        |  |               | (1,764 | )      |   |  |        |        |   |  |       |      |   |  |      |      |   |  | (1,361 | )     
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|Dec. 31, 2003                                                                                  |                                  |                                | 730,341,920 |          |  |             | 1,870 |          |  |         | 2,942 |             |  |                     | 10,479 |        |  |               | (1,361 | )      |   |  | (1,699 | )      |   |  | 13    |      |   |  | (31  | )    |   |  | 12,213 |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |         |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       

The accompanying notes are an integral part of
the financial statements

F-5



---



##### Table of Contents



Bayer Group

Consolidated Statements of Cash
Flows

|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|-------------------------------------------------------------------------------- |  | ---- | ---- | ----------- |  | ---- | ------ | ---- |  |  | ------ | - |  |  | ------ | -
|                                                                                 |  | Note |      | 2001        |  | 2002 |        | 2003
|                                                                                 |  |      |      |             |  |      |        |     
|                                                                                 |  |      |      |            
|                                                                                 |  |      |      | ( million)
|Operating result                                                                 |  |      |      |             |  |      | 1,676  |      |  |  | 1,610  |   |  |  | (1,203 | )
|Income taxes                                                                     |  |      |      |             |  |      | (616   | )    |  |  | (301   | ) |  |  | (607   | )
|Depreciation and amortization                                                    |  |      |      |             |  |      | 2,516  |      |  |  | 3,312  |   |  |  | 4,735  |  
|Change in long-term provisions                                                   |  |      |      |             |  |      | (193   | )    |  |  | (135   | ) |  |  | 421    |  
|Gains on retirements of noncurrent assets                                        |  |      |      |             |  |      | (374   | )    |  |  | (1,401 | ) |  |  | (102   | )
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Gross cash provided by operating
    activities                                  |  |      |      |             |  |      | 3,009  |      |  |  | 3,085  |   |  |  | 3,244  |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|of which discontinuing operations                                                |  |      | [42] |             |  |      | 433    |      |  |  | 416    |   |  |  | 228    |  
|(Increase) Decrease in inventories                                               |  |      |      |             |  |      | 146    |      |  |  | (55    | ) |  |  | (49    | )
|(Increase) Decrease in trade accounts receivable                                 |  |      |      |             |  |      | 638    |      |  |  | 546    |   |  |  | 115    |  
|Increase (Decrease) in trade accounts payable                                    |  |      |      |             |  |      | 73     |      |  |  | 419    |   |  |  | (143   | )
|Changes in other working capital                                                 |  |      |      |             |  |      | 14     |      |  |  | 463    |   |  |  | 126    |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Net cash provided by operating
    activities                                    |  |      | [39] |             |  |      | 3,880  |      |  |  | 4,458  |   |  |  | 3,293  |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|of which discontinuing operations                                                |  |      | [42] |             |  |      | 850    |      |  |  | 461    |   |  |  | 33     |  
|Cash outflows for additions to property, plant
    and equipment                 |  |      |      |             |  |      | (2,617 | )    |  |  | (2,239 | ) |  |  | (1,653 | )
|Cash inflows from sales of property, plant and
    equipment                     |  |      |      |             |  |      | 521    |      |  |  | 2,114  |   |  |  | 1,644  |  
|Cash inflows from sales of investments                                           |  |      |      |             |  |      | 109    |      |  |  | 903    |   |  |  | 258    |  
|Cash outflows for acquisitions less acquired cash                                |  |      |      |             |  |      | (502   | )    |  |  | (7,776 | ) |  |  | (72    | )
|Interest and dividends received                                                  |  |      |      |             |  |      | 138    |      |  |  | 402    |   |  |  | 366    |  
|Cash inflows from marketable securities                                          |  |      |      |             |  |      | 219    |      |  |  | 26     |   |  |  | (83    | )
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Net Cash provided by (used in) investing
    activities                          |  |      | [40] |             |  |      | (2,132 | )    |  |  | (6,570 | ) |  |  | 460    |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|of which discontinuing operations                                                |  |      | [42] |             |  |      | (184   | )    |  |  | 973    |   |  |  | (186   | )
|Bayer AG dividend and dividend payments to
    minority stockholders             |  |      |      |             |  |      | (1,028 | )    |  |  | (662   | ) |  |  | (664   | )
|Issuances of debt                                                                |  |      |      |             |  |      | 2,514  |      |  |  | 7,427  |   |  |  | 1,621  |  
|Retirements of debt                                                              |  |      |      |             |  |      | (2,551 | )    |  |  | (3,890 | ) |  |  | (1,936 | )
|Interest paid                                                                    |  |      |      |             |  |      | (505   | )    |  |  | (704   | ) |  |  | (782   | )
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Net cash (used in) provided by financing
    activities                          |  |      | [41] |             |  |      | (1,570 | )    |  |  | 2,171  |   |  |  | (1,761 | )
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|of which discontinuing operations                                                |  |      | [42] |             |  |      | (148   | )    |  |  | (60    | ) |  |  | 153    |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Change in cash and cash equivalents due to
    business activities               |  |      |      |             |  |      | 178    |      |  |  | 59     |   |  |  | 1,992  |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Cash and cash equivalents at beginning of
    year                               |  |      |      |             |  |      | 491    |      |  |  | 719    |   |  |  | 767    |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Change in cash and cash equivalents due to
    changes in scope of consolidation |  |      |      |             |  |      | 42     |      |  |  | 4      |   |  |  | 1      |  
|Change in cash and cash equivalents due to
    exchange rate movements           |  |      |      |             |  |      | 8      |      |  |  | (15    | ) |  |  | (26    | )
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Cash and cash equivalents at end of
    year                                     |  |      | [43] |             |  |      | 719    |      |  |  | 767    |   |  |  | 2,734  |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Marketable securities and other instruments                                      |  |      |      |             |  |      | 52     |      |  |  | 29     |   |  |  | 129    |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Liquid assets as per balance sheets                                              |  |      |      |             |  |      | 771    |      |  |  | 796    |   |  |  | 2,863  |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  

The accompanying notes are an integral part of
the financial statements

F-6



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group

Key Data by Business Segment

|                                    |                              |                  |        |                |   |               |        |              |   |                  |        |                  |   |           |        |        |   |      |       |       |   |      |       |       |   |      |        |       |  |  |        |       |  |  |        |       |   |  |        |       |   |  |        |       |   |  |        |       |   |  |        |        |   |  |        |        |  
|----------------------------------- | ---------------------------- | ---------------- | ------ | -------------- | - | ------------- | ------ | ------------ | - | ---------------- | ------ | ---------------- | - | --------- | ------ | ------ | - | ---- | ----- | ----- | - | ---- | ----- | ----- | - | ---- | ------ | ----- |  |  | ------ | ----- |  |  | ------ | ----- | - |  | ------ | ----- | - |  | ------ | ----- | - |  | ------ | ----- | - |  | ------ | ------ | - |  | ------ | ------ | -
|                                    |                              |                  |        |                |   |               |        |              |   |                  |        |                  |   |           |        |        |   |      |       |       |   |      |       |       |   |     
|                                    |                              | Pharmaceuticals, |        |                |   |               |        |              |   |                  |        |                  |   |           |        |        |   |      |       |       |   |     
|                                    |                              | Biological       |        | Consumer Care, |   |               |        |              |   |                  |        | Polyurethanes,   |   |          
|                                    |                              | Products         |        | Diagnostics    |   | Animal Health |        | Crop Science |   | Plastics, Rubber |        | Coatings, Fibers |   | Chemicals
|                                    |                              |                  |        |                |   |               |        |              |   |                  |        |                  |   |          
|Business Segments                   |                              | 2002             |        | 2003           |   | 2002          |        | 2003         |   | 2002             |        | 2003             |   | 2002      |        | 2003   |   | 2002 |       | 2003  |   | 2002 |       | 2003  |   | 2002 |        | 2003 
|                                    |                              |                  |        |                |   |               |        |              |   |                  |        |                  |   |           |        |        |   |      |       |       |   |      |       |       |   |      |        |      
|                                    |                              |                 
|                                    |                              | ( million)     
|Net sales (external)                |                              |                  | 4,767  |                |   |               | 4,745  |              |   |                  | 3,755  |                  |   |           | 3,336  |        |   |      | 850   |       |   |      | 790   |       |   |      | 4,697  |       |  |  | 5,764  |       |  |  | 5,210  |       |   |  | 4,813  |       |   |  | 5,213  |       |   |  | 5,084  |       |   |  | 4,322  |        |   |  | 3,400  |       
|                                    |  Change in
                |                  |        | (16.8%         | ) |               |        | (0.5%        | ) |                  |        | (8.5%            | ) |           |        | (11.2% | ) |      |       | (0.9% | ) |      |       | (7.1% | ) |      |        | 65.5% |  |  |        | 22.7% |  |  |        | (3.4% | ) |  |        | (7.6% | ) |  |        | (1.2% | ) |  |        | (2.5% | ) |  |        | (16.9% | ) |  |        | (21.3% | )
|                                    |  Change in local currencies |                  |        | (12.4%         | ) |               |        | 11.4%        |   |                  |        | (1.5%            | ) |           |        | (0.3%  | ) |      |       | 5.8%  |   |      |       | 4.7%  |   |      |        | 72.4% |  |  |        | 32.4% |  |  |        | (0.5% | ) |  |        | (0.8% | ) |  |        | 2.9%  |   |  |        | 6.2%  |   |  |        | (11.7% | ) |  |        | (16.3% | )
|Intersegment sales                  |                              |                  | 33     |                |   |               | 51     |              |   |                  | 2      |                  |   |           | 4      |        |   |      | 1     |       |   |      | 8     |       |   |      | 90     |       |  |  | 69     |       |  |  | 115    |       |   |  | 76     |       |   |  | 78     |       |   |  | 207    |       |   |  | 409    |        |   |  | 370    |       
|Other operating income              |                              |                  | 120    |                |   |               | 100    |              |   |                  | 321    |                  |   |           | 383    |        |   |      | 9     |       |   |      | 25    |       |   |      | 328    |       |  |  | 329    |       |  |  | 79     |       |   |  | 41     |       |   |  | 60     |       |   |  | 51     |       |   |  | 1,042  |        |   |  | 57     |       
|Operating result                    |                              |                  | (186   | )              |   |               | (425   | )            |   |                  | 602    |                  |   |           | 589    |        |   |      | 170   |       |   |      | 170   |       |   |      | (108   | )     |  |  | 324    |       |  |  | 76     |       |   |  | (666   | )     |   |  | (134   | )     |   |  | (514   | )     |   |  | 1,057  |        |   |  | (499   | )     
|Return on sales                     |                              |                  | (3.9%  | )              |   |               | (9.0%  | )            |   |                  | 16.0%  |                  |   |           | 17.7%  |        |   |      | 20.0% |       |   |      | 21.5% |       |   |      | (2.3%  | )     |  |  | 5.6%   |       |  |  | 1.5%   |       |   |  | (13.8% | )     |   |  | (2.6%  | )     |   |  | (10.1% | )     |   |  | 24.5%  |        |   |  | (14.7% | )     
|Gross cash flow                     |                              |                  | 4      |                |   |               | 191    |              |   |                  | 827    |                  |   |           | 668    |        |   |      | 182   |       |   |      | 143   |       |   |      | 516    |       |  |  | 924    |       |  |  | 420    |       |   |  | 368    |       |   |  | 710    |       |   |  | 661    |       |   |  | 473    |        |   |  | 291    |       
|Capital invested                    |                              |                  | 4,095  |                |   |               | 3,001  |              |   |                  | 3,152  |                  |   |           | 2,891  |        |   |      | 592   |       |   |      | 409   |       |   |      | 10,085 |       |  |  | 8,033  |       |  |  | 5,772  |       |   |  | 4,862  |       |   |  | 6,913  |       |   |  | 5,852  |       |   |  | 4,823  |        |   |  | 4,051  |       
|CFRoI                               |                              |                  | 0.1%   |                |   |               | 5.0%   |              |   |                  | 23.9%  |                  |   |           | 21.5%  |        |   |      | 30.5% |       |   |      | 26.9% |       |   |      | 6.6%   |       |  |  | 10.3%  |       |  |  | 6.8%   |       |   |  | 6.8%   |       |   |  | 9.3%   |       |   |  | 10.4%  |       |   |  | 8.5%   |        |   |  | 6.7%   |       
|Net cash flow                       |                              |                  | 484    |                |   |               | (163   | )            |   |                  | 951    |                  |   |           | 719    |        |   |      | 140   |       |   |      | 226   |       |   |      | 1,212  |       |  |  | 1,165  |       |  |  | 457    |       |   |  | 198    |       |   |  | 710    |       |   |  | 844    |       |   |  | 590    |        |   |  | 199    |       
|Equity-method income (loss)         |                              |                  |       |                |   |               |       |              |   |                  |       |                  |   |           |       |        |   |      |      |       |   |      |      |       |   |      |       |       |  |  |       |       |  |  |       |       |   |  | 1      |       |   |  | (3     | )     |   |  | (23    | )     |   |  | 8      |        |   |  | (143   | )     
|Equity-method investments           |                              |                  | 16     |                |   |               | 4      |              |   |                  |       |                  |   |           |       |        |   |      |      |       |   |      |      |       |   |      |       |       |  |  |       |       |  |  | 10     |       |   |  | 2      |       |   |  | 728    |       |   |  | 703    |       |   |  | 341    |        |   |  | 161    |       
|Total assets                        |                              |                  | 4,221  |                |   |               | 4,632  |              |   |                  | 3.352  |                  |   |           | 3,207  |        |   |      | 637   |       |   |      | 575   |       |   |      | 13,462 |       |  |  | 10,745 |       |  |  | 5,165  |       |   |  | 4,460  |       |   |  | 5,912  |       |   |  | 4,512  |       |   |  | 3,500  |        |   |  | 3,438  |       
|Capital expenditures                |                              |                  | 178    |                |   |               | 185    |              |   |                  | 272    |                  |   |           | 201    |        |   |      | 26    |       |   |      | 21    |       |   |      | 297    |       |  |  | 413    |       |  |  | 504    |       |   |  | 290    |       |   |  | 506    |       |   |  | 283    |       |   |  | 285    |        |   |  | 203    |       
|Amortization and depreciation       |                              |                  | 350    |                |   |               | 555    |              |   |                  | 339    |                  |   |           | 300    |        |   |      | 49    |       |   |      | 32    |       |   |      | 628    |       |  |  | 749    |       |  |  | 435    |       |   |  | 903    |       |   |  | 916    |       |   |  | 1,170  |       |   |  | 432    |        |   |  | 762    |       
|Liabilities                         |                              |                  | 2,130  |                |   |               | 2,279  |              |   |                  | 1,236  |                  |   |           | 961    |        |   |      | 304   |       |   |      | 207   |       |   |      | 2,944  |       |  |  | 2,808  |       |  |  | 1,377  |       |   |  | 1,579  |       |   |  | 1,615  |       |   |  | 1,179  |       |   |  | 1,315  |        |   |  | 1,518  |       
|Research and development expenses   |                              |                  | 1,072  |                |   |               | 966    |              |   |                  | 235    |                  |   |           | 211    |        |   |      | 80    |       |   |      | 72    |       |   |      | 598    |       |  |  | 727    |       |  |  | 125    |       |   |  | 146    |       |   |  | 173    |       |   |  | 153    |       |   |  | 145    |        |   |  | 122    |       
|Number of employees (as of Dec. 31) |                              |                  | 21,900 |                |   |               | 20,700 |              |   |                  | 12,700 |                  |   |           | 11,000 |        |   |      | 3,000 |       |   |      | 2,900 |       |   |      | 20,700 |       |  |  | 19,400 |       |  |  | 15,800 |       |   |  | 14,500 |       |   |  | 10,100 |       |   |  | 9,200  |       |   |  | 14,800 |        |   |  | 14,100 |       

|                                    |                              |                |        |             |  |               |        |      |  |          |         |       |   |  |         |       |   |  |        |   |  |  |        |   | 
|----------------------------------- | ---------------------------- | -------------- | ------ | ----------- |  | ------------- | ------ | ---- |  | -------- | ------- | ----- | - |  | ------- | ----- | - |  | ------ | - |  |  | ------ | - | 
|                                    |                              |                |        |             |  |               |        |      |  |         
|                                    |                              |                |        |             |  |               |        |      |  | Of which
|                                    |                              |                |        |             |  | Discontinuing
|                                    |                              | Reconciliation |        | Bayer Group |  | Operations   
|                                    |                              |                |        |             |  |              
|Business Segments                   |                              | 2002           |        | 2003        |  | 2002          |        | 2003 |  | 2002     |         | 2003 
|                                    |                              |                |        |             |  |               |        |      |  |          |         |      
|                                    |                              |               
|                                    |                              | ( million)   
|Net sales (external)                |                              |                | 810    |             |  |               | 635    |      |  |          | 29,624  |       |   |  | 28,567  |       |   |  | 7,586  |   |  |  | 6,389  |  
|                                    |  Change in
                |                |        |            |  |               |        |     |  |          |         | (2.2% | ) |  |         | (3.6% | ) |  |        |  |  |  |        |  | 
|                                    |  Change in local currencies |                |        |            |  |               |        |     |  |          |         | 2.6%  |   |  |         | 5.0%  |   |  |        |  |  |  |        |  | 
|Intersegment sales                  |                              |                | (728   | )           |  |               | (785   | )    |  |          |        |       |   |  |        |       |   |  |        |   |  |  |        |  
|Other operating income              |                              |                | 747    |             |  |               | 172    |      |  |          | 2,706   |       |   |  | 1,158   |       |   |  |       |   |  |  |       |  
|Operating result                    |                              |                | 133    |             |  |               | (182   | )    |  |          | 1,610   |       |   |  | (1,203  | )     |   |  | 760    |   |  |  | (1,652 | )
|Return on sales                     |                              |                |       |             |  |               |       |      |  |          | 5.4%    |       |   |  | (4.2%   | )     |   |  |       |   |  |  |       |  
|Gross cash flow                     |                              |                | (47    | )           |  |               | (2     | )    |  |          | 3,085   |       |   |  | 3,244   |       |   |  | 416    |   |  |  | 228    |  
|Capital invested                    |                              |                | 1,280  |             |  |               | 5,298  |      |  |          | 36,712  |       |   |  | 34,397  |       |   |  |       |   |  |  |       |  
|CFRoI                               |                              |                |       |             |  |               |       |      |  |          | 8.3%    |       |   |  | 9.2%    |       |   |  |       |   |  |  |       |  
|Net cash flow                       |                              |                | (86    | )           |  |               | 105    |      |  |          | 4,458   |       |   |  | 3,293   |       |   |  | 461    |   |  |  | 33     |  
|Equity-method income (loss)         |                              |                |       |             |  |               |       |      |  |          | 5       |       |   |  | (165    | )     |   |  |       |   |  |  |       |  
|Equity-method investments           |                              |                |       |             |  |               |       |      |  |          | 1,095   |       |   |  | 870     |       |   |  |       |   |  |  |       |  
|Total assets                        |                              |                | 5,443  |             |  |               | 5,876  |      |  |          | 41,692  |       |   |  | 37,445  |       |   |  | 6,904  |   |  |  | 5655   |  
|Capital expenditures                |                              |                | 315    |             |  |               | 143    |      |  |          | 2,383   |       |   |  | 1,739   |       |   |  |       |   |  |  |       |  
|Amortization and depreciation       |                              |                | 163    |             |  |               | 264    |      |  |          | 3,312   |       |   |  | 4,735   |       |   |  | 706    |   |  |  | 1,685  |  
|Liabilities                         |                              |                | 15,316 |             |  |               | 14,578 |      |  |          | 26,237  |       |   |  | 25,109  |       |   |  | 3,143  |   |  |  | 3,153  |  
|Research and development expenses   |                              |                | 149    |             |  |               | 17     |      |  |          | 2,577   |       |   |  | 2,414   |       |   |  | 244    |   |  |  | 215    |  
|Number of employees (as of Dec. 31) |                              |                | 23,600 |             |  |               | 23,600 |      |  |          | 122,600 |       |   |  | 115,400 |       |   |  | 22,900 |   |  |  | 22,000 |  

F-7



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)

Key Data by Business Segment

|                                    |                              |                  |        |                |   |               |        |              |   |                  |        |                  |  |           |        |       |   |      |       |       |   |      |       |       |   |      |       |       |  |  |        |       |  |  |        |       |   |  |        |       |   |  |        |       |   |  |        |       |   |  |        |       |   |  |        |        |  
|----------------------------------- | ---------------------------- | ---------------- | ------ | -------------- | - | ------------- | ------ | ------------ | - | ---------------- | ------ | ---------------- |  | --------- | ------ | ----- | - | ---- | ----- | ----- | - | ---- | ----- | ----- | - | ---- | ----- | ----- |  |  | ------ | ----- |  |  | ------ | ----- | - |  | ------ | ----- | - |  | ------ | ----- | - |  | ------ | ----- | - |  | ------ | ----- | - |  | ------ | ------ | -
|                                    |                              |                  |        |                |   |               |        |              |   |                  |        |                  |  |           |        |       |   |      |       |       |   |      |       |       |   |     
|                                    |                              | Pharmaceuticals, |        |                |   |               |        |              |   |                  |        |                  |  |           |        |       |   |      |       |       |   |     
|                                    |                              | Biological       |        | Consumer Care, |   |               |        |              |   |                  |        | Polyurethanes,   |  |          
|                                    |                              | Products         |        | Diagnostics    |   | Animal Health |        | Crop Science |   | Plastics, Rubber |        | Coatings, Fibers |  | Chemicals
|                                    |                              |                  |        |                |   |               |        |              |   |                  |        |                  |  |          
|Business Segments                   |                              | 2001             |        | 2002           |   | 2001          |        | 2002         |   | 2001             |        | 2002             |  | 2001      |        | 2002  |   | 2001 |       | 2002  |   | 2001 |       | 2002  |   | 2001 |       | 2002 
|                                    |                              |                  |        |                |   |               |        |              |   |                  |        |                  |  |           |        |       |   |      |       |       |   |      |       |       |   |      |       |      
|                                    |                              |                 
|                                    |                              | ( million)     
|Net sales (external)                |                              |                  | 5,729  |                |   |               | 4,767  |              |   |                  | 4,104  |                  |  |           | 3,755  |       |   |      | 858   |       |   |      | 850   |       |   |      | 2,838 |       |  |  | 4,697  |       |  |  | 5,396  |       |   |  | 5,210  |       |   |  | 5,275  |       |   |  | 5,213  |       |   |  | 5,201  |       |   |  | 4,322  |       
|                                    |  Change in
                |                  |        | (6.7%          | ) |               |        | (16.8%       | ) |                  |        | 5.6%             |  |           |        | (8.5% | ) |      |       | (1.7% | ) |      |       | (0.9% | ) |      |       | 9.9%  |  |  |        | 65.5% |  |  |        | (4.8% | ) |  |        | (3.4% | ) |  |        | (0.6% | ) |  |        | (1.2% | ) |  |        | (2.4% | ) |  |        | (16.9% | )
|                                    |  Change in local currencies |                  |        | (6.7%          | ) |               |        | (12.4%       | ) |                  |        | 5.0%             |  |           |        | (1.5% | ) |      |       | (1.7% | ) |      |       | 5.8%  |   |      |       | 10.2% |  |  |        | 72.4% |  |  |        | (5.7% | ) |  |        | (0.5% | ) |  |        | (1.1% | ) |  |        | 2.9%  |   |  |        | (2.4% | ) |  |        | (11.7% | )
|Intersegment sales                  |                              |                  | 38     |                |   |               | 33     |              |   |                  | 2      |                  |  |           | 2      |       |   |      | 4     |       |   |      | 1     |       |   |      | 102   |       |  |  | 90     |       |  |  | 116    |       |   |  | 115    |       |   |  | 138    |       |   |  | 78     |       |   |  | 456    |       |   |  | 409    |       
|Other operating income              |                              |                  | 63     |                |   |               | 120    |              |   |                  | 50     |                  |  |           | 321    |       |   |      | 13    |       |   |      | 9     |       |   |      | 128   |       |  |  | 328    |       |  |  | 93     |       |   |  | 79     |       |   |  | 59     |       |   |  | 60     |       |   |  | 416    |       |   |  | 1,042  |       
|Operating result                    |                              |                  | 52     |                |   |               | (186   | )            |   |                  | 342    |                  |  |           | 602    |       |   |      | 162   |       |   |      | 170   |       |   |      | 490   |       |  |  | (108   | )     |  |  | 214    |       |   |  | 76     |       |   |  | 153    |       |   |  | (134   | )     |   |  | 527    |       |   |  | 1,057  |       
|Return on sales                     |                              |                  | 0.9%   |                |   |               | (3.9%  | )            |   |                  | 8.3%   |                  |  |           | 16.0%  |       |   |      | 18.9% |       |   |      | 20.0% |       |   |      | 17.3% |       |  |  | (2.3%  | )     |  |  | 4.0%   |       |   |  | 1.5%   |       |   |  | 2.9%   |       |   |  | (2.6%  | )     |   |  | 10.1%  |       |   |  | 24.5%  |       
|Gross cash flow                     |                              |                  | 230    |                |   |               | 4      |              |   |                  | 535    |                  |  |           | 827    |       |   |      | 153   |       |   |      | 182   |       |   |      | 586   |       |  |  | 516    |       |  |  | 562    |       |   |  | 420    |       |   |  | 681    |       |   |  | 710    |       |   |  | 470    |       |   |  | 473    |       
|Capital invested                    |                              |                  | 5,352  |                |   |               | 4,095  |              |   |                  | 3,799  |                  |  |           | 3,152  |       |   |      | 579   |       |   |      | 592   |       |   |      | 3,950 |       |  |  | 10,085 |       |  |  | 6,405  |       |   |  | 5,772  |       |   |  | 8,496  |       |   |  | 6,913  |       |   |  | 5,721  |       |   |  | 4,823  |       
|CFRoI                               |                              |                  | 4,2%   |                |   |               | 0.1%   |              |   |                  | 14.0%  |                  |  |           | 23.9%  |       |   |      | 24.2% |       |   |      | 30.5% |       |   |      | 14.5% |       |  |  | 6.6%   |       |  |  | 8.5%   |       |   |  | 6.8%   |       |   |  | 8.4%   |       |   |  | 9.3%   |       |   |  | 7.0%   |       |   |  | 8.5%   |       
|Net cash flow                       |                              |                  | 343    |                |   |               | 484    |              |   |                  | 577    |                  |  |           | 951    |       |   |      | 190   |       |   |      | 140   |       |   |      | 428   |       |  |  | 1,212  |       |  |  | 924    |       |   |  | 457    |       |   |  | 1,063  |       |   |  | 710    |       |   |  | 513    |       |   |  | 590    |       
|Equity-method income (loss)         |                              |                  |       |                |   |               |       |              |   |                  |       |                  |  |           |       |       |   |      |      |       |   |      |      |       |   |      |      |       |  |  |       |       |  |  |       |       |   |  |       |       |   |  |       |       |   |  | (3     | )     |   |  | 12     |       |   |  | 8      |       
|Equity-method investments           |                              |                  | 21     |                |   |               | 16     |              |   |                  |       |                  |  |           |       |       |   |      |      |       |   |      |      |       |   |      |      |       |  |  |       |       |  |  | 27     |       |   |  | 10     |       |   |  | 772    |       |   |  | 728    |       |   |  | 346    |       |   |  | 341    |       
|Total assets                        |                              |                  | 5,303  |                |   |               | 4,221  |              |   |                  | 3,956  |                  |  |           | 3,352  |       |   |      | 734   |       |   |      | 637   |       |   |      | 3,488 |       |  |  | 13,462 |       |  |  | 5,867  |       |   |  | 5,165  |       |   |  | 7,722  |       |   |  | 5,912  |       |   |  | 5,036  |       |   |  | 3,500  |       
|Capital expenditures                |                              |                  | 375    |                |   |               | 178    |              |   |                  | 238    |                  |  |           | 272    |       |   |      | 45    |       |   |      | 26    |       |   |      | 199   |       |  |  | 297    |       |  |  | 536    |       |   |  | 504    |       |   |  | 468    |       |   |  | 506    |       |   |  | 501    |       |   |  | 285    |       
|Amortization and depreciation       |                              |                  | 364    |                |   |               | 350    |              |   |                  | 291    |                  |  |           | 339    |       |   |      | 39    |       |   |      | 49    |       |   |      | 248   |       |  |  | 628    |       |  |  | 482    |       |   |  | 435    |       |   |  | 594    |       |   |  | 916    |       |   |  | 455    |       |   |  | 432    |       
|Liabilities                         |                              |                  | 1,869  |                |   |               | 2,130  |              |   |                  | 1,271  |                  |  |           | 1,236  |       |   |      | 379   |       |   |      | 304   |       |   |      | 1,130 |       |  |  | 2,944  |       |  |  | 1,339  |       |   |  | 1,377  |       |   |  | 2,385  |       |   |  | 1,615  |       |   |  | 2,030  |       |   |  | 1,315  |       
|Research and development expenses   |                              |                  | 1,242  |                |   |               | 1,072  |              |   |                  | 252    |                  |  |           | 235    |       |   |      | 91    |       |   |      | 80    |       |   |      | 299   |       |  |  | 598    |       |  |  | 134    |       |   |  | 125    |       |   |  | 194    |       |   |  | 173    |       |   |  | 177    |       |   |  | 145    |       
|Number of employees (as of Dec. 31) |                              |                  | 22,000 |                |   |               | 21,900 |              |   |                  | 12,800 |                  |  |           | 12,700 |       |   |      | 3,100 |       |   |      | 3,000 |       |   |      | 8,400 |       |  |  | 20,700 |       |  |  | 16,400 |       |   |  | 15,800 |       |   |  | 10,300 |       |   |  | 10,100 |       |   |  | 19,000 |       |   |  | 14,800 |       

|                                    |                              |                |        |             |  |               |        |      |  |          |         |       |   |  |         |       |   |  |        |   |  |  |        |   | 
|----------------------------------- | ---------------------------- | -------------- | ------ | ----------- |  | ------------- | ------ | ---- |  | -------- | ------- | ----- | - |  | ------- | ----- | - |  | ------ | - |  |  | ------ | - | 
|                                    |                              |                |        |             |  |               |        |      |  |         
|                                    |                              |                |        |             |  |               |        |      |  | Of which
|                                    |                              |                |        |             |  | Discontinuing
|                                    |                              | Reconciliation |        | Bayer Group |  | Operations   
|                                    |                              |                |        |             |  |              
|Business Segments                   |                              | 2001           |        | 2002        |  | 2001          |        | 2002 |  | 2001     |         | 2002 
|                                    |                              |                |        |             |  |               |        |      |  |          |         |      
|                                    |                              |               
|                                    |                              | ( million)   
|Net sales (external)                |                              |                | 874    |             |  |               | 810    |      |  |          | 30,275  |       |   |  | 29,624  |       |   |  | 8,573  |   |  |  | 7,586  |  
|                                    |  Change in
                |                |        |            |  |               |        |     |  |          |         | (2.2% | ) |  |         | (2.2% | ) |  |        |  |  |  |        |  | 
|                                    |  Change in local currencies |                |        |            |  |               |        |     |  |          |         | (2.5% | ) |  |         | 2.6%  |   |  |        |  |  |  |        |  | 
|Intersegment sales                  |                              |                | (856   | )           |  |               | (728   | )    |  |          |        |       |   |  |        |       |   |  |       |   |  |  |        |  
|Other operating income              |                              |                | 63     |             |  |               | 747    |      |  |          | 885     |       |   |  | 2,706   |       |   |  |       |   |  |  |       |  
|Operating result                    |                              |                | (264   | )           |  |               | 133    |      |  |          | 1,676   |       |   |  | 1,610   |       |   |  | 210    |   |  |  | 760    |  
|Return on sales                     |                              |                |       |             |  |               |       |      |  |          | 5.5%    |       |   |  | 5.4%    |       |   |  |       |   |  |  |       |  
|Gross cash flow                     |                              |                | (208   | )           |  |               | (47    | )    |  |          | 3,009   |       |   |  | 3,085   |       |   |  | 433    |   |  |  | 416    |  
|Capital invested                    |                              |                | 556    |             |  |               | 1,280  |      |  |          | 34,858  |       |   |  | 36,712  |       |   |  |       |   |  |  |       |  
|CFRoI                               |                              |                |       |             |  |               |       |      |  |          | 8.4%    |       |   |  | 8.3%    |       |   |  |       |   |  |  |       |  
|Net cash flow                       |                              |                | (158   | )           |  |               | (86    | )    |  |          | 3,880   |       |   |  | 4,458   |       |   |  | 850    |   |  |  | 461    |  
|Equity-method income (loss)         |                              |                | 14     |             |  |               |       |      |  |          | 26      |       |   |  | 5       |       |   |  |       |   |  |  |       |  
|Equity-method investments           |                              |                |       |             |  |               |       |      |  |          | 1,166   |       |   |  | 1,095   |       |   |  |       |   |  |  |       |  
|Total assets                        |                              |                | 4,933  |             |  |               | 5,443  |      |  |          | 37,039  |       |   |  | 41,692  |       |   |  | 8,813  |   |  |  | 6,904  |  
|Capital expenditures                |                              |                | 255    |             |  |               | 315    |      |  |          | 2,617   |       |   |  | 2,383   |       |   |  |       |   |  |  |       |  
|Amortization and depreciation       |                              |                | 43     |             |  |               | 163    |      |  |          | 2,516   |       |   |  | 3,312   |       |   |  | 742    |   |  |  | 706    |  
|Liabilities                         |                              |                | 9,616  |             |  |               | 15,316 |      |  |          | 20,019  |       |   |  | 26,237  |       |   |  | 3,489  |   |  |  | 3,143  |  
|Research and development expenses   |                              |                | 170    |             |  |               | 149    |      |  |          | 2,559   |       |   |  | 2,577   |       |   |  | 304    |   |  |  | 244    |  
|Number of employees (as of Dec. 31) |                              |                | 24,900 |             |  |               | 23,600 |      |  |          | 116,900 |       |   |  | 122,600 |       |   |  | 26,900 |   |  |  | 22,900 |  

F-8



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)

Key Data by Business Region

|                                              |                              |             |        |               |   |              |        |                    |  |      |        |       |   |      |        |       |   |      |        |       |   |      |        |       |   |  |        |      |  |  |        |      |  |  |        |       |   |  |        |      |  |  |        |       |  |  |        |       |  
|--------------------------------------------- | ---------------------------- | ----------- | ------ | ------------- | - | ------------ | ------ | ------------------ |  | ---- | ------ | ----- | - | ---- | ------ | ----- | - | ---- | ------ | ----- | - | ---- | ------ | ----- | - |  | ------ | ---- |  |  | ------ | ---- |  |  | ------ | ----- | - |  | ------ | ---- |  |  | ------ | ----- |  |  | ------ | ----- | -
|                                              |                              |             |        |               |   |              |        |                    |  |      |        |       |   |      |        |       |   |      |        |      
|                                              |                              |             |        |               |   |              |        | Latin America/    
|                                              |                              | Europe      |        | North America |   | Asia/Pacific |        | Africa/Middle East
|                                              |                              |             |        |               |   |              |        |                   
|Regions                                       |                              | 2001        |        | 2002          |   | 2003         |        | 2001               |  | 2002 |        | 2003  |   | 2001 |        | 2002  |   | 2003 |        | 2001  |   | 2002 |        | 2003 
|                                              |                              |             |        |               |   |              |        |                    |  |      |        |       |   |      |        |       |   |      |        |       |   |      |        |      
|                                              |                              |            
|                                              |                              | ( million)
|Net sales (external)  by market              |                              |             | 12,383 |               |   |              | 12,266 |                    |  |      | 12,162 |       |   |      | 9,720  |       |   |      | 9,005  |       |   |      | 8,636  |       |   |  | 4,826  |      |  |  | 4,901  |      |  |  | 4,529  |       |   |  | 3,346  |      |  |  | 3,452  |       |  |  | 3,240  |      
|Net sales (external)  by point of
    origin |                              |             | 13,837 |               |   |              | 13,894 |                    |  |      | 13,518 |       |   |      | 10,067 |       |   |      | 9,135  |       |   |      | 8,763  |       |   |  | 3,930  |      |  |  | 4,010  |      |  |  | 3,913  |       |   |  | 2,441  |      |  |  | 2,585  |       |  |  | 2,373  |      
|Of which discontinuing                        |                              |             | 4,665  |               |   |              | 4,147  |                    |  |      | 3,717  |       |   |      | 2,627  |       |   |      | 2,322  |       |   |      | 1,848  |       |   |  | 836    |      |  |  | 727    |      |  |  | 564    |       |   |  | 445    |      |  |  | 390    |       |  |  | 260    |      
|                                              |  Change in
                |             |        | (6.4%         | ) |              |        | 0.4%               |  |      |        | (2.7% | ) |      |        | 0.8%  |   |      |        | (9.3% | ) |      |        | (4.1% | ) |  |        | 1.9% |  |  |        | 2.0% |  |  |        | (2.4% | ) |  |        | 3.7% |  |  |        | 5.9%  |  |  |        | (8.2% | )
|                                              |  Change in local currencies |             |        | (6.5%         | ) |              |        | 0.5%               |  |      |        | (2.7% | ) |      |        | (2.2% | ) |      |        | (3.9% | ) |      |        | 11.4% |   |  |        | 7.6% |  |  |        | 7.6% |  |  |        | 10.2% |   |  |        | 2.7% |  |  |        | 33.3% |  |  |        | 11.1% |  
|Interregional sales                           |                              |             | 3,157  |               |   |              | 3,181  |                    |  |      | 3,833  |       |   |      | 1,946  |       |   |      | 1,961  |       |   |      | 1,876  |       |   |  | 227    |      |  |  | 227    |      |  |  | 266    |       |   |  | 116    |      |  |  | 139    |       |  |  | 151    |      
|Other operating income                        |                              |             | 717    |               |   |              | 2,447  |                    |  |      | 812    |       |   |      | 70     |       |   |      | 90     |       |   |      | 64     |       |   |  | 48     |      |  |  | 86     |      |  |  | 84     |       |   |  | 50     |      |  |  | 83     |       |  |  | 198    |      
|Operating result                              |                              |             | 1,859  |               |   |              | 1,891  |                    |  |      | (277   | )     |   |      | (283   | )     |   |      | (676   | )     |   |      | (1,247 | )     |   |  | 240    |      |  |  | 207    |      |  |  | 65     |       |   |  | 214    |      |  |  | 410    |       |  |  | 433    |      
|Of which discontinuing                        |                              |             | 629    |               |   |              | 1,050  |                    |  |      | (839   | )     |   |      | (481   | )     |   |      | (388   | )     |   |      | (772   | )     |   |  | 52     |      |  |  | 34     |      |  |  | (53    | )     |   |  | 10     |      |  |  | 64     |       |  |  | 12     |      
|Return on sales                               |                              |             | 13.4%  |               |   |              | 13.6%  |                    |  |      | (2.0%  | )     |   |      | (2.8%  | )     |   |      | (7.4%  | )     |   |      | (14.2% | )     |   |  | 6.1%   |      |  |  | 5.2%   |      |  |  | 1.7%   |       |   |  | 8.8%   |      |  |  | 15.9%  |       |  |  | 18.2%  |      
|Gross cash flow                               |                              |             | 2,017  |               |   |              | 1,843  |                    |  |      | 1,639  |       |   |      | 641    |       |   |      | 740    |       |   |      | 899    |       |   |  | 324    |      |  |  | 360    |      |  |  | 342    |       |   |  | 249    |      |  |  | 363    |       |  |  | 398    |      
|Capital invested                              |                              |             | 16,938 |               |   |              | 21,338 |                    |  |      | 20,000 |       |   |      | 13,449 |       |   |      | 11,594 |       |   |      | 9,325  |       |   |  | 2,781  |      |  |  | 2,460  |      |  |  | 2,258  |       |   |  | 1,705  |      |  |  | 1,322  |       |  |  | 1,197  |      
|CFRoI                                         |                              |             | 11.7%  |               |   |              | 8.6%   |                    |  |      | 7.9%   |       |   |      | 4.5%   |       |   |      | 5.9%   |       |   |      | 8.6%   |       |   |  | 11.2%  |      |  |  | 12.6%  |      |  |  | 14.5%  |       |   |  | 15.0%  |      |  |  | 25.4%  |       |  |  | 31.6%  |      
|Equity-method income (loss)                   |                              |             | 26     |               |   |              | 5      |                    |  |      | (166   | )     |   |      |       |       |   |      |       |       |   |      |       |       |   |  |       |      |  |  |       |      |  |  |       |       |   |  |       |      |  |  |       |       |  |  | 1      |      
|Equity-method investments                     |                              |             | 527    |               |   |              | 572    |                    |  |      | 452    |       |   |      | 616    |       |   |      | 505    |       |   |      | 412    |       |   |  | 2      |      |  |  | 2      |      |  |  | 2      |       |   |  | 21     |      |  |  | 16     |       |  |  | 4      |      
|Total assets                                  |                              |             | 17,887 |               |   |              | 23,694 |                    |  |      | 22,400 |       |   |      | 12,898 |       |   |      | 11,565 |       |   |      | 9,045  |       |   |  | 3,227  |      |  |  | 3,225  |      |  |  | 2,731  |       |   |  | 1,953  |      |  |  | 1,734  |       |  |  | 1,627  |      
|Capital expenditures                          |                              |             | 1,684  |               |   |              | 1,422  |                    |  |      | 1,047  |       |   |      | 560    |       |   |      | 676    |       |   |      | 496    |       |   |  | 255    |      |  |  | 188    |      |  |  | 138    |       |   |  | 118    |      |  |  | 97     |       |  |  | 58     |      
|Amortization and depreciation                 |                              |             | 1,280  |               |   |              | 1,746  |                    |  |      | 2,351  |       |   |      | 969    |       |   |      | 1,344  |       |   |      | 1,963  |       |   |  | 155    |      |  |  | 153    |      |  |  | 333    |       |   |  | 108    |      |  |  | 64     |       |  |  | 69     |      
|Liabilities                                   |                              |             | 9,949  |               |   |              | 14,370 |                    |  |      | 15,898 |       |   |      | 6,490  |       |   |      | 6,390  |       |   |      | 5,253  |       |   |  | 1,403  |      |  |  | 1,613  |      |  |  | 1,189  |       |   |  | 695    |      |  |  | 945    |       |  |  | 675    |      
|Research and development expenses             |                              |             | 1,786  |               |   |              | 1,801  |                    |  |      | 1,674  |       |   |      | 696    |       |   |      | 708    |       |   |      | 650    |       |   |  | 68     |      |  |  | 51     |      |  |  | 74     |       |   |  | 9      |      |  |  | 17     |       |  |  | 16     |      
|Number of employees (as of Dec. 31)           |                              |             | 68,400 |               |   |              | 70,600 |                    |  |      | 66,700 |       |   |      | 24,000 |       |   |      | 24,600 |       |   |      | 23,300 |       |   |  | 13,000 |      |  |  | 15,400 |      |  |  | 13,900 |       |   |  | 11,500 |      |  |  | 12,000 |       |  |  | 11,500 |      

|                                              |                              |                |        |             |  |      |        |      |  |      |        |      |  |  |         |       |   |  |         |       |   |  |         |       |  
|--------------------------------------------- | ---------------------------- | -------------- | ------ | ----------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  |  | ------- | ----- | - |  | ------- | ----- | - |  | ------- | ----- | -
|                                              |                              |                |        |            
|                                              |                              | Reconciliation |        | Bayer Group
|                                              |                              |                |        |            
|Regions                                       |                              | 2001           |        | 2002        |  | 2003 |        | 2001 |  | 2002 |        | 2003
|                                              |                              |                |        |             |  |      |        |      |  |      |        |     
|                                              |                              |               
|                                              |                              | ( million)   
|Net sales (external)  by market              |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 30,275  |       |   |  | 29,624  |       |   |  | 28,567  |      
|Net sales (external)  by point of
    origin |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 30,275  |       |   |  | 29,624  |       |   |  | 28,567  |      
|Of which discontinuing                        |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 8,573   |       |   |  | 7,586   |       |   |  | 6,389   |      
|                                              |  Change in
                |                |        |            |  |      |        |     |  |      |        |     |  |  |         | (2.2% | ) |  |         | (2.2% | ) |  |         | (3.6% | )
|                                              |  Change in local currencies |                |        |            |  |      |        |     |  |      |        |     |  |  |         | (2.5% | ) |  |         | 2.6%  |   |  |         | 5.0%  |  
|Interregional sales                           |                              |                | (5,446 | )           |  |      | (5,508 | )    |  |      | (6,126 | )    |  |  |        |       |   |  |        |       |   |  |        |      
|Other operating income                        |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 885     |       |   |  | 2,706   |       |   |  | 1,158   |      
|Operating result                              |                              |                | (354   | )           |  |      | (222   | )    |  |      | (177   | )    |  |  | 1,676   |       |   |  | 1,610   |       |   |  | (1,203  | )    
|Of which discontinuing                        |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 210     |       |   |  | 760     |       |   |  | (1,652  | )    
|Return on sales                               |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 5.5%    |       |   |  | 5.4%    |       |   |  | (4.2%   | )    
|Gross cash flow                               |                              |                | (222   | )           |  |      | (221   | )    |  |      | (34    | )    |  |  | 3,009   |       |   |  | 3,085   |       |   |  | 3,244   |      
|Capital invested                              |                              |                | (15    | )           |  |      | (2     | )    |  |      | 1,617  |      |  |  | 34,858  |       |   |  | 36,712  |       |   |  | 34,397  |      
|CFRoI                                         |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 8.4%    |       |   |  | 8.3%    |       |   |  | 9.2%    |      
|Equity-method income (loss)                   |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 26      |       |   |  | 5       |       |   |  | (165    | )    
|Equity-method investments                     |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 1,166   |       |   |  | 1,095   |       |   |  | 870     |      
|Total assets                                  |                              |                | 1,074  |             |  |      | 1,474  |      |  |      | 1,642  |      |  |  | 37,039  |       |   |  | 41,692  |       |   |  | 37,445  |      
|Capital expenditures                          |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 2,617   |       |   |  | 2,383   |       |   |  | 1,739   |      
|Amortization and depreciation                 |                              |                | 4      |             |  |      | 5      |      |  |      | 19     |      |  |  | 2,516   |       |   |  | 3,312   |       |   |  | 4,735   |      
|Liabilities                                   |                              |                | 1,482  |             |  |      | 2,919  |      |  |      | 2,094  |      |  |  | 20,019  |       |   |  | 26,237  |       |   |  | 25,109  |      
|Research and development expenses             |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 2,559   |       |   |  | 2,577   |       |   |  | 2,414   |      
|Number of employees (as of Dec. 31)           |                              |                |       |             |  |      |       |      |  |      |       |      |  |  | 116,900 |       |   |  | 122,600 |       |   |  | 115,400 |      

F-9



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Accounting policies

The consolidated financial statements of the
Bayer Group are prepared  pursuant to
Article 292a of the German Commercial Code  in
accordance with the rules of the International Accounting
Standards Board (IASB), London, in effect at the closing date,
and are approved by the Supervisory Board for publication on
March 18, 2004. They comply with the European Unions
guidelines on consolidation of financial statements (Directive
83/349/EEC).

A Declaration of Conformity with the German
Corporate Governance Code has been issued pursuant to §161
of the German Stock Corporation Act and made available to
stockholders.

The financial statements of the consolidated
companies are prepared according to uniform recognition and
valuation principles. Valuation adjustments made for tax reasons
are not reflected in the Group statements. The individual
companies statements are prepared as of the closing date
for the Group statements.

The consolidated financial statements of the
Bayer Group are drawn up in
euros ().
Amounts are stated in millions of euros
( million)
except where otherwise indicated.

The income statement is prepared using the
cost-of-sales method.

In the income statement and balance sheet,
certain items are combined for the sake of clarity, as explained
in the Notes. A distinction is made in the balance sheet between
long-term and short-term liabilities in accordance with
IAS 1 (Presentation of Financial Statements). Liabilities
are classified as short-term if they mature within one year.
Certain prior year amounts have been reclassified to conform
with the current year presentation.

The preparation of financial statements requires
estimates and assumptions to be made. These affect the
classification and valuation of assets, liabilities, income,
expenses and contingent liabilities. The actual values may vary
from the estimates.

Since 2002 the term International Financial
Reporting Standards (IFRS) has been used to refer to the
body of accounting and reporting standards compiled by the
International Accounting Standards Board (IASB), London. It thus
replaces the term International Accounting
Standards. However, standards issued prior to the name
change continue to be referred to as IAS.

Effect of new accounting
pronouncements

The consolidated financial statements of the
Bayer Group for the 2003 fiscal year comply with the following
new International Accounting Standard (IAS) published by the
International Accounting Standards Board (IASB):

IAS 41 (Agriculture) prescribes the accounting
treatment, financial statement presentation and disclosures
related to agricultural activity. This standard stipulates,
among other things, the accounting treatment for biological
assets during the period of growth, degeneration, production and
procreation, and for the initial measurement of agricultural
produce at the point of harvest. It prescribes that biological
assets be included at fair value less estimated point-of-sale
costs, provided that fair value can be measured reliably.
Agricultural produce harvested from such biological assets is
also recognized at fair value at the point of harvest less
estimated point-of-sale costs.

The adoption of this new standard did not have
any material impact on Bayers financial position or
results of operations in 2003 or on the comparability of the
consolidated financial statements for 2003 and 2002.

In December 2003 the IASB issued 15 revised
international accounting standards (IAS) as part of its
Improvements Project to eliminate redundancies and
conflicts between existing standards. The revised standards are
to be applied for fiscal years starting on or after
January 1, 2005. The Bayer Group is currently examining
whether to introduce them earlier and what impact they will have
on the Groups net worth, financial position and results of
operations.

F-10



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Basic principles of the Group financial
statements

Consolidation methods

Capital consolidation is performed according to
IAS 22 (Business Combinations) by offsetting investments in
subsidiaries against the underlying equity at the dates of
acquisition. The identifiable assets and liabilities of
subsidiaries and joint ventures are included at their fair
values in proportion to Bayers interest. Remaining
differences are recognized as goodwill. Fair value adjustments
of the assets and liabilities concerned are amortized together
with the corresponding assets and liabilities in subsequent
periods.

Where the statements of individual consolidated
companies reflect write-downs or write-backs of investments in
other consolidated companies, these are reversed for the Group
statements.

Intragroup sales, profits, losses, income,
expenses, receivables and payables are eliminated.

Deferred taxes are recognized for temporary
differences related to consolidation entries.

Joint ventures are included by proportionate
consolidation according to the same principles.

The consolidated financial statements include the
accounts of those material subsidiaries in which Bayer AG
directly or indirectly, has a majority of the voting rights,
over which it exercises uniform control, or from which it is
able to derive benefit by virtue of its power to govern
corporate financial and operating policies, generally through an
ownership interest greater than 50 percent. Inclusion of such
companies accounts in the consolidated financial
statements begins when Bayer AG starts to exercise control over
the company and ceases when it is no longer able to do so.
Subsidiaries and joint ventures that do not have a material
impact on assets and earnings either individually or in
aggregate are not consolidated. They are recognized at the lower
of cost of acquisition or fair value.

Investments in material entities in which Bayer
AG exerts significant influence, generally through an ownership
interest between 20 and 50 percent, are accounted for by
the equity method. The cost of acquisition of a company included
at equity is adjusted annually by the percentage of any change
in its stockholders equity corresponding to Bayers
percentage interest in the company. Any goodwill arising from
the first-time inclusion of companies at equity is accounted for
in the same way as goodwill relating to fully consolidated
companies. Intercompany profits and losses on transactions with
companies included at equity were immaterial in 2003 and 2002.

Foreign currency translation

In the financial statements of the individual
consolidated companies, foreign currency receivables and
payables are translated at closing rates, irrespective of
whether they are exchange-hedged. Forward contracts that, from
an economic point of view, serve as a hedge against fluctuations
in exchange rates are stated at fair value.

The majority of consolidated companies outside
the euro zone are to be regarded as foreign entities since they
are financially, economically and organizationally autonomous.
Their functional currencies according to IAS 21 (The
Effects of Changes in Foreign Exchange Rates) are thus the
respective local currencies. The assets and liabilities of these
companies are therefore translated at closing rates, income and
expense items at average rates for the year.

Where the operations of a company outside the
euro zone are integral to those of Bayer AG, the functional
currency is the euro. Property, plant and equipment, intangible
assets, investments in affiliated companies and other securities
included in investments are translated at the historical
exchange rates on the dates of addition, along with any relevant
amortization, depreciation and write-downs. All other balance
sheet items are translated at closing rates. Income and expense
items (except amortization, depreciation and write-downs) are
translated at average rates for the year.

Companies operating in hyperinflationary
economies prepare their statements in Euro and thus, in effect,
by the temporal method described above.

F-11



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Exchange differences arising from the translation
of foreign companies balance sheets are shown in a
separate stockholders equity item.

In case of divestiture, the respective exchange
differences are reversed and recognized in income.

The exchange rates for major currencies against
the euro varied as follows:

|            |  |  |     |              |  |              |        |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        |  |  |  |        | 
|----------- |  |  | --- | ------------ |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|            |  |  |     |              |  |             
|            |  |  |     | Closing rate |  | Average rate
|            |  |  |     |              |  |             
|            |  |  |     | 2001         |  | 2002         |        | 2003 |  | 2001 |        | 2002 |  | 2003
|            |  |  |     |              |  |              |        |      |  |      |        |      |  |     
|            |  |  |     |             
|            |  |  |     | (1)        
|Argentina   |  |  | ARS |              |  |              | 0.88   |      |  |      | 3.53   |      |  |      | 3.70   |  |  |  | 0.90   |  |  |  | 2.97   |  |  |  | 3.33   | 
|Brazil      |  |  | BRL |              |  |              | 2.05   |      |  |      | 3.71   |      |  |      | 3.66   |  |  |  | 2.10   |  |  |  | 2.78   |  |  |  | 3.47   | 
|U.K.        |  |  | GBP |              |  |              | 0.61   |      |  |      | 0.65   |      |  |      | 0.70   |  |  |  | 0.62   |  |  |  | 0.63   |  |  |  | 0.69   | 
|Japan       |  |  | JPY |              |  |              | 115.33 |      |  |      | 124.39 |      |  |      | 135.05 |  |  |  | 108.74 |  |  |  | 118.06 |  |  |  | 130.96 | 
|Canada      |  |  | CAD |              |  |              | 1.41   |      |  |      | 1.66   |      |  |      | 1.62   |  |  |  | 1.39   |  |  |  | 1.48   |  |  |  | 1.58   | 
|Mexico      |  |  | MXN |              |  |              | 8.06   |      |  |      | 10.99  |      |  |      | 14.18  |  |  |  | 8.36   |  |  |  | 9.15   |  |  |  | 12.22  | 
|Switzerland |  |  | CHF |              |  |              | 1.48   |      |  |      | 1.45   |      |  |      | 1.56   |  |  |  | 1.51   |  |  |  | 1.47   |  |  |  | 1.52   | 
|U.S.A.      |  |  | USD |              |  |              | 0.88   |      |  |      | 1.05   |      |  |      | 1.26   |  |  |  | 0.90   |  |  |  | 0.95   |  |  |  | 1.13   | 

Recognition and valuation
principles

Net sales and other operating income

Sales are recognized upon delivery of goods or
rendering of services to third parties and are reported net of
sales taxes and rebates. Revenues from contracts that contain
customer acceptance provisions are deferred until customer
acceptance occurs or the contractual acceptance period has
lapsed. Allocations to provisions for rebates to customers are
recognized in the period in which the related sales are recorded
based on the contract terms. Payments relating to the sale or
outlicensing of technologies or technological
expertise  once the respective agreements have become
effective  are immediately recognized in income if
all rights to the technologies and all obligations resulting
from them have been relinquished under the contract terms.
However, if rights to the technologies continue to exist or
obligations resulting from them have yet to be fulfilled, the
payments received are recorded in line with the actual
circumstances. Revenues such as license and rental revenues, and
dividend and interest income, are recognized according to the
same principles.

Research and development expenses

According to IAS 38 (Intangible Assets), research
costs cannot be capitalized; development costs can only be
capitalized if specific conditions are fulfilled. Development
costs must be capitalized if it is sufficiently certain that the
future economic benefits to the company will cover not only the
usual production, selling and administrative costs but also the
development costs themselves. There are also several other
criteria relating to the development project and the product or
process being developed, all of which have to be met to justify
asset recognition. As in previous years, these conditions are
not satisfied.

Intangible assets

Acquired intangible assets other than goodwill
are recognized at cost and amortized by the straight-line method
over a period of 4 to 15 years, depending on their
estimated useful lives. Write-downs are made for impairment
losses. Assets are written back if the reasons for previous
years write-downs no longer apply. Scheduled amortization
for 2003 has been allocated to the cost of goods sold, selling
expenses, research and development expenses or general
administration expenses.

Goodwill, including that resulting from capital
consolidation, is capitalized in accordance with IAS 22
(Business Combinations) and amortized on a straight-line basis
over a maximum estimated useful life of 20 years. The value
of goodwill is reassessed regularly based on impairment
indicators and written down if necessary. In

F-12



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


compliance with IAS 36 (Impairment of
Assets), such write-downs of goodwill are measured by comparison
to the discounted cash flows expected to be generated by the
assets to which the goodwill can be ascribed. Amortization and
write-downs of capitalized goodwill is recorded as other
operating expense.

Self-created intangible assets generally are not
capitalized. Certain development costs relating to the
application development stage of internally developed software
are, however, capitalized in the Group balance sheet. These
costs are amortized over the useful life of the software from
the date it is placed in service.

Property, plant and equipment

Property, plant and equipment is carried at the
cost of acquisition or construction. Assets subject to depletion
are depreciated over their estimated useful lives. Write-downs
are made for any declines in value that go beyond the depletion
reflected in depreciation. In compliance with IAS 36
(Impairment of Assets), such write-downs are measured by
comparing the carrying amounts to the discounted cash flows
expected to be generated by the respective assets. Where it is
not possible to estimate the impairment loss for an individual
asset, the loss is assessed on the basis of the discounted cash
flow for the cash-generating unit to which the asset belongs.
Assets are written back if the reasons for previous years
write-downs no longer apply.

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 and write-downs of assets
used in construction. It includes the shares of expenses for
company pension plans and discretionary employee benefits that
are attributable to construction.

If the construction phase of property, plant or
equipment extends over a long period, the interest incurred on
borrowed capital up to the date of completion is capitalized as
part of the cost of acquisition or construction.

Expenses for the repair of property, plant and
equipment are normally charged against income, but they are
capitalized if they result in an enlargement or substantial
improvement of the respective assets.

Property, plant and equipment is depreciated by
the straight-line method, except where the declining-balance
method is more appropriate in light of the actual utilization
pattern. Depreciation for 2003 has been allocated to the cost of
goods sold, selling expenses, research and development expenses
or general administration expenses.

When assets are closed down, sold, or abandoned,
the difference between the net proceeds and the net carrying
amount of the assets is recognized as a gain or loss in other
operating income or expenses, respectively.

The following depreciation periods, based on the
estimated useful lives of the respective assets, are applied
throughout the Group:

|                                   |  |  |                | 
|---------------------------------- |  |  | -------------- | 
|Buildings                          |  |  | 20 to 50 years | 
|Outdoor infrastructure             |  |  | 10 to 20 years | 
|Plant installations                |  |  | 6 to 20 years  | 
|Machinery and apparatus            |  |  | 6 to 12 years  | 
|Laboratory and research facilities |  |  | 3 to  5 years  | 
|Storage tanks and pipelines        |  |  | 10 to 20 years | 
|Vehicles                           |  |  | 5 to  8 years  | 
|Computer equipment                 |  |  | 3 to  5 years  | 
|Furniture and fixtures             |  |  | 4 to 10 years  | 

In accordance with IAS 17 (Leases), assets
leased on terms equivalent to financing a purchase by a
long-term loan (finance leases) are capitalized at the lower of
their fair value or the present value of the minimum lease
payments at the date of addition. The leased assets are
depreciated over their estimated useful lives except where
subsequent transfer of title is uncertain, in which case they
are depreciated over their estimated useful lives or the
respective lease terms, whichever are shorter. The future lease
payments are recorded as financial obligations.

F-13



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Investments

Investments in securities of companies in which
Bayer does not exercise significant influence are classified as
held-to-maturity investments or available-for-sale financial
assets and recognized in compliance with IAS 39 (Financial
Instruments: Recognition and Measurement) at amortized cost or
fair value depending on whether a quoted market price exists for
the securities. Where evidence exists that such assets may be
impaired, they are written down as necessary on the basis of an
impairment test. Investments are written back if the reasons for
previous years write-downs no longer apply.

Investments in companies included at equity are
recognized at amounts corresponding to Bayers shares in
their equities.

Loans receivable that are interest-free or bear
low rates of interest are carried at present value; other loans
receivable are carried at amortized cost.

Financial instruments

Financial instruments entail contractual claims
on financial assets. Under IAS 32 (Financial Instruments:
Disclosure and Presentation), financial instruments include both
primary instruments, such as trade accounts receivable and
payable, investments, and financial obligations; and derivative
financial instruments, which are used to hedge risks arising
from changes in currency exchange and interest rates. Further
details of financial instruments are given in Note 38.

Inventories

In accordance with IAS 2 (Inventories),
inventories encompass assets (finished goods and work in
process) held for sale in the ordinary course of business, in
the process of production for such sale (unfinished goods) or in
the form of materials or supplies to be consumed in the
production process or in the rendering of services (raw
materials and supplies). Inventories are usually valued by the
weighted-average method and recognized at the lower of cost or
net realizable value, that is, the estimated normal selling
price less the estimated production and selling expenses.

The cost of production comprises the direct cost
of materials, direct manufacturing expenses and appropriate
allocations of fixed and variable material and manufacturing
overheads, where these are attributable to production.

It also includes the shares of expenses for
company pension plans and discretionary employee benefits that
are attributable to production. Administrative costs are
included where they are attributable to production.

In view of the production sequences
characteristic of the Bayer Group, work in process and finished
goods are grouped together.

Other receivables and assets

Other receivables and other assets are carried at
amortized cost. Any necessary write-downs are made on the basis
of the probability of default.

Deferred taxes

Deferred taxes are calculated in accordance with
IAS 12 (Income Taxes). Deferred taxes arise from temporary
differences between the carrying amounts of assets or
liabilities in the accounting and tax balance sheets, from
consolidation measures and from realizable tax loss
carryforwards. Deferred taxes are calculated at the rates
which  on the basis of the statutory regulations in
force, or already enacted in relation to future periods, as of
the closing date  are expected to apply in the
individual countries at the time of realization.

F-14



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


A valuation allowance is recognized against tax
loss carryforwards when it is not sufficiently certain that this
income will be realized.

Provisions

Other provisions are valued in accordance with
IAS 37 (Provisions, Contingent Liabilities and Contingent
Assets) and, where appropriate, IAS 19 (Employee Benefits),
using the best estimate of the extent of the obligation.
Long-term portions of provisions are discounted to their present
value insofar as the extent and timing of the obligation can be
assessed with a reasonable degree of certainty. Further details
of pension provisions are given in Note 28.

If the projected obligation declines as a result
of a change in the estimate, the provision is reversed by the
corresponding amount and the resulting income recognized in the
cost of goods sold, selling expenses, research and development
expenses or general administration expenses as appropriate.

Personnel commitments mainly include annual bonus
payments, service awards and other personnel costs.
Reimbursements to be received from the German government under
the senior work program are recorded as receivables and
recognized in income as soon as the criteria for such
reimbursements are fulfilled. Trade-related commitments mainly
include rebates, as well as obligations relating to services
already received but not yet invoiced.

The Group sets up and maintains provisions for
ongoing or probable litigations where reasonable estimates are
possible. These provisions include all estimated legal fees and
costs of expected settlements. The amounts are based upon
information and cost estimates provided by the Groups
attorneys. The provisions are reviewed with the Groups
attorneys and updated at regular intervals not exceeding three
months.

Liabilities

Short-term liabilities are recognized at payment
or redemption amounts. Long-term liabilities and financial
obligations that are not the hedged item in a permissible hedge
accounting relationship are carried at amortized cost.
Liabilities relating to finance leases are carried at the
present value of the future lease payments.



| |                
| | ---------------
| | Deferred income

In accordance with IAS 20 (Accounting for
Government Grants and Disclosure of Government Assistance),
grants and subsidies that serve to promote investment are
reflected in the balance sheet as deferred income. The amounts
are gradually reversed to income during the useful lives of the
respective assets.

Cash flow statement

The cash flow statement shows how the liquidity
of the Bayer Group was affected by the inflow and outflow of
cash and cash equivalents during the year. The effects of
acquisitions, divestitures and other changes in the scope of
consolidation are eliminated. Cash flows are classified by
operating, investing and financing activities in accordance with
IAS 7 (Cash Flow Statements). Cash and cash equivalents
shown in the balance sheet comprise cash, checks, balances with
banks and securities with original maturities of up to three
months. An adjustment is shown to reconcile cash and cash
equivalents at the end of the year to the liquid assets
reflected in the balance sheet.

The amounts reported by consolidated companies
outside the euro zone are translated at average exchange rates
for the year, with the exception of cash and cash equivalents,
which are translated at closing rates as in the balance sheet.
The effect of changes in exchange rates on cash and cash
equivalents is shown separately.

F-15



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Procedure used in global impairment testing
and its impact

In the fourth quarter of 2003, the Bayer Group
conducted an impairment test on its global assets in accordance
with IAS 36. In the industrial business areas in
particular, this was triggered, first, by the strategic
realignment of the Bayer Group, including the plans to dispose
of certain of the polymers and chemicals activities, and,
second, by the sustained deterioration in business conditions in
some areas of operation. These conditions mainly consist of an
accumulation of adverse external factors such as sustained
unfavorable price trends, especially higher raw materials prices
that cannot be passed on fully to customers, lower volume growth
as a result of tougher competition caused partly by global
overcapacities, lower economic growth forecasts and continued
unfavorable currency trends.

Assets were tested for impairment by comparing
the carrying amount of each cash generating unit (CGU) to
the recoverable amount, which is the higher of the net selling
price or value in use.

In line with the definition of cash generating
units, those of the Bayer Group were identified as being the
strategic business entities, since these are the next financial
reporting levels below the segments.

In fiscal 2003, impairment tests were performed
for the Polyurethanes, Coatings, Fibers; Plastics, Rubber;
Chemicals; and Pharmaceuticals, Biological Products segments and
their strategic business entities, which are as follows:

|                                |  |                           |  |                              |  |                    
|------------------------------- |  | ------------------------- |  | ---------------------------- |  | -------------------
|                                |  |                           |  |                              |  | Pharmaceuticals,   
|Polyurethanes, Coatings, Fibers |  | Plastics, Rubber          |  | Chemicals                    |  | Biological Products
|                                |  |                           |  |                              |  |                    
|Polyether                       |  | Styrenics                 |  | Textile Processing Chemicals |  | Plasma             
|Fibers                          |  | Rubber Chemicals          |  | Paper                        |  |                    
|Polyester, TPU, Films           |  | BR/ Butyl                 |  | Fine Chemicals               |  |                    
|                                |  | Technical Rubber Products |  | Inorganic Pigments           |  |                    

Where the carrying amount of a cash generating
unit exceeded the recoverable amount, an impairment loss was
recognized for the difference. First, the goodwill of the
relevant strategic business entity was written down. Any
remaining impairment loss was allocated among the other assets
of the strategic business entity, based on the net carrying
amounts of each asset on December 31, 2003.

The value in use was determined from the present
value of future cash flows, based on continuing use of the asset
by the strategic business entity and its retirement at the end
of its useful life. The cash flow forecasts were derived from
the current long-term planning for the Bayer Group.

The discount rate was determined from in-house
analyses of the weighted average cost of capital (WACC). The
model used for this is based on the option pricing theory and
takes account of country, credit and interest rate risks arising
from the volatility of business operations and the capital
structure of the respective subgroup.

A capital structure was determined for each
subgroup by first calculating its theoretical stockholders
equity on the basis of the market capitalization of Bayer AG,
taking into account sector-specific financing structures. For
the global strategic business entities subjected to impairment
testing, the WACC used to discount the estimated cash flows
varied between 6 and 10 percent, depending on the specific
risk intrinsic to the respective asset.

The following capital cost bands were applied to
the segments tested for impairment:

|                                |       |                  |  |           |       |                                      |  |  |       |  |  |  |    | 
|------------------------------- | ----- | ---------------- |  | --------- | ----- | ------------------------------------ |  |  | ----- |  |  |  | -- | 
|Polyurethanes, Coatings, Fibers |       | Plastics, Rubber |  | Chemicals |       | Pharmaceuticals, Biological Products
|                                |       |                  |  |           |       |                                     
|                                | 6%-8% |                  |  |           | 6%-9% |                                      |  |  | 7%-8% |  |  |  | 9% | 

F-16



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The following impairment losses were recognized
on the noncurrent assets of the Bayer Group and its reporting
segments:

|                                                  |  |             |     |      |  |  |       | 
|------------------------------------------------- |  | ----------- | --- | ---- |  |  | ----- | 
|                                                  |  | 2002        |     | 2003
|                                                  |  |             |     |     
|                                                  |  |            
|                                                  |  | ( million)
|Goodwill                                          |  |             | 5   |      |  |  | 167   | 
|of which Polyurethanes, Coatings,
    Fibers      |  |             | 5   |      |  |  | 88    | 
|of which Plastics, Rubber                         |  |             |    |      |  |  |      | 
|of which Chemicals                                |  |             |    |      |  |  | 79    | 
|Intangible assets, excluding goodwill             |  |             | 200 |      |  |  | 511   | 
|of which Polyurethanes, Coatings,
    Fibers      |  |             | 200 |      |  |  | 430   | 
|of which Plastics, Rubber                         |  |             |    |      |  |  | 55    | 
|of which Chemicals                                |  |             |    |      |  |  | 26    | 
|Property, plant and equipment                     |  |             | 84  |      |  |  | 1,131 | 
|of which Polyurethanes, Coatings,
    Fibers      |  |             | 84  |      |  |  | 153   | 
|of which Plastics, Rubber                         |  |             |    |      |  |  | 408   | 
|of which Chemicals                                |  |             |    |      |  |  | 371   | 
|of which Pharmaceuticals, Biological
    Products |  |             |    |      |  |  | 199   | 
|Total                                             |  |             | 289 |      |  |  | 1,809 | 
|of which Polyurethanes, Coatings,
    Fibers      |  |             | 289 |      |  |  | 671   | 
|of which Plastics, Rubber                         |  |             |    |      |  |  | 463   | 
|of which Chemicals                                |  |             |    |      |  |  | 476   | 
|of which Pharmaceuticals, Biological
    Products |  |             |    |      |  |  | 199   | 

Scope of consolidation

The financial statements of the Bayer Group as of
December 31, 2003 include Bayer AG and 65 German and
260 foreign consolidated subsidiaries in which Bayer AG,
directly or indirectly, has a majority of the voting rights,
over which it exercises uniform control, or from which it is
able to derive benefit by virtue of its power to govern
corporate financial and operating policies. There was virtually
no change in the total number of consolidated companies compared
with the previous year (2002: 59 German and
268 foreign consolidated subsidiaries). Excluded from
consolidation are 142 subsidiaries that in aggregate are
immaterial to the net worth, financial position and earnings of
the Bayer Group; they account for less than 1 percent of
Group sales.

F-17



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


We have included eight joint ventures in
2003  three fewer than in the previous
year  by proportionate consolidation in compliance
with IAS 31 (Financial Reporting of Interests in Joint
Ventures). The effect of joint ventures on the Group balance
sheet and income statement is as follows:

|                      |  |           |     |  
|--------------------- |  | --------- | --- | -
|                      |  |  million
|                      |  |          
|Noncurrent assets     |  |           | 135 |  
|Current assets        |  |           | 85  |  
|Pension provisions    |  |           | (1  | )
|Other provisions      |  |           | (4  | )
|Financial obligations |  |           | (45 | )
|Remaining liabilities |  |           | (59 | )
|                      |  |           |     |  
|Net assets            |  |           | 111 |  
|                      |  |           |     |  
|Income                |  |           | 330 |  
|Expenses              |  |           | 306 |  
|                      |  |           |     |  
|Income after taxes    |  |           | 24  |  
|                      |  |           |     |  

While nine companies are stated at equity, 51
companies that in aggregate are of minor importance are stated
at their carrying amounts.

Consolidated for the first time are 35 companies,
while 40 companies have been deconsolidated. The increase is
largely due to carve-outs of businesses to separate legal
entities in Germany and the United States. The companies no
longer consolidated are mainly those of the divested
PolymerLatex group and those eliminated by the merger of former
Aventis CropScience companies with Bayer companies, and five
other companies.

Acquisitions/ Divestitures

Acquisitionsare
accounted for by the purchase method. Accordingly, the results
of operations of the acquired businesses are included in the
consolidated financial statements as from the respective dates
of acquisition. The purchase prices of acquisitions outside the
euro zone are translated at the exchange rates in effect at the
respective dates of acquisition.

In 2003 a total of
72 million
was spent on acquisitions, translated at the exchange rates in
effect on the respective dates of acquisition. They were paid
for in cash. These acquisitions led to goodwill of
52 million.
The goodwill amounts are being amortized by the straight-line
method over periods not exceeding 10 years.

At the start of July 2003 Bayer acquired the
remaining interest in the Bayer Polymers Sheet Europe group
(formerly Makroform), headquartered in Darmstadt, Germany, for
59 million.
Bayer previously held an interest of 54.5 percent in this joint
venture, which was set up in mid-2000. The other 45.5 percent
was held by Röhm GmbH. Acquired goodwill of
45 million
will be amortized over its anticipated useful life of
10 years. The acquired Group comprises Bayer Polymers Sheet
GmbH, Darmstadt, Germany, Bayer Polymers Sheet N.V., Tielt,
Belgium, and Bayer Polymers Sheet SpA, Milan, Italy. Bayer
Polymers Sheet Europe develops, manufactures and markets
Makrolon® polycarbonate sheet, Axpet® and Vivak®
polyester sheet and Bayloy® sheet made of high-quality
polymers. Areas of application for these products in the
construction sector include sports stadiums, railroad stations
and greenhouses. Other uses include visual communications, where
plastic sheets are used to protect displays, billboards, traffic
signs and price signs, and industrial applications such as
protective visors, machine covers, light diffusers and housings.

The following significant divestitureswere made in 2003:

By the end of fiscal 2003, the conditions set by
the European, U.S. and Canadian antitrust authorities for the
acquisition of Aventis CropScience Holding S.A., France, as of
June 1, 2002 had been met in full, except for those
relating to propoxycarbazone. In compliance with these
regulatory conditions, Bayer CropScience AG sold

F-18



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


the insecticide active ingredients fipronil
(worldwide, except China) and ethiprole, and the attendant
rights to BASF AG, Ludwigshafen, Germany, together with a number
of fungicidal active ingredients (principally in Europe, though
the transaction also included a non-exclusive license for seed
treatments outside Europe). The
1,330 million
transaction also included inventories, as well as production
facilities in Elbeuf, France. Adjusted for the back-licensing of
these products in accordance with the conditions set by the E.U.
and the FTC to give Bayer CropScience access to certain
non-agricultural markets, the selling price totaled
1,185 million.
The Bayer CropScience subgroup also divested a large number of
low-volume products and inventories for a total of
118 million
to comply with antitrust conditions.

As part of the streamlining of the Bayer
HealthCare portfolio, initiated in 2002, the Bayer Group sold
the remaining parts of the Consumer Care Business Groups
household insecticides business to SC Johnson & Son Inc., of
the United States, for
339 million
after obtaining the necessary approvals from the respective
local antitrust authorities. Alongside inventories, SC Johnson
acquired marketing rights to products such as Baygon®,
Autan®, Bayclin® and Bayfresh®. Bayer will
continue to manufacture the active ingredients for these
products, which it will supply to SC Johnson and other users.
The divestiture of the household insecticides business had
already generated proceeds of
386 million
in 2002.

The successful five-year research cooperation
between Bayer HealthCare AG and Millennium Pharmaceuticals Inc.,
U.S.A. was terminated in the fourth quarter of 2003. At the same
time, Bayer AG sold its 6.6 percent interest in Millennium
Pharmaceuticals to the investment bank CSFB for
272 million.

In fiscal 2003 the Bayer Group sold further real
estate in Germany, Belgium and Spain for a total of
122 million,
continuing the streamlining of its portfolio. In 2002 it had
already sold its interest in Bayer WoGe GmbH, together with land
and buildings owned by this company, for
528 million.

Effective April 1, 2003 Bayer sold its
50 percent interest in the PolymerLatex Group, which is
based in Marl, Germany, to Soros Private Equity Partners for
118 million.
Comprised of seven companies, PolymerLatex is a leading supplier
of latex products for paper, carpets/molded foam and specialty
applications.

At the end of January 2003 the Bayer Groups
organic pigments business was sold to the Sun Chemicals Group,
of the United States, for
46 million.

In December 2003, Bayer HealthCare AG sold its
rights to the Bayovac (IBR marker vaccines) and Baypamun
(immunomodulator) brands to Pfizer for a total of
32 million.
This transaction included a toll manufacturing agreement under
which Bayer will continue to manufacture these products for a
transition period of three years. This divestiture does not
include the foot-and-mouth vaccines, which Bayer HealthCare will
continue to manufacture and market.

In the fourth quarter of 2003, Bayer AG sold its
subsidiary Walothen GmbH, Walsrode, Germany, to the Wihuri
Group, of Finland, for
9 million.
This company manufactures high-quality polypropylene films for
the following market segments: films for the tobacco industry,
films for print lamination, overwrap films and standard films.
It was formerly part of the Bayer Chemicals subgroup.

F-19



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Acquisitions and divestitures of businesses
affected the Groups assets and liabilities as of the dates
of acquisition or divestiture as follows:

|                                         |  |              |    |              |  |  |       |  
|---------------------------------------- |  | ------------ | -- | ------------ |  |  | ----- | -
|                                         |  | Acquisitions |    | Divestitures
|                                         |  |              |    |             
|                                         |  |             
|                                         |  | ( million) 
|2003                                     |  |              |    |              |  |  |       |  
|Noncurrent assets                        |  |              | 52 |              |  |  | 239   |  
|Current assets (excluding liquid assets) |  |              |   |              |  |  | 1,262 |  
|Liquid assets                            |  |              |   |              |  |  | 5     |  
|                                         |  |              |    |              |  |  |       |  
|Assets                                   |  |              | 52 |              |  |  | 1,506 |  
|                                         |  |              |    |              |  |  |       |  
|Pension provisions                       |  |              |   |              |  |  | (10   | )
|Other provisions                         |  |              |   |              |  |  | (11   | )
|Financial obligations                    |  |              |   |              |  |  | (8    | )
|Remaining liabilities                    |  |              |   |              |  |  | (28   | )
|                                         |  |              |    |              |  |  |       |  
|Liabilities                              |  |              |   |              |  |  | (57   | )
|                                         |  |              |    |              |  |  |       |  

|                                         |  |              |        |              |  |  |       | 
|---------------------------------------- |  | ------------ | ------ | ------------ |  |  | ----- | 
|                                         |  | Acquisitions |        | Divestitures
|                                         |  |              |        |             
|                                         |  |             
|                                         |  | ( million) 
|2002                                     |  |              |        |              |  |  |       | 
|Noncurrent assets                        |  |              | 6,449  |              |  |  | 537   | 
|Current assets (excluding liquid assets) |  |              | 5,101  |              |  |  | 481   | 
|Liquid assets                            |  |              | 353    |              |  |  | 29    | 
|                                         |  |              |        |              |  |  |       | 
|Assets                                   |  |              | 11,903 |              |  |  | 1,047 | 
|                                         |  |              |        |              |  |  |       | 
|Pension provisions                       |  |              | 578    |              |  |  | 74    | 
|Other provisions                         |  |              | 133    |              |  |  | 47    | 
|Financial obligations                    |  |              | 2,545  |              |  |  | 170   | 
|Remaining liabilities                    |  |              | 2,725  |              |  |  | 124   | 
|                                         |  |              |        |              |  |  |       | 
|Liabilities                              |  |              | 5,981  |              |  |  | 415   | 
|                                         |  |              |        |              |  |  |       | 

Lists of Bayer AGs direct and indirect
holdings have been included in the Cologne commercial register.
They also are available directly from Bayer AG on request.

The principle companies included in the
consolidated financial statements are listed in the following
table:

|                                               |  |                  |     | 
|---------------------------------------------- |  | ---------------- | --- | 
|Company Name and Place of Business             |  | Bayers interest
|                                               |  |                 
|                                               |  | (%)             
|Germany                                        |  |                  |     | 
|Bayer Chemicals AG, Leverkusen                 |  |                  | 100 | 
|Bayer CropScience AG, Monheim                  |  |                  | 100 | 
|Bayer CropScience Deutschland GmbH, Langenfeld |  |                  | 100 | 
|Bayer CropScience GmbH, Frankfurt am Main      |  |                  | 100 | 
|Bayer HealthCare AG, Leverkusen                |  |                  | 100 | 
|Bayer MaterialScience AG, Leverkusen           |  |                  | 100 | 
|Bayer Vital GmbH, Leverkusen                   |  |                  | 100 | 
|H. C. Starck GmbH, Goslar                      |  |                  | 100 | 
|Wolff Cellulosics GmbH & Co. KG, Bomlitz       |  |                  | 100 | 

F-20



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                          |  |                  |      | 
|----------------------------------------- |  | ---------------- | ---- | 
|Company Name and Place of Business        |  | Bayers interest
|                                          |  |                 
|                                          |  | (%)             
|Other European Countries                  |  |                  |      | 
|Bayer Antwerpen N.V., Belgium             |  |                  | 100  | 
|Bayer Biologicals S.r.l., Italy           |  |                  | 100  | 
|Bayer CropScience France S.A., France     |  |                  | 100  | 
|Bayer CropScience Holding S.A., France    |  |                  | 100  | 
|Bayer CropScience Limited, U.K            |  |                  | 100  | 
|Bayer CropScience S.r.l., Italy           |  |                  | 100  | 
|Bayer CropScience S.A., France            |  |                  | 100  | 
|Bayer Diagnostics Europe Ltd., Ireland    |  |                  | 100  | 
|Bayer International S.A., Switzerland     |  |                  | 100  | 
|Bayer Pharma S.A., France                 |  |                  | 99.8 | 
|Bayer Polimeros S. L., Spain              |  |                  | 100  | 
|Bayer Public Limited Company, U.K.        |  |                  | 100  | 
|Bayer Rubber N.V., Netherlands            |  |                  | 100  | 
|Bayer S.p.A., Italy                       |  |                  | 100  | 
|Quimica Farmaceutica Bayer, S.A., Spain   |  |                  | 100  | 
|                                         
|North America                             |  |                  |      | 
|Bayer CropScience LP, USA                 |  |                  | 100  | 
|Bayer HealthCare LLC, USA                 |  |                  | 100  | 
|Bayer Inc., Canada                        |  |                  | 100  | 
|Bayer Pharmaceuticals Corporation, USA    |  |                  | 100  | 
|Bayer Polymers LLC, USA                   |  |                  | 100  | 
|                                         
|Asia/Pacific                              |  |                  |      | 
|Bayer (India) Ltd., India                 |  |                  | 71.2 | 
|Bayer Australia Ltd., Australia           |  |                  | 100  | 
|Bayer CropScience K.K., Japan             |  |                  | 100  | 
|Bayer Medical Ltd., Japan                 |  |                  | 100  | 
|Bayer Polymers Co. Ltd., Hong Kong        |  |                  | 100  | 
|Bayer South East Asia Pte Ltd., Singapore |  |                  | 100  | 
|Bayer Thai Company Ltd., Thailand         |  |                  | 100  | 
|Bayer Yakuhin Ltd., Japan                 |  |                  | 100  | 
|Sumika Bayer Urethane Co., Ltd., Japan    |  |                  | 60   | 
|                                         
|Latin America/Africa/Middle East          |  |                  |      | 
|Bayer (Proprietary) Ltd., South Africa    |  |                  | 100  | 
|Bayer CropScience Ltda., Brazil           |  |                  | 100  | 
|Bayer de México, S.A.de C.V., Mexico      |  |                  | 100  | 
|Bayer S.A., Argentina                     |  |                  | 100  | 
|Bayer S.A., Brazil                        |  |                  | 100  | 

F-21



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Also included in the consolidated financial
statements are the following material associated companies:

|                                                                              |  |                  |      | 
|----------------------------------------------------------------------------- |  | ---------------- | ---- | 
|Company Name and Place of Business                                            |  | Bayers interest
|                                                                              |  |                 
|                                                                              |  | (%)             
|DyStar Textilfarben GmbH, Frankfurt am Main,
    Germany                      |  |                  | 35   | 
|DyStar Textilfarben GmbH & Co. Deutschland
    KG, Frankfurt am Main, Germany |  |                  | 35   | 
|Lyondell Bayer Manufacturing Maasvlakte VOF,
    Netherlands                  |  |                  | 50   | 
|PO JV, LP, United States                                                      |  |                  | 42.7 | 

The following domestic subsidiaries availed
themselves in 2003 of certain exemptions granted under Articles
264, paragraph 3 and 264 b, No. 4 of the German Commercial
Code regarding the preparation, auditing and publication of
financial statements:

|                                                             |  |                   |             | 
|------------------------------------------------------------ |  | ----------------- | ----------- | 
|Company Name and Place of Business                           |  | Place of Business
|                                                             |  |                  
|Bayer Beteiligungsverwaltungsgesellschaft mbH                |  |                   | Leverkusen  | 
|Bayer Bitterfeld GmbH                                        |  |                   | Greppin     | 
|Bayer Buna GmbH                                              |  |                   | Marl        | 
|Bayer Business Services GmbH                                 |  |                   | Leverkusen  | 
|Bayer CropScience AG                                         |  |                   | Monheim     | 
|Bayer CropScience Deutschland GmbH                           |  |                   | Langenfeld  | 
|Bayer CropScience
    Vermögensverwaltungsgesellschaft mbH   |  |                   | Hattersheim | 
|Bayer Distribution Service GmbH                              |  |                   | Leverkusen  | 
|Bayer Faser GmbH                                             |  |                   | Dormagen    | 
|Bayer Gastronomie GmbH                                       |  |                   | Leverkusen  | 
|Bayer Gesellschaft für Beteiligungen mbH                     |  |                   | Leverkusen  | 
|Bayer HealthCare AG                                          |  |                   | Leverkusen  | 
|Bayer Industrieprodukte GmbH & Co. KG                        |  |                   | Leverkusen  | 
|Bayer Innovation Beteiligungsgesellschaft mbH                |  |                   | Leverkusen  | 
|Bayer Kautschuk GmbH                                         |  |                   | Dormagen    | 
|Bayer Polymers Customer Services GmbH & Co. KG               |  |                   | Leverkusen  | 
|Bayer Technology Services GmbH                               |  |                   | Leverkusen  | 
|Bayer-Handelsgesellschaft mbH                                |  |                   | Leverkusen  | 
|Bayer-Kaufhaus GmbH                                          |  |                   | Leverkusen  | 
|CaseTech GmbH & Co. KG                                       |  |                   | Bomlitz     | 
|Chemion Logistik GmbH                                        |  |                   | Leverkusen  | 
|DYNEVO GmbH                                                  |  |                   | Leverkusen  | 
|EPUREX Films GmbH & Co. KG                                   |  |                   | Bomlitz     | 
|Erste K-W-A Beteiligungsgesellschaft mbH                     |  |                   | Leverkusen  | 
|Euroservices Bayer GmbH                                      |  |                   | Leverkusen  | 
|Generics Holding GmbH                                        |  |                   | Leverkusen  | 
|GVW Garnveredelungswerke GmbH                                |  |                   | Goch        | 
|H.C.Starck Ceramics GmbH & Co. KG                            |  |                   | Selb        | 
|H.C. Starck Hermsdorf
    Vermögensverwaltungs-GmbH & Co. KG |  |                   | Hermsdorf   | 
|IAB Ionenaustauscher GmbH Bitterfeld                         |  |                   | Greppin     | 
|ISL-Chemie GmbH & Co. KG                                     |  |                   | Kürten      | 
|KVP Pharma + Veterinär-Produkte GmbH                         |  |                   | Kiel        | 

F-22



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                          |  |                   |            | 
|----------------------------------------- |  | ----------------- | ---------- | 
|Company Name and Place of Business        |  | Place of Business
|                                          |  |                  
|PharmAgro GmbH                            |  |                   | Leverkusen | 
|Probis GmbH                               |  |                   | Bomlitz    | 
|Travel Board GmbH                         |  |                   | Leverkusen | 
|Wolff Cellulosics GmbH & Co. KG           |  |                   | Bomlitz    | 
|Wolff Walsrode Aktiengesellschaft         |  |                   | Walsrode   | 
|Zweite K-W-A Beteiligungsgesellschaft mbH |  |                   | Leverkusen | 

Notes to the Statements of Income

[1] Net sales

Total reported sales declined by
1,057 million
(-3.6 percent) compared with 2002, to
28,567 million
(2001:
30,275 million).
A
1,433 million
increase in volumes (+4.8 percent) was offset by a negative
effect of 2,545
million (-8.6 percent) from adverse shifts in exchange
rates. Changes in selling prices contributed an extra
150 million
(+0.5 percent) compared with the previous year and thus had
a negligible effect on total sales. The net effect of
acquisitions and divestitures diminished sales by
95 million.
Acquisitions and divestitures during 2003 and 2002 affected the
comparison between the two years sales figures by the
following amounts:

|                                                                      |  |           |        |  
|--------------------------------------------------------------------- |  | --------- | ------ | -
|                                                                      |  | 2003     
|                                                                      |  |          
|                                                                      |  |  million
|Acquisitions                                                          |  |           |        |  
|Aventis CropScience Holding S.A., Lyon, France
    (acquired in 2002) |  |           | 1,450  |  
|Visible Genetics Inc., Canada (acquired in 2002)                      |  |           | 9      |  
|Tectrade A/ S, Copenhagen, Denmark (acquired in
    2002)             |  |           | 6      |  
|Other                                                                 |  |           | 1      |  
|                                                                      |  |           |        |  
|                                                                      |  |           | 1,466  |  
|                                                                     
|Divestitures                                                          |  |           |        |  
|Haarmann & Reimer Group (divested in 2002)                            |  |           | (666   | )
|Compliance with antitrust conditions by Bayer
    CropScience         |  |           | (435   | )
|Household insecticides business of Bayer
    HealthCare               |  |           | (272   | )
|PolymerLatex Group                                                    |  |           | (117   | )
|Organic Pigments                                                      |  |           | (54    | )
|Walothen GmbH                                                         |  |           | (10    | )
|Other                                                                 |  |           | (7     | )
|                                                                      |  |           |        |  
|                                                                      |  |           | (1,561 | )
|                                                                      |  |           |        |  
|Net effect of portfolio changes                                       |  |           | (95    | )
|                                                                      |  |           |        |  

F-23



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


In 2002, total reported sales declined by
651 million
compared with 2001, to
29,624 million.
A
54 million
increase in volumes was offset by negative contributions of
715 million
from lower selling prices and
1,421 million
from adverse shifts in exchange rates. The net effect of
acquisitions and divestitures raised sales by
1,870 million.
Acquisitions and divestitures during 2002 and 2001 affected the
comparison between the two years sales figures by the
following amounts:

|                                               |  |           |       |  
|---------------------------------------------- |  | --------- | ----- | -
|                                               |  | 2002     
|                                               |  |          
|                                               |  |  million
|Acquisitions                                   |  |           |       |  
|Aventis CropScience Holding S.A., Lyon, France |  |           | 1,977 |  
|Tectrade A/S, Copenhagen, Denmark              |  |           | 12    |  
|Other                                          |  |           | 3     |  
|                                               |  |           |       |  
|                                               |  |           | 1,992 |  
|                                              
|Divestitures                                   |  |           |       |  
|ChemDesign Corporation (divested in 2001)      |  |           | (56   | )
|Covexx Films (divested in 2001)                |  |           | (42   | )
|Sale of the generics business                  |  |           | (16   | )
|Other                                          |  |           | (8    | )
|                                               |  |           |       |  
|                                               |  |           | (122  | )
|                                               |  |           |       |  
|Net effect of portfolio changes                |  |           | 1,870 |  
|                                               |  |           |       |  

Reported sales declined 2001 by
696 million,
to 30,275. A
1,168 million
decrease due to lower volumes was offset by positive
contributions of
274 million from
higher selling prices,
84 million
from favorable shifts in exchange rates and
859 million
from the net effect of acquisitions and divestitures.
Acquisitions and divestitures during 2001 and 2000 affected the
comparison between the two years sales figures by the
following amounts:

|                                                                                  |  |           |      |  
|--------------------------------------------------------------------------------- |  | --------- | ---- | -
|                                                                                  |  | 2001     
|                                                                                  |  |          
|                                                                                  |  |  million
|Acquisitions                                                                      |  |           |      |  
|Sybron Chemicals Inc. (polymers and specialty
    chemicals) (acquired in 2000)   |  |           | 206  |  
|Polyols business of Lyondell Chemical Company
    (acquired in 2000)              |  |           | 202  |  
|CSM Group (acquired in 2000)                                                      |  |           | 133  |  
|Fungicide product lines, primarily FLINT
    (acquired in 2000)                   |  |           | 104  |  
|Full consolidation of Sumika Bayer Urethane Co.
    Ltd., Japan                   |  |           | 99   |  
|Paper chemicals business of Cytec Industries Inc.
    (acquired in 2000)          |  |           | 83   |  
|MIKADO corn herbicide                                                             |  |           | 46   |  
|Other                                                                             |  |           | 110  |  
|                                                                                  |  |           |      |  
|                                                                                  |  |           | 983  |  
|                                                                                  |  |           |      |  
|                                                                                 
|Divestitures                                                                      |  |           |      |  
|Covexx Films                                                                      |  |           | (61  | )
|U.S. livestock vaccines business to Intervet
    International (divested in 2000) |  |           | (30  | )
|Other                                                                             |  |           | (33  | )
|                                                                                  |  |           |      |  
|                                                                                  |  |           | (124 | )
|                                                                                  |  |           |      |  
|Net effect an sales from continuing
    operations                                |  |           | 859  |  
|                                                                                  |  |           |      |  

F-24



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Breakdowns of net sales by segment and by region
are given in the table on page F-7.

[2] Selling expenses

Selling expenses include
792 million
in shipping and handling costs in 2003 (2002:
797 million;
2001:
789 million).
They also include advertising and promotion costs, expensed in
the period in which they are incurred. These costs amount to
1,030 million
(2002:
1,051 million;
2001: 1,392).

[3] Research and development
expenses

Because of their importance in the Bayer Group,
research and development expenses are recognized separately
alongside the cost of goods sold, selling expenses and general
administration expenses.

[4] Other operating income

|                                                                            |  |             |     |      |  |      |       |  |  |  |       | 
|--------------------------------------------------------------------------- |  | ----------- | --- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                                                            |  | 2001        |     | 2002 |  | 2003
|                                                                            |  |             |     |      |  |     
|                                                                            |  |            
|                                                                            |  | ( million)
|Sideline operations                                                         |  |             | 24  |      |  |      | 56    |  |  |  | 60    | 
|Gains from sales of property, plant and
    equipment/portfolio adjustments |  |             | 316 |      |  |      | 2,039 |  |  |  | 583   | 
|Reversals of unutilized provisions                                          |  |             | 68  |      |  |      | 154   |  |  |  | 115   | 
|Write-backs of receivables and other assets                                 |  |             | 14  |      |  |      | 23    |  |  |  | 68    | 
|Recognition of exchange rate hedges                                         |  |             | 65  |      |  |      | 36    |  |  |  | 114   | 
|Other operating income                                                      |  |             | 398 |      |  |      | 398   |  |  |  | 218   | 
|                                                                            |  |             |     |      |  |      |       |  |  |  |       | 
|                                                                            |  |             | 885 |      |  |      | 2,706 |  |  |  | 1,158 | 
|                                                                            |  |             |     |      |  |      |       |  |  |  |       | 

The cost of goods sold incurred for sideline
operations has been offset against the corresponding revenues to
more clearly reflect the earnings position.

[5] Other operating expenses

|                                                   |  |             |        |      |  |      |        |   |  |  |        |  
|-------------------------------------------------- |  | ----------- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                                   |  | 2001        |        | 2002 |  | 2003
|                                                   |  |             |        |      |  |     
|                                                   |  |            
|                                                   |  | ( million)
|Amortization and write-downs of acquired goodwill  |  |             | (115   | )    |  |      | (205   | ) |  |  | (366   | )
|Write-downs of trade accounts receivable           |  |             | (91    | )    |  |      | (101   | ) |  |  | (106   | )
|Losses from sales of property, plant and equipment |  |             | (15    | )    |  |      | (42    | ) |  |  | (108   | )
|Impairment write-downs, excluding goodwill         |  |             |       |      |  |      | (284   | ) |  |  | (1,642 | )
|Other operating expenses                           |  |             | (1,019 | )    |  |      | (1,438 | ) |  |  | (1,284 | )
|                                                   |  |             |        |      |  |      |        |   |  |  |        |  
|                                                   |  |             | (1,240 | )    |  |      | (2,070 | ) |  |  | (3,506 | )
|                                                   |  |             |        |      |  |      |        |   |  |  |        |  

In fiscal 2003 the global impairment charges in
the Polymers, Chemicals and HealthCare subgroups resulted in
additional other operating expense of
1,134 million,
476 million
and
199 million
respectively.

In the previous year, impairment write-downs of
intangible assets, property, plant and equipment of the polyols
and fibers operations in the Polymers subgroup together
accounted for expenses of
289 million.

In fiscal 2001 there were no impairment
write-downs.

408 million
(2002:
427 million;
2001:
214 million)
was spent on restructuring. Further details of restructuring
expenses are given in Note 29.

F-25



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[6] Discontinuing operations

In connection with the realignment of the Bayer
Group, we are planning to transfer certain activities of the
Polymers and Chemicals subgroups that we no longer define as
part of our core business to a separate company named Lanxess,
which we plan to list on the Frankfurt Stock Exchange by early
2005. These activities are shown as discontinuing operations.
They essentially include the Bayer Chemicals
subgroup  with the exception of H.C. Starck and Wolff
Walsrode  along with the solid rubber and rubber
chemicals operations (including RheinChemie), semi-crystalline
polymers, ABS/ SAN and fibers activities of the former Bayer
Polymers subgroup.

In addition, we are planning to divest the plasma
operations of the Biological Products Division of our HealthCare
subgroup. These activities are also shown under discontinuing
operations. This decision does not affect the Kogenate®
operations.

In the context of its ongoing portfolio
management, Bayer divested the Haarmann & Reimer business
group, headquartered in Holzminden, Germany, in 2002. This
wholly owned subsidiary, manufacturing fragrances and flavors,
was sold to the financial investor EQT Northern Europe Private
Equity Funds. The earnings of this subsidiary up to the date of
divestiture were recognized in income for 2002, as was the gain
from the sale of this business in 2002.

The amounts shown in the notes to the
consolidated financial statements of the Bayer Group under
discontinuing operations relate to the plasma operations and all
assets, liabilities, income and expenses of the activities that
are to be transferred to Lanxess, based on the current status of
our planning. Slight modifications may be made to the allocation
of assets, liabilities, income and expenses. These data are
presented from the viewpoint of the Bayer Group and should be
viewed as parts of the Group by analogy to our segment
reporting. The purpose is not to provide separate overviews of
the Lanxess activities or of the operations that are to remain
in the Bayer Group. The presentation thus follows the principles
set out in IAS 35 for reporting discontinuing operations.

The earnings of Lanxess, the plasma business and
Haarmann & Reimer, and the related income taxes, are
reflected in the respective income statement items.

A breakdown of the results of discontinuing
operations is given below.

|                                                   |  |                  |      |                  |  |      |      |      |  |      |      |      |  |  |        |   |  |  |        |   |  |  |        |  
|-------------------------------------------------- |  | ---------------- | ---- | ---------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ------ | - |  |  | ------ | - |  |  | ------ | -
|                                                   |  |                  |      |                  |  |      |      |     
|                                                   |  | Polyurethanes,   |      |                 
|                                                   |  | Coatings, Fibers |      | Plastics, Rubber
|                                                   |  |                  |      |                 
|                                                   |  | 2001             |      | 2002             |  | 2003 |      | 2001 |  | 2002 |      | 2003
|                                                   |  |                  |      |                  |  |      |      |      |  |      |      |     
|                                                   |  |                 
|                                                   |  | ( million)     
|Net sales                                          |  |                  | 228  |                  |  |      | 199  |      |  |      | 167  |      |  |  | 3,689  |   |  |  | 3,337  |   |  |  | 3,096  |  
|Cost of goods sold                                 |  |                  | (170 | )                |  |      | (187 | )    |  |      | (144 | )    |  |  | (2,878 | ) |  |  | (2,631 | ) |  |  | (2,681 | )
|Selling expenses                                   |  |                  | (42  | )                |  |      | (32  | )    |  |      | (26  | )    |  |  | (540   | ) |  |  | (457   | ) |  |  | (389   | )
|Research and development expenses                  |  |                  | (8   | )                |  |      | (8   | )    |  |      | (5   | )    |  |  | (91    | ) |  |  | (71    | ) |  |  | (84    | )
|General administration expenses                    |  |                  | (7   | )                |  |      | (6   | )    |  |      | (10  | )    |  |  | (129   | ) |  |  | (125   | ) |  |  | (136   | )
|Other operating income (expense)  net             |  |                  | (18  | )                |  |      | (65  | )    |  |      | (49  | )    |  |  | (45    | ) |  |  | (101   | ) |  |  | (522   | )
|Operating result from discontinuing
    operations |  |                  | (17  | )                |  |      | (99  | )    |  |      | (67  | )    |  |  | 6      |   |  |  | (48    | ) |  |  | (716   | )
|Non-operating result                               |  |                  |     |                  |  |      |     |      |  |      |     |      |  |  |       |   |  |  |       |   |  |  |       |  
|Income (loss) before income
    taxes              |  |                  |     |                  |  |      |     |      |  |      |     |      |  |  |       |   |  |  |       |   |  |  |       |  
|Income taxes                                       |  |                  |     |                  |  |      |     |      |  |      |     |      |  |  |       |   |  |  |       |   |  |  |       |  
|                                                   |  |                  |      |                  |  |      |      |      |  |      |      |      |  |  |        |   |  |  |        |   |  |  |        |  
|Income (loss) after taxes                          |  |                  |     |                  |  |      |     |      |  |      |     |      |  |  |       |   |  |  |       |   |  |  |       |  
|                                                   |  |                  |      |                  |  |      |      |      |  |      |      |      |  |  |        |   |  |  |        |   |  |  |        |  

F-26



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                                   |  |             |        |                |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  
|-------------------------------------------------- |  | ----------- | ------ | -------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  |  | --- | - |  |  | --- | - |  |  | --- | -
|                                                   |  |             |        |               
|                                                   |  | Chemicals   |        | Reconciliation
|                                                   |  |             |        |               
|                                                   |  | 2001        |        | 2002           |  | 2003 |        | 2001 |  | 2002 |        | 2003
|                                                   |  |             |        |                |  |      |        |      |  |      |        |     
|                                                   |  |            
|                                                   |  | ( million)
|Net sales                                          |  |             | 2,856  |                |  |      | 2,705  |      |  |      | 2,513  |      |  |  |    |   |  |  |    |   |  |  |    |  
|Cost of goods sold                                 |  |             | (2,084 | )              |  |      | (1,938 | )    |  |      | (1,867 | )    |  |  |    |   |  |  |    |   |  |  |    |  
|Selling expenses                                   |  |             | (528   | )              |  |      | (498   | )    |  |      | (480   | )    |  |  |    |   |  |  |    |   |  |  |    |  
|Research and development expenses                  |  |             | (93    | )              |  |      | (76    | )    |  |      | (82    | )    |  |  |    |   |  |  |    |   |  |  |    |  
|General administration expenses                    |  |             | (81    | )              |  |      | (52    | )    |  |      | (102   | )    |  |  |    |   |  |  |    |   |  |  |    |  
|Other operating income (expense)  net             |  |             | (116   | )              |  |      | (103   | )    |  |      | (498   | )    |  |  |    |   |  |  |    |   |  |  |    |  
|Operating result from discontinuing
    operations |  |             | (46    | )              |  |      | 38     |      |  |      | (516   | )    |  |  |    |   |  |  |    |   |  |  |    |  
|Non-operating result                               |  |             | 12     |                |  |      | 8      |      |  |      | (144   | )    |  |  | (83 | ) |  |  | (54 | ) |  |  | (80 | )
|Income (loss) before income
    taxes              |  |             |       |                |  |      |       |      |  |      |       |      |  |  |    |   |  |  |    |   |  |  |    |  
|Income taxes                                       |  |             |       |                |  |      |       |      |  |      |       |      |  |  | 51  |   |  |  | 62  |   |  |  | 548 |  
|                                                   |  |             |        |                |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  
|Income (loss) after taxes                          |  |             |       |                |  |      |       |      |  |      |       |      |  |  |    |   |  |  |    |   |  |  |    |  
|                                                   |  |             |        |                |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  

|                                                   |  |               |        |        |  |             |        |      |  |      |        |      |  |  |      |   |  |  |      |   |  |  |      |  
|-------------------------------------------------- |  | ------------- | ------ | ------ |  | ----------- | ------ | ---- |  | ---- | ------ | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                                   |  |               |        |       
|                                                   |  | Total Lanxess |        | Plasma
|                                                   |  |               |        |       
|                                                   |  | 2001          |        | 2002   |  | 2003        |        | 2001 |  | 2002 |        | 2003
|                                                   |  |               |        |        |  |             |        |      |  |      |        |     
|                                                   |  |               |        |        |  |             |        |      |  |     
|                                                   |  |               |        |        |  | ( million) |        |      |  |     
|Net sales                                          |  |               | 6,773  |        |  |             | 6,241  |      |  |      | 5,776  |      |  |  | 695  |   |  |  | 679  |   |  |  | 613  |  
|Cost of goods sold                                 |  |               | (5,132 | )      |  |             | (4,756 | )    |  |      | (4,692 | )    |  |  | (621 | ) |  |  | (653 | ) |  |  | (519 | )
|Selling expenses                                   |  |               | (1,110 | )      |  |             | (987   | )    |  |      | (895   | )    |  |  | (177 | ) |  |  | (97  | ) |  |  | (86  | )
|Research and development expenses                  |  |               | (192   | )      |  |             | (155   | )    |  |      | (171   | )    |  |  | (49  | ) |  |  | (44  | ) |  |  | (44  | )
|General administration expenses                    |  |               | (217   | )      |  |             | (183   | )    |  |      | (248   | )    |  |  |     |   |  |  |     |   |  |  |     |  
|Other operating income (expense)  net             |  |               | (179   | )      |  |             | (269   | )    |  |      | (1,069 | )    |  |  | 13   |   |  |  | 4    |   |  |  | (317 | )
|Operating result from discontinuing
    operations |  |               | (57    | )      |  |             | (109   | )    |  |      | (1,299 | )    |  |  | (139 | ) |  |  | (111 | ) |  |  | (353 | )
|Non-operating result                               |  |               | (71    | )      |  |             | (46    | )    |  |      | (224   | )    |  |  |     |   |  |  | (15  | ) |  |  |     |  
|Income (loss) before income
    taxes              |  |               | (128   | )      |  |             | (155   | )    |  |      | (1,523 | )    |  |  | (139 | ) |  |  | (126 | ) |  |  | (353 | )
|Income taxes                                       |  |               | 51     |        |  |             | 62     |      |  |      | 548    |      |  |  |     |   |  |  |     |   |  |  | 123  |  
|                                                   |  |               |        |        |  |             |        |      |  |      |        |      |  |  |      |   |  |  |      |   |  |  |      |  
|Income (loss) after taxes                          |  |               | (77    | )      |  |             | (93    | )    |  |      | (975   | )    |  |  | (139 | ) |  |  | (126 | ) |  |  | (230 | )
|                                                   |  |               |        |        |  |             |        |      |  |      |        |      |  |  |      |   |  |  |      |   |  |  |      |  

|                                                   |  |                   |      |             |  |      |      |      |  |      |   |      |  |  |      |   |  |  |   |  |  |  |   | 
|-------------------------------------------------- |  | ----------------- | ---- | ----------- |  | ---- | ---- | ---- |  | ---- | - | ---- |  |  | ---- | - |  |  | - |  |  |  | - | 
|                                                   |  |                   |      |            
|                                                   |  | Haarmann & Reimer |      | Erdölchemie
|                                                   |  |                   |      |            
|                                                   |  | 2001              |      | 2002        |  | 2003 |      | 2001 |  | 2002 |   | 2003
|                                                   |  |                   |      |             |  |      |      |      |  |      |   |     
|                                                   |  |                  
|                                                   |  | ( million)      
|Net sales                                          |  |                   | 872  |             |  |      | 666  |      |  |      |  |      |  |  | 233  |   |  |  |  |  |  |  |  | 
|Cost of goods sold                                 |  |                   | (481 | )           |  |      | (376 | )    |  |      |  |      |  |  | (196 | ) |  |  |  |  |  |  |  | 
|Selling expenses                                   |  |                   | (199 | )           |  |      | (147 | )    |  |      |  |      |  |  | (16  | ) |  |  |  |  |  |  |  | 
|Research and development expenses                  |  |                   | (63  | )           |  |      | (45  | )    |  |      |  |      |  |  |     |   |  |  |  |  |  |  |  | 
|General administration expenses                    |  |                   | (38  | )           |  |      | (27  | )    |  |      |  |      |  |  | (3   | ) |  |  |  |  |  |  |  | 
|Other operating income (expense)  net             |  |                   | (18  | )           |  |      | 909  |      |  |      |  |      |  |  | 315  |   |  |  |  |  |  |  |  | 
|Operating result from discontinuing
    operations |  |                   | 73   |             |  |      | 980  |      |  |      |  |      |  |  | 333  |   |  |  |  |  |  |  |  | 
|Non-operating result                               |  |                   | (4   | )           |  |      | (11  | )    |  |      |  |      |  |  | (1   | ) |  |  |  |  |  |  |  | 
|Income (loss) before income
    taxes              |  |                   | 69   |             |  |      | 969  |      |  |      |  |      |  |  | 332  |   |  |  |  |  |  |  |  | 
|Income taxes                                       |  |                   | (35  | )           |  |      | (15  | )    |  |      |  |      |  |  | (6   | ) |  |  |  |  |  |  |  | 
|                                                   |  |                   |      |             |  |      |      |      |  |      |   |      |  |  |      |   |  |  |   |  |  |  |   | 
|Income (loss) after taxes                          |  |                   | 34   |             |  |      | 954  |      |  |      |  |      |  |  | 326  |   |  |  |  |  |  |  |  | 
|                                                   |  |                   |      |             |  |      |      |      |  |      |   |      |  |  |      |   |  |  |   |  |  |  |   | 

F-27



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                                   |  |             |        |      |  |      |        |   |  |  |        |  
|-------------------------------------------------- |  | ----------- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                                   |  |            
|                                                   |  | Total      
|                                                   |  |            
|                                                   |  | 2001        |        | 2002 |  | 2003
|                                                   |  |             |        |      |  |     
|                                                   |  |            
|                                                   |  | ( million)
|Net sales                                          |  |             | 8,573  |      |  |      | 7,586  |   |  |  | 6,389  |  
|Cost of goods sold                                 |  |             | (6,430 | )    |  |      | (5,785 | ) |  |  | (5,211 | )
|Selling expenses                                   |  |             | (1,502 | )    |  |      | (1,231 | ) |  |  | (981   | )
|Research and development expenses                  |  |             | (304   | )    |  |      | (244   | ) |  |  | (215   | )
|General administration expenses                    |  |             | (258   | )    |  |      | (210   | ) |  |  | (248   | )
|Other operating income (expense)  net             |  |             | 131    |      |  |      | 644    |   |  |  | (1,386 | )
|Operating result from discontinuing
    operations |  |             | 210    |      |  |      | 760    |   |  |  | (1,652 | )
|Non-operating result                               |  |             | (76    | )    |  |      | (72    | ) |  |  | (224   | )
|Income (loss) before income
    taxes              |  |             | 134    |      |  |      | 688    |   |  |  | (1,876 | )
|Income taxes                                       |  |             | 10     |      |  |      | 47     |   |  |  | 671    |  
|                                                   |  |             |        |      |  |      |        |   |  |  |        |  
|Income (loss) after taxes                          |  |             | 144    |      |  |      | 735    |   |  |  | (1,205 | )
|                                                   |  |             |        |      |  |      |        |   |  |  |        |  

The other operating expense for Lanxess and the
plasma operations in fiscal 2003 includes charges of
989 million
and
199 million
respectively arising from the global impairment tests carried
out by the Bayer Group. The non-operating result of Lanxess in
2003 also includes one-time equity-method expense of
137 million
in connection with the planned sale of the financial interest in
the DyStar Group.

[7] Operating result

Breakdowns of the operating result by segment and
by region are given in the table on page F-7. Starting in fiscal
2003, the results of foreign currency hedges for planned or
pending operating business are recognized in operating result.
The prior-year figures have been adjusted by
36 million
(2002) and
65 million
(2001) to conform to the current year presentation.

[8] Income (expense) from
investments in affiliated companies  net

This comprises the following items:

|                                                                |                                                                                                                |             |    |      |  |      |     |   |  |  |      |   | 
|--------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ----------- | -- | ---- |  | ---- | --- | - |  |  | ---- | - | 
|                                                                |                                                                                                                | 2001        |    | 2002 |  | 2003
|                                                                |                                                                                                                |             |    |      |  |     
|                                                                |                                                                                                                |            
|                                                                |                                                                                                                | ( million)
|Dividends and similar income                                    |                                                                                                                |             | 15 |      |  |      | 25  |   |  |  | 5    |  
|                                                                |  of which
    3 million
    (2002:
    23 million;
    2001: 12
    million) from subsidiaries             |             |    |      |  |      |     |   |  |  |      |   | 
|Income from profit and loss transfer agreements                 |                                                                                                                |             | *  |      |  |      | 1   |   |  |  | 2    |  
|                                                                |  of which
    1 million
    (2002:
    1 million;
    2001: less than
    1 million)
    from subsidiaries |             |    |      |  |      |     |   |  |  |      |   | 
|Equity-method income (expense)                                  |                                                                                                                |             | 26 |      |  |      | 5   |   |  |  | (165 | )
|Gains from the sale of investments in affiliated
    companies  |                                                                                                                |             | 16 |      |  |      | 274 |   |  |  | 191  |  
|Losses from the sale of investments in affiliated
    companies |                                                                                                                |             | (3 | )    |  |      |    |   |  |  | (2   | )
|Write-downs of investments in affiliated companies              |                                                                                                                |             |   |      |  |      | (82 | ) |  |  | (124 | )
|                                                                |                                                                                                                |             |    |      |  |      |     |   |  |  |      |  
|                                                                |                                                                                                                |             | 54 |      |  |      | 223 |   |  |  | (93  | )
|                                                                |                                                                                                                |             |    |      |  |      |     |   |  |  |      |  



---



|  |                         
|- | ------------------------
|* | less than
    1 million

Gains from investments in affiliated companies
include the
190 million
gain from the sale of the interest in Millennium Pharmaceuticals
Inc., United States, to the investment bank CSFB. In fiscal 2002
this item contained

F-28



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


gains from the sale of the remaining stake in
Agfa-Gevaert N.V., Belgium, to the investment bank Goldman
Sachs for
259 million.
Equity  method expense for 2003 included
137 million
relating to the planned divestiture of our financial interest in
the DyStar Group.

[9] Interest expense 
net

Interest income and expense comprises:

|                                                                   |                                                                                                    |             |      |      |  |      |      |   |  |  |      |   | 
|------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------- | ----------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | - | 
|                                                                   |                                                                                                    | 2001        |      | 2002 |  | 2003
|                                                                   |                                                                                                    |             |      |      |  |     
|                                                                   |                                                                                                    |            
|                                                                   |                                                                                                    | ( million)
|Income from other securities and loans included
    in investments |                                                                                                    |             | 9    |      |  |      | 8    |   |  |  | 17   |  
|Other interest and similar income                                  |                                                                                                    |             | 108  |      |  |      | 459  |   |  |  | 513  |  
|                                                                   | of which
    2 million
    (2002:
    2 million;
    2001:
    1 million)
    from subsidiaries |             |      |      |  |      |      |   |  |  |      |   | 
|Interest and similar expenses                                      |                                                                                                    |             | (466 | )    |  |      | (916 | ) |  |  | (883 | )
|                                                                   | of which
    5 million
    (2002:
    13 million;
    2001:
    5 million)
    to subsidiaries  |             |      |      |  |      |      |   |  |  |      |   | 
|                                                                   |                                                                                                    |             |      |      |  |      |      |   |  |  |      |  
|                                                                   |                                                                                                    |             | (349 | )    |  |      | (449 | ) |  |  | (353 | )
|                                                                   |                                                                                                    |             |      |      |  |      |      |   |  |  |      |  

Finance leases are capitalized under property,
plant and equipment in compliance with IAS 17 (Leases). The
interest portion of the lease payments, amounting to
30 million
(2002:
34 million;
2001:
9 million),
is reflected in interest expense.

Interest expense incurred to finance the
construction phase of major investment projects is not included
here. Such interest expense, amounting in 2003 to
18 million
(2002:
22 million;
2001:
30 million),
is capitalized as part of the cost of acquisition or
construction of the property, plant or equipment concerned,
based on an average capitalization rate of 5 percent (2002:
5 percent).

[10] Other non-operating
expenses  net

This item comprises:

|                                                |  |             |      |      |  |      |      |   |  |  |      |  
|----------------------------------------------- |  | ----------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                |  | 2001        |      | 2002 |  | 2003
|                                                |  |             |      |      |  |     
|                                                |  |            
|                                                |  | ( million)
|Interest portion of interest-bearing provisions |  |             | (274 | )    |  |      | (296 | ) |  |  | (281 | )
|Net Exchange gain (loss)                        |  |             | (16  | )    |  |      | (5   | ) |  |  | (31  | )
|Miscellaneous non-operating expenses            |  |             | (28  | )    |  |      | (174 | ) |  |  | (69  | )
|Miscellaneous non-operating income              |  |             | 52   |      |  |      | 47   |   |  |  | 36   |  
|                                                |  |             |      |      |  |      |      |   |  |  |      |  
|                                                |  |             | (266 | )    |  |      | (428 | ) |  |  | (345 | )
|                                                |  |             |      |      |  |      |      |   |  |  |      |  

Miscellaneous non-operating expenses contain
12 million
in write-downs of other securities included in investments
(2002:
81 million),
and
0 million
in write-downs of marketable securities (2002:
16 million).

F-29



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[11] Income taxes

This item comprises the income taxes paid or
accrued in the individual countries, plus deferred taxes.

The breakdown of pre-tax income and income tax
expense by origin is as follows:

|                             |                              |             |       |      |   |      |      |       |   |  |        |        |  
|---------------------------- | ---------------------------- | ----------- | ----- | ---- | - | ---- | ---- | ----- | - |  | ------ | ------ | -
|                             |                              | 2001        |       | 2002 |   | 2003
|                             |                              |             |       |      |   |     
|                             |                              |            
|                             |                              | ( million)
|Income before income taxes   |                              |             |       |      |   |      |      |       |   |  |        |       
|                             | Germany                      |             |       | 971  |   |      |      | 1,392 |   |  |        | (1,298 | )
|                             | Other countries              |             |       | 144  |   |      |      | (436  | ) |  |        | (696   | )
|                             |                              |             |       |      |   |      |      |       |   |  |        |       
|                             |                              |             | 1,115 |      |   |      | 956  |       |   |  | (1,994 | )     
|                             |                              |             |       |      |   |      |      |       |   |  |        |       
|Income taxes paid or accrued |                              |             |       |      |   |      |      |       |   |  |        |       
|                             | Germany                      |             |       | (122 | ) |      |      | (129  | ) |  |        | (178   | )
|                             | Other countries              |             |       | (502 | ) |      |      | (169  | ) |  |        | (429   | )
|                             |                              |             |       |      |   |      |      |       |   |  |        |       
|                             |                              |             | (624  | )    |   |      | (298 | )     |   |  | (607   | )     
|                             |                              |             |       |      |   |      |      |       |   |  |        |       
|Deferred taxes               |                              |             |       |      |   |      |      |       |   |  |        |       
|                             | from temporary differences   |             |       | 272  |   |      |      | 185   |   |  |        | 1,156  |  
|                             | from tax loss carry-forwards |             |       | 198  |   |      |      | 220   |   |  |        | 96     |  
|                             |                              |             |       |      |   |      |      |       |   |  |        |       
|                             |                              |             | 470   |      |   |      | 405  |       |   |  | 1,252  |       
|                             |                              |             |       |      |   |      |      |       |   |  |        |       
|                             |                              |             | (154  | )    |   |      | 107  |       |   |  | 645    |       
|                             |                              |             |       |      |   |      |      |       |   |  |        |       

In fiscal 2003 changes in tax rates decreased
deferred tax expense by
2 million, while
in fiscal 2002 deferred tax expense was not impacted by a change
in tax rates. In 2001, changes in tax rates diminished deferred
tax expense by
8 million.

F-30



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The deferred tax assets and liabilities are
allocable to the various balance sheet items as follows:

|                                               |  |               |        |               |  |               |        |              |  |              |        |              |  |  |        |   |  |  |        |   |  |  |        |  
|---------------------------------------------- |  | ------------- | ------ | ------------- |  | ------------- | ------ | ------------ |  | ------------ | ------ | ------------ |  |  | ------ | - |  |  | ------ | - |  |  | ------ | -
|                                               |  |               |        |               |  |              
|                                               |  | Dec. 31, 2001 |        | Dec. 31, 2002 |  | Dec. 31, 2003
|                                               |  |               |        |               |  |              
|                                               |  | Deferred tax  |        | Deferred tax  |  | Deferred tax  |        | Deferred tax |  | Deferred tax |        | Deferred tax
|                                               |  | assets        |        | liabilities   |  | assets        |        | liabilities  |  | assets       |        | liabilities 
|                                               |  |               |        |               |  |               |        |              |  |              |        |             
|                                               |  |              
|                                               |  | ( million)  
|Intangible assets                              |  |               | 438    |               |  |               | 177    |              |  |              | 416    |              |  |  | 1,589  |   |  |  | 453    |   |  |  | 1,228  |  
|Property, plant and equipment                  |  |               | 243    |               |  |               | 1,672  |              |  |              | 419    |              |  |  | 1,558  |   |  |  | 602    |   |  |  | 1,426  |  
|Investments                                    |  |               | 20     |               |  |               | 88     |              |  |              | 52     |              |  |  | 106    |   |  |  | 56     |   |  |  | 54     |  
|Inventories                                    |  |               | 267    |               |  |               | 86     |              |  |              | 308    |              |  |  | 75     |   |  |  | 348    |   |  |  | 72     |  
|Receivables                                    |  |               | 122    |               |  |               | 53     |              |  |              | 113    |              |  |  | 70     |   |  |  | 120    |   |  |  | 135    |  
|Other current assets                           |  |               | 11     |               |  |               | 189    |              |  |              | 52     |              |  |  | 242    |   |  |  | 11     |   |  |  | 391    |  
|Pension provisions                             |  |               | 357    |               |  |               | 247    |              |  |              | 328    |              |  |  | 225    |   |  |  | 525    |   |  |  | 206    |  
|Other provisions                               |  |               | 166    |               |  |               | 74     |              |  |              | 254    |              |  |  | 66     |   |  |  | 451    |   |  |  | 58     |  
|Other liabilities                              |  |               | 158    |               |  |               | 30     |              |  |              | 55     |              |  |  | 172    |   |  |  | 304    |   |  |  | 33     |  
|Tax loss carryforwards                         |  |               | 282    |               |  |               |       |              |  |              | 743    |              |  |  |       |   |  |  | 723    |   |  |  |       |  
|Valuation allowance for tax loss carryforwards |  |               | (78    | )             |  |               |       |              |  |              | (123   | )            |  |  |       |   |  |  | (154   | ) |  |  |       |  
|                                               |  |               |        |               |  |               |        |              |  |              |        |              |  |  |        |   |  |  |        |   |  |  |        |  
|                                               |  |               | 1,986  |               |  |               | 2,616  |              |  |              | 2,617  |              |  |  | 4,103  |   |  |  | 3,439  |   |  |  | 3,603  |  
|of which long-term                             |  |               | 1,174  |               |  |               | 1,911  |              |  |              | 1,439  |              |  |  | 2,954  |   |  |  | 1,996  |   |  |  | 2,608  |  
|Set-off*                                       |  |               | (1,378 | )             |  |               | (1,378 | )            |  |              | (1,650 | )            |  |  | (1,650 | ) |  |  | (2,141 | ) |  |  | (2,141 | )
|                                               |  |               |        |               |  |               |        |              |  |              |        |              |  |  |        |   |  |  |        |   |  |  |        |  
|                                               |  |               | 608    |               |  |               | 1,238  |              |  |              | 967    |              |  |  | 2,453  |   |  |  | 1,298  |   |  |  | 1,462  |  
|                                               |  |               |        |               |  |               |        |              |  |              |        |              |  |  |        |   |  |  |        |   |  |  |        |  



---



|  |                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | According to IAS 12 (Income Taxes), deferred tax
    assets and deferred tax liabilities should, under certain
    conditions, be offset if they relate to income taxes levied by
    the same taxation authority.

In 2003, deferred tax assets of
2 million
(2002:
331 million;
2001: 9 million)
and deferred tax liabilities of
2 million
(2002:
1,340 million;
2001:
10 million)
relate to changes in the scope of consolidation. Utilization of
tax loss carryforwards from previous years diminished the amount
of income taxes paid or accrued in 2003 by
165 million
(2002:
11 million;
2001: 88
million).

The value of existing tax loss carryforwards by
expiration date is as follows:

|                          |  |               |     |               |  |               |       |  |  |  |       | 
|------------------------- |  | ------------- | --- | ------------- |  | ------------- | ----- |  |  |  | ----- | 
|                          |  | Dec. 31, 2001 |     | Dec. 31, 2002 |  | Dec. 31, 2003
|                          |  |               |     |               |  |              
|                          |  |              
|                          |  | ( million)  
|One year                  |  |               | 6   |               |  |               | 17    |  |  |  | 23    | 
|Two years                 |  |               | 11  |               |  |               | 4     |  |  |  | 7     | 
|Three years               |  |               | 16  |               |  |               | 17    |  |  |  | 41    | 
|Four years                |  |               | 50  |               |  |               | 17    |  |  |  | 104   | 
|Five years and thereafter |  |               | 653 |               |  |               | 1,936 |  |  |  | 1,674 | 
|                          |  |               |     |               |  |               |       |  |  |  |       | 
|                          |  |               | 736 |               |  |               | 1,991 |  |  |  | 1,849 | 
|                          |  |               |     |               |  |               |       |  |  |  |       | 

Deferred tax assets of
569 million
(2002:
620 million;
2001: 204
million) are recognized on the
1,735 million
(2002:
1,731 million;
2001: 540
million) in tax loss carryforwards that represent income likely
to be realized in the future. Recognition of these deferred tax
assets results in deferred tax income of
96 million
(2002:
220 million;
2001:
198 million).

Deferred tax liabilities have not been recognized
for temporary differences associated with investments in foreign
subsidiaries of
3,639 million
(2002:
3,327 million;
2001:
3,030 million)
as Bayer has determined that

F-31



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


the profits concerned will not be distributed in
the foreseeable future. If deferred taxes were recognized for
these temporary differences, the liability would be based on the
respective withholding tax rates only, taking into account the
German tax of 5 percent on corporate dividends where
applicable.

The actual tax income for 2003 is
645 million
(2002:
107 million;
2001:
154 million).
This figure differs by
107 million
(2002:
465 million;
2001:
259 million)
from the tax income of
752 million
(2002: tax expense of
358 million;
2001: 
413 million) that would result from applying to the pre-tax
loss of the Group a tax rate of 37.7 percent (2002:
37.5 percent; 2001: 37.1 percent), which is the weighted
average of the theoretical tax rates for the individual Group
companies.

The reconciliation of theoretical to actual
income tax income (expense) for the Group is as follows:

|                                                         |                                                                           |           |     |      |   |           |      |     |   |           |      |      |   |  |       |     |   |  |      |      |   |  |       |     |  
|-------------------------------------------------------- | ------------------------------------------------------------------------- | --------- | --- | ---- | - | --------- | ---- | --- | - | --------- | ---- | ---- | - |  | ----- | --- | - |  | ---- | ---- | - |  | ----- | --- | -
|                                                         |                                                                           |           |     |      |   |          
|                                                         |                                                                           | 2001      |     | 2002 |   | 2003     
|                                                         |                                                                           |           |     |      |   |          
|                                                         |                                                                           |  million |     | %    |   |  million |      | %   |   |  million |      | %   
|Theoretical income tax income (expense)                  |                                                                           |           | 413 |      |   |           | 100  |     |   |           | 358  |      |   |  | 100   |     |   |  | (752 | )    |   |  | 100   |    
|Reduction in taxes due to tax-free income                |                                                                           |           |     |      |   |           |      |     |   |           |      |      |   |  |       |     |   |  |      |      |   |  |       |    
|                                                         | Relating to the divestiture of EC Erdölchemie                             |           |     | (131 | ) |           |      | (32 | ) |           |      |     |   |  |       |    |   |  |      |     |   |  |       |    |  
|                                                         | Relating to the divestiture of Haarmann &
    Reimer                      |           |     |     |   |           |      |    |   |           |      | (342 | ) |  |       | (95 | ) |  |      |     |   |  |       |    |  
|                                                         | Relating to the divestiture of Baywoge                                    |           |     |     |   |           |      |    |   |           |      | (131 | ) |  |       | (37 | ) |  |      |     |   |  |       |    |  
|                                                         | Relating to the divestiture of the remaining
    interest in Agfa-Gevaert |           |     |     |   |           |      |    |   |           |      | (104 | ) |  |       | (29 | ) |  |      |     |   |  |       |    |  
|                                                         | Relating to the divestiture of Millennium                                 |           |     |     |   |           |      |    |   |           |      |     |   |  |       |    |   |  |      | (76  | ) |  |       | 10  |  
|                                                         | Other                                                                     |           |     | (152 | ) |           |      | (37 | ) |           |      | (100 | ) |  |       | (28 | ) |  |      | (103 | ) |  |       | 14  |  
|Increase in taxes due to non-tax-deductible
    expenses |                                                                           |           |     |      |   |           |      |     |   |           |      |      |   |  |       |     |   |  |      |      |   |  |       |    
|                                                         | Write-downs on investments                                                |           |     |     |   |           |      |    |   |           |      | 22   |   |  |       | 6   |   |  |      | 49   |   |  |       | (7  | )
|                                                         | Amortization of goodwill                                                  |           |     | 30   |   |           |      | 7   |   |           |      | 68   |   |  |       | 19  |   |  |      | 62   |   |  |       | (8  | )
|                                                         | Impairment charges                                                        |           |     |     |   |           |      |    |   |           |      | 2    |   |  |       | 0   |   |  |      | 124  |   |  |       | (16 | )
|                                                         | Other                                                                     |           |     | 17   |   |           |      | 4   |   |           |      | 103  |   |  |       | 29  |   |  |      | 38   |   |  |       | (5  | )
|Other tax effects                                        |                                                                           |           | (23 | )    |   |           | (5   | )   |   |           | 17   |      |   |  | 5     |     |   |  | 13   |      |   |  | (2    | )  
|                                                         |                                                                           |           |     |      |   |           |      |     |   |           |      |      |   |  |       |     |   |  |      |      |   |  |       |    
|Actual tax income (expense)                              |                                                                           |           | 154 |      |   |           | 37   |     |   |           | (107 | )    |   |  | (30   | )   |   |  | (645 | )    |   |  | 86    |    
|                                                         |                                                                           |           |     |      |   |           |      |     |   |           |      |      |   |  |       |     |   |  |      |      |   |  |       |    
|Effective tax rate in %                                  |                                                                           |           |     |      |   |           | 13.8 |     |   |           |      |      |   |  | (11.2 | )   |   |  |      |      |   |  | (32.3 | )  

[12] Other taxes

Other taxes amounting to
303 million
(2002: 221 million;
2001:
247 million)
are included in the cost of production, selling expenses,
research and development expenses or general administration
expenses. These are mainly taxes related to property, as well as
taxes on electricity and other utilities.

[13] Minority Stockholders
interest

Minority interest in income amounts to
19 million
(2002:
12 million;
2001:
6 million),
and minority interest in losses to
7 million
(2002:
9 million;
2001:
10 million).

[14] Earnings per share

Earnings per share are determined according to
IAS 33 (Earnings Per Share) by dividing the net income/loss by
the average number of shares.

In 2003, as in 2002 and in 2001, the number of
shares remained constant at 730,341,920. Loss per share was
1.86 (2002:
Earnings per share of
1.45; 2001:
Earnings per share of
1.32).

F-32



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


There were no subscription rights outstanding in
2003, 2002 or 2001 and therefore no dilutive potential shares.

[15] Cost of materials

The total cost of materials amounted to
12,247 million
(2002: 11,614
million; 2001:
11,590 million),
comprising
11,520 million
(2002: 11,024
million; 2001:
10,874 million)
in expenses for raw materials, supplies and goods purchased for
resale, and
727 million
(2002:
590 million;
2001:
716 million)
in expenses for purchased services.

The cost of materials for discontinuing
operations was
2,616 million
(2002:
3,022 million;
2001:
3,674 million).
This was split as follows:

|                                |  |             |       |      |  |      |       |  |  |  |       | 
|------------------------------- |  | ----------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                |  | 2001        |       | 2002 |  | 2003
|                                |  |             |       |      |  |     
|                                |  |            
|                                |  | ( million)
|Polyurethanes, Coatings, Fibers |  |             | 63    |      |  |      | 62    |  |  |  | 52    | 
|Plastics, Rubber                |  |             | 1,673 |      |  |      | 1,507 |  |  |  | 1,473 | 
|Chemicals                       |  |             | 1,084 |      |  |      | 865   |  |  |  | 759   | 
|                                |  |             |       |      |  |      |       |  |  |  |       | 
|Total Lanxess                   |  |             | 2,820 |      |  |      | 2,434 |  |  |  | 2,284 | 
|                                |  |             |       |      |  |      |       |  |  |  |       | 
|Plasma business                 |  |             | 357   |      |  |      | 320   |  |  |  | 332   | 
|Haarmann & Reimer               |  |             | 344   |      |  |      | 268   |  |  |  |      | 
|EC Erdölchemie                  |  |             | 153   |      |  |      |      |  |  |  |      | 
|                                |  |             |       |      |  |      |       |  |  |  |       | 
|Total discontinuing operations  |  |             | 3,674 |      |  |      | 3,022 |  |  |  | 2,616 | 
|                                |  |             |       |      |  |      |       |  |  |  |       | 

[16]  Personnel expenses

Personnel expenses declined by
186 million
to
7,990 million
in 2003 (2002:
8,176 million;
2001:
7,872 million).
Of this decrease,
555 million
was due to currency translations. Personnel expenses include
wages and salaries totaling
6,077 million
(2002:
6,455 million;
2001:
6,243 million)
and social expenses of
1,913 million
(2002: 1,721 million; 2001:
1,629 million),
of which
855 million
(2002:
544 million;
2001:
446 million)
were pension expenses.

Total personnel expenses include the following
expenses for the discontinuing operations:

|                                |  |             |       |      |  |      |       |   |  |  |       |  
|------------------------------- |  | ----------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                |  | 2001        |       | 2002 |  | 2003
|                                |  |             |       |      |  |     
|                                |  |            
|                                |  | ( million)
|Polyurethanes, Coatings, Fibers |  |             | 56    |      |  |      | 51    |   |  |  | 50    |  
|Plastics, Rubber                |  |             | 702   |      |  |      | 722   |   |  |  | 619   |  
|Chemicals                       |  |             | 648   |      |  |      | 611   |   |  |  | 600   |  
|                                |  |             |       |      |  |      |       |   |  |  |       |  
|Total Lanxess                   |  |             | 1,406 |      |  |      | 1,384 |   |  |  | 1,269 |  
|                                |  |             |       |      |  |      |       |   |  |  |       |  
|Plasma business                 |  |             | 118   |      |  |      | 109   |   |  |  | 90    |  
|Haarmann & Reimer               |  |             | 235   |      |  |      | 175   |   |  |  |      |  
|EC Erdölchemie                  |  |             | 23    |      |  |      |      |   |  |  |      |  
|                                |  |             |       |      |  |      |       |   |  |  |       |  
|Total discontinuing operations  |  |             | 1,782 |      |  |      | 1,668 |   |  |  | 1,359 |  
|                                |  |             |       |      |  |      |       |   |  |  |       |  
|Of which social expenses        |  |             | (393  | )    |  |      | (354  | ) |  |  | (327  | )

F-33



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[17] Number of employees

The average number of employees, classified by
corporate functions, was as follows:

|                 |  |      |         |      |  |      |         |  |  |  |         | 
|---------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                 |  | 2001 |         | 2002 |  | 2003
|                 |  |      |         |      |  |     
|Marketing        |  |      | 33,875  |      |  |      | 35,985  |  |  |  | 34,765  | 
|Technology       |  |      | 61,055  |      |  |      | 66,051  |  |  |  | 62,850  | 
|Research         |  |      | 11,206  |      |  |      | 12,521  |  |  |  | 11,602  | 
|Administration   |  |      | 9,091   |      |  |      | 10,035  |  |  |  | 9,063   | 
|                 |  |      |         |      |  |      |         |  |  |  |         | 
|                 |  |      | 115,227 |      |  |      | 124,592 |  |  |  | 118,280 | 
|                 |  |      |         |      |  |      |         |  |  |  |         | 
|Of which trainee |  |      | 2,646   |      |  |      | 2,564   |  |  |  | 2,680   | 
|                 |  |      |         |      |  |      |         |  |  |  |         | 

The employees of joint ventures are included in
the above figures in proportion to Bayers interests in the
respective companies. The total number of people employed by our
joint ventures in 2003 was 401 (2002: 1,102; 2001: 1,075). The
decline was mainly due to the divestiture of the PolymerLatex
Group.

The average number of employees in the
discontinuing operations was as follows:

|                                |  |      |        |      |  |      |        |  |  |  |        | 
|------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                                |  | 2001 |        | 2002 |  | 2003
|                                |  |      |        |      |  |     
|Polyurethanes, Coatings, Fibers |  |      | 1,013  |      |  |      | 925    |  |  |  | 844    | 
|Plastics, Rubber                |  |      | 10,285 |      |  |      | 10,275 |  |  |  | 9,664  | 
|Chemicals                       |  |      | 10,732 |      |  |      | 10,260 |  |  |  | 9,915  | 
|                                |  |      |        |      |  |      |        |  |  |  |        | 
|Total Lanxess                   |  |      | 22,030 |      |  |      | 21,460 |  |  |  | 20,423 | 
|                                |  |      |        |      |  |      |        |  |  |  |        | 
|Plasma business                 |  |      | 1,185  |      |  |      | 1,403  |  |  |  | 1,545  | 
|Haarmann & Reimer               |  |      | 3,660  |      |  |      |       |  |  |  |       | 
|                                |  |      |        |      |  |      |        |  |  |  |        | 
|Total discontinuing operations  |  |      | 26,875 |      |  |      | 22,863 |  |  |  | 21,968 | 
|                                |  |      |        |      |  |      |        |  |  |  |        | 

F-34



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[18] Intangible assets

Changes in intangible assets in 2003 were as
follows:

|                                                                            |                      |                     |       |          |  |          |       |       |  |  |     |      |  |  |        |       | 
|--------------------------------------------------------------------------- | -------------------- | ------------------- | ----- | -------- |  | -------- | ----- | ----- |  |  | --- | ---- |  |  | ------ | ----- | 
|                                                                            |                      | Acquired            |       |          |  |          |       |      
|                                                                            |                      | concessions,        |       |          |  |          |       |      
|                                                                            |                      | industrial property |       |          |  |          |       |      
|                                                                            |                      | rights, similar     |       |          |  |          |       |      
|                                                                            |                      | rights and assets,  |       |          |  |          |       |      
|                                                                            |                      | and licenses        |       | Acquired |  | Advance  |       |      
|                                                                            |                      | thereunder          |       | goodwill |  | payments |       | Total
|                                                                            |                      |                     |       |          |  |          |       |      
|                                                                            |                      |                    
|                                                                            |                      | ( million)        
|Gross carrying amounts, Dec. 31, 2002                                       |                      |                     | 7,923 |          |  |          | 3,306 |       |  |  | 58  |      |  |  | 11,287 |      
|Exchange differences                                                        |                      |                     | (553  | )        |  |          | (291  | )     |  |  | (10 | )    |  |  | (854   | )    
|Changes in scope of consolidation                                           |                      |                     | 42    |          |  |          | 1     |       |  |  |    |      |  |  | 43     |      
|Acquisitions                                                                |                      |                     |      |          |  |          | 52    |       |  |  |    |      |  |  | 52     |      
|Capital expenditures                                                        |                      |                     | 217   |          |  |          |      |       |  |  | 78  |      |  |  | 295    |      
|Retirements                                                                 |                      |                     | (192  | )        |  |          | (48   | )     |  |  | (43 | )    |  |  | (283   | )    
|Subsequent adjustments relating to the Aventis
    Crop Science acquisition |                      |                     | (112  | )        |  |          | (375  | )     |  |  |    |      |  |  | (487   | )    
|Transfers                                                                   |                      |                     | 58    |          |  |          | 14    |       |  |  | (23 | )    |  |  | 49     |      
|                                                                            |                      |                     |       |          |  |          |       |       |  |  |     |      |  |  |        |      
|Gross carrying amounts, Dec. 31,
    2003                                   |                      |                     | 7,383 |          |  |          | 2,659 |       |  |  | 60  |      |  |  | 10,102 |      
|                                                                            |                      |                     |       |          |  |          |       |       |  |  |     |      |  |  |        |      
|Accumulated amortization and write-downs,
    Dec. 31, 2002                 |                      |                     | 1,966 |          |  |          | 442   |       |  |  |    |      |  |  | 2,408  |      
|Exchange differences                                                        |                      |                     | (231  | )        |  |          | (48   | )     |  |  |    |      |  |  | (279   | )    
|Changes in scope of consolidation                                           |                      |                     | 6     |          |  |          |      |       |  |  |    |      |  |  | 6      |      
|Amortization and write-downs in 2003                                        |                      |                     | 1,334 |          |  |          | 366   |       |  |  | 49  |      |  |  | 1,749  |      
|                                                                            | of which write-downs |                     |       | [578]    |  |          |       | [167] |  |  |     | [49] |  |  |        | [794] | 
|Write-backs                                                                 |                      |                     |      |          |  |          |      |       |  |  |    |      |  |  |       |      
|Retirements                                                                 |                      |                     | (184  | )        |  |          | (18   | )     |  |  | (43 | )    |  |  | (245   | )    
|Transfers                                                                   |                      |                     | (32   | )        |  |          | (19   | )     |  |  |    |      |  |  | (51    | )    
|                                                                            |                      |                     |       |          |  |          |       |       |  |  |     |      |  |  |        |      
|Accumulated amortization and write-downs
    Dec. 31, 2003                  |                      |                     | 2,859 |          |  |          | 723   |       |  |  | 6   |      |  |  | 3,588  |      
|                                                                            |                      |                     |       |          |  |          |       |       |  |  |     |      |  |  |        |      
|Net carrying amounts, Dec. 31, 2003                                         |                      |                     | 4,524 |          |  |          | 1,936 |       |  |  | 54  |      |  |  | 6,514  |      
|                                                                            |                      |                     |       |          |  |          |       |       |  |  |     |      |  |  |        |      
|Net carrying amounts, Dec. 31, 2002                                         |                      |                     | 5,957 |          |  |          | 2,864 |       |  |  | 58  |      |  |  | 8,879  |      
|                                                                            |                      |                     |       |          |  |          |       |       |  |  |     |      |  |  |        |      

The exchange differences are the differences
between the carrying amounts at the beginning and the end of the
year that result from translating the figures of companies
outside the euro zone at the respective different exchange rates
and changes in their assets during the year at the average rate
for the year. This translation method generally also applies to
acquisition-related goodwill and remeasurement amounts reflected
in the statements of companies outside the euro zone.

In connection with the acquisition of Aventis
CropScience Holding S.A., France, in fiscal 2002, the carrying
amounts of acquired and identifiable assets have been adjusted
in accordance with IAS 22 (Business Combinations) to
reflect material evidence obtained after December 31, 2002
which altered the allocation of the purchase price to intangible
assets, property, plant and equipment. The retirement of
acquired goodwill essentially relates to the agreement reached
with Aventis S.A. to reduce the purchase price paid for Aventis
CropScience retroactively by
327 million.

F-35



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[19] Property, plant and
equipment

Changes in property, plant and equipment in 2003
were as follows:

|                                                                            |                      |             |       |               |   |            |        |              |   |       |       |     |   |  |        |     |   |  |        |        |  
|--------------------------------------------------------------------------- | -------------------- | ----------- | ----- | ------------- | - | ---------- | ------ | ------------ | - | ----- | ----- | --- | - |  | ------ | --- | - |  | ------ | ------ | -
|                                                                            |                      |             |       |               |   |            |        | Construction |   |      
|                                                                            |                      |             |       |               |   |            |        | in progress  |   |      
|                                                                            |                      |             |       |               |   | Furniture, |        | and advance  |   |      
|                                                                            |                      | Land        |       | Machinery     |   | fixtures   |        | payments to  |   |      
|                                                                            |                      | and         |       | and technical |   | and other  |        | vendors and  |   |      
|                                                                            |                      | buildings   |       | equipment     |   | equipment  |        | contractors  |   | Total
|                                                                            |                      |             |       |               |   |            |        |              |   |      
|                                                                            |                      |            
|                                                                            |                      | ( million)
|Gross carrying amounts, Dec. 31, 2002                                       |                      |             | 8,061 |               |   |            | 18,590 |              |   |       | 2,245 |     |   |  | 1,309  |     |   |  | 30,205 |       
|Exchange differences                                                        |                      |             | (445  | )             |   |            | (997   | )            |   |       | (103  | )   |   |  | (63    | )   |   |  | (1,608 | )     
|Changes in scope of consolidation                                           |                      |             | 8     |               |   |            | 143    |              |   |       |      |     |   |  | 66     |     |   |  | 217    |       
|Acquisitions                                                                |                      |             |      |               |   |            |       |              |   |       |      |     |   |  |       |     |   |  |       |       
|Capital expenditures                                                        |                      |             | 87    |               |   |            | 390    |              |   |       | 170   |     |   |  | 797    |     |   |  | 1,444  |       
|Retirements                                                                 |                      |             | (228  | )             |   |            | (911   | )            |   |       | (312  | )   |   |  | (37    | )   |   |  | (1,488 | )     
|Subsequent adjustments relating to the Aventis
    Crop Science acquisition |                      |             | 61    |               |   |            | 110    |              |   |       |      |     |   |  |       |     |   |  | 171    |       
|Transfers                                                                   |                      |             | 354   |               |   |            | 690    |              |   |       | 94    |     |   |  | (1,187 | )   |   |  | (49    | )     
|                                                                            |                      |             |       |               |   |            |        |              |   |       |       |     |   |  |        |     |   |  |        |       
|Gross carrying amounts,
    Dec. 31, 2003                                   |                      |             | 7,898 |               |   |            | 18,015 |              |   |       | 2,094 |     |   |  | 885    |     |   |  | 28,892 |       
|                                                                            |                      |             |       |               |   |            |        |              |   |       |       |     |   |  |        |     |   |  |        |       
|Accumulated depreciation and write-downs
    Dec. 31, 2002                  |                      |             | 4,052 |               |   |            | 12,176 |              |   |       | 1,540 |     |   |  | 1      |     |   |  | 17,769 |       
|Exchange differences                                                        |                      |             | (158  | )             |   |            | (566   | )            |   |       | (70   | )   |   |  |       |     |   |  | (794   | )     
|Changes in scope of consolidation                                           |                      |             |      |               |   |            |       |              |   |       |      |     |   |  |       |     |   |  |       |       
|Depreciation and write-downs in 2003                                        |                      |             | 617   |               |   |            | 2,046  |              |   |       | 312   |     |   |  | 33     |     |   |  | 3,008  |       
|                                                                            | of which write-downs |             |       | [368          | ] |            |        | [885         | ] |       |       | [42 | ] |  |        | [33 | ] |  |        | [1,328 | ]
|Write-backs                                                                 |                      |             |      |               |   |            |       |              |   |       |      |     |   |  |       |     |   |  |       |       
|Retirements                                                                 |                      |             | (113  | )             |   |            | (690   | )            |   |       | (263  | )   |   |  | (13    | )   |   |  | (1,079 | )     
|Transfers                                                                   |                      |             | 142   |               |   |            | (141   | )            |   |       | 51    |     |   |  | (1     | )   |   |  | 51     |       
|                                                                            |                      |             |       |               |   |            |        |              |   |       |       |     |   |  |        |     |   |  |        |       
|Accumulated depreciation and write-downs,
    Dec. 31, 2003                 |                      |             | 4,540 |               |   |            | 12,825 |              |   |       | 1,570 |     |   |  | 20     |     |   |  | 18,955 |       
|                                                                            |                      |             |       |               |   |            |        |              |   |       |       |     |   |  |        |     |   |  |        |       
|Net carrying amounts,
    Dec. 31, 2003                                     |                      |             | 3,358 |               |   |            | 5,190  |              |   |       | 524   |     |   |  | 865    |     |   |  | 9,937  |       
|                                                                            |                      |             |       |               |   |            |        |              |   |       |       |     |   |  |        |     |   |  |        |       
|Net carrying amounts, Dec. 31, 2002                                         |                      |             | 4,009 |               |   |            | 6,414  |              |   |       | 705   |     |   |  | 1,308  |     |   |  | 12,436 |       
|                                                                            |                      |             |       |               |   |            |        |              |   |       |       |     |   |  |        |     |   |  |        |       

The exchange differences are as defined for
intangible assets.

In connection with the acquisition of Aventis
CropScience Holding S.A., France, in fiscal 2002, the carrying
amounts of acquired and identifiable assets have been adjusted
in accordance with IAS 22 (Business Combinations) to
reflect material evidence obtained after December 31, 2002
which altered the allocation of the purchase price to intangible
assets, property, plant and equipment.

Capitalized property, plant and equipment
includes assets with a total net value of
344 million
(2002:
504 million)
held under finance leases. The gross carrying amounts of these
assets total
937 million
(2002:
1,106 million).

These assets are mainly machinery and technical
equipment with a carrying amount of
230 million
(gross amount:
745 million)
and buildings with a carrying amount of
102 million
(gross amount:
139 million).
In the case of buildings, either the present value of the
minimum lease payments covers substantially all of the cost of
acquisition, or title passes to the lessee on expiration of the
lease.

F-36



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Also included are products leased to other
parties under operating leases with a carrying amount of
183 million
(2002:
232 million).
The gross carrying amount of these assets was
452 million
(2002:
500 million);
their depreciation in 2003 amounted to
72 million
(2002:
83 million).
However, if under the relevant agreements the lessee is to be
regarded as the economic owner of the assets and the lease
therefore constitutes a finance lease as defined in IAS 17
(Leases), a receivable is recognized in the balance sheet in the
amount of the discounted future lease payments.

[20] Investments

Changes in investments in 2003 were as follows:

|                                           |  |                 |     |              |  |                      |   |           |  |            |       |            |  |       |      |       |  |  |   |  |  |  |     |   |  |  |     |   |  |  |       |  
|------------------------------------------ |  | --------------- | --- | ------------ |  | -------------------- | - | --------- |  | ---------- | ----- | ---------- |  | ----- | ---- | ----- |  |  | - |  |  |  | --- | - |  |  | --- | - |  |  | ----- | -
|                                           |  |                 |     |              |  |                      |   |           |  |            |       |            |  |      
|                                           |  |                 |     |              |  | Investments in other |   |           |  |            |       |            |  |      
|                                           |  |                 |     |              |  | affiliated companies |   | Loans to  |  |            |       |            |  |      
|                                           |  |                 |     |              |  |                      |   | other     |  |            |       |            |  |      
|                                           |  | Investments     |     | Loans to     |  | Associated           |   | Other     |  | affiliated |       | Other      |  | Other |      |      
|                                           |  | in subsidiaries |     | subsidiaries |  | companies            |   | companies |  | companies  |       | securities |  | loans |      | Total
|                                           |  |                 |     |              |  |                      |   |           |  |            |       |            |  |       |      |      
|                                           |  |                
|                                           |  | ( Million)    
|Gross carrying amounts, Dec. 31, 2002      |  |                 | 139 |              |  |                      |  |           |  |            | 1,205 |            |  |       | 391  |       |  |  | 7 |  |  |  | 252 |   |  |  | 411 |   |  |  | 2,405 |  
|Exchange differences                       |  |                 | (6  | )            |  |                      |  |           |  |            | (86   | )          |  |       | (7   | )     |  |  |  |  |  |  | (20 | ) |  |  | (11 | ) |  |  | (130  | )
|Changes in scope of consolidation          |  |                 | (33 | )            |  |                      |  |           |  |            | (23   | )          |  |       |     |       |  |  |  |  |  |  |    |   |  |  | 2   |   |  |  | (54   | )
|Changes of fair value                      |  |                 |    |              |  |                      |  |           |  |            |      |            |  |       | 112  |       |  |  |  |  |  |  | 2   |   |  |  |    |   |  |  | 114   |  
|Acquisitions                               |  |                 |    |              |  |                      |  |           |  |            |      |            |  |       |     |       |  |  |  |  |  |  |    |   |  |  |    |   |  |  |      |  
|Other additions                            |  |                 | 6   |              |  |                      |  |           |  |            | 50    |            |  |       | 7    |       |  |  |  |  |  |  | 77  |   |  |  | 42  |   |  |  | 182   |  
|Retirements                                |  |                 | (9  | )            |  |                      |  |           |  |            | (175  | )          |  |       | (194 | )     |  |  |  |  |  |  | (2  | ) |  |  | (29 | ) |  |  | (409  | )
|Transfers                                  |  |                 | 11  |              |  |                      |  |           |  |            |      |            |  |       |     |       |  |  |  |  |  |  | (17 | ) |  |  | 17  |   |  |  | 11    |  
|                                           |  |                 |     |              |  |                      |   |           |  |            |       |            |  |       |      |       |  |  |   |  |  |  |     |   |  |  |     |   |  |  |       |  
|Gross carrying amounts,
    Dec. 31, 2003  |  |                 | 108 |              |  |                      |  |           |  |            | 971   |            |  |       | 309  |       |  |  | 7 |  |  |  | 292 |   |  |  | 432 |   |  |  | 2,119 |  
|                                           |  |                 |     |              |  |                      |   |           |  |            |       |            |  |       |      |       |  |  |   |  |  |  |     |   |  |  |     |   |  |  |       |  
|Accumulated write-downs, Dec. 31, 2002     |  |                 | 9   |              |  |                      |  |           |  |            | 46    |            |  |       | 66   |       |  |  | 2 |  |  |  | 76  |   |  |  | 8   |   |  |  | 207   |  
|Exchange differences                       |  |                 | 2   |              |  |                      |  |           |  |            | (1    | )          |  |       | (8   | )     |  |  |  |  |  |  | (9  | ) |  |  |    |   |  |  | (16   | )
|Changes in scope of consolidation          |  |                 |    |              |  |                      |  |           |  |            |      |            |  |       |     |       |  |  |  |  |  |  |    |   |  |  |    |   |  |  |      |  
|Write-downs in 2003                        |  |                 | 4   |              |  |                      |  |           |  |            | 21    |            |  |       | 99   |       |  |  |  |  |  |  | 12  |   |  |  | 1   |   |  |  | 137   |  
|Write-Backs                                |  |                 | (1  | )            |  |                      |  |           |  |            |      |            |  |       |     |       |  |  |  |  |  |  | 1   |   |  |  | (1  | ) |  |  | (1    | )
|Retirements                                |  |                 |    |              |  |                      |  |           |  |            |      |            |  |       |     |       |  |  |  |  |  |  |    |   |  |  |    |   |  |  |      |  
|Transfers                                  |  |                 | 11  |              |  |                      |  |           |  |            |      |            |  |       |     |       |  |  |  |  |  |  |    |   |  |  |    |   |  |  | 11    |  
|                                           |  |                 |     |              |  |                      |   |           |  |            |       |            |  |       |      |       |  |  |   |  |  |  |     |   |  |  |     |   |  |  |       |  
|Accumulated write-downs,
    Dec. 31, 2003 |  |                 | 25  |              |  |                      |  |           |  |            | 66    |            |  |       | 157  |       |  |  | 2 |  |  |  | 80  |   |  |  | 8   |   |  |  | 338   |  
|                                           |  |                 |     |              |  |                      |   |           |  |            |       |            |  |       |      |       |  |  |   |  |  |  |     |   |  |  |     |   |  |  |       |  
|Net carrying amounts,
    Dec. 31, 2003    |  |                 | 83  |              |  |                      |  |           |  |            | 905   |            |  |       | 152  |       |  |  | 5 |  |  |  | 212 |   |  |  | 424 |   |  |  | 1,781 |  
|                                           |  |                 |     |              |  |                      |   |           |  |            |       |            |  |       |      |       |  |  |   |  |  |  |     |   |  |  |     |   |  |  |       |  
|Net carrying amounts, Dec. 31, 2002        |  |                 | 130 |              |  |                      |  |           |  |            | 1,159 |            |  |       | 325  |       |  |  | 5 |  |  |  | 176 |   |  |  | 403 |   |  |  | 2,198 |  
|                                           |  |                 |     |              |  |                      |   |           |  |            |       |            |  |       |      |       |  |  |   |  |  |  |     |   |  |  |     |   |  |  |       |  

The exchange differences are as defined for
intangible assets.

The difference between the equity interest in the
underlying net assets of companies included at equity and their
at-equity accounting values is
39 million
(2002:
34 million).
It mainly relates to goodwill. The net carrying amount of
companies included at equity is
870 million
(2002:
1,095 million).
Retirements of investments in associated companies related
principally to the write-down of
137 million
on the financial interest in the DyStar Group. Retirements of
investments in other companies mainly relate to the divestiture
of the

F-37



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


6.6 percent interest in Millennium
Pharmaceuticals to the investment bank CSFB for
272 million,
which is recognized at fair value.

[21] Inventories

Of the
5,885 million
in inventories carried as of December 31, 2003 (2002:
6,342 million),
1,311 million
(2002:
833 million)
represents inventories carried at net realizable value.

Inventories comprise the following:

|                                                                   |  |               |       |               |  |  |       | 
|------------------------------------------------------------------ |  | ------------- | ----- | ------------- |  |  | ----- | 
|                                                                   |  | Dec. 31, 2002 |       | Dec. 31, 2003
|                                                                   |  |               |       |              
|                                                                   |  |              
|                                                                   |  | ( million)  
|Raw materials and supplies                                         |  |               | 1,362 |               |  |  | 1,013 | 
|Work in process, finished goods and goods
    purchased for resale |  |               | 4,963 |               |  |  | 4,865 | 
|Advanced payments                                                  |  |               | 17    |               |  |  | 7     | 
|                                                                   |  |               |       |               |  |  |       | 
|                                                                   |  |               | 6,342 |               |  |  | 5,885 | 
|                                                                   |  |               |       |               |  |  |       | 

The changes in inventory write-downs are as
follows:

|                                     |  |               |      |               |  |  |      |  
|------------------------------------ |  | ------------- | ---- | ------------- |  |  | ---- | -
|                                     |  | Dec. 31, 2002 |      | Dec. 31, 2003
|                                     |  |               |      |              
|                                     |  |              
|                                     |  | ( million)  
|Balance at the beginning of the year |  |               | (434 | )             |  |  | (457 | )
|Additions charged to expense         |  |               | (282 | )             |  |  | (408 | )
|Exchange differences                 |  |               | 33   |               |  |  | 6    |  
|Changes in scope of consolidation    |  |               | (82  | )             |  |  | 1    |  
|Deductions due to utilization        |  |               | 308  |               |  |  | 381  |  
|                                     |  |               |      |               |  |  |      |  
|Balance at the end of year           |  |               | (457 | )             |  |  | (477 | )
|                                     |  |               |      |               |  |  |      |  

[22] Trade accounts receivable

Trade accounts receivable include write-downs of
302 million
(2002: 345
million) for amounts unlikely to be recovered.

Trade accounts receivable as of December 31,
2003 include
5,066 million
(2002:
5,529 million)
maturing within one year and
5 million
(2002: 13 million)
maturing after one year. Of the total,
16 million
(2002: 47 million)
is receivable from subsidiaries,
42 million
(2002: 60 million)
from other affiliated companies and
5,013 million
(2002: 5,435 million)
from other customers.

Changes in write-downs of trade accounts
receivable are as follows:

|                                  |  |               |      |               |  |  |      |  
|--------------------------------- |  | ------------- | ---- | ------------- |  |  | ---- | -
|                                  |  | Dec. 31, 2002 |      | Dec. 31, 2003
|                                  |  |               |      |              
|                                  |  |              
|                                  |  | ( million)  
|Balance at beginning of year      |  |               | (222 | )             |  |  | (345 | )
|Additions charged to expense      |  |               | (101 | )             |  |  | (106 | )
|Exchange differences              |  |               | 49   |               |  |  | 13   |  
|Changes in scope of consolidation |  |               | (384 | )             |  |  | 1    |  
|Deductions due to utilization     |  |               | 313  |               |  |  | 135  |  
|                                  |  |               |      |               |  |  |      |  
|Balance at end of year            |  |               | (345 | )             |  |  | (302 | )
|                                  |  |               |      |               |  |  |      |  

F-38



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[23] Other receivables and other
assets

Other receivables and other assets are carried at
amortized cost, less write-downs of
20 million
(2002: 4 million).

They are comprised as follows:

|                                                  |  |               |       |               |  |  |       | 
|------------------------------------------------- |  | ------------- | ----- | ------------- |  |  | ----- | 
|                                                  |  | Dec. 31, 2002 |       | Dec. 31, 2003
|                                                  |  |               |       |              
|                                                  |  |              
|                                                  |  | ( million)  
|Claims for tax refunds                            |  |               | 677   |               |  |  | 697   | 
|Pension assets in excess of obligations           |  |               | 555   |               |  |  | 599   | 
|Receivables from derivative financial instruments |  |               | 502   |               |  |  | 646   | 
|Interest receivable on loans                      |  |               | 98    |               |  |  | 160   | 
|Short-term loans                                  |  |               | 85    |               |  |  | 64    | 
|Short-term loans from clearing                    |  |               | 51    |               |  |  | 24    | 
|Lease payments receivable                         |  |               | 48    |               |  |  | 67    | 
|Payroll receivables                               |  |               | 14    |               |  |  | 17    | 
|Other receivables                                 |  |               | 2,180 |               |  |  | 1,580 | 
|                                                  |  |               |       |               |  |  |       | 
|                                                  |  |               | 4,210 |               |  |  | 3,854 | 
|                                                  |  |               |       |               |  |  |       | 

Interest receivable on loans consists mainly of
interest earned in the fiscal year but not due to be received
until after the balance sheet date.

Total other receivables and other assets include
47 million
(2002:
47 million)
pertaining to subsidiaries and
20 million
(2002:
60 million)
pertaining to other affiliated companies.

Total other receivables and other assets in the
amount of
707 million
(2002:
711 million)
have maturities of more than one year. Of this amount,
28 million
(2002:
29 million)
pertains to subsidiaries.

Lease agreements in which the other party, as
lessee, is to be regarded as the economic owner of the leased
assets (finance leases) give rise to accounts receivable in the
amount of the discounted future lease payments. These
receivables amount to
67 million
(2002:
48 million),
while the interest portion pertaining to future years amounts to
6 million
(2002:
9 million).
The lease payments are due as follows:

|           |  |             |    |          |  |            |   |  |  |  |    | 
|---------- |  | ----------- | -- | -------- |  | ---------- | - |  |  |  | -- | 
|           |  | Lease       |    | Of which |  | Account   
|           |  | payments    |    | interest |  | receivable
|           |  |             |    |          |  |           
|           |  |            
|           |  | ( million)
|2004       |  |             | 36 |          |  |            | 3 |  |  |  | 33 | 
|2005       |  |             | 14 |          |  |            | 1 |  |  |  | 13 | 
|2006       |  |             | 11 |          |  |            | 1 |  |  |  | 10 | 
|2007       |  |             | 7  |          |  |            | 1 |  |  |  | 6  | 
|2008       |  |             | 3  |          |  |            |  |  |  |  | 3  | 
|After 2008 |  |             | 2  |          |  |            |  |  |  |  | 2  | 
|           |  |             |    |          |  |            |   |  |  |  |    | 
|           |  |             | 73 |          |  |            | 6 |  |  |  | 67 | 
|           |  |             |    |          |  |            |   |  |  |  |    | 

F-39



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[24] Liquid assets

|                                            |  |               |     |               |  |  |       | 
|------------------------------------------- |  | ------------- | --- | ------------- |  |  | ----- | 
|                                            |  | Dec. 31, 2002 |     | Dec. 31, 2003
|                                            |  |               |     |              
|                                            |  |              
|                                            |  | ( million)  
|Marketable securities and other instruments |  |               | 29  |               |  |  | 129   | 
|Cash and cash equivalents                   |  |               | 767 |               |  |  | 2,734 | 
|                                            |  |               |     |               |  |  |       | 
|                                            |  |               | 796 |               |  |  | 2,863 | 
|                                            |  |               |     |               |  |  |       | 

Securities are recognized at fair value in
compliance with IAS 39 (Financial Instruments: Recognition and
Measurement). Their total fair value at the closing date amounts
to
129 million
(2002: 29 million),
which is
16 million
(2002: 14 million)
less than their cost of acquisition. Financial instruments with
original maturities of up to three months are recognized as cash
equivalents in view of their high liquidity.

[25] Deferred charges

Total deferred charges include
218 million
(2002: 261 million)
that is expected to be used up in 2004.

[26] Stockholders equity

The capital stock of Bayer AG amounts to
1,870 million,
as in the previous year, and is divided into 730,341,920 no-par
bearer shares of a single class.

Further authorized capital totaling
250 million
was approved by the Annual Stockholders Meeting on
April 26, 2002. It expires on April 26, 2007. The
authorized capital can be used to increase the capital stock by
issuing new shares against cash contributions. The Board of
Management is authorized to exclude subscription rights with
respect to
100 million
of this authorized capital; however, in this case the issue
price of the new shares must not be significantly below the
market price. Exclusion of subscription rights for a further
150 million
is only possible in specific cases.

Authorized capital in the amount of
374 million
was approved by the Annual Stockholders Meeting on
April 27, 2001. This authorized capital, which expires on
April 27, 2006, can be used to increase the capital stock
by issuing new shares against non-cash contributions.
Subscription rights for existing stockholders are excluded.

Conditional capital of
83 million
existed on December 31, 2002. This capital may only be
utilized to the extent necessary to issue the requisite number
of shares as and when conversion or subscription rights are
exercised by the holders of convertible bonds or of warrants
conferring subscription rights, respectively, that may be issued
by Bayer AG or a wholly owned direct or indirect subsidiary
through April 29, 2004.

Capital reserves include the paid-in surplus from
the issuance of shares and subscription rights by Bayer AG.

The retained earnings contain prior years
undistributed income of consolidated companies.

Changes in fair values of financial instruments
are recognized in miscellaneous items of other comprehensive
income. Among other factors affecting these items in 2003 was
the sale of our interest in Millennium Pharmaceuticals Inc.,
United States, to the investment bank CSFB.

The changes in the various components of
stockholders equity during 2003 and 2002 are shown in the
statements of changes in stockholders equity.

The dividend per share paid for the 2002 fiscal
year was 0.90
(2001: 0.90).

[27] Minority stockholders
interest

Minority stockholders interest mainly
comprises third parties shares in the equity of the
consolidated subsidiaries Sumika Bayer Urethane Co. Ltd., Japan;
Bayer (India) Ltd., Bayer ABS Ltd., Bilag Industries Private
Ltd., India; and Bayer CropScience Nufarm Ltd., United Kingdom.

F-40



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[28] Provisions for pensions and other
post-employment benefits

Group companies provide retirement benefits for
most of their employees, either directly or by contributing to
independently administered funds.

The way these benefits are provided varies
according to the legal, fiscal and economic conditions of each
country, the benefits generally being based on the
employees remuneration and years of service. The
obligations relate both to existing retirees pensions and
to pension entitlements of future retirees.

Group companies provide retirement benefits under
defined contribution and/or defined benefit plans.

In the case of defined contribution plans,
the company pays contributions to publicly or privately
administered pension insurance plans on a mandatory, contractual
or voluntary basis. Once the contributions have been paid, the
company has no further payment obligations.

The regular contributions constitute net periodic
costs for the year in which they are due and as such are
included in the cost of goods sold, selling expenses, research
and development expenses or general administration expenses, and
thus in the operating result. In 2003, these expenses totaled
298 million
(2002: 339 million;
2001: 312 million).
The decline is attributable to a drop in the average number of
employees and to currency effects.

All other retirement benefit systems are
defined benefitplans, which may be either unfunded,
i.e. financed by provisions (accruals), or funded,
i.e. financed through pension funds. In 2003, expenses for
defined benefit plans amounted to
747 million
(2002: 521 million;
2001: 301 million).
These net periodic costs  except for the interest
portion  are generally included in the cost of goods
sold, selling expenses, research and development expenses,
general administration expenses or other operating income and
expenses.

Provisions are also set up under this item for
the obligations of Group companies, particularly in the United
States, to provide health care to their retirees. For health
care costs, the valuation is based on the assumption that they
will increase at an annual rate of 5 percent in the long
term. Early retirement and certain other benefits to retirees
are also included, since these obligations are similar in
character to pension obligations. Like pension obligations, they
are valued in line with international standards. In 2003,
provisions for early retirement and other post-employment
benefits amounted to
661 million
(2002:
629 million).
The resulting expenses for 2003 amounted to
212 million
(2002:
114 million),
comprising
173 million
(2002:
87 million)
for service cost,
57 million
(2002:
57 million)
for interest cost,
20 million
(2002:
26 million)
for expected return on plan assets,
7 million
for actuarial losses
(2002: 4 million
for actuarial gains) and a
5 million
gain
(2002: 0 million)
from subsequent adjustments of pension entitlements.

F-41



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The periodic expense for the plans comprise the
following:



| |        
| | -------
| | Germany

|                                                |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |    |  |  |  |    |  |  |  |     | 
|----------------------------------------------- |  | ---------------- | ---- | --------------- |  | ---- | ---- | ----- |  | ---- | ---- | ---- |  |  | -- |  |  |  | -- |  |  |  | --- | 
|                                                |  |                  |      |                 |  |      |      |      
|                                                |  |                  |      |                 |  |      |      | Other
|                                                |  |                  |      | Post-Employment
|                                                |  | Pension benefits |      | Benefits       
|                                                |  |                  |      |                
|                                                |  | 2001             |      | 2002            |  | 2003 |      | 2001  |  | 2002 |      | 2003
|                                                |  |                  |      |                 |  |      |      |       |  |      |      |     
|                                                |  |                 
|                                                |  | ( million)     
|Benefit cost                                    |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |    |  |  |  |    |  |  |  |     | 
|Service cost                                    |  |                  | 121  |                 |  |      | 138  |       |  |      | 141  |      |  |  | 4  |  |  |  | 57 |  |  |  | 144 | 
|Flat-rate tax on employer contributions         |  |                  | 7    |                 |  |      |     |       |  |      |     |      |  |  |   |  |  |  |   |  |  |  |    | 
|Interest cost                                   |  |                  | 474  |                 |  |      | 480  |       |  |      | 480  |      |  |  | 11 |  |  |  | 7  |  |  |  | 4   | 
|Expected return on plan assets                  |  |                  | (356 | )               |  |      | (333 | )     |  |      | (284 | )    |  |  |   |  |  |  |   |  |  |  |    | 
|Employee contributions                          |  |                  | (39  | )               |  |      |     |       |  |      |     |      |  |  |   |  |  |  |   |  |  |  |    | 
|Amortisation of unrecognized prior service cost |  |                  | 9    |                 |  |      | 10   |       |  |      | 21   |      |  |  |   |  |  |  |   |  |  |  |    | 
|Amortization of transition obligation           |  |                  | (46  | )               |  |      |     |       |  |      |     |      |  |  |   |  |  |  |   |  |  |  |    | 
|Amortisation of actuarial (gains) losses        |  |                  | 9    |                 |  |      | 7    |       |  |      | 53   |      |  |  |   |  |  |  |   |  |  |  |    | 
|Gains (losses) from settlements                 |  |                  |     |                 |  |      |     |       |  |      |     |      |  |  |   |  |  |  |   |  |  |  |    | 
|                                                |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |    |  |  |  |    |  |  |  |     | 
|Net periodic benefit cost                       |  |                  | 179  |                 |  |      | 302  |       |  |      | 411  |      |  |  | 15 |  |  |  | 64 |  |  |  | 148 | 
|                                                |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |    |  |  |  |    |  |  |  |     | 



| |                
| | ---------------
| | Other countries

|                                                |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |     |   |  |  |     |   |  |  |     |  
|----------------------------------------------- |  | ---------------- | ---- | --------------- |  | ---- | ---- | ----- |  | ---- | ---- | ---- |  |  | --- | - |  |  | --- | - |  |  | --- | -
|                                                |  |                  |      |                 |  |      |      |      
|                                                |  |                  |      |                 |  |      |      | Other
|                                                |  |                  |      | Post-Employment
|                                                |  | Pension benefits |      | Benefits       
|                                                |  |                  |      |                
|                                                |  | 2001             |      | 2002            |  | 2003 |      | 2001  |  | 2002 |      | 2003
|                                                |  |                  |      |                 |  |      |      |       |  |      |      |     
|                                                |  |                 
|                                                |  | ( million)     
|Benefit cost                                    |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |     |   |  |  |     |   |  |  |     |  
|Service cost                                    |  |                  | 144  |                 |  |      | 164  |       |  |      | 194  |      |  |  | 19  |   |  |  | 30  |   |  |  | 29  |  
|Flat-rate tax on employer contributions         |  |                  |     |                 |  |      |     |       |  |      |     |      |  |  |    |   |  |  |    |   |  |  |    |  
|Interest cost                                   |  |                  | 195  |                 |  |      | 247  |       |  |      | 255  |      |  |  | 47  |   |  |  | 50  |   |  |  | 53  |  
|Expected return on plan assets                  |  |                  | (252 | )               |  |      | (274 | )     |  |      | (221 | )    |  |  | (31 | ) |  |  | (26 | ) |  |  | (20 | )
|Employee contributions                          |  |                  |     |                 |  |      |     |       |  |      |     |      |  |  |    |   |  |  |    |   |  |  |    |  
|Amortisation of unrecognized prior service cost |  |                  | 1    |                 |  |      | 2    |       |  |      | 11   |      |  |  |    |   |  |  |    |   |  |  | (5  | )
|Amortization of transition obligation           |  |                  |     |                 |  |      |     |       |  |      |     |      |  |  |    |   |  |  |    |   |  |  |    |  
|Amortisation of actuarial (gains) losses        |  |                  | 3    |                 |  |      | 60   |       |  |      | 38   |      |  |  | 13  |   |  |  | (4  | ) |  |  | 7   |  
|Gains (losses) from settlements                 |  |                  |     |                 |  |      | 20   |       |  |      | 59   |      |  |  |    |   |  |  |    |   |  |  |    |  
|                                                |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |     |   |  |  |     |   |  |  |     |  
|Net periodic benefit cost                       |  |                  | 91   |                 |  |      | 219  |       |  |      | 336  |      |  |  | 48  |   |  |  | 50  |   |  |  | 64  |  
|                                                |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |     |   |  |  |     |   |  |  |     |  

F-42



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




| |      
| | -----
| | Total

|                                                |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |     |   |  |  |     |   |  |  |     |  
|----------------------------------------------- |  | ---------------- | ---- | --------------- |  | ---- | ---- | ----- |  | ---- | ---- | ---- |  |  | --- | - |  |  | --- | - |  |  | --- | -
|                                                |  |                  |      |                 |  |      |      |      
|                                                |  |                  |      |                 |  |      |      | Other
|                                                |  |                  |      | Post-Employment
|                                                |  | Pension benefits |      | Benefits       
|                                                |  |                  |      |                
|                                                |  | 2001             |      | 2002            |  | 2003 |      | 2001  |  | 2002 |      | 2003
|                                                |  |                  |      |                 |  |      |      |       |  |      |      |     
|                                                |  |                 
|                                                |  | ( million)     
|Benefit cost                                    |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |     |   |  |  |     |   |  |  |     |  
|Service cost                                    |  |                  | 265  |                 |  |      | 302  |       |  |      | 335  |      |  |  | 23  |   |  |  | 87  |   |  |  | 173 |  
|Flat-rate tax on employer contributions         |  |                  | 7    |                 |  |      |     |       |  |      |     |      |  |  |    |   |  |  |    |   |  |  |    |  
|Interest cost                                   |  |                  | 669  |                 |  |      | 727  |       |  |      | 735  |      |  |  | 58  |   |  |  | 57  |   |  |  | 57  |  
|Expected return on plan assets                  |  |                  | (608 | )               |  |      | (607 | )     |  |      | (505 | )    |  |  | (31 | ) |  |  | (26 | ) |  |  | (20 | )
|Employee contributions                          |  |                  | (39  | )               |  |      |     |       |  |      |     |      |  |  |    |   |  |  |    |   |  |  |    |  
|Amortisation of unrecognized prior service cost |  |                  | 10   |                 |  |      | 12   |       |  |      | 32   |      |  |  |    |   |  |  |    |   |  |  | (5  | )
|Amortization of transition obligation           |  |                  | (46  | )               |  |      |     |       |  |      |     |      |  |  |    |   |  |  |    |   |  |  |    |  
|Amortisation of actuarial (gains) losses        |  |                  | 12   |                 |  |      | 67   |       |  |      | 91   |      |  |  | 13  |   |  |  | (4  | ) |  |  | 7   |  
|Gains (losses) from settlements                 |  |                  |     |                 |  |      | 20   |       |  |      | 59   |      |  |  |    |   |  |  |    |   |  |  |    |  
|                                                |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |     |   |  |  |     |   |  |  |     |  
|Net periodic benefit cost                       |  |                  | 270  |                 |  |      | 521  |       |  |      | 747  |      |  |  | 63  |   |  |  | 114 |   |  |  | 212 |  
|                                                |  |                  |      |                 |  |      |      |       |  |      |      |      |  |  |     |   |  |  |     |   |  |  |     |  

The pension provisions for defined benefit plans
are calculated in accordance with IAS 19 (Employee Benefits) by
the projected unit credit method. The future benefit obligations
are valued by actuarial methods on the basis of an appropriate
assessment of the relevant parameters. Funds and benefit
obligations are valued on a regular basis at least every three
years. For all major funds, comprehensive actuarial valuations
are performed annually.

Benefits expected to be payable after retirement
are spread over each employees entire period of
employment, allowing for future changes in remuneration.

The legally independent fund Bayer
Pensionskasse VvaG (Bayer Pensionskasse) is a private
insurance company and is therefore subject to the German Law on
the Supervision of Private Insurance Companies. Since Bayer
guarantees the commitments of the Bayer Pensionskasse, it is
classified as a defined benefit plan for IFRS purposes. The fair
value of the plan assets includes real estate leased by Bayer
which is recognized at a fair value of
66 million
(2002:
70 million).

The investment policy of Bayer Pensionskasse is
geared to complying with regulatory provisions governing the
risk structure of its obligations. In the light of capital
market movements, Bayer Pensionskasse has therefore developed a
target investment portfolio aligned to an appropriate risk
structure. Its investment strategy focuses principally on
stringent management of downside risks rather than on maximizing
absolute returns. It is anticipated that this investment policy
can generate a return that enables it to meet its long-term
commitments.

All defined benefit plans necessitate actuarial
computations and valuations. These are based not only on life
expectancy but also on the following parameters, which vary from
country to country according to economic conditions:



| |        
| | -------
| | Germany

|                                                              |  |                 |       |               |  |  |       | 
|------------------------------------------------------------- |  | --------------- | ----- | ------------- |  |  | ----- | 
|                                                              |  |                
|                                                              |  | Parameters used
|                                                              |  |                
|                                                              |  | Dec. 31, 2002   |       | Dec. 31, 2003
|                                                              |  |                 |       |              
|Discount rate                                                 |  |                 | 6.00% |               |  |  | 5.50% | 
|Projected future remuneration increases                       |  |                 | 2.75% |               |  |  | 2.50% | 
|Projected future pension increases                            |  |                 | 1.75% |               |  |  | 1.50% | 
|Projected employee turnover (according to age and
    gender) |  | Empirical data 
|Expected return on plan assets                                |  |                 | 6.25% |               |  |  | 6.00% | 

F-43



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Obligations to pay early retirement benefits are
calculated on the basis of expected mid-term utilization using a
discount rate of 3.50% (2002: 3.75%).



| |                
| | ---------------
| | Other countries

|                                                              |  |                 |                |               |  |  |                | 
|------------------------------------------------------------- |  | --------------- | -------------- | ------------- |  |  | -------------- | 
|                                                              |  |                
|                                                              |  | Parameters used
|                                                              |  |                
|                                                              |  | Dec. 31, 2002   |                | Dec. 31, 2003
|                                                              |  |                 |                |              
|Discount rate                                                 |  |                 | 2.50% to 7.00% |               |  |  | 2.00% to 6.25% | 
|Projected future remuneration increases                       |  |                 | 2.00% to 5.10% |               |  |  | 2.50% to 5.00% | 
|Projected future pension increases                            |  |                 | 1.70% to 3.30% |               |  |  | 2.00% to 3.25% | 
|Projected employee turnover (according to age and
    gender) |  | Empirical data 
|Expected return on plan assets                                |  |                 | 1.5% to 8.5%   |               |  |  | 2.00% to 8.25% | 

F-44



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The status of unfunded and funded defined benefit
obligations, computed using the appropriate parameters, is as
follows:



| |        
| | -------
| | Germany

|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|-------------------------------------------------------------------- |  | ---------------- | ------ | ------------------------------ |  | ------------- | ------ | ------------- |  |  | ---- | - |  |  | ---- | -
|                                                                     |  |                  |        |                               
|                                                                     |  | Pension benefits |        | Other post-employment benefits
|                                                                     |  |                  |        |                               
|                                                                     |  | Dec. 31, 2002    |        | Dec. 31, 2003                  |  | Dec. 31, 2002 |        | Dec. 31, 2003
|                                                                     |  |                  |        |                                |  |               |        |              
|                                                                     |  |                 
|                                                                     |  | ( million)     
|Defined benefit obligation                                           |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Benefit obligation at start of year                                  |  |                  | 7,920  |                                |  |               | 8,165  |               |  |  | 146  |   |  |  | 143  |  
|Service cost                                                         |  |                  | 138    |                                |  |               | 141    |               |  |  | 57   |   |  |  | 144  |  
|Interest cost                                                        |  |                  | 480    |                                |  |               | 480    |               |  |  | 7    |   |  |  | 4    |  
|Employee contributions                                               |  |                  | 39     |                                |  |               | 38     |               |  |  |     |   |  |  |     |  
|Plan amendments                                                      |  |                  |       |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Plan settlements                                                     |  |                  |       |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Actuarial (gain) loss                                                |  |                  | (42    | )                              |  |               | 469    |               |  |  |     |   |  |  |     |  
|Foreign currency translation                                         |  |                  |       |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Benefits paid                                                        |  |                  | (396   | )                              |  |               | (415   | )             |  |  | (64  | ) |  |  | (57  | )
|Mergers & acquisitions                                               |  |                  | 98     |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Divestitures                                                         |  |                  | (83    | )                              |  |               | (16    | )             |  |  | (3   | ) |  |  | (1   | )
|Plan curtailments                                                    |  |                  | 11     |                                |  |               | 21     |               |  |  |     |   |  |  |     |  
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Benefit obligation at year end                                       |  |                  | 8,165  |                                |  |               | 8,883  |               |  |  | 143  |   |  |  | 233  |  
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Fair value of plan assets                                            |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Plan assets at start of year                                         |  |                  | 5,209  |                                |  |               | 4,573  |               |  |  |     |   |  |  |     |  
|Actual return on plan assets                                         |  |                  | (420   | )                              |  |               | 302    |               |  |  |     |   |  |  |     |  
|Mergers & acquisitions                                               |  |                  |       |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Divestitures                                                         |  |                  | (122   | )                              |  |               | (12    | )             |  |  |     |   |  |  |     |  
|Plan settlements                                                     |  |                  |       |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Foreign currency translation                                         |  |                  |       |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Employer contributions                                               |  |                  | 263    |                                |  |               | 320    |               |  |  | 64   |   |  |  | 57   |  
|Employee contributions                                               |  |                  | 39     |                                |  |               | 38     |               |  |  |     |   |  |  |     |  
|Benefits paid                                                        |  |                  | (396   | )                              |  |               | (415   | )             |  |  | (64  | ) |  |  | (57  | )
|Plan assets at year-end                                              |  |                  | 4,573  |                                |  |               | 4,806  |               |  |  |     |   |  |  |     |  
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Funded status                                                        |  |                  | (3,592 | )                              |  |               | (4,077 | )             |  |  | (143 | ) |  |  | (233 | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Unrecognized prior service cost                                      |  |                  |       |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Unrecognized transition obligation                                   |  |                  |       |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Unrecognized actuarial (gain) loss                                   |  |                  | 1,559  |                                |  |               | 1,957  |               |  |  |     |   |  |  |     |  
|Asset limitation due to uncertainty of obtaining
    future benefits |  |                  | (1,187 | )                              |  |               | (1,186 | )             |  |  |     |   |  |  |     |  
|Net recognized liability                                             |  |                  | (3,220 | )                              |  |               | (3,306 | )             |  |  | (143 | ) |  |  | (233 | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Amounts recognized in the balance sheet                              |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Prepaid benefits assets                                              |  |                  | 469    |                                |  |               | 507    |               |  |  |     |   |  |  |     |  
|Accrued benefit liability                                            |  |                  | (3,689 | )                              |  |               | (3,813 | )             |  |  | (143 | ) |  |  | (233 | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Net amount recognized                                                |  |                  | (3,220 | )                              |  |               | (3,306 | )             |  |  | (143 | ) |  |  | (233 | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  

F-45



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




| |                
| | ---------------
| | Other countries

|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|-------------------------------------------------------------------- |  | ---------------- | ------ | ------------------------------ |  | ------------- | ------ | ------------- |  |  | ---- | - |  |  | ---- | -
|                                                                     |  |                  |        |                               
|                                                                     |  | Pension benefits |        | Other post-employment benefits
|                                                                     |  |                  |        |                               
|                                                                     |  | Dec. 31, 2002    |        | Dec. 31, 2003                  |  | Dec. 31, 2002 |        | Dec. 31, 2003
|                                                                     |  |                  |        |                                |  |               |        |              
|                                                                     |  |                 
|                                                                     |  | ( million)     
|Defined benefit obligation                                           |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Benefit obligation at start of year                                  |  |                  | 3,383  |                                |  |               | 4,249  |               |  |  | 811  |   |  |  | 818  |  
|Service cost                                                         |  |                  | 164    |                                |  |               | 194    |               |  |  | 30   |   |  |  | 29   |  
|Interest cost                                                        |  |                  | 247    |                                |  |               | 255    |               |  |  | 50   |   |  |  | 53   |  
|Employee contributions                                               |  |                  | 7      |                                |  |               | 7      |               |  |  |     |   |  |  |     |  
|Plan amendments                                                      |  |                  | 7      |                                |  |               | 3      |               |  |  |     |   |  |  | 42   |  
|Plan settlements                                                     |  |                  | (33    | )                              |  |               | (83    | )             |  |  |     |   |  |  |     |  
|Actuarial (gain) loss                                                |  |                  | 5      |                                |  |               | 247    |               |  |  | 46   |   |  |  | 240  |  
|Foreign currency translation                                         |  |                  | (531   | )                              |  |               | (531   | )             |  |  | (149 | ) |  |  | (159 | )
|Benefits paid                                                        |  |                  | (190   | )                              |  |               | (233   | )             |  |  | (39  | ) |  |  | (43  | )
|Mergers & acquisitions                                               |  |                  | 1,192  |                                |  |               |       |               |  |  | 69   |   |  |  |     |  
|Divestitures                                                         |  |                  | (5     | )                              |  |               |       |               |  |  | (1   | ) |  |  |     |  
|Plan curtailments                                                    |  |                  | 3      |                                |  |               | (12    | )             |  |  | 1    |   |  |  |     |  
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Benefit obligation at year end                                       |  |                  | 4,249  |                                |  |               | 4,096  |               |  |  | 818  |   |  |  | 980  |  
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Fair value of plan assets                                            |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Plan assets at start of year                                         |  |                  | 2,917  |                                |  |               | 2,933  |               |  |  | 337  |   |  |  | 257  |  
|Actual return on plan assets                                         |  |                  | (248   | )                              |  |               | 442    |               |  |  | (18  | ) |  |  | 49   |  
|Mergers & acquisitions                                               |  |                  | 790    |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Divestitures                                                         |  |                  | 55     |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Plan settlements                                                     |  |                  | (8     | )                              |  |               | (74    | )             |  |  |     |   |  |  |     |  
|Foreign currency translation                                         |  |                  | (478   | )                              |  |               | (381   | )             |  |  | (51  | ) |  |  | (46  | )
|Employer contributions                                               |  |                  | 88     |                                |  |               | 246    |               |  |  | 28   |   |  |  | 46   |  
|Employee contributions                                               |  |                  | 7      |                                |  |               | 6      |               |  |  |     |   |  |  |     |  
|Benefits paid                                                        |  |                  | (190   | )                              |  |               | (233   | )             |  |  | (39  | ) |  |  | (43  | )
|Plan assets at year-end                                              |  |                  | 2,933  |                                |  |               | 2,939  |               |  |  | 257  |   |  |  | 263  |  
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Funded status                                                        |  |                  | (1,316 | )                              |  |               | (1,157 | )             |  |  | (561 | ) |  |  | (717 | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Unrecognized prior service cost                                      |  |                  | 7      |                                |  |               | 2      |               |  |  | (68  | ) |  |  | (13  | )
|Unrecognized transition obligation                                   |  |                  | 2      |                                |  |               |       |               |  |  |     |   |  |  |     |  
|Unrecognized actuarial (gain) loss                                   |  |                  | 786    |                                |  |               | 656    |               |  |  | 143  |   |  |  | 302  |  
|Asset limitation due to uncertainty of obtaining
    future benefits |  |                  |       |                                |  |               | (7     | )             |  |  |     |   |  |  |     |  
|Net recognized liability                                             |  |                  | (521   | )                              |  |               | (506   | )             |  |  | (486 | ) |  |  | (428 | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Amounts recognized in the balance sheet                              |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Prepaid benefits assets                                              |  |                  | 86     |                                |  |               | 92     |               |  |  |     |   |  |  |     |  
|Accrued benefit liability                                            |  |                  | (607   | )                              |  |               | (598   | )             |  |  | (486 | ) |  |  | (428 | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  
|Net amount recognized                                                |  |                  | (521   | )                              |  |               | (506   | )             |  |  | (486 | ) |  |  | (428 | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |      |  

F-46



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




| |      
| | -----
| | Total

|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |       |  
|-------------------------------------------------------------------- |  | ---------------- | ------ | ------------------------------ |  | ------------- | ------ | ------------- |  |  | ---- | - |  |  | ----- | -
|                                                                     |  |                  |        |                               
|                                                                     |  | Pension benefits |        | Other post-employment benefits
|                                                                     |  |                  |        |                               
|                                                                     |  | Dec. 31, 2002    |        | Dec. 31, 2003                  |  | Dec. 31, 2002 |        | Dec. 31, 2003
|                                                                     |  |                  |        |                                |  |               |        |              
|                                                                     |  |                 
|                                                                     |  | ( million)     
|Defined benefit obligation                                           |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |       |  
|Benefit obligation at start of year                                  |  |                  | 11,303 |                                |  |               | 12,414 |               |  |  | 957  |   |  |  | 961   |  
|Service cost                                                         |  |                  | 302    |                                |  |               | 335    |               |  |  | 87   |   |  |  | 173   |  
|Interest cost                                                        |  |                  | 727    |                                |  |               | 735    |               |  |  | 57   |   |  |  | 57    |  
|Employee contributions                                               |  |                  | 46     |                                |  |               | 45     |               |  |  |     |   |  |  |      |  
|Plan amendments                                                      |  |                  | 7      |                                |  |               | 3      |               |  |  |     |   |  |  | 42    |  
|Plan settlements                                                     |  |                  | (33    | )                              |  |               | (83    | )             |  |  |     |   |  |  |      |  
|Actuarial (gain) loss                                                |  |                  | (37    | )                              |  |               | 716    |               |  |  | 46   |   |  |  | 240   |  
|Foreign currency translation                                         |  |                  | (531   | )                              |  |               | (531   | )             |  |  | (149 | ) |  |  | (159  | )
|Benefits paid                                                        |  |                  | (586   | )                              |  |               | (648   | )             |  |  | (103 | ) |  |  | (100  | )
|Mergers & acquisitions                                               |  |                  | 1,290  |                                |  |               |       |               |  |  | 69   |   |  |  |      |  
|Divestitures                                                         |  |                  | (88    | )                              |  |               | (16    | )             |  |  | (4   | ) |  |  | (1    | )
|Plan curtailments                                                    |  |                  | 14     |                                |  |               | 9      |               |  |  | 1    |   |  |  |      |  
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |       |  
|Benefit obligation at year end                                       |  |                  | 12,414 |                                |  |               | 12,979 |               |  |  | 961  |   |  |  | 1,213 |  
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |       |  
|Fair value of plan assets                                            |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |       |  
|Plan assets at start of year                                         |  |                  | 8,126  |                                |  |               | 7,506  |               |  |  | 337  |   |  |  | 257   |  
|Actual return on plan assets                                         |  |                  | (668   | )                              |  |               | 744    |               |  |  | (18  | ) |  |  | 49    |  
|Mergers & acquisitions                                               |  |                  | 790    |                                |  |               |       |               |  |  |     |   |  |  |      |  
|Divestitures                                                         |  |                  | (67    | )                              |  |               | (12    | )             |  |  |     |   |  |  |      |  
|Plan settlements                                                     |  |                  | (8     | )                              |  |               | (74    | )             |  |  |     |   |  |  |      |  
|Foreign currency translation                                         |  |                  | (478   | )                              |  |               | (381   | )             |  |  | (51  | ) |  |  | (46   | )
|Employer contributions                                               |  |                  | 351    |                                |  |               | 566    |               |  |  | 92   |   |  |  | 103   |  
|Employee contributions                                               |  |                  | 46     |                                |  |               | 44     |               |  |  |     |   |  |  |      |  
|Benefits paid                                                        |  |                  | (586   | )                              |  |               | (648   | )             |  |  | (103 | ) |  |  | (100  | )
|Plan assets at year-end                                              |  |                  | 7,506  |                                |  |               | 7,745  |               |  |  | 257  |   |  |  | 263   |  
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |       |  
|Funded status                                                        |  |                  | (4,908 | )                              |  |               | (5,234 | )             |  |  | (704 | ) |  |  | (950  | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |       |  
|Unrecognized prior service cost                                      |  |                  | 7      |                                |  |               | 2      |               |  |  | (68  | ) |  |  | (13   | )
|Unrecognized transition obligation                                   |  |                  | 2      |                                |  |               |       |               |  |  |     |   |  |  |      |  
|Unrecognized actuarial (gain) loss                                   |  |                  | 2,345  |                                |  |               | 2,613  |               |  |  | 143  |   |  |  | 302   |  
|Asset limitation due to uncertainty of obtaining
    future benefits |  |                  | (1,187 | )                              |  |               | (1,193 | )             |  |  |     |   |  |  |      |  
|Net recognized liability                                             |  |                  | (3,741 | )                              |  |               | (3,812 | )             |  |  | (629 | ) |  |  | (661  | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |       |  
|Amounts recognized in the balance sheet                              |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |       |  
|Prepaid benefits assets                                              |  |                  | 555    |                                |  |               | 599    |               |  |  |     |   |  |  |      |  
|Accrued benefit liability                                            |  |                  | (4,296 | )                              |  |               | (4,411 | )             |  |  | (629 | ) |  |  | (661  | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |       |  
|Net amount recognized                                                |  |                  | (3,741 | )                              |  |               | (3,812 | )             |  |  | (629 | ) |  |  | (661  | )
|                                                                     |  |                  |        |                                |  |               |        |               |  |  |      |   |  |  |       |  

4,829 million
(2002:
4,267 million)
of the defined benefit obligation for pensions relates to
unfunded benefit obligations while
8,150 million
(2002:
8,147 million)
relates to funded benefit obligations.
410 million

F-47



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


(2002:
374 million)
of the defined benefit obligation for other post-employment
benefits relates to unfunded obligations while
803 million
(2002:
587 million)
relates to funded obligations.

Of the funded pension plans, total overfunding of
individual plans amounts to
404 million
while underfunding amounts to
851 million.
Similarly, other funded post-employment benefit obligations in
individual plans are underfunded by
541 million.

The adjustments, as yet unrecognized in the
income statement, represent the difference between the defined
benefit obligation  after deducting the fair value of plan
assets  and the net liability recognized in the balance
sheet. They arise mainly from actuarial gains or losses caused
by differences between actual and previously assumed trends in
employee turnover and remuneration. Pension assets in excess of
the obligation are reflected in other receivables, subject to
the asset limitation specified in IAS 19 (Employee Benefits). In
accordance with IAS 19, the amounts reflected in the
balance sheet will be recognized in the income statement over
the expected average remaining working lives of existing
employees. The portion of the net actuarial gain or loss to be
recognized in the income statement is determined by the corridor
method.

The net recognized liability is reflected in the
following balance sheet items:

|                                                               |  |             |        |      |  |  |        |  
|-------------------------------------------------------------- |  | ----------- | ------ | ---- |  |  | ------ | -
|                                                               |  | 2002        |        | 2003
|                                                               |  |             |        |     
|                                                               |  |            
|                                                               |  | ( million)
|Provisions for pensions and other post-employment
    benefits |  |             | (4,925 | )    |  |  | (5,072 | )
|Other assets                                                   |  |             | 555    |      |  |  | 599    |  
|                                                               |  |             |        |      |  |  |        |  
|Net recognized liability                                       |  |             | (4,370 | )    |  |  | (4,473 | )
|                                                               |  |             |        |      |  |  |        |  

Provisions for pensions and other post-employment
benefits changed as follows:

|                                  |  |             |       |  
|--------------------------------- |  | ----------- | ----- | -
|                                  |  | ( million)
|                                  |  |            
|Balance at beginning of year      |  |             | 4,925 |  
|Allocations                       |  |             | 913   |  
|Utilisation                       |  |             | (669  | )
|Currency effects                  |  |             | (88   | )
|Changes in scope of consolidation |  |             | (9    | )
|Reversal                          |  |             |      |  
|                                  |  |             |       |  
|Balance at end of year            |  |             | 5,072 |  
|                                  |  |             |       |  

[29] Other provisions

The breakdown of other provisions is as follows:

|                                         |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 
|---------------------------------------- |  | ------------- | ----- | ------------- |  | ----- | ----- | -------- |  |  | ----- |  |  |  | ----- | 
|                                         |  |               |       |              
|                                         |  | Dec. 31, 2002 |       | Dec. 31, 2003
|                                         |  |               |       |              
|                                         |  |               |       | Maturing      |  |       |       | Maturing
|                                         |  | Total         |       | in 2003       |  | Total |       | in 2004 
|                                         |  |               |       |               |  |       |       |         
|                                         |  |              
|                                         |  | ( million)  
|Provisions for taxes                     |  |               | 650   |               |  |       | 426   |          |  |  | 863   |  |  |  | 710   | 
|Provisions for personnel commitments     |  |               | 976   |               |  |       | 411   |          |  |  | 1,337 |  |  |  | 645   | 
|Provisions for environmental remediation |  |               | 202   |               |  |       | 23    |          |  |  | 200   |  |  |  | 9     | 
|Provisions for restructuring             |  |               | 230   |               |  |       | 189   |          |  |  | 238   |  |  |  | 192   | 
|Provisions for trade-related commitments |  |               | 694   |               |  |       | 649   |          |  |  | 531   |  |  |  | 528   | 
|Other provisions                         |  |               | 720   |               |  |       | 559   |          |  |  | 622   |  |  |  | 364   | 
|                                         |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 
|                                         |  |               | 3,472 |               |  |       | 2,257 |          |  |  | 3,791 |  |  |  | 2,448 | 
|                                         |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 

F-48



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Changes in provisions were as follows:

|                                         |  |             |       |               |  |          |    |            |  |             |      |          |  |          |       |  |  |  |        |   |  |  |      |   |  |  |       | 
|---------------------------------------- |  | ----------- | ----- | ------------- |  | -------- | -- | ---------- |  | ----------- | ---- | -------- |  | -------- | ----- |  |  |  | ------ | - |  |  | ---- | - |  |  | ----- | 
|                                         |  |             |       | Changes in    |  |          |    |            |  |             |      |          |  |         
|                                         |  | Jan. 1,     |       | scope of      |  | Currency |    |            |  |             |      |          |  | Dec. 31,
|                                         |  | 2003        |       | consolidation |  | effects  |    | Allocation |  | Utilization |      | Reversal |  | 2003    
|                                         |  |             |       |               |  |          |    |            |  |             |      |          |  |         
|                                         |  |            
|                                         |  | ( million)
|Provisions for taxes                     |  |             | 650   |               |  |          | (1 | )          |  |             | (14  | )        |  |          | 642   |  |  |  | (400   | ) |  |  | (14  | ) |  |  | 863   | 
|Provisions for personnel commitments     |  |             | 976   |               |  |          | (5 | )          |  |             | (35  | )        |  |          | 795   |  |  |  | (335   | ) |  |  | (59  | ) |  |  | 1,337 | 
|Provisions for environmental remediation |  |             | 202   |               |  |          |   |            |  |             | (14  | )        |  |          | 49    |  |  |  | (24    | ) |  |  | (13  | ) |  |  | 200   | 
|Provisions for restructuring             |  |             | 230   |               |  |          |   |            |  |             | (28  | )        |  |          | 189   |  |  |  | (135   | ) |  |  | (18  | ) |  |  | 238   | 
|Provisions for trade-related commitments |  |             | 694   |               |  |          | (2 | )          |  |             | (66  | )        |  |          | 697   |  |  |  | (663   | ) |  |  | (129 | ) |  |  | 531   | 
|Other provisions                         |  |             | 720   |               |  |          | (1 | )          |  |             | (28  | )        |  |          | 579   |  |  |  | (570   | ) |  |  | (78  | ) |  |  | 622   | 
|                                         |  |             |       |               |  |          |    |            |  |             |      |          |  |          |       |  |  |  |        |   |  |  |      |   |  |  |       | 
|                                         |  |             | 3,472 |               |  |          | (9 | )          |  |             | (185 | )        |  |          | 2,951 |  |  |  | (2,127 | ) |  |  | (311 | ) |  |  | 3,791 | 
|                                         |  |             |       |               |  |          |    |            |  |             |      |          |  |          |       |  |  |  |        |   |  |  |      |   |  |  |       | 

Stock compensation program

Bayers three-tier stock compensation
program was first launched in 2000. It consists of a Stock
Option Program for the members of the Board of Management and
other Group Executives, a Stock Incentive Program for other
senior managers, and a Stock Participation Program for junior
management. To be eligible for the Stock Option Program, Stock
Incentive Program or Module 1 of the Stock Participation
Program, participants must place Bayer AG shares of their own
into a special deposit account.

Provided participants retain these shares for the
full term of the Stock Incentive Program or Stock Participation
Program, they receive specific payments from the company after
defined retention periods. Under Module 2 of the Stock
Participation Program, employees have the opportunity to
purchase shares at a discounted price.



| |                     
| | --------------------
| | Stock Option Program

Members of the Board of Management and Group
Executives who wish to participate in the Stock Option Program
must place Bayer AG shares of their own in a special deposit
account. We determine on an individual basis the maximum number
of shares each participant may deposit; the participant receives
between one and three options (depending on individual
performance) for each share deposited.

The deposited shares are blocked for
three years and may not be sold or transferred during that time.
Thereafter, a two-year exercise period begins. During this
period, the participant may exercise the option rights if he or
she has fulfilled the performance criteria.

Any unexercised option rights expire at the end
of this two-year period. To determine whether the participant is
eligible to exercise option rights and, if so, the cash payment
he or she receives upon exercise, we apply two performance
criteria based on the absolute and relative performance of Bayer
AG stock. If the minimum criteria are not met, the participant
receives no payment under the program. At December 31,
2003, no options were exercisable. No options expired, nor were
any options canceled, during fiscal 2003.



| |                        
| | -----------------------
| | Stock Incentive Program

Like the Stock Option Program, our Stock
Incentive Program for senior managers other than Group
Executives requires participants to deposit Bayer AG shares of
their own in a special deposit account. Each participant may
deposit shares with a maximum aggregate value of half his or her
performance-related bonus for the preceding fiscal year. The
incentive payment received depends on the number of shares
deposited at the launch of the program as well as on the overall
performance of Bayer stock. Unlike the Stock Option Program,
there is no lock-up period for the shares deposited under the
Stock Incentive Program. Participants may sell their deposited
shares during the term of the program, but any deposited shares
they sell are no longer counted when calculating the incentive
payment on subsequent distribution dates. The Stock Incentive
Program has a ten-year

F-49



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


term. There are three incentive distribution
dates during this period. On these dates, the participant
receives incentive payments as follows:



| |                                                                      
| | ---------------------------------------------------------------------
| | Incentive payments to employees under the
    Stock Incentive Program

|                            |  |                             |    | 
|--------------------------- |  | --------------------------- | -- | 
|                            |  | Incentive payments received
|                            |  | (per 10 deposited shares)  
|                            |  |                            
|Distribution date at end of |  |                             |    | 
|Second year                 |  |                             | 2  | 
|Sixth year                  |  |                             | 4  | 
|Tenth year                  |  |                             | 4  | 
|Total                       |  |                             | 10 | 

Participants receive incentive shares only if
Bayer stock has outperformed the Dow Jones EURO
STOXX 50SM index on the relevant distribution
dates, as calculated from the beginning of the program.



| |                            
| | ---------------------------
| | Stock Participation Program

Our Stock Participation Program has two
components, Module 1 and Module 2. Employees not
covered by the Stock Option Program or Stock Incentive Program
may normally participate in both Module 1 and
Module 2. The Module 1 program, like the Stock
Incentive Program, requires participants to deposit Bayer AG
shares of their own in a special account. As with the Stock
Incentive Program, participants in the Stock Participation
Program may sell their deposited shares during the term of the
program; any shares they sell are no longer counted in
calculating the incentive payment on subsequent distribution
dates.

Module 1 has a term of ten years and
entitles the participant to receive incentive payments on three
distribution dates on the basis of the number of shares he or
she has deposited. Unlike the payments under the Stock Incentive
Program, those made under Module 1 of the Stock
Participation Program are not dependent on any share performance
criteria.

The participant receives incentive payments as
follows:



| |                                                                       
| | ----------------------------------------------------------------------
| | Incentive payments to employees in the Stock
    Participation Program

|                            |  |                             |   | 
|--------------------------- |  | --------------------------- | - | 
|                            |  | Incentive payments received
|                            |  | (per 10 deposited shares)  
|                            |  |                            
|Distribution date at end of |  |                             |   | 
|Second year                 |  |                             | 1 | 
|Sixth year                  |  |                             | 2 | 
|Tenth year                  |  |                             | 2 | 
|Total                       |  |                             | 5 | 

In addition, under Module 2 each participant may
purchase up to 20 Bayer AG shares per year at a tax-free
discount. In 2003 this discount amounted to
7.70 per
share on the market price for a maximum of 20 shares (2002:
15.40 per
share for a maximum of 10 shares). Participants may not
include shares purchased under Module 2 among the shares
they deposit under Module 1. Each participant may take up
both modules up to a maximum aggregate value of half his or her
performance-related bonus for the preceding fiscal year.

The Stock Option Program, the Stock Incentive
Program and Module 1 of the Stock Participation Program are
accounted for as follows: Since participants are entitled to
receive a payment equivalent to the market price of Bayer AG
stock, subject in some cases to certain performance criteria, an
expense for possible disbursements is recorded when there is a
reasonable basis on which to estimate whether these performance
criteria will ultimately be met. Compensation expense is
recorded at each balance sheet date by multiplying the estimated
number of

F-50



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


rights outstanding by the current quoted market
price of Bayer AG shares. The related personnel provisions on
December 31, 2003 amounted to
8 million.

For Module 2 of the Stock Participation
Program, the difference between the quoted market price of Bayer
AG stock and the discounted price paid by participants at the
date of purchase is expensed immediately. During the year ended
December 31, 2003, participants in Module 2 received
441,280 shares at a total price of
5.4 million,
resulting in personnel expenses of
3.4 million.
The discount to the price of Bayer AG stock was 39 percent.

Environmental provisions

The Groups activities are subject to
extensive laws and regulations in the jurisdictions in which it
does business and maintains properties. Our compliance with
environmental laws and regulations may require us to remove or
mitigate the effects of the disposal or release of chemical
substances at various sites. Under some of these laws and
regulations, a current or previous owner or operator of property
may be held liable for the costs of removal or remediation of
hazardous substances on, under, or in its property, without
regard to whether the owner or operator knew of, or caused the
presence of the contaminants, and regardless of whether the
practices that resulted in the contamination were legal at the
time they occurred. As many of our production sites have an
extended history of industrial use, it is impossible to predict
precisely what effect these laws and regulations will have on us
in the future.

As is typical for companies involved in the
chemical and related industries, soil and groundwater
contamination has occurred in the past at some of our sites, and
might occur or be discovered at other sites. We are subject to
claims brought by United States Federal or State regulatory
agencies and other private entities and individuals regarding
the remediation of sites that we own, formerly owned or
operated, where materials were produced specifically for us by
contract manufacturers or where waste from our operations was
treated, stored or disposed of.

In particular, we have a potential liability
under the U.S. Federal Comprehensive Environmental Response,
Compensation, and Liability Act, commonly known as
Superfund, the U.S. Resource Conservation and
Recovery Act and related state laws for investigation and
remediation costs at a number of sites. At most of these sites,
numerous companies, including Bayer, have been notified that the
U.S. Environmental Protection Agency, state governing body or
private individuals consider such companies to be potentially
responsible parties under Superfund or related laws. At other
sites, Bayer is the sole responsible party. The proceedings
relating to these sites are in various stages. In most cases
remediation measures have already been initiated.

Provisions for environmental remediation as of
December 31, 2003 amounted to
200 million
(2002:
202 million).
The material components of the provisions for environmental
remediation costs primarily relate to land reclamation,
rehabilitation of contaminated sites, recultivation of
landfills, and redevelopment and water protection measures. The
provisions for environmental remediation costs are recorded on a
discounted basis where environmental assessments or clean-ups
are probable, the costs can be reasonably estimated and no
future economic benefit is expected to arise from these
measures. The above amount of provisions represents anticipated
future remediation payments totaling
267 million
(2002:
270 million),
discounted at risk-free rates of 0.5 percent to
5.5 percent.

These discounted amounts will be paid out over
the period of remediation of the relevant sites, which is
expected to be 15 years. Costs are estimated based on
significant factors such as previous experience in similar
cases, environmental assessments, development of current costs
and new circumstances with major influences on expenses, our
understanding of current environmental laws and regulations, the
number of other potentially responsible parties at each site and
the identity and financial position of such parties in light of
the joint and several nature of the liability, and the
remediation methods expected to be employed.

It is difficult to estimate the future costs of
environmental protection and remediation because of many
uncertainties, particularly with regard to the status of laws,
regulations and the information available about

F-51



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


conditions in the various countries and at the
individual sites. Subject to these factors, but taking into
consideration our experience to date regarding environmental
matters of a similar nature, we believe that the provisions are
adequate based upon currently available information. However,
given the inherent difficulties in estimating liabilities in
this area, it cannot be guaranteed that additional costs will
not be incurred beyond the amounts accrued. It is possible that
the final resolution of these matters may require us to make
expenditures in excess of established provisions, over an
extended period of time and in a range of amounts that cannot be
reasonably estimated. Management nevertheless believes that such
additional amounts, if any, would not have a material adverse
effect on the Groups financial position, results of
operations or cash flows.

Legal risks

As a global company with a diverse business
portfolio, the Bayer Group is exposed to numerous legal risks,
particularly in the areas of product liability, patent disputes,
tax assessments, competition and antitrust law, and
environmental matters. The outcome of any current or future
proceedings cannot be predicted with certainty. It is therefore
possible that legal 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.

Increased risks currently result from litigation
commenced in the United States following the voluntary
withdrawal of the statin Lipobay/ Baycol from the market and the
voluntary cessation in the marketing of products containing PPA.
Without acknowledging any liability, the company had settled
2,224 Baycol cases in the United States as of March 5,
2004, resulting in settlement payments totaling approximately
US$ 842 million. As of that date, 9,948 cases were pending
in the U.S. Where facts have been developed in the course of the
litigation, it so far appears that the vast majority of
plaintiffs did not suffer serious side-effects. Should the U.S.
plaintiffs in the Baycol litigation or in the
phenylpropanolamine (PPA) product liability litigation
substantially prevail despite the existing meritorious defenses,
it is possible that Bayer could face payments that exceed its
insurance coverage. The same is true should an unexpectedly
sharp increase in settlement cases occur in the Baycol
litigation. Due to the considerable uncertainty associated with
the proceedings, it is currently not possible to estimate
potential liability. For this reason, provisions for any amount
by which liability in this regard might exceed insurance
coverage have not presently been made. Depending on the progress
of the litigation, we will continue to regularly reconsider the
need to establish provisions, which may have a negative effect
on financial results. PPA, which was widely used as an active
ingredient in appetite suppressants and cough-and-cold
medications by many manufacturers, was voluntarily replaced by
Bayer and other producers in the U.S. after a recommendation in
2000 by the U.S. Food and Drug Administration.

In negotiations with the insurance companies
concerning the Lipobay/ Baycol litigation, a final agreement has
been reached with the majority of the insurers. The insurers had
previously proceeded only on a provisional basis under a
customary reservation of rights. The insurers that are parties
to this agreement have now withdrawn the reservation of rights.
Thus, Bayer expects the insurance coverage for Lipobay/ Baycol
to be approximately US$1.2 billion. In consideration of
expenses already incurred and quantifiable expenses expected to
be incurred in this connection in the future, the company has
taken 300
million charge to the operating result.

Risks also exist because Bayer AG and some of its
domestic and foreign affiliated companies are the subject of
investigations by the E.U. Commission and the U.S. and Canadian
antitrust authorities for alleged anticompetitive conduct
involving products of the former Rubber Business Group. The
effects of these proceedings and their eventual conclusion
cannot be predicted at this time. Civil actions are also pending
in the United States in connection herewith.

Restructuring charges

Restructuring charges of
408 million
were incurred in 2003 for closures of facilities and relocation
of business activities, including
189 million
in provisions that are expected to be utilized as the respective
restructuring measures are implemented. The total charges
include
182 million
in severance payments, a total
145 million
in accelerated amortization/depreciation and write-downs of
intangible assets, property, plant and

F-52



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


equipment, and
81 million
in other expenses. Most of the charges taken for severance
payments and other expenses in 2003 will lead to disbursements
in 2004.

Restructuring was once again a major focus of
activity in fiscal 2003.

As part of the repositioning of the
pharmaceuticals business, it was decided in the fourth quarter
of 2003 to close the research centers in Kyoto,
92 million
in write-downs of assets no longer used,
4 million
for severance payments and
23 million
for other expenses. For the closure of the research center in
Berkeley we incurred charges of
20 million,
of which write-downs accounted for
9 million,
severance payments for
6 million
and other expenses for
5 million.

A further
21 million
comprised asset write-downs at production facilities scheduled
for closure at West Haven, Connecticut, United States. An
additional
8 million
went for severance payments, while other expenses totaled
3 million.

The continued integration of the Aventis
CropScience operations, acquired in 2002, led primarily to
charges for redundancy plans amounting to
53 million
in France and
25 million
in the United States. In addition,
13 million
was incurred for the planned shutdown of the production site in
Wolfenbüttel, Germany, comprising
11 million
in severance payments and
2 million
in write-downs. Additionally, severance payments totaling
11 million
were made in connection with further restructuring in Spain and
the United Kingdom.

Restructuring expenses of
19 million
related to the closure of the polyols production site at
Institute, West Virginia, United States. Of this amount,
12 million
was for write-downs on property, plant and equipment,
3 million
for severance payments and
4 million
for other expenses relating to the termination of existing
contractual agreements. A further
52 million
was incurred for personnel adjustments in connection with the
reorganization in the Polymers segment.

Further ongoing restructuring programs to improve
the profitability of the subgroups and integrate acquisitions
gave rise to total charges of
64 million,
comprising
9 million
in severance payments,
9 million
in write-downs and
46 million
in other expenses.

Changes in provisions for restructuring were as
follows:

|                             |  |             |      |       |  |       |     |   |  |  |      |  
|---------------------------- |  | ----------- | ---- | ----- |  | ----- | --- | - |  |  | ---- | -
|                             |  | Severance   |      | Other |  |      
|                             |  | payments    |      | Costs |  | Total
|                             |  |             |      |       |  |      
|                             |  |            
|                             |  | ( million)
|Balance at January 1, 2002   |  |             | 79   |       |  |       | 66  |   |  |  | 145  |  
|Additions                    |  |             | 193  |       |  |       | 68  |   |  |  | 261  |  
|Utilization                  |  |             | (99  | )     |  |       | (49 | ) |  |  | (148 | )
|Exchange differences         |  |             | (15  | )     |  |       | (13 | ) |  |  | (28  | )
|Balance at December 31, 2002 |  |             | 158  |       |  |       | 72  |   |  |  | 230  |  
|Additions                    |  |             | 125  |       |  |       | 64  |   |  |  | 189  |  
|Utilization                  |  |             | (124 | )     |  |       | (29 | ) |  |  | (153 | )
|Exchange differences         |  |             | (13  | )     |  |       | (15 | ) |  |  | (28  | )
|                             |  |             |      |       |  |       |     |   |  |  |      |  
|Balance at December 31, 2003 |  |             | 146  |       |  |       | 92  |   |  |  | 238  |  
|                             |  |             |      |       |  |       |     |   |  |  |      |  

The other costs are mainly demolition expenses
and other charges related to the abandonment of production
facilities.

F-53



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[30] Financial obligations

Financial obligations comprise the following:

|                                                  |  |               |        |               |  |       |       |          |  |  |       |  |  |  |       | 
|------------------------------------------------- |  | ------------- | ------ | ------------- |  | ----- | ----- | -------- |  |  | ----- |  |  |  | ----- | 
|                                                  |  |               |        |              
|                                                  |  | Dec. 31, 2002 |        | Dec. 31, 2003
|                                                  |  |               |        |              
|                                                  |  |               |        | Maturing      |  |       |       | Maturing
|                                                  |  | Total         |        | in 2003       |  | Total |       | in 2004 
|                                                  |  |               |        |               |  |       |       |         
|                                                  |  |              
|                                                  |  | ( million)  
|Debentures                                        |  |               | 6,742  |               |  |       | 477   |          |  |  | 6,440 |  |  |  | 396   | 
|Liabilities to banks                              |  |               | 1,023  |               |  |       | 873   |          |  |  | 532   |  |  |  | 377   | 
|Liabilities under lease agreements                |  |               | 708    |               |  |       | 121   |          |  |  | 575   |  |  |  | 86    | 
|Liabilities from the issuance of promissory notes |  |               | 78     |               |  |       | 78    |          |  |  | 59    |  |  |  | 59    | 
|Commercial paper                                  |  |               | 1,084  |               |  |       | 1,084 |          |  |  | 852   |  |  |  | 852   | 
|Liabilities from derivative financial instruments |  |               | 86     |               |  |       | 85    |          |  |  | 116   |  |  |  | 114   | 
|Other financial obligations                       |  |               | 438    |               |  |       | 123   |          |  |  | 852   |  |  |  | 429   | 
|                                                  |  |               |        |               |  |       |       |          |  |  |       |  |  |  |       | 
|                                                  |  |               | 10,159 |               |  |       | 2,841 |          |  |  | 9,426 |  |  |  | 2,313 | 
|                                                  |  |               |        |               |  |       |       |          |  |  |       |  |  |  |       | 

The maturities of financial obligations existing
at December 31, 2003 were as follows:

|              |  |             |       | 
|------------- |  | ----------- | ----- | 
|              |  | ( million)
|              |  |            
|Maturing in   |  |             |       | 
|2004          |  |             | 2,313 | 
|2005          |  |             | 388   | 
|2006          |  |             | 373   | 
|2007          |  |             | 3,085 | 
|2008          |  |             | 36    | 
|2009 or later |  |             | 3,231 | 
|              |  |             |       | 
|              |  |             | 9,426 | 
|              |  |             |       | 

Financial obligations in U.S. dollars amounted to
2.0 billion
(2002:
3.3 billion)
and account for 22 percent (2002: 32 percent) of total
financial obligations.

Short-term borrowings (excluding the short-term
portion of debentures) amounted to
2.0 billion
(2002:
2.4 billion)
with a weighted average interest rate of 6.2 percent (2002:
7.9 percent). The Bayer Groups financial obligations
are primarily unsecured and of equal priority.

F-54



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Debentures include the following:

|                  |        |        |  |  |        |        |  |                                                  |  |               |                    |  |  |  |       |  |  |  |       | 
|----------------- | ------ | ------ |  |  | ------ | ------ |  | ------------------------------------------------ |  | ------------- | ------------------ |  |  |  | ----- |  |  |  | ----- | 
|Effective         |        | Stated |  |  |        |        |  |                                                  |  |              
|Rate              |        | Rate   |  |  |        | Volume |  | Dec. 31, 2002                                    |  | Dec. 31, 2003
|                  |        |        |  |  |        |        |  |                                                  |  |              
|                  |        |        |  |  |        |        |  |                                                 
|                  |        |        |  |  |        |        |  | ( million)                                     
|Bayer AG          |        |        |  |  |        |        |  |                                                  |  |               |                    |  |  | 
|                  | 5.515% |        |  |  | 5.375% |        |  | Eurobonds 2002/2007                              |  |               | EUR 3,000  million |  |  |  | 3,081 |  |  |  | 3,039 | 
|                  | 5.108% |        |  |  | 6.000% |        |  | Eurobonds 2002/2012                              |  |               | EUR 2,000  million |  |  |  | 2,102 |  |  |  | 2,097 | 
|Bayer Corporation |        |        |  |  |        |        |  |                                                  |  |               |                    |  |  | 
|                  | 7.180% |        |  |  | 7.125% |        |  | Notes 1995/2015                                  |  |               | USD 200 million    |  |  |  | 191   |  |  |  | 158   | 
|                  | 1.200% |        |  |  | 3.500% |        |  | Revenue Bonds 1997/2009                          |  |               | USD 20.6 million   |  |  |  | 20    |  |  |  | 16    | 
|                  | 6.670% |        |  |  | 6.650% |        |  | Notes 1998/2028                                  |  |               | USD 350 million    |  |  |  | 334   |  |  |  | 277   | 
|                  | 6.210% |        |  |  | 6.200% |        |  | Bonds 1998/2028                                  |  |               | USD 250 million    |  |  |  | 238   |  |  |  | 198   | 
|                  | 6.375% |        |  |  | 6.375% |        |  | Money Market Puttable Reset Securities 2001/2011 |  |               | USD 500 million    |  |  |  | 476   |  |  |  | 397   | 
|Bayer Ltd., Japan |        |        |  |  |        |        |  |                                                  |  |               |                    |  |  | 
|                  | 3.750% |        |  |  | 3.750% |        |  | Bonds 2000/2005                                  |  |               | CHF 400 million    |  |  |  | 300   |  |  |  | 258   | 
|                  |        |        |  |  |        |        |  |                                                  |  |               |                    |  |  |  |       |  |  |  |       | 
|                  |        |        |  |  |        |        |  |                                                  |  |               |                    |  |  |  | 6,742 |  |  |  | 6,440 | 
|                  |        |        |  |  |        |        |  |                                                  |  |               |                    |  |  |  |       |  |  |  |       | 

In April 2002 Bayer AG launched two Eurobond
issues under its
8 billion
European Medium Term Note (EMTN) program. One of these
issues, in the nominal volume of
3 billion,
carries a 5.375% coupon and has a term of 5 years, maturing
in 2007. Interest is payable annually in arrears. The issue
price was 99.402%. The other Eurobond issue has a nominal volume
of
2 billion
and a term of 10 years, so it matures in 2012. The bonds
carry a 6% coupon. Again, all interest is payable annually in
arrears. The issue price was 99.45%.

In October 1995, Bayer Corporation issued USD
200 million of 7.125% Notes to qualified institutional
buyers. The Notes have a term of 20 years and mature in
October 2015. Interest is paid semi-annually in April and
October. The Group recorded a discount of
USD 2.4 million, which includes commissions paid to
underwriters.

In March 1997, Bayer Corporation issued USD
20.6 million of Revenue Bonds to U.S. institutional buyers.
The interest rate is reset daily with monthly interest payments.
The Revenue Bonds have a term of 12 years and mature in May
2009.

In February 1998, Bayer Corporation issued USD
350 million of 6.65% Notes to qualified institutional
buyers. The Notes have a term of 30 years and mature in
February 2028. Interest is paid semi-annually in August and
February. The Group recorded a discount of
USD 1.9 million, which includes commissions paid to
underwriters. The Notes will be redeemable, in whole or in part,
at the option of Bayer Corporation at any time, upon not less
than 30 but not more than 60 days notice, at a
redemption price equal to the greater of (i) 100% of the
principal amount or (ii) as determined by an independent
investment banker.

In February 1998, Bayer Corporation issued USD
250 million of 6.20% Bonds to qualified institutional
buyers. The Bonds have combined call and put options giving the
lead manager the right to repurchase them, and the investors the
right to cash them, after 10 years. At that time the lead
manager can reset the interest rate and remarket the Bonds for a
further period of 20 years such that they would mature in
2028. If the lead manager does not exercise its call option and
the investors exercise their put option, the Bonds will be
redeemed in 2008. Interest is paid semi-annually in August and
February. The Group recorded a discount of
USD 0.6 million which includes commissions paid to
underwriters. The redemption provision on the 1998 6.65% Notes
also applies for these Bonds.

F-55



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


In April 2000, Bayer Ltd., Japan, issued CHF
400 million of 3.75% Bonds in Switzerland. The Bonds have a
term of 5 years and mature in April 2005. Interest is paid
annually in April. The Group recorded a discount of
CHF 1.2 million. The debt was swapped into yen at a
floating interest rate.

In March 2001, Bayer Corporation issued USD
500 million of 4.75% Money Market Puttable Reset Securities
to qualified institutional buyers, due in 2011. The Bonds have
combined call and put options giving the lead manager the right
to repurchase them, and the investors the right to cash them, on
each anniversary date of the original marketing of the
securities.

At December 31, 2003, the Group had
approximately
5.8 billion
(2002: 6.2
billion) of total lines of credit, of which
0.5 billion
(2002:
1.0 billion)
was used and
5.3 billion
(2002:
5.2 billion)
was unused and available for borrowing on an unsecured basis.

Liabilities under finance leases are recognized
as financial obligations if the leased assets are capitalized
under property, plant and equipment. They are stated at present
values. Lease payments totaling
760 million
(2002: 899
million), including
185 million
(2002:
191 million)
in interest, are to be made to the respective lessors in future
years.

The liabilities associated with finance leases
mature as follows:

|           |  |             |     |          |  |           |     |  |  |  |     | 
|---------- |  | ----------- | --- | -------- |  | --------- | --- |  |  |  | --- | 
|           |  | Lease       |     | Of which |  |          
|           |  | payments    |     | interest |  | Liability
|           |  |             |     |          |  |          
|           |  |            
|           |  | ( million)
|2004       |  |             | 106 |          |  |           | 20  |  |  |  | 86  | 
|2005       |  |             | 77  |          |  |           | 18  |  |  |  | 59  | 
|2006       |  |             | 76  |          |  |           | 18  |  |  |  | 58  | 
|2007       |  |             | 60  |          |  |           | 22  |  |  |  | 38  | 
|2008       |  |             | 32  |          |  |           | 15  |  |  |  | 17  | 
|After 2008 |  |             | 409 |          |  |           | 92  |  |  |  | 317 | 
|           |  |             |     |          |  |           |     |  |  |  |     | 
|           |  |             | 760 |          |  |           | 185 |  |  |  | 575 | 
|           |  |             |     |          |  |           |     |  |  |  |     | 

Lease payments in 2003 in connection with
operating leases amounted to
124 million
(2002:
191 million;
2001:
244 million).

The other financial obligations include
7 million
(2002:
4 million)
to non-consolidated subsidiaries.

[31] Trade accounts payable

Trade accounts are payable mainly to third
parties. As last year, the entire amount totaling
2,265 million
(2002:
2,534 million)
is due within one year.

Of this total,
33 million
(2002: 4 million)
is payable to subsidiaries,
12 million
(2002:
18 million)
to other affiliated companies and
2,220 million
(2002:
2,512 million)
to other suppliers.

F-56



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[32] Miscellaneous liabilities

Miscellaneous liabilities are carried at
amortized cost. They are comprised as follows:

|                                          |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 
|----------------------------------------- |  | ------------- | ----- | ------------- |  | ----- | ----- | -------- |  |  | ----- |  |  |  | ----- | 
|                                          |  |               |       |              
|                                          |  | Dec. 31, 2002 |       | Dec. 31, 2003
|                                          |  |               |       |              
|                                          |  |               |       | Maturing      |  |       |       | Maturing
|                                          |  | Total         |       | in 2003       |  | Total |       | in 2004 
|                                          |  |               |       |               |  |       |       |         
|                                          |  |              
|                                          |  | ( million)  
|Payroll liabilities                       |  |               | 422   |               |  |       | 330   |          |  |  | 337   |  |  |  | 247   | 
|Tax liabilities                           |  |               | 346   |               |  |       | 346   |          |  |  | 549   |  |  |  | 549   | 
|Liabilities for social expenses           |  |               | 170   |               |  |       | 170   |          |  |  | 172   |  |  |  | 166   | 
|Accrued interest on liabilities           |  |               | 308   |               |  |       | 308   |          |  |  | 315   |  |  |  | 315   | 
|Advance payments received                 |  |               | 20    |               |  |       | 20    |          |  |  | 18    |  |  |  | 18    | 
|Liabilities from the acceptance of drafts |  |               | 17    |               |  |       | 17    |          |  |  | 21    |  |  |  | 21    | 
|License liabilities                       |  |               | 57    |               |  |       | 57    |          |  |  | 47    |  |  |  | 47    | 
|Other miscellaneous liabilities           |  |               | 890   |               |  |       | 890   |          |  |  | 1,000 |  |  |  | 998   | 
|                                          |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 
|                                          |  |               | 2,230 |               |  |       | 2,138 |          |  |  | 2,459 |  |  |  | 2,361 | 
|                                          |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 

Tax liabilities include not only Group
companies own tax liabilities, but also taxes withheld for
paying over to the authorities on behalf of third parties.

Liabilities for social expenses include, in
particular, social insurance contributions that had not been
paid over by the closing date.

The other miscellaneous liabilities comprise
mainly guarantees, commissions to customers, and expense
reimbursements.

Total miscellaneous liabilities include
12 million
(2002:
19 million)
liabilities to non-consolidated subsidiaries and
2 million
(2002:
1 million)
liabilities to other affiliated companies.

[33] Further Information on other
liabilities

Other liabilities (financial obligations, trade
accounts payable and miscellaneous liabilities) include
3,283 million
(2002:
6,539 million)
with maturities of more than five years.

Of the total,
394 million
(2002:
146 million)
was collateralised, including
33 million
collateralised by mortgages.

The total amount includes
315 million
(2002:
308 million)
in accrued interest, representing expenses attributable to the
fiscal year but not due to be paid until after the closing date.

[34] Deferred income

Deferred income as of December 31, 2003
includes
121 million
(2002: 97
million) in grants and subsidies received from government. The
amount reversed and recognized in income was
23 million
(2002:
19 million).

F-57



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[35] Discontinuing operations

Assets and liabilities as of December 31,
2003 contain the following amounts relating to discontinuing
operations (Lanxess and the plasma business):

|                                         |  |                                 |     |                  |  |      |      |      |  |  |       |   |  |  |       |  
|---------------------------------------- |  | ------------------------------- | --- | ---------------- |  | ---- | ---- | ---- |  |  | ----- | - |  |  | ----- | -
|                                         |  |                                 |     |                 
|                                         |  | Polyurethanes, Coatings, Fibers |     | Plastics, Rubber
|                                         |  |                                 |     |                 
|                                         |  | 2002                            |     | 2003             |  | 2002 |      | 2003
|                                         |  |                                 |     |                  |  |      |      |     
|                                         |  |                                
|                                         |  | ( million)                    
|Noncurrent assets                        |  |                                 | 113 |                  |  |      | 33   |      |  |  | 1,576 |   |  |  | 888   |  
|Current assets (excluding liquid assets) |  |                                 | 104 |                  |  |      | 81   |      |  |  | 1,475 |   |  |  | 1,442 |  
|Liquid assets                            |  |                                 |    |                  |  |      |     |      |  |  |      |   |  |  |      |  
|                                         |  |                                 |     |                  |  |      |      |      |  |  |       |   |  |  |       |  
|Assets                                   |  |                                 | 217 |                  |  |      | 114  |      |  |  | 3,051 |   |  |  | 2,330 |  
|                                         |  |                                 |     |                  |  |      |      |      |  |  |       |   |  |  |       |  
|Pension provisions                       |  |                                 | (33 | )                |  |      | (34  | )    |  |  | (187  | ) |  |  | (183  | )
|Other provisions                         |  |                                 | (21 | )                |  |      | (33  | )    |  |  | (184  | ) |  |  | (170  | )
|Financial obligations                    |  |                                 |    |                  |  |      |     |      |  |  |      |   |  |  |      |  
|Remaining liabilities                    |  |                                 | (40 | )                |  |      | (71  | )    |  |  | (600  | ) |  |  | (621  | )
|                                         |  |                                 |     |                  |  |      |      |      |  |  |       |   |  |  |       |  
|Liabilities                              |  |                                 | (94 | )                |  |      | (138 | )    |  |  | (971  | ) |  |  | (974  | )
|                                         |  |                                 |     |                  |  |      |      |      |  |  |       |   |  |  |       |  

|                                         |  |             |       |                |  |      |        |      |  |  |        |   |  |  |        |  
|---------------------------------------- |  | ----------- | ----- | -------------- |  | ---- | ------ | ---- |  |  | ------ | - |  |  | ------ | -
|                                         |  |             |       |               
|                                         |  | Chemicals   |       | Reconciliation
|                                         |  |             |       |               
|                                         |  | 2002        |       | 2003           |  | 2002 |        | 2003
|                                         |  |             |       |                |  |      |        |     
|                                         |  |            
|                                         |  | ( million)
|Noncurrent assets                        |  |             | 1,659 |                |  |      | 902    |      |  |  | 39     |   |  |  | 103    |  
|Current assets (excluding liquid assets) |  |             | 1,117 |                |  |      | 1,246  |      |  |  | (191   | ) |  |  | 191    |  
|Liquid assets                            |  |             |      |                |  |      |       |      |  |  | 150    |   |  |  | 150    |  
|                                         |  |             |       |                |  |      |        |      |  |  |        |   |  |  |        |  
|Assets                                   |  |             | 2,776 |                |  |      | 2,148  |      |  |  | (2     | ) |  |  | 444    |  
|                                         |  |             |       |                |  |      |        |      |  |  |        |   |  |  |        |  
|Pension provisions                       |  |             | (159  | )              |  |      | (201   | )    |  |  |       |   |  |  |       |  
|Other provisions                         |  |             | (177  | )              |  |      | (248   | )    |  |  |       |   |  |  |       |  
|Financial obligations                    |  |             |      |                |  |      |       |      |  |  | (1,052 | ) |  |  | (1,131 | )
|Remaining liabilities                    |  |             | (439  | )              |  |      | (629   | )    |  |  | (161   | ) |  |  | 257    |  
|                                         |  |             |       |                |  |      |        |      |  |  |        |   |  |  |        |  
|Liabilities                              |  |             | (775  | )              |  |      | (1,078 | )    |  |  | (1,213 | ) |  |  | (874   | )
|                                         |  |             |       |                |  |      |        |      |  |  |        |   |  |  |        |  

|                                         |  |               |        |      |  |  |        |  
|---------------------------------------- |  | ------------- | ------ | ---- |  |  | ------ | -
|                                         |  |              
|                                         |  | Total Lanxess
|                                         |  |              
|                                         |  | 2002          |        | 2003
|                                         |  |               |        |     
|                                         |  |              
|                                         |  | ( million)  
|Noncurrent assets                        |  |               | 3,387  |      |  |  | 1,926  |  
|Current assets (excluding liquid assets) |  |               | 2,505  |      |  |  | 2,960  |  
|Liquid assets                            |  |               | 150    |      |  |  | 150    |  
|                                         |  |               |        |      |  |  |        |  
|Assets                                   |  |               | 6,042  |      |  |  | 5,036  |  
|                                         |  |               |        |      |  |  |        |  
|Pension provisions                       |  |               | (379   | )    |  |  | (418   | )
|Other provisions                         |  |               | (382   | )    |  |  | (451   | )
|Financial obligations                    |  |               | (1,052 | )    |  |  | (1,131 | )
|Remaining liabilities                    |  |               | (1,240 | )    |  |  | (1,064 | )
|                                         |  |               |        |      |  |  |        |  
|Liabilities                              |  |               | (3,053 | )    |  |  | (3,064 | )
|                                         |  |               |        |      |  |  |        |  

F-58



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                         |  |             |     |       |  |      |     |      |  |  |        |   |  |  |        |  
|---------------------------------------- |  | ----------- | --- | ----- |  | ---- | --- | ---- |  |  | ------ | - |  |  | ------ | -
|                                         |  |             |     |       |  |     
|                                         |  | Plasma      |     |      
|                                         |  | Business    |     | Total
|                                         |  |             |     |      
|                                         |  | 2002        |     | 2003  |  | 2002 |     | 2003
|                                         |  |             |     |       |  |      |     |     
|                                         |  |            
|                                         |  | ( million)
|Noncurrent assets                        |  |             | 241 |       |  |      | 3   |      |  |  | 3,628  |   |  |  | 1,929  |  
|Current assets (excluding liquid assets) |  |             | 621 |       |  |      | 616 |      |  |  | 3,126  |   |  |  | 3,576  |  
|Liquid assets                            |  |             |    |       |  |      |    |      |  |  | 150    |   |  |  | 150    |  
|                                         |  |             |     |       |  |      |     |      |  |  |        |   |  |  |        |  
|Assets                                   |  |             | 862 |       |  |      | 619 |      |  |  | 6,904  |   |  |  | 5,655  |  
|                                         |  |             |     |       |  |      |     |      |  |  |        |   |  |  |        |  
|Pension provisions                       |  |             |    |       |  |      |    |      |  |  | (379   | ) |  |  | (418   | )
|Other provisions                         |  |             | (46 | )     |  |      | (43 | )    |  |  | (428   | ) |  |  | (494   | )
|Financial obligations                    |  |             |    |       |  |      |    |      |  |  | (1,052 | ) |  |  | (1,131 | )
|Remaining liabilities                    |  |             | (44 | )     |  |      | (46 | )    |  |  | (1,284 | ) |  |  | (1,110 | )
|                                         |  |             |     |       |  |      |     |      |  |  |        |   |  |  |        |  
|Liabilities                              |  |             | (90 | )     |  |      | (89 | )    |  |  | (3,143 | ) |  |  | (3,153 | )
|                                         |  |             |     |       |  |      |     |      |  |  |        |   |  |  |        |  

[36] Commitments and
contingencies

Contingent liabilities as of December 31,
2003  nearly all of which existed toward third
parties  amounted to
341 million.
They result from:

|                                  |  |               |     |               |  |  |     | 
|--------------------------------- |  | ------------- | --- | ------------- |  |  | --- | 
|                                  |  | Dec. 31, 2002 |     | Dec. 31, 2003
|                                  |  |               |     |              
|                                  |  |              
|                                  |  | ( million)  
|Issuance and endorsement of bills |  |               | 6   |               |  |  | 4   | 
|Guarantees                        |  |               | 104 |               |  |  | 130 | 
|Warranties                        |  |               | 135 |               |  |  | 207 | 
|                                  |  |               |     |               |  |  |     | 
|                                  |  |               | 245 |               |  |  | 341 | 
|                                  |  |               |     |               |  |  |     | 

The respective items refer to potential future
obligations where the occurrence of the future events would
create an obligation, the existence of which is uncertain at the
balance sheet date. Group companies frequently enter into
warranty obligations related to business transactions. These
mainly comprise commitments undertaken by subsidiaries for a
defined level of performance or the rendering of a specific
service that go beyond the degree of liability commonly assumed
in the respective sector. Guarantees comprise mainly bank
guarantees where subsidiaries guarantee third parties
liabilities to banks resulting from contractual agreements with
those subsidiaries. A liability to perform under the guarantee
arises if the debtor is in arrears with payments or is insolvent.

In addition to provisions, other liabilities and
contingent liabilities, there are also other financial
commitments. Bayer AG has undertaken to provide profit-sharing
capital totaling
150 million
for the Bayer Pensionskasse, which can be drawn up to
December 31, 2010. Of this amount,
50 million
was drawn in 2003, so the potential future obligation is now
100 million.

Further financial commitments also exist, mainly
under long-term lease and rental agreements.

Minimum non-discounted future payments relating
to operating leases total
478 million
(2002:
619 million).

F-59



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The respective payment obligations mature as
follows:

|              |  |             |     | 
|------------- |  | ----------- | --- | 
|              |  | ( million)
|              |  |            
|2004          |  |             | 124 | 
|2005          |  |             | 93  | 
|2006          |  |             | 76  | 
|2007          |  |             | 64  | 
|2008          |  |             | 55  | 
|2009 or later |  |             | 66  | 
|              |  |             |     | 
|              |  |             | 478 | 
|              |  |             |     | 

Financial commitments resulting from orders
already placed under purchase agreements related to planned or
ongoing capital expenditure projects total
181 million
(2002:
286 million).
Of the respective payments,
149 million 
almost the entire amount  is due in 2004.

In addition, the Group has entered into research
agreements with a number of third parties under which Bayer has
agreed to fund various research projects or has assumed other
commitments based on the achievement of certain milestones or
other specific conditions. The total amount of such funding and
other commitments is
424 million
(2002:
570 million).
At December 31, 2003, the remaining payments expected to be
made to these parties, assuming the milestones or other
conditions are met, were as follows:

|              |  |           |     | 
|------------- |  | --------- | --- | 
|              |  |  million
|              |  |          
|Maturing in   |  |           |     | 
|2004          |  |           | 129 | 
|2005          |  |           | 91  | 
|2006          |  |           | 55  | 
|2007          |  |           | 32  | 
|2008          |  |           | 22  | 
|2009 or later |  |           | 95  | 
|              |  |           |     | 
|              |  |           | 424 | 
|              |  |           |     | 

[37] Related Parties

In the course of our operating business, we
source materials, inventories and services from a large number
of business partners around the world. These include companies
in which we hold an interest, and companies with which members
of the Supervisory Board of Bayer AG are associated.
Transactions with these companies are carried out on an
arms length basis. Business with such companies was not
material from the viewpoint of the Bayer Group. The Bayer Group
was not a party to any transaction of an unusual nature or
structure that was material to us or to companies or persons
closely associated with us, nor does it intend to be party to
such transactions in the future.

[38] Financial Instruments

Primary financial instruments

Primary financial instruments are reflected in
the balance sheet. In compliance with IAS 39 (Financial
Instruments: Recognition and Measurement), asset instruments are
categorized as held for trading, held to
maturity or available for sale and,
accordingly, recognized at fair value or amortized cost. Changes
in the fair value of available-for-sale securities are
recognized in stockholders equity. In the event of
impairment losses, the

F-60



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


assets are written down and the write-downs are
recognized in income. Financial instruments constituting
liabilities are carried at amortized cost.

Fair value

The fair value of a primary financial instrument
is the price at which it could be exchanged in a current
transaction between knowledgeable, willing parties in an active
market. The fair values of other securities included in
investments and of marketable securities are derived from their
market prices and reflected in the financial statements.
Financial obligations are valued mainly by discounting future
cash flows, or in some cases on the basis of quoted prices.
Their total fair value reflected in the consolidated financial
statements is
234 million
above their carrying value. The remaining receivables and
liabilities and the liquid assets have such short terms that
there is no significant discrepancy between their fair values
and carrying amounts.

Credit risk

Credit risk arises from the possibility of asset
impairment occurring because counterparties cannot meet their
obligations in transactions involving financial instruments.

Since we do not conclude master netting
arrangements with our customers, the total of the amounts
recognized in assets represents the maximum exposure to credit
risk.

Currency risk

Currency risk is the potential decline in the
value of financial instruments due to exchange rate
fluctuations. Exposure to currency risk arises mainly when
receivables and payables are denominated in a currency other
than the companys local currency or will be denominated in
such a currency in the planned course of business.

Such risks may be naturally hedged, as when a
receivable in a given currency is matched, for example between
Group companies, by one or more payables in the same amount, and
having an equivalent term, in the same currency. They may also
be hedged using derivative financial instruments.

Currency risks arising on financial transactions,
including interest, are generally fully hedged. The instruments
used are mainly currency swaps, interest and principal currency
swaps and forward exchange contracts. Currency risks relating to
operating activities are systematically monitored and analyzed.
The level of hedging is regularly reviewed.

The position at the end of 2003 was as follows:

|                                                           |  |               |        |               |  |  |        |  
|---------------------------------------------------------- |  | ------------- | ------ | ------------- |  |  | ------ | -
|                                                           |  | Dec. 31, 2002 |        | Dec. 31, 2003
|                                                           |  |               |        |              
|                                                           |  |              
|                                                           |  | ( million)  
|Primary asset instruments exposed to currency risk         |  |               | 3,564  |               |  |  | 4,899  |  
|Primary liability instruments exposed to currency
    risk |  |               | 3,154  |               |  |  | 983    |  
|Amount naturally hedged                                    |  |               | (3,621 | )             |  |  | (696   | )
|Amount hedged through derivative financial
    instruments |  |               | (2,720 | )             |  |  | (5,178 | )
|                                                           |  |               |        |               |  |  |        |  
|Residual unhedged currency exposure                        |  |               | 377    |               |  |  | 8      |  
|                                                           |  |               |        |               |  |  |        |  

In some cases forecasted transactions are also
hedged to further reduce the related anticipated currency risk.
At December 31, 2003 the total notional amount of the
hedging instruments concerned  mainly forward
exchange contracts for the sale of U.S. dollars or Japanese yen
and all maturing before December 31, 2004  was
352 million,
which is not included in the hedged amount of
5.2 billion.
The contracts are concluded monthly so that they run for one
year and mature in the middle of each month. Changes in fair
value are recognized in the income statement.

F-61



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


On the asset side, 50 percent of currency
risks relate to the U.S. dollar. On the liabilities side,
36 percent of foreign currency risks relate to the
U.S. dollar. The remaining exposure involves liabilities in
British pounds (8 percent), Japanese yen (4 percent)
and a number of other currencies outside of the dollar and euro
zones. The U.S. dollar accounts for 51 percent of the
asset volume hedged through derivative financial instruments,
while the remaining 49 percent relates to a range of other
currencies. Of the hedged liabilities, 21 percent are in
U.S. dollars and 6 percent in British pounds. When
hedging exchange rate risk on recorded foreign currency
operating items, we do not aim for hedge accounting treatment.
These items are thus treated as trading operations, the changes
in the fair values of the hedging instruments normally being
recognized immediately in the income statement.

The other securities included in investments are
almost exclusively denominated in the currency used by the Group
company making the investment, so no currency risk is involved.
Similarly, the other loans are made only to borrowers in the
same currency zone. Where intragroup loans are exposed to
currency risk, they are hedged through derivative financial
instruments.



| |                   
| | ------------------
| | Interest rate risk

An interest rate risk  the possibility
that the value of a financial instrument will change due to
movements in market rates of interest  applies mainly
to receivables and payables with maturities of over one year.

Items with such long maturities are not of
material significance on the operating side but are relevant in
the case of investments and financial obligations. Here,
derivative financial instruments are used as the main method of
interest rate hedging, though in some cases interest rate risk
is not hedged if attractive fixed interest rates can be obtained.

The other securities included in investments are
mostly floating rate investments at market rates of interest.
Interest rate swaps are not used to convert floating rate
investments into fixed rate investments.

The other loans chiefly comprise loans to
employees, generally at market-oriented, fixed interest rates.
Such loans are exposed to an interest rate risk which, however,
is not hedged since it was entered into for specific reasons.
More than three quarters of employee loans are for terms of more
than five years.

Derivative financial instruments

The derivatives we use are mainly
over-the-counter instruments, particularly forward foreign
exchange contracts, option contracts, interest rate swaps, and
interest and principal currency swaps. We deal only with banks
of high credit standing. The instruments are employed according
to uniform guidelines and are subject to strict internal
controls. Their use is generally confined to the hedging of the
operating business and of the related investments and financing
transactions. Derivative transactions are also carried out on
the commodities markets. Regular way purchases and
sales of financial assets are recorded at the settlement date in
compliance with IAS 39. The main objective in using
derivative financial instruments is to reduce fluctuations in
cash flows and earnings associated with changes in interest and
foreign exchange rates.

Market risk

Market risk arises from the fact that the value
of financial instruments may be positively or negatively
affected by fluctuating prices on the financial markets. The
fair values quoted are the current values of the derivative
financial instruments, disregarding any opposite movements in
the values of the respective hedged transactions. The fair value
is the repurchase value of the derivatives on the closing date,
based on quoted prices or determined by standard methods. The
notional amount is the total volume of the contracted purchases
or sales of the respective derivatives.

F-62



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The notional amounts and fair values of the
derivative financial instruments held at the closing date were
as follows:

|                                                                                      |  |                 |       |               |  |               |        |               |  |  |     |  |  |  |     | 
|------------------------------------------------------------------------------------- |  | --------------- | ----- | ------------- |  | ------------- | ------ | ------------- |  |  | --- |  |  |  | --- | 
|                                                                                      |  |                 |       |              
|                                                                                      |  | Notional amount |       | Fair value   
|                                                                                      |  |                 |       |              
|                                                                                      |  | Dec. 31, 2002   |       | Dec. 31, 2003 |  | Dec. 31, 2002 |        | Dec. 31, 2003
|                                                                                      |  |                 |       |               |  |               |        |              
|                                                                                      |  |                
|                                                                                      |  | ( million)    
|Forward foreign exchange contracts                                                    |  |                 | 2,979 |               |  |               | 3,984  |               |  |  | 105 |  |  |  | 143 | 
|Currency options                                                                      |  |                 | 239   |               |  |               | 266    |               |  |  | 9   |  |  |  | 11  | 
|Interest rate hedging contracts (including
    interest and principal currency swaps) |  |                 | 5,799 |               |  |               | 6,331  |               |  |  | 365 |  |  |  | 485 | 
|                                                                                      |  |                 |       |               |  |               |        |               |  |  |     |  |  |  |     | 
|                                                                                      |  |                 | 9,017 |               |  |               | 10,581 |               |  |  | 479 |  |  |  | 639 | 
|                                                                                      |  |                 |       |               |  |               |        |               |  |  |     |  |  |  |     | 

Gains and losses from changes in fair values are
immediately recognized in income, except where the strict
conditions for the recognition of a hedge accounting
relationship are present. This is also the case with fair value
hedges, where the gain or loss on both the hedging contract and
the hedged item are recognized in income. However, gains or
losses incurred through cash flow hedge accounting are
recognized initially in equity and subsequently in the income
for the year in which the term of the respective hedging
contract is completed.

Credit risk

Credit risk exposure is
733 million
(2002:
578 million),
this amount being the total of the positive fair values of
derivatives that give rise to claims against the other parties
to the instruments. It represents the losses that could result
from non-performance of contractual obligations by these
parties. We minimize this risk by imposing a limit on the volume
of business in derivative financial instruments transacted with
individual parties.

Currency risk

Exchange hedging instruments in the notional
amount of
4.2 billion
(2002: 3.2 billion)
mature within one year. No contracts
(2002: 8 million)
have longer remaining terms.

Interest rate risk

Short-term interest rate hedging contracts
(including interest and principal currency swaps) total
0.3 billion
(2002:
0.5 billion).
The notional volume of those with maturities of more than one
year but less than five years totals
4.2 billion
(2002:
3.2 billion)
while the notional volume of those with maturity of more than
five years total
1.8 billion
(2002:
2.1 billion).

Most interest rate swaps and interest and
principal currency swaps are performed to allow the company to
maintain a target range of floating rate debt. In 2002 such
contracts were mainly used in connection with bond issues in the
amounts of
2 billion
and
3 billion.
A portion of these bonds was converted from fixed to floating
rate debt by means of interest rate swaps. Changes in the fair
values of derivatives that hedge interest rate risk are recorded
as interest income or expense for the respective periods. The
effective portion of fair value hedges amounts to
83 million
while the ineffective portion is
7 million.
Some interest rate or interest and principal currency
instruments involve a swap from variable to fixed interest
rates. Such contracts are accounted for as cash flow hedges as
defined in IAS 39. The effective portion of such hedges
totals
21 million
while the ineffective portion amounts to
2 million.

Procurement market risk

The Bayer Group is exposed to changes in the
market prices of commodities used for its business operations.
In order to participate in commodity market fluctuations, we
make use of derivative financial instruments according to our
own assessments of the relevant markets. As of December 31,
2003 the total notional volume of commodity derivatives was
224 million.
The total fair value of existing commodity contracts was
11 million.

F-63



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[39] Net cash provided by operating
activities

The cash flow statement starts from the operating
result. The gross cash flow for 2003 of
3.2 billion
(2002: 3.1 billion;
2001: 3.0 billion)
is the cash surplus from operating activities before any changes
in working capital. Breakdowns of the gross cash flow by segment
and region are given in the table on page F-7. The net cash flow
of
3.3 billion
(2002: 4.5 billion;
2001: 3.9 billion)
takes into account changes in working capital. The gross and net
operating cash flow figures for fiscal 2002 have been increased
to reflect the reclassification of taxes on the non-operating
result
(38 million).
These taxes are now reflected in income taxes whereas in 2002
they were shown as a separate item of financing cash flow.

[40] Net cash provided by (used in)
investing activities

Additions to property, plant and equipment and
intangible assets in 2003 resulted in a cash outflow of
1.7 billion
(2002:
2.1 billion;
2001: 2.6 billion).
Sales of property, plant and equipment led to a cash inflow of
1.6 billion
(2002: 2.1 billion;
2001: 0.5 billion),
while the cash inflow from the sale of investments and from
interest and dividend receipts, including marketable securities,
amounted to
0.6 billion
(2002: 1.3 billion;
2001: 0.5 billion).
Further information on acquisitions and divestments
(2002: cash outflow of
7.8 billion,
principally due to the acquisition of Aventis CropScience) can
be found on page F-18. Net cash provided by investing
activities came to
0.5 billion.

[41] Net cash provided by (used in)
financing activities

In fiscal 2003 there was a net cash outflow for
financing activities of
1.8 billion
(2002: net cash inflow of
2.1 billion;
2001: net cash outflow
1.6 billion).
Net repayment of debt resulted in an net outflow of
0.3 billion
(2002: net inflow of
3.5 billion
from net borrowings; 2001 net outflow of less than
0.1 billion).
Dividend payments for 2002 and interest payments totaled
1.5 billion
(2002:
1.4 billion;
2001
1.5 billion).

[42] Discontinuing operations

Discontinuing operations affected the Group cash
flow statements as follows:

|                                                        |  |                  |    |                  |  |             |   |      |  |      |    |      |  |  |     |  |  |  |     |  |  |  |    |  
|------------------------------------------------------- |  | ---------------- | -- | ---------------- |  | ----------- | - | ---- |  | ---- | -- | ---- |  |  | --- |  |  |  | --- |  |  |  | -- | -
|                                                        |  |                  |    |                  |  |             |   |     
|                                                        |  | Polyurethanes,   |    |                 
|                                                        |  | Coatings, Fibers |    | Plastics, Rubber
|                                                        |  |                  |    |                 
|                                                        |  | 2001             |    | 2002             |  | 2003        |   | 2001 |  | 2002 |    | 2003
|                                                        |  |                  |    |                  |  |             |   |      |  |      |    |     
|                                                        |  |                  |    |                  |  |             |   |      |  |     
|                                                        |  |                  |    |                  |  | ( million) |   |      |  |     
|Net cash provided by (used in) operating
    activities |  |                  | 71 |                  |  |             | 9 |      |  |      | 16 |      |  |  | 346 |  |  |  | 139 |  |  |  | (3 | )
|Net cash provided by (used in) investing
    activities |  |                  |   |                  |  |             |  |      |  |      |   |      |  |  |    |  |  |  |    |  |  |  |   |  
|Net cash provided by (used in) financing
    activities |  |                  |   |                  |  |             |  |      |  |      |   |      |  |  |    |  |  |  |    |  |  |  |   |  
|                                                        |  |                  |    |                  |  |             |   |      |  |      |    |      |  |  |     |  |  |  |     |  |  |  |    |  
|Change in cash and cash equivalents                     |  |                  |   |                  |  |             |  |      |  |      |   |      |  |  |    |  |  |  |    |  |  |  |   |  
|                                                        |  |                  |    |                  |  |             |   |      |  |      |    |      |  |  |     |  |  |  |     |  |  |  |    |  

|                                                        |  |             |     |                |  |      |     |      |  |      |     |      |  |  |      |   |  |  |      |   |  |  |      |  
|------------------------------------------------------- |  | ----------- | --- | -------------- |  | ---- | --- | ---- |  | ---- | --- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                                        |  |             |     |               
|                                                        |  | Chemicals   |     | Reconciliation
|                                                        |  |             |     |               
|                                                        |  | 2001        |     | 2002           |  | 2003 |     | 2001 |  | 2002 |     | 2003
|                                                        |  |             |     |                |  |      |     |      |  |      |     |     
|                                                        |  |            
|                                                        |  | ( million)
|Net cash provided by (used in) operating
    activities |  |             | 376 |                |  |      | 355 |      |  |      | 118 |      |  |  |     |   |  |  |     |   |  |  |     |  
|Net cash provided by (used in) investing
    activities |  |             |    |                |  |      |    |      |  |      |    |      |  |  | (446 | ) |  |  | (285 | ) |  |  | (163 | )
|Net cash provided by (used in) financing
    activities |  |             |    |                |  |      |    |      |  |      |    |      |  |  | (347 | ) |  |  | (218 | ) |  |  | 32   |  
|                                                        |  |             |     |                |  |      |     |      |  |      |     |      |  |  |      |   |  |  |      |   |  |  |      |  
|Change in cash and cash equivalents                     |  |             |    |                |  |      |    |      |  |      |    |      |  |  |     |   |  |  |     |   |  |  |     |  
|                                                        |  |             |     |                |  |      |     |      |  |      |     |      |  |  |      |   |  |  |      |   |  |  |      |  

F-64



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                                        |  |               |      |                 |  |      |      |      |  |      |      |      |  |  |     |   |  |  |      |   |  |  |     |  
|------------------------------------------------------- |  | ------------- | ---- | --------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | --- | - |  |  | ---- | - |  |  | --- | -
|                                                        |  |               |      |                
|                                                        |  | Total Lanxess |      | Plasma Business
|                                                        |  |               |      |                
|                                                        |  | 2001          |      | 2002            |  | 2003 |      | 2001 |  | 2002 |      | 2003
|                                                        |  |               |      |                 |  |      |      |      |  |      |      |     
|                                                        |  |              
|                                                        |  | ( million)  
|Net cash provided by (used in) operating
    activities |  |               | 793  |                 |  |      | 503  |      |  |      | 131  |      |  |  | (74 | ) |  |  | (129 | ) |  |  | (98 | )
|Net cash provided by (used in) investing
    activities |  |               | (446 | )               |  |      | (285 | )    |  |      | (163 | )    |  |  | (48 | ) |  |  | (28  | ) |  |  | (23 | )
|Net cash provided by (used in) financing
    activities |  |               | (347 | )               |  |      | (218 | )    |  |      | 32   |      |  |  | 122 |   |  |  | 157  |   |  |  | 121 |  
|                                                        |  |               |      |                 |  |      |      |      |  |      |      |      |  |  |     |   |  |  |      |   |  |  |     |  
|Change in cash and cash equivalents                     |  |               |     |                 |  |      |     |      |  |      |     |      |  |  |    |   |  |  |     |   |  |  |    |  
|                                                        |  |               |      |                 |  |      |      |      |  |      |      |      |  |  |     |   |  |  |      |   |  |  |     |  

|                                                        |  |                   |      |                |  |      |       |      |  |      |   |      |  |  |     |  |  |  |   |  |  |  |   | 
|------------------------------------------------------- |  | ----------------- | ---- | -------------- |  | ---- | ----- | ---- |  | ---- | - | ---- |  |  | --- |  |  |  | - |  |  |  | - | 
|                                                        |  |                   |      |               
|                                                        |  | Haarmann & Reimer |      | EC Erdölchemie
|                                                        |  |                   |      |               
|                                                        |  | 2001              |      | 2002           |  | 2003 |       | 2001 |  | 2002 |   | 2003
|                                                        |  |                   |      |                |  |      |       |      |  |      |   |     
|                                                        |  |                  
|                                                        |  | ( million)      
|Net cash provided by (used in) operating
    activities |  |                   | 118  |                |  |      | 87    |      |  |      |  |      |  |  | 13  |  |  |  |  |  |  |  |  | 
|Net cash provided by (used in) investing
    activities |  |                   | (164 | )              |  |      | 1,286 |      |  |      |  |      |  |  | 474 |  |  |  |  |  |  |  |  | 
|Net cash provided by (used in) financing
    activities |  |                   | 77   |                |  |      | 1     |      |  |      |  |      |  |  |    |  |  |  |  |  |  |  |  | 
|                                                        |  |                   |      |                |  |      |       |      |  |      |   |      |  |  |     |  |  |  |   |  |  |  |   | 
|Change in cash and cash equivalents                     |  |                   | 31   |                |  |      | 1,374 |      |  |      |  |      |  |  | 487 |  |  |  |  |  |  |  |  | 
|                                                        |  |                   |      |                |  |      |       |      |  |      |   |      |  |  |     |  |  |  |   |  |  |  |   | 

|                                                        |  |  |      |   |  |  |       |             |  |      |      |      |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------------------- |  |  | ---- | - |  |  | ----- | ----------- |  | ---- | ---- | ---- |  |  |  |  |  |  |  |  |  |  |  | 
|                                                        |  |  |      |   |  |  |       |            
|                                                        |  |  |      |   |  |  |       | Total      
|                                                        |  |  |      |   |  |  |       |            
|                                                        |  |  |      |   |  |  |       | 2001        |  | 2002 |      | 2003
|                                                        |  |  |      |   |  |  |       |             |  |      |      |     
|                                                        |  |  |      |   |  |  |       |             |  |      |      |     
|                                                        |  |  |      |   |  |  |       |            
|                                                        |  |  |      |   |  |  |       | ( million)
|Net cash provided by (used in) operating
    activities |  |  | 850  |   |  |  | 461   |             |  |      | 33   |     
|Net cash provided by (used in) investing
    activities |  |  | (184 | ) |  |  | 973   |             |  |      | (186 | )   
|Net cash provided by (used in) financing
    activities |  |  | (148 | ) |  |  | (60   | )           |  |      | 153  |     
|                                                        |  |  |      |   |  |  |       |             |  |      |      |     
|Change in cash and cash equivalents                     |  |  | 518  |   |  |  | 1,374 |             |  |      |     |     
|                                                        |  |  |      |   |  |  |       |             |  |      |      |     

[43] Cash and cash equivalents

Cash and cash equivalents as of December 31,
2003 amounted to
2.7 billion
(2002:
0.8 billion;
2001:
0.7 billion).
In accordance with IAS 7 (Cash Flow Statements), this item
also includes financial securities with original maturities of
up to three months. The liquid assets of
2.9 billion
(2002:
0.8 billion;
2001:
0.8 billion)
shown in the balance sheet also include marketable securities
and other instruments.

Notes on Segment Reporting

In accordance with IAS 14 (Segment
Reporting), a breakdown of certain data in the financial
statements is given by segments and geographical region. The
segments and regions are the same as those used for internal
reporting, allowing a reliable assessment of risks and returns.
The aim is to provide users of the financial statements with
information regarding the profitability and future prospects of
the Groups various activities.

As of December 31, 2003 the Bayer Group
comprised four subgroups whose operations are subdivided into
divisions (HealthCare), business groups (CropScience), business
units (Chemicals) or strategic business entities (Polymers).
Their activities are aggregated into the seven reporting
segments listed below according to economic characteristics,
products, production processes, customer relationships and
methods of distribution.

F-65



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The subgroups activities are as follows:

|                                     |  |                                                                                                                                                                                                                                                                 
|------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Subgroup                             |  | Activities                                                                                                                                                                                                                                                      
|                                     |  |                                                                                                                                                                                                                                                                 
|HealthCare                           |  |                                                                                                                                                                                                                                                                 
|Pharmaceuticals, Biological Products |  | Development and marketing of prescription
    pharmaceuticals and biological products                                                                                                                                                                           
|Consumer Care, Diagnostics           |  | Development and marketing of over-the-counter
    medications, nutritional supplements and diagnostic products for
    laboratory testing, near-patient testing and self-testing
    applications                                                               
|Animal Health                        |  | Development and marketing of veterinary
    medicines, nutritionals and grooming products for companion
    animals and livestock                                                                                                                               
|CropScience                          |  |                                                                                                                                                                                                                                                                 
|CropScience                          |  | Development and marketing of a comprehensive
    portfolio of fungicides, herbicides, insecticides, seed
    treatment products, non-agricultural applications, plant
    biotechnology and conventional seeds to meet a wide range of
    regional requirements
|Polymers                             |  |                                                                                                                                                                                                                                                                 
|Plastics, Rubber                     |  | Manufacturing and marketing of engineering
    plastics with a variety of raw materials for the rubber and tire
    industries                                                                                                                                  
|Polyurethanes, Coatings, Fibers      |  | Development, manufacturing and marketing of a
    range of polyurethane raw materials for a wide variety of
    applications as well as coating and adhesive raw materials                                                                                      
|Chemicals                            |  |                                                                                                                                                                                                                                                                 
|Chemicals                            |  | Manufacture and marketing of bulk and specialty
    chemicals, metal and ceramic powders and cellulosics.                                                                                                                                                       

As part of the reorganization of the Polymers
operations in 2003, responsibility for the organic and inorganic
pigments businesses was transferred to the Chemicals segment. At
the same time, the industrial basic chemicals business (mainly
chlorine electrolysis) was transferred to the Polyurethanes,
Coatings, Fibers segment. The prior-year figures have been
restated to reflect these organizational changes.

The reconciliationeliminates intersegment
items and reflects income and expenses not allocable to
segments. These include in particular the Corporate Center, the
service companies and sideline operations.

Business activities that Bayer has already
divested or intends to divest are shown as discontinuing
operations. These are the plasma operations, the Lanxess
activities and, in 2002, Haarmann & Reimer. In 2001 it was
Haarmann & Reimer and EC Erdölchemie.

The segment data are calculated as follows:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | The intersegment and interregional sales reflect
    intragroup transactions effected at transfer prices fixed on an
    arms-length basis.
|
| |  | The return on sales is the ratio of the operating
    result to external net sales.                                                         

F-66



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The gross cash flow comprises the operating
    result plus depreciation, amortization and write-downs, less
    gains on the sale of assets, less income taxes, adjusted for the
    change in long-term provisions.                                                                                                                                                                                                                                         
|
| |  | The net cash flow is the cash flow from operating
    activities as defined in IAS 7.                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The capital invested comprises all assets serving
    the respective segment that are required to yield a return on
    their cost of acquisition. Noncurrent assets are included at
    cost of acquisition or construction throughout their useful
    lives because the calculation of CFROI requires that
    depreciation and amortization be excluded. Interest-free
    liabilities are deducted. The capital invested is stated as of
    December 31.
|
| |  | The CFROI is the ratio of the gross cash flow to
    the average capital invested for the year and is thus a measure
    of the return on capital employed.                                                                                                                                                                                                                                                                                                   
|
| |  | The equity items are those reflected in the
    balance sheet and income statement. They are allocated to the
    segments where possible. The reconciliation of the balance of
    equity-method income and expense to the income statement line
    Income (expense) from investments in affiliated
    companies  net is apparent from Note 8.                                                                                                          
|
| |  | Capital expenditures, amortization and
    depreciation relate to intangible assets, property, plant and
    equipment.                                                                                                                                                                                                                                                                                                                                       
|
| |  | Employees by segment: the reconciliation line
    comprises the employees of the service companies who were
    employees of the subgroups before the service companies became
    separate legal entities. The prior-year figures have been
    restated accordingly.                                                                                                                                                                                        

[44] U.S. GAAP Information

The Groups consolidated financial
statements have been prepared in accordance with IFRS, which as
applied by the Group, differs in certain significant respects
from U.S. GAAP. The effects of the application of U.S. GAAP
to net income and stockholders equity are set out in the
tables below:

|                                                         |  |       |   |             |  |                |      |      |  |      |       |   |  |  |        |   |  |  |        |  
|-------------------------------------------------------- |  | ----- | - | ----------- |  | -------------- | ---- | ---- |  | ---- | ----- | - |  |  | ------ | - |  |  | ------ | -
|                                                         |  | Notes |   | 2001        |  | 2002           |      | 2003 |  | 2003
|                                                         |  |       |   |             |  |                |      |      |  |     
|                                                         |  |       |   |             |  |               
|                                                         |  |       |   | ( million) |  | ($ million(*))
|Net income reported under IFRS                           |  |       |   |             |  |                | 965  |      |  |      | 1,060 |   |  |  | (1,361 | ) |  |  | (1,714 | )
|Fair value of derivative financial instruments           |  |       | a |             |  |                | (95  | )    |  |      |      |   |  |  |       |   |  |  |       |  
|Available for sale securities                            |  |       | b |             |  |                | (30  | )    |  |      | 30    |   |  |  |       |   |  |  |       |  
|Business combinations                                    |  |       | c |             |  |                | (63  | )    |  |      | 205   |   |  |  | 28     |   |  |  | 35     |  
|Pensions                                                 |  |       | d |             |  |                | (24  | )    |  |      | (24   | ) |  |  | (23    | ) |  |  | (29    | )
|In-process research and development                      |  |       | e |             |  |                |     |      |  |      | (133  | ) |  |  | 12     |   |  |  | 15     |  
|Asset impairment                                         |  |       | f |             |  |                |     |      |  |      | 205   |   |  |  | (360   | ) |  |  | (453   | )
|Other employee benefits                                  |  |       | g |             |  |                | 5    |      |  |      | (4    | ) |  |  | 178    |   |  |  | 224    |  
|Other                                                    |  |       | h |             |  |                | (10  | )    |  |      | (29   | ) |  |  | (17    | ) |  |  | (21    | )
|Deferred tax effect on U.S. GAAP adjustments             |  |       |   |             |  |                | 52   |      |  |      | (33   | ) |  |  | 98     |   |  |  | 123    |  
|                                                         |  |       |   |             |  |                |      |      |  |      |       |   |  |  |        |   |  |  |        |  
|Net income reported under U.S. GAAP                      |  |       |   |             |  |                | 800  |      |  |      | 1,277 |   |  |  | (1,445 | ) |  |  | (1,820 | )
|                                                         |  |       |   |             |  |                |      |      |  |      |       |   |  |  |        |   |  |  |        |  
|Basic and diluted earnings per share under
    U.S. GAAP |  |       |   |             |  |                | 1.10 |      |  |      | 1.75  |   |  |  | (1.98  | ) |  |  | (2.49  | )
|                                                         |  |       |   |             |  |                |      |      |  |      |       |   |  |  |        |   |  |  |        |  

F-67



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                                  |  |       |   |              |  |                |        |      |  |  |        |   |  |  |        |  
|------------------------------------------------- |  | ----- | - | ------------ |  | -------------- | ------ | ---- |  |  | ------ | - |  |  | ------ | -
|                                                  |  |       |   |             
|                                                  |  |       |   | December 31,
|                                                  |  |       |   |             
|                                                  |  | Notes |   | 2002         |  | 2003           |        | 2003
|                                                  |  |       |   |              |  |                |        |     
|                                                  |  |       |   |              |  |               
|                                                  |  |       |   | ( million)  |  | ($ million(*))
|Stockholders equity reported under
    IFRS      |  |       |   |              |  |                | 15,335 |      |  |  | 12,213 |   |  |  | 15,385 |  
|Fair value of derivative financial instruments    |  |       | a |              |  |                |       |      |  |  |       |   |  |  |       |  
|Available for sale securities                     |  |       | b |              |  |                |       |      |  |  |       |   |  |  |       |  
|Business combinations                             |  |       | c |              |  |                | 900    |      |  |  | 841    |   |  |  | 1,059  |  
|Pensions                                          |  |       | d |              |  |                | 730    |      |  |  | 556    |   |  |  | 700    |  
|In-process research and development               |  |       | e |              |  |                | (145   | )    |  |  | (131   | ) |  |  | (165   | )
|Asset impairment                                  |  |       | f |              |  |                | 205    |      |  |  | (155   | ) |  |  | (195   | )
|Other employee benefits                           |  |       | g |              |  |                | 31     |      |  |  | 209    |   |  |  | 263    |  
|Other                                             |  |       | h |              |  |                | 53     |      |  |  | 33     |   |  |  | 42     |  
|Deferred tax effect on U.S. GAAP adjustments      |  |       |   |              |  |                | (375   | )    |  |  | (239   | ) |  |  | (301   | )
|                                                  |  |       |   |              |  |                |        |      |  |  |        |   |  |  |        |  
|Stockholders equity reported under U.S.
    GAAP |  |       |   |              |  |                | 16,734 |      |  |  | 13,327 |   |  |  | 16,788 |  
|                                                  |  |       |   |              |  |                |        |      |  |  |        |   |  |  |        |  

|                                                                     |                                                                                                                                                |              |        |                |   |      |        |      |   |  |        |      |  
|-------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------ | -------------- | - | ---- | ------ | ---- | - |  | ------ | ---- | -
|                                                                     |                                                                                                                                                |             
|                                                                     |                                                                                                                                                | December 31,
|                                                                     |                                                                                                                                                |             
|                                                                     |                                                                                                                                                | 2002         |        | 2003           |   | 2003
|                                                                     |                                                                                                                                                |              |        |                |   |     
|                                                                     |                                                                                                                                                |              |        |               
|                                                                     |                                                                                                                                                | ( million)  |        | ($ million(*))
|Components of stockholders equity in
    accordance with U.S. GAAP: |                                                                                                                                                |              |        |                |   |      |        |      |   |  |        |     
|Capital stock of Bayer AG                                            |                                                                                                                                                |              | 1,870  |                |   |      | 1,870  |      |   |  | 2,356  |     
|Capital reserves of Bayer AG                                         |                                                                                                                                                |              | 2,942  |                |   |      | 2,942  |      |   |  | 3,706  |     
|Retained earnings                                                    |                                                                                                                                                |              | 12,780 |                |   |      | 10,682 |      |   |  | 13,456 |     
|Accumulated other comprehensive income:                              |                                                                                                                                                |              |        |                |   |      |        |      |   |  |        |     
|                                                                     | Unrealized market value adjustment on securities
    available for sale (net of taxes of
    13 million,
    11 million
    and $14 million) |              |        | (20            | ) |      |        | 13   |   |  |        | 16   |  
|                                                                     | Unrealized market value adjustment on cash flow
    hedges (net of taxes of
    6 million,
    17 million
    and $21 million)               |              |        | (11            | ) |      |        | (31  | ) |  |        | (39  | )
|                                                                     | Additional minimum pension liability (net of
    taxes of
    197 million,
    260 million
    and $328 million)                             |              |        | (283           | ) |      |        | (377 | ) |  |        | (475 | )
|Translation differences                                              |                                                                                                                                                |              | (544   | )              |   |      | (1,772 | )    |   |  | (2,232 | )   
|                                                                     |                                                                                                                                                |              |        |                |   |      |        |      |   |  |        |     
|Total                                                                |                                                                                                                                                |              | 16,734 |                |   |      | 13,327 |      |   |  | 16,788 |     
|                                                                     |                                                                                                                                                |              |        |                |   |      |        |      |   |  |        |     



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(*) | The 2003 U.S. dollar figures have been translated
    at an exchange rate of
    1.0000 = $1.2597
    which is the noon buying rate of the Federal Reserve Bank of New
    York on December 31, 2003. Such translations should not be
    construed as representations that the euro amounts represent, or
    have been or could be converted into, United States dollars at
    that or any other rate.

a. Fair Value of Derivative Financial
Instruments

Effective January 1, 2001, the Group began
applying IAS 39, Financial Instruments: Recognition
and Measurement and Statement of Financial Accounting
Standard (SFAS) 133, Accounting for Derivative
Instruments and Hedging Activities. As a result,
derivative financial instruments are recorded in the balance
sheet at their fair values under both IFRS and U.S. GAAP. The
Group uses foreign currency forward contracts for hedging of
anticipated transactions. Prior to the adoption of IAS 39
and SFAS 133, these forward contracts were recorded at the
lower of cost or market value under IFRS and marked to market
through the income statement in accordance with U.S. GAAP
applicable at the time.

F-68



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


In 2000, a
95 million
difference between IFRS and U.S. GAAP net income arose from the
recognition of a
95 million
gain relating to the anticipated cash flow forward contracts
under U.S. GAAP. During 2001, the fair value of the foreign
currency forward contracts that had been entered into during
2000 declined to
68 million.
As the hedged anticipated transactions were realized during
2001, this
68 million
was recorded as a gain under IFRS. Conversely, under U.S. GAAP,
the
27 million
decline in value was recognized as an expense. Therefore, the
reconciling item between net income under IFRS and U.S. GAAP for
the year ended December 31, 2001 of
95 million
results from the reversal of the
68 million
gain under IFRS plus the
27 million
expense under U.S. GAAP. Subsequent to the adoption of
IAS 39 and SFAS 133, the accounting for new foreign
currency forward contracts for hedging of anticipated
transactions is consistent between IFRS and U.S. GAAP.

b. Available for Sale
Securities

Under IFRS, unrealized losses on
available-for-sale financial assets are recorded in income only
when the decline in market value is considered permanent. Under
U.S. GAAP, unrealized losses are recorded in income when
they are judged to be other-than-temporary. Bayers policy
is to evaluate all declines in market value if they have
exceeded 20% of the carrying value over a continual period of
6 months. If there is no indication of a significant
increase in fair value in the short-term, the declines are
considered other-than-temporary. Principally, other declines in
fair value that do not meet these criteria may be considered
other-than-temporary depending upon the circumstances
surrounding the underlying investment.

Prior to the adoption of IAS 39 in 2001,
investments in debt and certain equity securities were reflected
in the balance sheet at nominal value less any necessary
write-downs under IFRS. Under U.S. GAAP, all investments
that have been classified as available-for-sale are carried at
fair value, with any unrealized gains or losses recorded as a
separate component of other comprehensive income. The adjustment
recorded in 2001 reflects an other-than-temporary decline for
U.S. GAAP purposes where no impairment was recognized under
IFRS; therefore, the amounts were reclassified from other
comprehensive income to net income. The adjustment in 2002
reflects the recognition under IFRS of an impairment that had
been recognized under U.S. GAAP in 2001.

c. Business Combinations

Prior to the adoption of IAS 22 (revised 1993) on
January 1, 1995, the Group wrote-off all goodwill directly
to equity in accordance with IFRS existing at that time. The
adoption of IAS 22 (revised 1993) did not require prior
period restatement. Accordingly, a U.S. GAAP difference
exists with respect to the recognition of goodwill and
amortisation before January 1, 1995. For the purpose of the
reconciliation to U.S. GAAP, in 2001, the pre-1995 goodwill
is being amortized through the income statement over estimated
useful lives between 20 and 40 years. In addition to the
normally recurring amortization expense on these amounts during
2001, the Group wrote-off
22 million
of goodwill capitalized under U.S. GAAP. The write-off was
due to the planned disposal of the entity to which the goodwill
relates.

In 2002, as required by the newly implemented
SFAS 142, the Group ceased amortization of its goodwill
recorded under IFRS, its indefinite-lived intangible asset, the
Bayer Cross, and the pre-1995 goodwill recognized
for U.S. GAAP purposes. The adjustment recorded in 2003 and
2002 reverses the amortization expense recognized under IFRS on
the Groups IFRS goodwill in the amount of
199 million
and
194 million,
respectively, and the amortization expense recorded under IAS on
the Bayer Cross indefinite-lived intangible asset in
the amount of
11 million
in 2003 and 2002. Furthermore, in addition to the adjustment
recorded in 2003 for the reversal of normal recurring
amortization expense, the Group wrote-off
182 million
of pre-1995 goodwill which was capitalized under U.S. GAAP
relating to the Polysar acquisition in 1990. See
Additional U.S. GAAP Disclosures for more
detail.

F-69



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


d. Pension Provisions

Under IFRS, pension costs and similar obligations
are accounted for in accordance with IAS 19, Employee
Benefits. For purposes of U.S. GAAP, pension costs
for defined benefit plans are accounted for in accordance with
SFAS No. 87 Employers Accounting for
Pensions. Using an accommodation of the United States
Securities and Exchange Commission (SEC) to foreign
private issuers, the Group adopted SFAS No. 87 on
January 1, 1994, for its non-U.S. plans, which was also the
date of adoption for IAS 19 for those plans. It was not
feasible to apply SFAS No. 87 on the effective date
specified in the standard. IAS 19 as applied by the Group from
1994 was substantially similar to the methodology required under
SFAS No. 87. The adjustment between IFRS and U.S. GAAP
comprises required SFAS 87 amortization of the unrecognized
transition obligation over the remaining average service lives
of employees from 1994 of
238 million,
the recognition of an asset limitation under IAS 19, which is
not allowed under SFAS No. 87, and the recognition of an
additional minimum liability under SFAS No. 87, which is
not required under IAS 19. As of December 31, 2003 the
unrecognized transition obligation from 1994 was fully amortized.

Following is a reconciliation of the balance
sheet and income statement amounts recognized for IFRS and
U.S. GAAP for both pension and post-retirement benefit
plans:



| |                 
| | ----------------
| | Plans in Germany

|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|------------------------------------------------------ |  | ----------- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                                       |  | 2001        |        | 2002 |  | 2003
|                                                       |  |             |        |      |  |     
|                                                       |  |            
|                                                       |  | ( million)
|Pension benefits:                                      |  |             |        |      |  |      |        |   |  |  |        |  
|Liability recognized for IFRS                          |  |             | (3,071 | )    |  |      | (3,220 | ) |  |  | (3,306 | )
|Asset limitation under IAS 19                          |  |             | 1,249  |      |  |      | 1,187  |   |  |  | 1,186  |  
|Additional minimum liability under SFAS
    No. 87     |  |             | (330   | )    |  |      | (322   | ) |  |  | (442   | )
|Difference in unrecognized transition obligation       |  |             | 47     |      |  |      | 23     |   |  |  |       |  
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|Liability recognized for U.S. GAAP                     |  |             | (2,105 | )    |  |      | (2,332 | ) |  |  | (2,562 | )
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|Net periodic benefit cost recognized for IFRS          |  |             | 179    |      |  |      | 302    |   |  |  | 411    |  
|Amortization of transition obligation                  |  |             | 24     |      |  |      | 24     |   |  |  | 23     |  
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|Net periodic benefit cost recognized for U.S.
    GAAP |  |             | 203    |      |  |      | 326    |   |  |  | 434    |  
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  



| |                         
| | ------------------------
| | Plans in other countries

|                                                       |  |             |     |      |  |      |      |   |  |  |      |  
|------------------------------------------------------ |  | ----------- | --- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                       |  | 2001        |     | 2002 |  | 2003
|                                                       |  |             |     |      |  |     
|                                                       |  |            
|                                                       |  | ( million)
|Pension benefits:                                      |  |             |     |      |  |      |      |   |  |  |      |  
|Liability recognized for IFRS                          |  |             | 14  |      |  |      | (521 | ) |  |  | (506 | )
|Asset limitation under IAS 19                          |  |             |    |      |  |      |     |   |  |  | 7    |  
|Additional minimum liability under SFAS
    No. 87     |  |             | (85 | )    |  |      | (158 | ) |  |  | (195 | )
|Difference in unrecognized transition obligation       |  |             |    |      |  |      |     |   |  |  |     |  
|                                                       |  |             |     |      |  |      |      |   |  |  |      |  
|Liability recognized for U.S. GAAP                     |  |             | (71 | )    |  |      | (679 | ) |  |  | (694 | )
|                                                       |  |             |     |      |  |      |      |   |  |  |      |  
|Net periodic benefit cost recognized for IFRS          |  |             | 91  |      |  |      | 219  |   |  |  | 336  |  
|Amortization of transition obligation                  |  |             |    |      |  |      |     |   |  |  |     |  
|                                                       |  |             |     |      |  |      |      |   |  |  |      |  
|Net periodic benefit cost recognized for U.S.
    GAAP |  |             | 91  |      |  |      | 219  |   |  |  | 336  |  
|                                                       |  |             |     |      |  |      |      |   |  |  |      |  

F-70



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




| |      
| | -----
| | Total

|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|------------------------------------------------------ |  | ----------- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                                       |  | 2001        |        | 2002 |  | 2003
|                                                       |  |             |        |      |  |     
|                                                       |  |            
|                                                       |  | ( million)
|Pension benefits:                                      |  |             |        |      |  |      |        |   |  |  |        |  
|Liability recognized for IFRS                          |  |             | (3,057 | )    |  |      | (3,741 | ) |  |  | (3,812 | )
|Asset limitation under IAS 19                          |  |             | 1,249  |      |  |      | 1,187  |   |  |  | 1,193  |  
|Additional minimum liability under SFAS
    No. 87     |  |             | (415   | )    |  |      | (480   | ) |  |  | (637   | )
|Difference in unrecognized transition obligation       |  |             | 47     |      |  |      | 23     |   |  |  |       |  
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|Liability recognized for U.S. GAAP                     |  |             | (2,176 | )    |  |      | (3,011 | ) |  |  | (3,256 | )
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|Net periodic benefit cost recognized for IFRS          |  |             | 270    |      |  |      | 521    |   |  |  | 747    |  
|Amortization of transition obligation                  |  |             | 24     |      |  |      | 24     |   |  |  | 23     |  
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|Net periodic benefit cost recognized for U.S.
    GAAP |  |             | 294    |      |  |      | 545    |   |  |  | 770    |  
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  



|   |                                    
|-- | -----------------------------------
|e. | In-process Research and Development

IFRS does not consider that in-process research
and development (IPR&D) is an intangible asset
that can be separated from goodwill. Under U.S. GAAP it is
considered to be a separate asset that needs to be written-off
immediately following an acquisition as the feasibility of the
acquired research and development has not been fully tested and
the technology has no alternative future use.

During 2002, IPR&D has been identified for
U.S. GAAP purposes in connection with the Aventis
CropScience and Visible Genetics acquisitions. Fair value
determinations were used to establish
133 million
of IPR&D related to both acquisitions, which was expensed
immediately. The independent appraisers used a discounted cash
flow income approach and relied upon information provided by
Group management. The discounted cash flow income approach uses
the expected future net cash flows, discounted to their present
value, to determine an assets current fair value.

As a whole, the income booked for the reversal of
the amortization of IPR&D recorded under IFRS as a component
of other operating expense and selling expense amounted to
5 million
in 2002 and to
12 million
in 2003.



|   |                  
|-- | -----------------
|f. | Asset Impairments

While the triggering events under both IFRS and
U.S. GAAP that require an impairment test on long-lived
assets are the same, there is a difference in the indicators of
an impairment. Under IFRS, impairments on long-lived assets are
recognized when the recoverable amount of an asset is less than
its carrying amount. An assets recoverable amount is the
higher of its net selling price, which is the sales price less
costs of disposal, and value in use, which is the estimated
discounted cash flows from the use and disposal of the asset.
Under U.S. GAAP, a two-step model is used in accordance
with SFAS 144 Accounting for the Impairment or
Disposal of Long-lived Assets (SFAS 144).
The first step is an analysis of an assets carrying value
as compared to the sum of its undiscounted cash flows. Only if
the undiscounted cash flows are less than the assets
carrying value will an impairment be indicated, in which case,
the loss is measured as the difference between the assets
carrying value and its fair value.

In 2002, the carrying values of long-lived assets
of the Polyether business were adjusted for a
205 million
impairment loss under IFRS. However, as the undiscounted cash
flows of the Polyether business were greater than its carrying
value under U.S. GAAP, no further impairment test was
required and, therefore, no impairment loss recorded.

The adjustment recorded in 2003 reflects the
recognition of the
205 million
impairment of the Polyether business under U.S. GAAP that had
been recognized under IFRS in 2002. In addition, the adjustment
recorded in

F-71



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


2003 reflects the reversal of impairment charges
relating to goodwill recognized under IFRS in the amount of
63 million
and the recognition of long lived asset impairment under
U.S. GAAP in the amount of
218 million
in connection with the strategic realignment of the Bayer Group
as well as the deterioration in business conditions in some
areas of operations. These adjustments resulted from differences
in applying the impairment provisions under IFRS and
U.S. GAAP. IAS 36 requires that an impairment loss of
a cash generating unit first be allocated to reduce the carrying
amount of goodwill allocated to the unit and, second, to other
assets of the unit on a pro-rata basis based on the carrying
amounts of each asset in the unit. However, U.S. GAAP
requires that long lived assets, other than goodwill and
indefinite lived intangible assets, first be analyzed and
impaired under SFAS 144. Subsequently, U.S. GAAP
requires goodwill and indefinite lived intangible assets to be
evaluated for impairment under SFAS 142, Goodwill and
Other Intangible Assets. Accordingly, the Group recognized
an additional impairment loss of
155 million
under U.S. GAAP. See Additional U.S. GAAP
Disclosures for a further discussion of the requirements
of SFAS 142. The impairment of the Polyether business in
2003 resulted from the sustained economic downturn.



|   |                                                       
|-- | ------------------------------------------------------
|g. | Other Employee Benefits (Early Retirement
    Program)

The Company offers an early retirement program to
its employees whose terms provide an employee the opportunity to
work fulltime for a period of up to two and a half years and
receive fifty percent of his or her base salary for up to five
years, plus additional bonus payments during each of those five
years. Under IFRS, the company immediately accrued and expensed
a portion of the related early retirement benefit obligation for
certain qualified employees who participate or are expected to
participate in this program in future periods. Under
U.S. GAAP, such early retirement benefits are accrued over
the employees remaining service lives for participating
employees that signed an early retirement agreement.



|   |      
|-- | -----
|h. | Other

There are also differences between IFRS and
U.S. GAAP in relation to (1) restructuring provisions
and (2) equity compensation. None of the differences are
individually significant and they are therefore shown as a
combined total.

Additional U.S. GAAP disclosures

Goodwill and Other Intangible
Assets

Effective January 1, 2002, the Group began
applying the provisions of SFAS 142, which requires that
goodwill no longer be amortized over its estimated useful life.
The Group must instead identify and value its reporting units
for the purpose of assessing, at least annually, potential
impairment of goodwill allocated to each reporting unit.
Goodwill must be evaluated for impairment between these annual
tests if events or changes in circumstances indicate that
goodwill might be impaired.

The testing of goodwill for impairment involves
two steps:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The first step is to compare each reporting
    units fair value with its carrying amount including
    goodwill. If a reporting units carrying amount exceeds its
    fair value, this indicates that its goodwill may be impaired and
    the second step is required.                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The second step is to compare the implied fair
    value of the reporting units goodwill with the carrying
    amount of its goodwill. The implied fair value is computed by
    allocating the reporting units fair value to all of its
    assets and liabilities in a manner that is similar to a purchase
    price allocation in a business combination in accordance with
    SFAS 141. The remaining unallocated purchase price is the
    implied fair value of the reporting units goodwill. If the
    implied fair value of goodwill is less than its carrying value,
    the difference is recorded as an impairment.

The Group also reassessed the useful lives of
existing recognized intangible assets. Intangible assets deemed
to have indefinite lives are no longer amortized, instead they
are tested annually for potential impairment, or more

F-72



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


frequently if events or changes in circumstances
indicate that the asset might be impaired. Intangible assets
with finite lives continue to be amortized over their useful
lives. No changes in useful lives were made as a result of this
reassessment.

Since the early 1900s, the Bayer
Cross has served to distinguish the Bayer name.
After World War I, the U.S. government expropriated
the U.S. rights to the Bayer name and trademarks as
enemy property. In 1986, Bayer reacquired the
U.S. rights to the Bayer trademark with respects to
products in the manufacturing industry and, in 1994, reacquired
the full U.S. rights to its name and trademarks, including
the Bayer Cross. We believe that the use of the
Bayer Cross by the business groups distinguishes
Bayer products, particularly in the U.S. markets. The Bayer
Cross is utilized on substantially all products sold
worldwide. There is no regulatory or legal life imposed on the
Bayer Cross. Bayer protects the value of the Bayer
Cross through its policy of not licensing its use to
any parties outside the Bayer Group. Based on these reasons, the
value associated with the Bayer Cross is assessed to
have an indefinite life and, accordingly, will not be amortized.
The intangible assets, related to the Bayer Cross
(primarily trademarks), had a total carrying value of
139 million
as of January 1, 2002.

In 2002 the Group has identified its reporting
units as their business groups. In 2003 due to the strategic
realignment of the Bayer Group the reporting units are currently
comprised of either divisions (or business groups, or business
units), which are comprised of strategic business entities, or
the strategic business entities themselves.

Upon implementation of SFAS 142,
transitional impairment testing was performed as of the
beginning of the year 2002 in accordance with the requirements
of the Standard. This testing resulted in no impairment of the
Groups goodwill and indefinite-lived intangible assets.

The adoption of SFAS 142 required the Group to
reclassify as goodwill any intangible assets that were acquired
in business combinations completed before July 1, 2001 and
that did not meet the criteria for separate recognition apart
from goodwill under SFAS 141. In addition any intangible
asset acquired that meets the new separability criteria but had
been previously included in the amount reported as goodwill must
be reclassified and accounted for as an asset apart from
goodwill. Application of these standards did not result in any
reclassifications.

In 2003, as a result of the strategic realignment
of the Bayer Group and the deterioration in business conditions
in some areas of operations, the Group recorded a pre-tax
impairment charge totaling approximately
286 million
for goodwill and
711 million
for intangible assets. The Group uses a discounted cash flow
model to determine the fair value of its reporting units and
asset groups. The cash flow forecasts were derived from the
current long-term planning for the Bayer Group. The discount
rate was determined from in-house analyses of the weighted
average cost of capital (WACC). The model used for this is based
on the option pricing theory and takes account of country,
credit and interest rate risks arising from the volatility of
business operations and the capital structure of the respective
subgroup.

F-73



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The following table represents details of the
Groups total purchased intangible assets and related
accumulated amortization:

|                                     |  |             |       |            |  |            |       |       |  |       |       |   |  |  |        |   |  |  |        |  
|------------------------------------ |  | ----------- | ----- | ---------- |  | ---------- | ----- | ----- |  | ----- | ----- | - |  |  | ------ | - |  |  | ------ | -
|                                     |  |             |       |            |  | Marketing, |       |       |  |      
|                                     |  |             |       |            |  | Selling    |       |       |  |      
|                                     |  |             |       |            |  | and Access |       |       |  |      
|                                     |  | Patents     |       | Trademarks |  | Rights     |       | Other |  | Total
|                                     |  |             |       |            |  |            |       |       |  |      
|                                     |  |            
|                                     |  | ( million)
|Gross Carrying amounts, Dec 31, 2003 |  |             | 1,286 |            |  |            | 889   |       |  |       | 2,526 |   |  |  | 2,742  |   |  |  | 7,443  |  
|Accumulated Amortization             |  |             | (442  | )          |  |            | (297  | )     |  |       | (488  | ) |  |  | (1,645 | ) |  |  | (2,872 | )
|                                     |  |             |       |            |  |            |       |       |  |       |       |   |  |  |        |   |  |  |        |  
|Net book value, Dec 31, 2003         |  |             | 844   |            |  |            | 592   |       |  |       | 2,038 |   |  |  | 1,097  |   |  |  | 4,571  |  
|                                     |  |             |       |            |  |            |       |       |  |       |       |   |  |  |        |   |  |  |        |  
|Gross Carrying amounts, Dec 31, 2002 |  |             | 1,426 |            |  |            | 1,009 |       |  |       | 4,409 |   |  |  | 1,098  |   |  |  | 7,942  |  
|Accumulated Amortization             |  |             | (344  | )          |  |            | (212  | )     |  |       | (783  | ) |  |  | (423   | ) |  |  | (1,762 | )
|                                     |  |             |       |            |  |            |       |       |  |       |       |   |  |  |        |   |  |  |        |  
|Net book value, Dec 31, 2002         |  |             | 1,082 |            |  |            | 797   |       |  |       | 3,626 |   |  |  | 675    |   |  |  | 6,180  |  
|                                     |  |             |       |            |  |            |       |       |  |       |       |   |  |  |        |   |  |  |        |  

The Group recorded aggregate amortization expense
of
1,570 million,
852 million,
and
553 million
in 2003, 2002, and 2001, respectively, on its intangible assets.
Impairment charges in the amount of
711 million,
 nil, and
 nil in
2003, 2002, and 2001, respectively, are included in these
amounts. In 2003 and 2002 additional amortization of
100 and
55 million
is included. This incremental amortization is due to the
reorganization of the Group, which will require certain entities
to run their business on individual ERP-Systems, thus,
significantly shortening the useful life of the current
ERP-System.

Based on the current amount of intangible assets,
subject to amortization, estimated amortization expenses for
each of the five succeeding fiscal years are as follows:

|                                              |  |             |     | 
|--------------------------------------------- |  | ----------- | --- | 
|                                              |  | ( million)
|                                              |  |            
|Estimated Aggregated Amortization
    Expense |  |             |     | 
|2004                                          |  |             | 631 | 
|2005                                          |  |             | 608 | 
|2006                                          |  |             | 585 | 
|2007                                          |  |             | 561 | 
|2008                                          |  |             | 539 | 

As acquisitions and dispositions occur in the
future, actual amounts will vary.

The carrying amount of goodwill had the following
changes in 2003 and 2002 in each of Bayers segments:

|                                       |  |                  |   |                |  |        |     |             |  |           |   |  |  |  |       |   |  |  |      |  
|-------------------------------------- |  | ---------------- | - | -------------- |  | ------ | --- | ----------- |  | --------- | - |  |  |  | ----- | - |  |  | ---- | -
|                                       |  | Pharmaceuticals, |   |                |  |        |     |             |  |          
|                                       |  | Biological       |   | Consumer Care, |  | Animal |     |             |  | Plastics,
|                                       |  | Products         |   | Diagnostics    |  | Health |     | CropScience |  | Rubber   
|                                       |  |                  |   |                |  |        |     |             |  |          
|                                       |  |                 
|                                       |  | ( million)     
|Book value as of January 1,
    2003   |  |                  | 1 |                |  |        | 663 |             |  |           | 1 |  |  |  | 2,353 |   |  |  | 318  |  
|                                       |  |                  |   |                |  |        |     |             |  |           |   |  |  |  |       |   |  |  |      |  
|Goodwill additions                     |  |                  |  |                |  |        |    |             |  |           |  |  |  |  | 7     |   |  |  | 45   |  
|Goodwill impairment                    |  |                  |  |                |  |        |    |             |  |           |  |  |  |  |      |   |  |  | (185 | )
|Other changes*                         |  |                  |  |                |  |        | (43 | )           |  |           |  |  |  |  | (147  | ) |  |  | (21  | )
|                                       |  |                  |   |                |  |        |     |             |  |           |   |  |  |  |       |   |  |  |      |  
|Book value as of December 31,
    2003 |  |                  | 1 |                |  |        | 620 |             |  |           | 1 |  |  |  | 2,213 |   |  |  | 157  |  
|                                       |  |                  |   |                |  |        |     |             |  |           |   |  |  |  |       |   |  |  |      |  

F-74



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                       |  |                  |     |           |  |                |     |             |  |  |   |  |  |  |       |  
|-------------------------------------- |  | ---------------- | --- | --------- |  | -------------- | --- | ----------- |  |  | - |  |  |  | ----- | -
|                                       |  | Polyurethanes,   |     |           |  | Other/         |     |            
|                                       |  | Coatings, Fibers |     | Chemicals |  | Reconciliation |     | Bayer Group
|                                       |  |                  |     |           |  |                |     |            
|                                       |  |                 
|                                       |  | ( million)     
|Book value as of January 1,
    2003   |  |                  | 209 |           |  |                | 158 |             |  |  |  |  |  |  | 3,703 |  
|                                       |  |                  |     |           |  |                |     |             |  |  |   |  |  |  |       |  
|Goodwill additions                     |  |                  |    |           |  |                |    |             |  |  |  |  |  |  | 52    |  
|Goodwill impairment                    |  |                  | (12 | )         |  |                | (89 | )           |  |  |  |  |  |  | (286  | )
|Other changes*                         |  |                  | (19 | )         |  |                | (10 | )           |  |  |  |  |  |  | (240  | )
|                                       |  |                  |     |           |  |                |     |             |  |  |   |  |  |  |       |  
|Book value as of December 31,
    2003 |  |                  | 178 |           |  |                | 59  |             |  |  |  |  |  |  | 3,229 |  
|                                       |  |                  |     |           |  |                |     |             |  |  |   |  |  |  |       |  



---



|  |                                                                  
|- | -----------------------------------------------------------------
|* | Other changes include transfers and exchange rate
    differences

|                                       |  |                  |   |                |  |        |      |             |  |           |   |  |  |  |       |  |  |  |     |  
|-------------------------------------- |  | ---------------- | - | -------------- |  | ------ | ---- | ----------- |  | --------- | - |  |  |  | ----- |  |  |  | --- | -
|                                       |  | Pharmaceuticals, |   |                |  |        |      |             |  |          
|                                       |  | Biological       |   | Consumer Care, |  | Animal |      |             |  | Plastics,
|                                       |  | Products         |   | Diagnostics    |  | Health |      | CropScience |  | Rubber   
|                                       |  |                  |   |                |  |        |      |             |  |          
|                                       |  |                 
|                                       |  | ( million)     
|Book value as of January 1,
    2002   |  |                  | 1 |                |  |        | 787  |             |  |           | 1 |  |  |  | 148   |  |  |  | 335 |  
|                                       |  |                  |   |                |  |        |      |             |  |           |   |  |  |  |       |  |  |  |     |  
|Goodwill additions                     |  |                  |  |                |  |        | 8    |             |  |           |  |  |  |  | 2,173 |  |  |  |    |  
|Goodwill impairment                    |  |                  |  |                |  |        |     |             |  |           |  |  |  |  |      |  |  |  |    |  
|Other changes*                         |  |                  |  |                |  |        | (132 | )           |  |           |  |  |  |  | 32    |  |  |  | (17 | )
|                                       |  |                  |   |                |  |        |      |             |  |           |   |  |  |  |       |  |  |  |     |  
|Book value as of December 31,
    2002 |  |                  | 1 |                |  |        | 663  |             |  |           | 1 |  |  |  | 2,353 |  |  |  | 318 |  
|                                       |  |                  |   |                |  |        |      |             |  |           |   |  |  |  |       |  |  |  |     |  

|                                       |  |                  |     |           |  |                |      |             |  |  |   |  |  |  |       |  
|-------------------------------------- |  | ---------------- | --- | --------- |  | -------------- | ---- | ----------- |  |  | - |  |  |  | ----- | -
|                                       |  | Polyurethanes,   |     |           |  | Other/         |      |            
|                                       |  | Coatings, Fibers |     | Chemicals |  | Reconciliation |      | Bayer Group
|                                       |  |                  |     |           |  |                |      |            
|                                       |  |                 
|                                       |  | ( million)     
|Book value as of January 1,
    2002   |  |                  | 236 |           |  |                | 252  |             |  |  |  |  |  |  | 1,760 |  
|                                       |  |                  |     |           |  |                |      |             |  |  |   |  |  |  |       |  
|Goodwill additions                     |  |                  | 16  |           |  |                | 13   |             |  |  |  |  |  |  | 2,210 |  
|Goodwill impairment                    |  |                  |    |           |  |                |     |             |  |  |  |  |  |  |      |  
|Other changes*                         |  |                  | (43 | )         |  |                | (107 | )           |  |  |  |  |  |  | (267  | )
|                                       |  |                  |     |           |  |                |      |             |  |  |   |  |  |  |       |  
|Book value as of December 31,
    2002 |  |                  | 209 |           |  |                | 158  |             |  |  |  |  |  |  | 3,703 |  
|                                       |  |                  |     |           |  |                |      |             |  |  |   |  |  |  |       |  



---



|  |                                                                  
|- | -----------------------------------------------------------------
|* | Other changes include transfers and exchange rate
    differences

If the Group had adopted SFAS 142 as of
January 1, 2001 and had accounted for goodwill and
indefinite-lived intangibles under the nonamortization method,
the impact on reported U.S. GAAP results would have been as
follows:

|                                                |                                   |                             |      |      |  |      |       |   |  |  |        |   | 
|----------------------------------------------- | --------------------------------- | --------------------------- | ---- | ---- |  | ---- | ----- | - |  |  | ------ | - | 
|                                                |                                   |                            
|                                                |                                   | For the year ended Dec. 31,
|                                                |                                   |                            
|                                                |                                   | 2001                        |      | 2002 |  | 2003
|                                                |                                   |                             |      |      |  |     
|                                                |                                   |                            
|                                                |                                   | ( million)                
|Net income (loss) under U.S. GAAP               |                                   |                             | 800  |      |  |      | 1,277 |   |  |  | (1,445 | )
|Amortization, net of tax                        |                                   |                             |      |      |  |      |       |   |  |  |        |  
|                                                | Goodwill                          |                             |      | 178  |  |      |       |  |  |  |        |  | 
|                                                | Indefinite-lived intangible asset |                             |      | 6    |  |      |       |  |  |  |        |  | 
|                                                |                                   |                             |      |      |  |      |       |   |  |  |        |  
|Adjusted net income (loss) under U.S. GAAP      |                                   |                             | 984  |      |  |      | 1,277 |   |  |  | (1,445 | )
|                                                |                                   |                             |      |      |  |      |       |   |  |  |        |  
|Adjusted basic and diluted net income per share |                                   |                             | 1.35 |      |  |      | 1.75  |   |  |  | (1.98  | )
|                                                |                                   |                             |      |      |  |      |       |   |  |  |        |  

F-75



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Discontinued operations

As discussed in Note 6, the expected disposal of
Lanxess, which consists of certain components of the Plastics,
Rubber; Polyurethanes, Coatings, and Fibers segments as well as
substantially all of Bayer Chemicals subgroup with the exception
of H.C. Starck and Wolff Walsrode is accounted for as
discontinuing operations in 2003 under IFRS. Under U.S. GAAP,
SFAS 144 requires that a component of an entity that either has
been disposed of or is classified as held for sale be reported
as discontinued operations if both of the following conditions
are met: (a) the operations and cash flows of the component
have been (or will be) eliminated from the ongoing operations of
the entity as a result of the disposal transaction and
(b) the entity will not have any significant continuing
involvement in the operations of the component after the
disposal transaction. Further, SFAS 144 indicates that a
component of an entity which is to be distributed to owners in a
spin-off transaction should not be reported as discontinued
operations until the transaction has taken place. Because the
expected disposal of Lanxess did not qualify as an asset held
for sale in accordance with SFAS 144 and was not spun-off as of
December 31, 2003, it is not accounted for as discontinued
operations in 2003 under U.S. GAAP.

In addition, as discussed in Note 6, the expected
disposal of the Plasma business (included in the
Pharmaceuticals, Biological Product segment) is accounted for as
a discontinuing operation in 2003 under IFRS. Under U.S. GAAP,
the planned disposal of the Plasma business, which the Company
expects to complete by a sale in 2004, is considered to have met
held for sale criteria in accordance with SFAS 144
and is accounted for as a discontinued operation. Accordingly,
as of December 31, 2003, the assets and liabilities of the
Plasma business are valued at the lower of their carrying amount
or fair value less cost to sell resulting in a loss recognized
in the amount of
199 million
which is recognized in other operating expenses. Amortization
and depreciation of assets included in the Plasma business
ceased when they were classified as held for sale. The following
table provides details of major classes of assets and
liabilities included as part of the Plasma disposal group held
for sale:

|                                                        |  |              |     | 
|------------------------------------------------------- |  | ------------ | --- | 
|                                                        |  | December 31,
|                                                        |  | 2003        
|                                                        |  |             
|                                                        |  | ( million) 
|Non-current assets                                      |  |              | 3   | 
|Inventories                                             |  |              | 390 | 
|Other current assets                                    |  |              | 103 | 
|Other assets                                            |  |              | 123 | 
|                                                        |  |              |     | 
|Total assets                                            |  |              | 619 | 
|                                                        |  |              |     | 
|Notes payable and current portion of long-term
    debt |  |              |    | 
|Other current liabilities                               |  |              | 84  | 
|Long term debt                                          |  |              |    | 
|Other liabilities                                       |  |              | 5   | 
|                                                        |  |              |     | 
|Total liabilities                                       |  |              | 89  | 
|                                                        |  |              |     | 

Under IFRS, the Group has classified
Haarmann & Reimer (included in the Chemicals segment),
which was disposed in 2002, and EC Erdölchemie (included in
the Chemicals segment), which was disposed in 2001, as a
discontinuing operations as they met the requirements under
IFRS, which requires an analysis of a disposition at the level
of a major line of business or geographical area of operations.
In accordance with the requirements of SFAS 144, the
threshold for reporting discontinued operations, i.e., a
component of an entity, is lower than under IFRS. Accordingly,
dispositions or assets and disposal groups held for sale
qualifying as a component of an entity, which is defined as
comprising operations and cash flows that can be clearly
distinguished, operationally and for financial reporting
purposes from the rest of the entity, shall be reported as
discontinued operations. Therefore, under U.S. GAAP, the
divestitures of Bayer Wohnungen GmbH, included in the
Reconciliation column in segment reporting; the French and
Spanish generic pharmaceuticals operations, included in the

F-76



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Pharmaceutical and Biological Products segment;
and the sale of Bayers global household insecticides
business (Flora) included in the Consumer Care and
Diagnostics segment, qualify for reporting as discontinued
operations.

For U.S. GAAP purposes, sales from discontinued
operations are
613 million,
1,706 million
and
2,269 million,
in 2003, 2002 and 2001, respectively. The operating result of
discontinued operations, including gains on disposals of
256 million,
1,732 million
and
316 million
in 2003, 2002 and 2001 respectively, is
(106) million,
1,735 million
and
383 million
in 2003, 2002 and 2001, respectively.

The following presents income from continuing
operation and discontinued operation under U.S. GAAP:

|                                             |  |             |     |             |  |      |       |      |  |  |        |   |  |  |        |  
|-------------------------------------------- |  | ----------- | --- | ----------- |  | ---- | ----- | ---- |  |  | ------ | - |  |  | ------ | -
|                                             |  | 2001        |     | 2002        |  | 2003 |       | 2003
|                                             |  |             |     |             |  |      |       |     
|                                             |  |             |     |            
|                                             |  | ( million) |     | ($ million)
|Income/loss from continuing
    operations   |  |             | 543 |             |  |      | (171  | )    |  |  | (1,366 | ) |  |  | (1,720 | )
|Discontinued operations  net of tax         |  |             | 257 |             |  |      | 1,448 |      |  |  | (79    | ) |  |  | (100   | )
|                                             |  |             |     |             |  |      |       |      |  |  |        |   |  |  |        |  
|Net income/loss reported under U.S.
    GAAP |  |             | 800 |             |  |      | 1,277 |      |  |  | (1,445 | ) |  |  | (1,820 | )
|                                             |  |             |     |             |  |      |       |      |  |  |        |   |  |  |        |  

|                                              |                                     |             |      |             |  |      |      |       |   |  |       |       |   |  |       |       |  
|--------------------------------------------- | ----------------------------------- | ----------- | ---- | ----------- |  | ---- | ---- | ----- | - |  | ----- | ----- | - |  | ----- | ----- | -
|Earnings per share                            |                                     | 2001        |      | 2002        |  | 2003 |      | 2003 
|                                              |                                     |             |      |             |  |      |      |      
|                                              |                                     |             |      |            
|                                              |                                     | ( million) |      | ($ million)
|Basic and diluted:                            |                                     |             |      |             |  |      |      |       |   |  |       |       |   |  |       |      
|                                              | Income from continuing operations   |             |      | 0.74        |  |      |      | (0.23 | ) |  |       | (1.87 | ) |  |       | (2.35 | )
|                                              | Income from discontinued operations |             |      | 0.36        |  |      |      | 1.98  |   |  |       | (0.11 | ) |  |       | (0.14 | )
|                                              |                                     |             |      |             |  |      |      |       |   |  |       |       |   |  |       |      
|Basic and diluted earnings/loss per
    share |                                     |             | 1.10 |             |  |      | 1.75 |       |   |  | (1.98 | )     |   |  | (2.49 | )    
|                                              |                                     |             |      |             |  |      |      |       |   |  |       |       |   |  |       |      

Classification Differences

Under IFRS, the Group recorded a purchase price
adjustment of
327 million in
connection with the Aventis CropScience acquisition as described
in Note 18 as a reduction in goodwill with an offsetting entry
to accounts receivable in 2003. Under US GAAP, purchase price
adjustments are not recognized until they are realized.
Accordingly, due to the fact that the final agreement concerning
the purchase price adjustment was reached and payment received
in March 2004, the
327 million
reduction in goodwill was reversed for U.S. GAAP purposes.

Financial assets and
liabilities

The components of marketable securities under
U.S. GAAP at December 31, 2003 and 2002 are as follows:

|                               |                   |             |     |            |  |            |    |                |  |  |     |     |   |  |     |     | 
|------------------------------ | ----------------- | ----------- | --- | ---------- |  | ---------- | -- | -------------- |  |  | --- | --- | - |  | --- | --- | 
|                               |                   |             |     | Gross      |  | Gross      |    | Carrying value
|                               |                   |             |     | unrealized |  | unrealized |    | and estimated 
|                               |                   | Cost        |     | gains      |  | losses     |    | fair value    
|                               |                   |             |     |            |  |            |    |               
|                               |                   |            
|                               |                   | ( million)
|As of December 31, 2003        |                   |             |     |            |  |            |    |                |  |  |     |     |   |  |     |    
|Available for sale securities: |                   |             |     |            |  |            |    |                |  |  |     |     |   |  |     |    
|                               | Equity securities |             |     | 266        |  |            |    | 25             |  |  |     | (6  | ) |  |     | 285 | 
|                               | Debt securities   |             |     | 130        |  |            |    | 6              |  |  |     | (1  | ) |  |     | 135 | 
|                               |                   |             |     |            |  |            |    |                |  |  |     |     |   |  |     |    
|Total                          |                   |             | 396 |            |  |            | 31 |                |  |  | (7  | )   |   |  | 420 |    
|                               |                   |             |     |            |  |            |    |                |  |  |     |     |   |  |     |    
|As of December 31, 2002        |                   |             |     |            |  |            |    |                |  |  |     |     |   |  |     |    
|Available for sale securities: |                   |             |     |            |  |            |    |                |  |  |     |     |   |  |     |    
|                               | Equity securities |             |     | 516        |  |            |    | 85             |  |  |     | (95 | ) |  |     | 506 | 
|                               | Debt securities   |             |     | 29         |  |            |    |               |  |  |     |    |   |  |     | 29  | 
|                               |                   |             |     |            |  |            |    |                |  |  |     |     |   |  |     |    
|Total                          |                   |             | 545 |            |  |            | 85 |                |  |  | (95 | )   |   |  | 535 |    
|                               |                   |             |     |            |  |            |    |                |  |  |     |     |   |  |     |    

F-77



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Proceeds from sales of available for sale
securities were
278 million,
714 million,
and
195 million
in 2003, 2002 and 2001, respectively. Gross realized gains of
196 million,
261 million
and
25 million
were included in those sales in 2003, 2002 and 2001,
respectively. There were gross realized losses, resulting from
the recognition of other-than-temporary impairments, of
86 million,
69 million,
and nil in 2003, 2002 or 2001, respectively. The gain or loss on
sales was determined using the weighted average cost method.

The maturities of debt securities at
December 31, 2003 are as follows:

|                                 |  |             |     | 
|-------------------------------- |  | ----------- | --- | 
|                                 |  | Available  
|                                 |  | for Sale   
|                                 |  |            
|                                 |  | ( million)
|Within one year                  |  |             | 122 | 
|Over one year through five years |  |             | 13  | 
|                                 |  |             |     | 
|Total                            |  |             | 135 | 
|                                 |  |             |     | 

Derivative financial
instruments

The estimated fair values of derivative financial
instruments are provided in Note 38 to the Consolidated
Financial Statements of the Bayer Group. The use of derivatives
is generally confined to the economic hedging of the operating
business and of the related investments and financing
transactions. To participate in commodity market fluctuations we
make use of derivative financial instruments according to our
own assessments of the relevant markets.

Fair Value Hedges

Changes in the fair value of derivatives that
hedge interest rate risk are recorded in interest expense-neteach period. The offsetting changes in the fair values of
the related debt are also recorded in interest
expense-net. Changes in the fair value of derivatives that
hedge foreign exchange rate risks are recorded in other
non-operating expense-netfor each period. The offsetting
changes in the fair values of the related debt are also recorded
in other non-operating expense-net.The Group maintains
no other fair value hedges. As of December 31, 2003, Bayer
recognized an amount of
83 million
as effective portion and
7 million
ineffectiveness for the fair-value hedges. All components of the
Groups interest rate swap and cross currency interest rate
swap gains or losses were included in the assessment of hedge
effectiveness.

Cash Flow Hedges

While each risk management program dealing
with/applying to forecasted transactions has a different time
horizon, no program currently extends beyond the next twelve
months. The effects of hedges of foreign currency-denominated
cash receipts are reported in other-operating
expense-net, and the effects of hedges of payments are
reported in the same line item as the underlying payment. As of
December 31, 2003, an amount of
21 million
was recognized as effective portion. The hedge ineffectiveness
reported in earnings in the twelve months ended
December 31, 2003 amounted to
2 million.
All components of the Groups cash flow hedge gains or
losses were included in the assessment of hedge effectiveness.
No amounts were reclassified to earnings for forecasted
transactions that did not occur. The estimated net amount of the
existing gains or losses on the reporting date that are expected
to be reclassified as earnings within the next twelve months
amount to
2 million.

Cash flow hedge results are reclassified into
earnings during the same period in which the related exposure
impacts earnings. If it appears that a forecasted transaction
will not materialize, reclassifications are made sooner.

F-78



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Hedges of Net Investment in a Foreign
Entity

The Group does not maintain any hedges of net
investment in a foreign entity.

Non-derivative financial
instruments

The U.S. GAAP carrying values are equivalent to
the IAS carrying values for all non-derivative financial assets
and liabilities. Non-derivative financial assets consist of cash
and cash equivalents, time deposits, and marketable securities.
Non-derivative liabilities consist of commercial paper, bank or
other short-term financial debts, and long-term debt.

The carrying amount of cash and cash equivalents,
time deposits, commercial paper, and bank and other short-term
financial debts approximates their estimated fair values, due to
the short-term nature of these instruments. The fair value for
marketable securities are estimated based on listed market
prices or broker or dealer price quotes. The fair value of
long-term debt is estimated based on the current quoted market
rates available for debt with similar terms and maturities.

Information concerning the fair values of long
and short-term financial debt is provided in Note 38 to the
Consolidated Financial Statements of the Bayer Group.

Comprehensive Income

SFAS No. 130 Reporting Comprehensive
Income established standards for the reporting and display
of comprehensive income and its components. Comprehensive income
includes net income and all changes in equity during a period
that arise from non-owner sources, such as foreign currency
items and unrealized gains and losses on securities
available-for-sale. The additional disclosures required under
U.S. GAAP are as follows:

|                                                                                                                                                                    |  |             |      |      |  |      |        |   |  |  |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---- | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                                                                                                                                                    |  | 2001        |      | 2002 |  | 2003
|                                                                                                                                                                    |  |             |      |      |  |     
|                                                                                                                                                                    |  |            
|                                                                                                                                                                    |  | ( million)
|Net income/loss under U.S. GAAP                                                                                                                                     |  |             | 800  |      |  |      | 1,277  |   |  |  | (1,445 | )
|Other comprehensive income/loss:                                                                                                                                    |  |             |      |      |  |      |        |   |  |  |        |  
|Unrealized market value adjustment on
    available-for-sale securities (net of taxes of
    28 million,
    51 million
    and
    5 million,
    respectively) |  |             | (834 | )    |  |      | (417   | ) |  |  | 27     |  
|Unrealized market value adjustment on cash flow
    hedges (net of taxes of
    1 million,
    2 million,
    and
    19 million)                                |  |             | 137  |      |  |      | (31    | ) |  |  | (29    | )
|Reclassification adjustment:                                                                                                                                        |  |             |      |      |  |      |        |   |  |  |        |  
|Net realized (gains)/losses on sales of
    securities (net of taxes of
     nil,
    1 million
    and
    6 million,
    respectively)                         |  |             | (25  | )    |  |      | (154   | ) |  |  | 1      |  
|Net realized (gains)/losses on sales of cash flow
    hedges (net of taxes of
    27 million,
    4 million
    and
    2 million,
    respectively)             |  |             | (68  | )    |  |      | 9      |   |  |  | 3      |  
|Additional minimum pension liability (net of
    taxes of
    80 million,
    26 million
    and
    63 million,
    respectively)                               |  |             | (120 | )    |  |      | (39    | ) |  |  | (94    | )
|Foreign currency translation adjustment                                                                                                                             |  |             | 322  |      |  |      | (1,444 | ) |  |  | (1,222 | )
|                                                                                                                                                                    |  |             |      |      |  |      |        |   |  |  |        |  
|Comprehensive income/loss under U.S.
    GAAP                                                                                                                       |  |             | 212  |      |  |      | (799   | ) |  |  | (2,759 | )
|                                                                                                                                                                    |  |             |      |      |  |      |        |   |  |  |        |  

F-79



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Employee Benefit Plans

Presented below are the disclosures required by
SFAS No. 132 Employers Disclosures about
Pensions and Other Post-Retirement Benefits, that have not
yet been presented elsewhere in the document:



| |                       
| | ----------------------
| | Additional Information

The additional minimum liability in the amount of
637 million
(2002:
480 million;
2001:
415 million)
is charged against stockholders equity.



| |                 
| | ----------------
| | Plans in Germany

|                                                                                              |  |              |       |      |  |  |       | 
|--------------------------------------------------------------------------------------------- |  | ------------ | ----- | ---- |  |  | ----- | 
|                                                                                              |  |             
|                                                                                              |  | December 31,
|                                                                                              |  |             
|Information for pension plans with an accumulated benefit obligation in excess of plan assets |  | 2002         |       | 2003
|                                                                                              |  |              |       |     
|                                                                                              |  |             
|                                                                                              |  | ( million) 
|Projected benefit obligation                                                                  |  |              | 4,098 |      |  |  | 4,492 | 
|Accumulated benefit obligation                                                                |  |              | 4,054 |      |  |  | 4,291 | 
|Fair value of plan assets                                                                     |  |              | 43    |      |  |  | 43    | 



| |                         
| | ------------------------
| | Plans in other countries

|                                                                                              |  |              |       |      |  |  |       | 
|--------------------------------------------------------------------------------------------- |  | ------------ | ----- | ---- |  |  | ----- | 
|                                                                                              |  |             
|                                                                                              |  | December 31,
|                                                                                              |  |             
|Information for pension plans with an accumulated benefit obligation in excess of plan assets |  | 2002         |       | 2003
|                                                                                              |  |              |       |     
|                                                                                              |  |             
|                                                                                              |  | ( million) 
|Projected benefit obligation                                                                  |  |              | 3,081 |      |  |  | 2,745 | 
|Accumulated benefit obligation                                                                |  |              | 2,656 |      |  |  | 2,324 | 
|Fair value of plan assets                                                                     |  |              | 2,207 |      |  |  | 2,022 | 



| |      
| | -----
| | Total

|                                                                                              |  |              |       |      |  |  |       | 
|--------------------------------------------------------------------------------------------- |  | ------------ | ----- | ---- |  |  | ----- | 
|                                                                                              |  |             
|                                                                                              |  | December 31,
|                                                                                              |  |             
|Information for pension plans with an accumulated benefit obligation in excess of plan assets |  | 2002         |       | 2003
|                                                                                              |  |              |       |     
|                                                                                              |  |             
|                                                                                              |  | ( million) 
|Projected benefit obligation                                                                  |  |              | 7,179 |      |  |  | 7,237 | 
|Accumulated benefit obligation                                                                |  |              | 6,710 |      |  |  | 6,615 | 
|Fair value of plan assets                                                                     |  |              | 2,250 |      |  |  | 2,065 | 



| |            
| | -----------
| | Assumptions



| |                 
| | ----------------
| | Plans in Germany

|                                                 |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |       | 
|------------------------------------------------ | -------------------------------- | ---------------- |  | --------------------- |  | ---- |  | ----- |  | ---- |  | ----- |  |  |  | ----- |  |  |  | ----- |  |  |  | ----- | 
|                                                 |                                  |                  |  |                       |  |      |  |      
|                                                 |                                  |                  |  | Other Post-Employment
|                                                 |                                  | Pension Benefits |  | Benefits             
|                                                 |                                  |                  |  |                      
|Weighted-average assumptions used at December 31 |                                  | 2001             |  | 2002                  |  | 2003 |  | 2001  |  | 2002 |  | 2003 
|                                                 |                                  |                  |  |                       |  |      |  |       |  |      |  |      
|Discount rate                                    |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |      
|                                                 | to determine net benefit costs   |                  |  | 6.50%                 |  |      |  | 6.25% |  |      |  | 6.00% |  |  |  | 6.50% |  |  |  | 4.00% |  |  |  | 3.75% | 
|                                                 | to determine benefit obligations |                  |  | 6.25%                 |  |      |  | 6.00% |  |      |  | 5.50% |  |  |  | 6.25% |  |  |  | 3.75% |  |  |  | 3.50% | 
|Rate of compensation increase                    |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |      
|                                                 | to determine net benefit costs   |                  |  | 3.00%                 |  |      |  | 3.00% |  |      |  | 2.75% |  |  |  | N/A   |  |  |  | N/A   |  |  |  | N/A   | 
|                                                 | to determine benefit obligations |                  |  | 3.00%                 |  |      |  | 2.75% |  |      |  | 2.50% |  |  |  | N/A   |  |  |  | N/A   |  |  |  | N/A   | 
|Expected return on plan assets                   |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |      
|                                                 | to determine net benefit costs   |                  |  | 6.50%                 |  |      |  | 6.50% |  |      |  | 6.25% |  |  |  | N/A   |  |  |  | N/A   |  |  |  | N/A   | 
|                                                 | to determine benefit obligations |                  |  | 6.50%                 |  |      |  | 6.25% |  |      |  | 6.00% |  |  |  | N/A   |  |  |  | N/A   |  |  |  | N/A   | 

F-80



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




| |                         
| | ------------------------
| | Plans in other countries

|                                                 |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |       | 
|------------------------------------------------ | -------------------------------- | ---------------- |  | --------------------- |  | ---- |  | ----- |  | ---- |  | ----- |  |  |  | ----- |  |  |  | ----- |  |  |  | ----- | 
|                                                 |                                  |                  |  |                       |  |      |  |      
|                                                 |                                  |                  |  | Other Post-Employment
|                                                 |                                  | Pension Benefits |  | Benefits             
|                                                 |                                  |                  |  |                      
|Weighted-average assumptions used at December 31 |                                  | 2001             |  | 2002                  |  | 2003 |  | 2001  |  | 2002 |  | 2003 
|                                                 |                                  |                  |  |                       |  |      |  |       |  |      |  |      
|Discount rate                                    |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |      
|                                                 | to determine net benefit costs   |                  |  | 6.60%                 |  |      |  | 6.70% |  |      |  | 6.70% |  |  |  | 7.00% |  |  |  | 7.00% |  |  |  | 6.80% | 
|                                                 | to determine benefit obligations |                  |  | 6.70%                 |  |      |  | 6.70% |  |      |  | 6.10% |  |  |  | 7.00% |  |  |  | 6.80% |  |  |  | 6.25% | 
|Rate of compensation increase                    |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |      
|                                                 | to determine net benefit costs   |                  |  | 4.50%                 |  |      |  | 4.50% |  |      |  | 4.40% |  |  |  | N/A   |  |  |  | N/A   |  |  |  | N/A   | 
|                                                 | to determine benefit obligations |                  |  | 4.50%                 |  |      |  | 4.40% |  |      |  | 4.20% |  |  |  | N/A   |  |  |  | N/A   |  |  |  | N/A   | 
|Expected return on plan assets                   |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |      
|                                                 | to determine net benefit costs   |                  |  | 8.30%                 |  |      |  | 8.40% |  |      |  | 8.30% |  |  |  | 8.50% |  |  |  | 8.50% |  |  |  | 7.00% | 
|                                                 | to determine benefit obligations |                  |  | 8.40%                 |  |      |  | 8.30% |  |      |  | 8.20% |  |  |  | 8.50% |  |  |  | 7.00% |  |  |  | 8.25% | 



| |      
| | -----
| | Total

|                                                 |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |       | 
|------------------------------------------------ | -------------------------------- | ---------------- |  | --------------------- |  | ---- |  | ----- |  | ---- |  | ----- |  |  |  | ----- |  |  |  | ----- |  |  |  | ----- | 
|                                                 |                                  |                  |  |                       |  |      |  |      
|                                                 |                                  |                  |  | Other Post-Employment
|                                                 |                                  | Pension Benefits |  | Benefits             
|                                                 |                                  |                  |  |                      
|Weighted-average assumptions used at December 31 |                                  | 2001             |  | 2002                  |  | 2003 |  | 2001  |  | 2002 |  | 2003 
|                                                 |                                  |                  |  |                       |  |      |  |       |  |      |  |      
|Discount rate                                    |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |      
|                                                 | to determine net benefit costs   |                  |  | 6.50%                 |  |      |  | 6.40% |  |      |  | 6.20% |  |  |  | 6.90% |  |  |  | 6.60% |  |  |  | 6.20% | 
|                                                 | to determine benefit obligations |                  |  | 6.40%                 |  |      |  | 6.20% |  |      |  | 5.90% |  |  |  | 6.90% |  |  |  | 6.30% |  |  |  | 5.70% | 
|Rate of compensation increase                    |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |      
|                                                 | to determine net benefit costs   |                  |  | 3.50%                 |  |      |  | 3.50% |  |      |  | 3.30% |  |  |  | N/A   |  |  |  | N/A   |  |  |  | N/A   | 
|                                                 | to determine benefit obligations |                  |  | 3.50%                 |  |      |  | 3.30% |  |      |  | 3.00% |  |  |  | N/A   |  |  |  | N/A   |  |  |  | N/A   | 
|Expected return on plan assets                   |                                  |                  |  |                       |  |      |  |       |  |      |  |       |  |  |  |       |  |  |  |       |  |  |  |      
|                                                 | to determine net benefit costs   |                  |  | 7.10%                 |  |      |  | 7.20% |  |      |  | 7.00% |  |  |  | 8.50% |  |  |  | 8.50% |  |  |  | 7.00% | 
|                                                 | to determine benefit obligations |                  |  | 7.20%                 |  |      |  | 7.10% |  |      |  | 6.80% |  |  |  | 8.50% |  |  |  | 7.00% |  |  |  | 8.25% | 

The assumed health care cost trend rate at
December 31, 2003 was 10.0% gradually declining to 8.0% by
the year 2005. The assumed health care cost trend rate at
December 31, 2002 was 7.0%, decreasing to 5.0% by the year
2004. A one-percentage-point change in the assumed health care
cost trend rates compared to those used for 2003 would have the
following effects:

|                                                             |  |                   |     |                   |  |  |      |  
|------------------------------------------------------------ |  | ----------------- | --- | ----------------- |  |  | ---- | -
|                                                             |  | 1% point increase |     | 1% point decrease
|                                                             |  |                   |     |                  
|                                                             |  |                  
|                                                             |  | ( million)      
|Effects on total of service and interest cost
    components |  |                   | 13  |                   |  |  | (11  | )
|Effect on post retirement benefit obligations                |  |                   | 125 |                   |  |  | (108 | )

F-81



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


On December 23, 2003, the Financial
Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 132 (revised 2003),
Employers Disclosures about Pensions and Other
Postretirement Benefits, an amendment of FASB Statements
No. 87, 88, and 106, and a revision of FASB Statement
No. 132.This requires the following additional
information for the German pension and post-retirement benefit
plans that has not yet been presented:



| |            
| | -----------
| | Plan assets

The Groups asset allocation for its German
pension plans at December 31, 2003 and 2002, by asset
category are as follows:

|                                  |  |                     |        |      |  |  |        | 
|--------------------------------- |  | ------------------- | ------ | ---- |  |  | ------ | 
|                                  |  |                    
|                                  |  | Pension Plan Assets
|                                  |  | at December 31     
|                                  |  |                    
|Asset Category                    |  | 2002                |        | 2003
|                                  |  |                     |        |     
|                                  |  | %                   |        | %   
|Equity securities (directly held) |  |                     | 0.06   |      |  |  | 0.03   | 
|Debt securities                   |  |                     | 29.55  |      |  |  | 32.26  | 
|Special securities funds          |  |                     | 42.74  |      |  |  | 40.32  | 
|Real estate                       |  |                     | 9.77   |      |  |  | 9.04   | 
|Special real estate funds         |  |                     | 4.53   |      |  |  | 4.54   | 
|Other                             |  |                     | 13.35  |      |  |  | 13.81  | 
|                                  |  |                     |        |      |  |  |        | 
|Total                             |  |                     | 100.00 |      |  |  | 100.00 | 
|                                  |  |                     |        |      |  |  |        | 

|                                       |  |            |       | 
|-------------------------------------- |  | ---------- | ----- | 
|                                       |  | Target    
|                                       |  | Allocation
|                                       |  |           
|Asset Category                         |  | 2004      
|                                       |  |           
|                                       |  | %         
|Equity securities (directly held)      |  |            |      | 
|Debt securities                        |  |            | 35-55 | 
|Special securities funds               |  |            | 10-30 | 
|Real estate/ Special real estate funds |  |            | 10-30 | 
|Other                                  |  |            | 5-15  | 

The investment policy of Bayer Pensionskasse is
geared to complying with regulatory provisions governing the
risk structure of its obligations. In the light of capital
market movements, Bayer Pensionskasse has therefore developed a
target investment portfolio aligned to an appropriate risk
structure. Its investment strategy focuses principally on
stringent management of downside risks rather than on maximizing
absolute returns. It is anticipated that this investment policy
can generate a return that enables it to meet its long-term
commitments.

Equity securities of the pension plan include
Groups common stock roughly in the same percentage as
contained in commonly used broad market indices at
December 31, 2003 and 2002, respectively.

The Groups German other post employment
benefit plans are unfunded.



| |           
| | ----------
| | Cash Flows



| |              
| | -------------
| | Contributions

The Group expects to contribute
337 million
to its German pension plan and
41 million
to its German other postemployment benefit plans in 2004. The
Group made contributions to its German pension plans of
320 million
and
263 million
in 2003 and 2002, respectively. Contributions made to German
other postemployment benefit plans in 2003 and 2002 amounted to
57 million and
65 million,
respectively.

F-82



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




| |                                  
| | ---------------------------------
| | Estimated Future Benefit Payments

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

|                  |  |             |       |                 |  |  |     | 
|----------------- |  | ----------- | ----- | --------------- |  |  | --- | 
|                  |  |             |       | Other          
|                  |  | Pension     |       | Post-Employment
|Year              |  | Benefits    |       | Benefits       
|                  |  |             |       |                
|                  |  |            
|                  |  | ( million)
|2004              |  |             | 461   |                 |  |  | 41  | 
|2005              |  |             | 473   |                 |  |  | 44  | 
|2006              |  |             | 496   |                 |  |  | 52  | 
|2007              |  |             | 522   |                 |  |  | 65  | 
|2008              |  |             | 548   |                 |  |  | 74  | 
|Years 2009  2013 |  |             | 3,190 |                 |  |  | 224 | 



| |                                             
| | --------------------------------------------
| | Additional information for German
    plans:

The overall expected long-term return on plan
assets was determined based on outside published and internal
capital markets forecasts for each asset class.

The accumulated benefit obligation for the German
defined benefit pension plan was
8,500 million
and
8,091 million
at December 31, 2003, and 2002, respectively.

The measurement date used to determine the German
pension benefit and German other post-employment benefits was
October 1, 2003.

Stock-Based Compensation

The Group applies Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (ABP 25) and related
interpretations in accounting for its stock compensation
program. SFAS 123, Accounting for Stock-Based
Compensation, would result in the same accounting
treatment for the Groups stock incentive plans as was
applied under APB 25 as Bayers stock compensation
plans are variable plans. Hence the additional pro forma
disclosures required under SFAS 123 do not apply.

Proportional Consolidation

The Group accounts for its investment in
8 joint ventures in 2003 (11 in 2002) using the
proportional consolidation method, which is the benchmark
treatment specified under IAS 31. Under U.S. GAAP, investments
in joint ventures generally are accounted for under the equity
method. The differences in accounting treatment between
proportionate consolidation and the equity method of accounting
have no impact on the Groups consolidated
stockholders equity or net income. Rather, they relate
solely to matters of classification and display. The SEC permits
the omission of such differences in classification and display
in the reconciliation to U.S. GAAP provided certain
criteria have been met.

Condensed financial information relating to the
Groups pro-rata interest in joint ventures accounted for
using the proportionate consolidation method is as follows:

|                          |  |               |     |               |  |  |     | 
|------------------------- |  | ------------- | --- | ------------- |  |  | --- | 
|Balance Sheet Information |  | Dec. 31, 2002 |     | Dec. 31, 2003
|                          |  |               |     |              
|                          |  |              
|                          |  | ( million)  
|Current assets            |  |               | 114 |               |  |  | 85  | 
|Noncurrent assets         |  |               | 221 |               |  |  | 135 | 
|Short-term liabilities    |  |               | 46  |               |  |  | 59  | 
|Long-term liabilities     |  |               |    |               |  |  |    | 

F-83



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                |  |               |     |               |  |  |     | 
|------------------------------- |  | ------------- | --- | ------------- |  |  | --- | 
|Statement of Income Information |  | Dec. 31, 2002 |     | Dec. 31, 2003
|                                |  |               |     |              
|                                |  |              
|                                |  | ( million)  
|Net sales                       |  |               | 176 |               |  |  | 296 | 
|Operating result                |  |               | 52  |               |  |  | 29  | 
|Net income                      |  |               | 47  |               |  |  | 24  | 

|                                          |  |               |     |               |  |  |     |  
|----------------------------------------- |  | ------------- | --- | ------------- |  |  | --- | -
|Statement of Cash Flow Information        |  | Dec. 31, 2002 |     | Dec. 31, 2003
|                                          |  |               |     |              
|                                          |  |              
|                                          |  | ( million)  
|Net cash provided by operating activities |  |               | 80  |               |  |  | 38  |  
|Net cash (used in) investing activities   |  |               | (7  | )             |  |  | (12 | )
|Net Cash (used in) financing activities   |  |               | (70 | )             |  |  | (11 | )

Self-Insurance

Various Group companies are self-insured to
different degrees. The maximum amount of any Group
companys self-insurance is for general liability up to
225 million
per occurrence, and product liability up to
300 million
per occurrence, including claims against our U.S. subsidiary.

Consolidated Financial Statements and Other
Financial Information

See Item 18.

Legal Proceedings

Bayer is involved in a number of legal
proceedings. As a global company active in a wide range of life
sciences and chemical activities, we may in the normal course of
our business become involved in proceedings relating to such
matters as:



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | product liability;                                                              
|
| |  | patent validity and infringement disputes;                                      
|
| |  | tax assessments;                                                                
|
| |  | competition and antitrust; and                                                  
|
| |  | past waste disposal practices and release of
    chemicals into the environment.

We cannot predict with certainty the outcome of
any proceedings in which we are or may become involved. An
adverse decision in a lawsuit seeking damages from us, or our
decision to settle certain cases, could result in a monetary
award to the plaintiff and, to the extent not covered by our
insurance policies, could significantly harm our business or the
result of our operations, financial position or cash flows. If
we lose a case in which we seek to enforce our patent rights, we
could sustain a loss of future revenue as other manufacturers
begin to market products we developed. The following discussion
describes what we believe to be the most significant of the
proceedings in which Bayer AG or its subsidiaries are currently
involved. The list of cases is not an exhaustive list of all of
the claims that have been made against Bayer AG or its
subsidiaries or of the proceedings in which they are involved,
and subsequent developments in any pending matter, as well as
additional claims that may arise from time to time, including
additional claims similar to those described below, could become
significant to Bayer.

Patent validity challenges and infringement
proceedings; patent-related antitrust actions

In the United States, Bayer AG and its
U.S. subsidiaries are and have been plaintiffs or coplaintiffs
in a number of patent infringement actions against generic drug
manufacturers. The lawsuits arose because these manufacturers
filed applications in the United States for regulatory approval
of generic versions of products

F-84



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


marketed by Bayer or its licensees. Some of these
actions have, in turn, given rise to lawsuits alleging that
Bayer AG, Bayer Corporation and other parties violated
federal and state antitrust and similar statutes.

Generic drug manufacturers may receive approval
to market formerly patented products after all applicable patent
protections have expired. A generic drug manufacturer may,
however, attempt to avoid a patent prior to its scheduled expiry
by attacking its validity or enforceability. In the United
States, the Federal Food, Drug, and Cosmetics Act (the
Act) enables generic manufacturers wishing to market
a bio-equivalent version of another manufacturers product
to seek regulatory approval by filing an Abbreviated New Drug
Application (ANDA). In its ANDA the applicant must state the
basis on which it seeks to avoid any applicable patents.

One basis for seeking approval is a claim that
the applicants product does not infringe existing patent
rights or that the patent is invalid or unenforceable. This
claim is commonly known as a paragraph IV
certification or ANDA (IV). Under the
Act, the filing of a paragraph IV certification is deemed an
infringement of patent rights. The Act permits the holder of the
patent rights to file an infringement action against the ANDA
applicant within 45 days of receiving notice of the
paragraph IV certification. If the holder of the patent rights
chooses not to file suit within this period, the FDA may approve
the ANDA immediately. The filing of a suit, however, stays final
FDA approval of the ANDA for a period of 30 months. The
court may shorten or extend this period. If the court rules that
the applicants product will not infringe the patent or
that the patent is invalid or unenforceable, the FDA may grant
approval immediately. If, on the other hand, the court rules
that the product will infringe the patent, the FDA may not grant
final approval until the original patent has expired.

Ciprofloxacin-related actions

Patent-related actions.In January 1997 Bayer AG and
Bayer Corporation settled a patent infringement suit against
Barr Laboratories, Inc. This suit arose when Barr filed an ANDA
(IV) seeking regulatory approval of a generic form of
Bayers ciprofloxacin anti-infective product, which we sell
in the United States under the trademark Cipro. Under the
settlement agreement, Barr and Rugby Laboratories Inc., another
generic manufacturer that supported Barr during the infringement
suit, agreed to dismiss the litigation, acknowledging the
validity and enforceability of Bayers patent rights, and
we agreed to pay each company $24.5 million. The agreement
gave us the option, until our patent expired in 2003, to supply
Barr and Rugbys then parent company Hoechst Marion Roussel
Inc. with ciprofloxacin products, which they could then market
under a license from Bayer using a single trade name, or else to
make quarterly cash payments. Since concluding the settlement
agreement, we have opted to make payments. As of June 9,
2003, Barr began selling ciprofloxacin hydrochloride tablets in
the United States using licensed product purchased from Bayer.
These purchases are being made pursuant to a separate obligation
of Bayer under the settlement agreement to supply such product
to Barr during the six month period immediately preceding the
December 2003 expiration of the patent protecting the sale of
Cipro in the United States. Bayer has received pediatric
exclusivity for Cipro from the FDA, which will delay the
introduction of generic versions of ciprofloxacin for six months
beyond expiration of the patent. The agreement term has been
extended to include the additional six month pediatric
exclusivity period. Shortly after settling this suit, we applied
to the U.S. Patent and Trademark Office for a re-examination of
our patent. The Patent and Trademark Office reissued the patent
in February 1999. See below,  Antitrust
actions.

Antitrust actions.Since July 2000 Bayer Corporation has
been named as a defendant in 39 putative class action lawsuits,
one individual lawsuit and one consumer protection group lawsuit
filed in a number of state and federal courts in the United
States. Bayer AG has also been named as a defendant in 20 of
those cases, including the individual lawsuit and the consumer
protection group lawsuit; however, to date it has only been
served with process in the individual lawsuit and twelve of the
putative class action lawsuits. In addition, Barr Laboratories,
Aventis S.A., Hoechst Marion Roussel, Inc., Rugby
Laboratories, Inc., and Watson Pharmaceuticals, Inc. have each
been named as a defendant in one or more of these lawsuits. The
plaintiffs in these suits allege that they are direct or
indirect purchasers of Cipro who were damaged because
Bayers settlement of the Barr
ANDA (IV) litigation prevented generic manufacturers
from selling a generic version of Cipro. The plaintiffs allege
that the settlement violates various federal antitrust and state
business, antitrust, unfair trade practices, and consumer
protection statutes, and seek treble damages and injunctive
relief.

F-85



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The Judicial Panel for Multidistrict Litigation
(or MDL Panel) transferred 35 of these cases to the
U.S. District Court for the Eastern District of New York
for coordinated pre-trial proceedings. The district court later
remanded nine of those cases to various state courts.

On January 25, 2002, Bayer filed a motion to
dismiss all of the cases pending in the District Court for the
Eastern District of New York, and the plaintiffs filed motions
for partial summary judgment that the conduct alleged in the
complaints constitutes an agreement that is unlawful on its
face. On May 20, 2003, the district court denied the
plaintiffs motions for partial summary judgment,
concluding that the alleged conduct was not per se
anticompetitive under U.S. antitrust laws. The district court
also denied Bayers motion to dismiss, except as to the
consumer protection group lawsuit.

Nine cases have been consolidated and are
currently pending in a California state court. The California
state court certified a class of certain indirect purchasers on
December 1, 2003 and the defendants appealed that decision
on January 9, 2004. No other court has certified a class.
Bayer is also involved in state court proceedings in Florida,
New York, Kansas, Tennessee and Wisconsin. The
New York and Wisconsin cases have been dismissed and
plaintiffs have appealed the dismissal in Wisconsin.

The Barr settlement is also the subject of an
ongoing antitrust investigation by the U.S. Federal Trade
Commission and a number of state attorneys general.

Because these cases, which may involve joint and
several liability among the defendants, in the aggregate allege
substantial unquantified damages and also seek treble and
punitive damages and penalties, it is possible that the ultimate
liability for us could materially adversely affect our results
of operations, financial position or cash flows. Although we
cannot predict the outcome of these cases with certainty, we
believe that we have meritorious defenses to the antitrust
allegations and intend to defend them vigorously. Additionally,
due to the considerable uncertainty associated with these
proceedings, it is currently not possible to accurately estimate
potential liability. Depending on the progress of the
litigation, we will continue to reconsider the need to establish
provisions, which may have a negative effect on our results of
operations, financial position or cash flows.

Nifedipine-related actions

Patent-related actions.Since 1997 Bayer AG and Bayer
Corporation have been involved in a number of patent
infringement actions arising from ANDA (IV)s filed by
generic manufacturers seeking regulatory marketing approval for
allegedly bio-equivalent versions of our brand-name product
Adalat CC and Pfizer, Inc.s brand-name product
Procardia XL. The active ingredient of these products is
nifedipine. We own patent rights related to nifedipine drug
product formulations. In addition, because Pfizer markets
Procardia XL under a license from Bayer, Bayer AG and
Bayer Corporation became Pfizers co-plaintiffs in the
infringement actions relating to that product. We have
satisfactorily concluded these cases related to nifedipine with
all of the defendants.

Antitrust actions.Biovail filed an antitrust lawsuit
against Bayer AG, Bayer Corporation and Pfizer in the U.S.
District Court for the District of Western Pennsylvania in April
1998. Biovail was seeking a declaratory judgment that
Bayers nifedipine patents are invalid. Biovail was also
seeking damages under federal and state antitrust statutes
alleging, among other things, that Bayer illegally asserted its
patent rights. The district court stayed this litigation pending
resolution of the nifedipine-related patent infringement actions
against Biovail. This suit has been dismissed.

Vardenafil-related actions

On October 22, 2002 a lawsuit (Declaratory
Judgment of Infringement of Pfizers U.S. Patent
number 6,469,012) was filed by Pfizer alleging that Bayer
and GlaxoSmithKline Inc. had and were engaging in activities
directed toward infringement of Pfizers patent, including
seeking FDA approval to market their co-promoted product,
Levitra®. FDA approved
Levitra® for marketing in the U.S. on
August 19, 2003. Bayer and SmithKlineBeecham Corporation
launched the product in the U.S. shortly thereafter. On
September 22, 2003, Bayer AG and Bayer Corporation and
SmithKline Beecham Corporation were sued by Pfizer Inc. and
certain of

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its affiliates in the U.S. District Court for the
District of Delaware in conjunction with Pfizers earlier
patent infringement lawsuit against the same Bayer companies and
two different GlaxoSmithKline companies. In this action Pfizer
alleged that Bayer and GlaxoSmithKline were infringing the
patent by, inter alia, marketing their co-promoted product,
Levitra®, for the treatment of erectile
dysfunction. In both, now consolidated, lawsuits, we and
GlaxoSmithKline/ SmithKline Beecham denied the allegations
raised by Pfizer and filed a counterclaim that Pfizers
patent is invalid. We believe that we have meritorious defenses
in these actions and intend to defend them vigorously. In
September 2003, the U.S. Patent and Trademark Office initiated a
re-examination of the Pfizer patent based on questions of
patentability in light of prior art. The litigation has been
stayed pending resolution of the re-examination.

In some other countries further proceedings are
pending, in part infringement actions initiated by Pfizer, in
part patent nullity proceedings initiated by Bayer. In October
2001, the equivalent European Patent held by Pfizer was revoked
by the European Patent Office. Pfizer has appealed against the
decision of the European Patent Office. The proceeding is
pending. We do not expect a final decision before the end of
2004.

Aventis Behring actions

Nattermann & Cie GmbH and Aventis Behring LLC
filed a suit on April 11, 2003 against Bayer Corporation
and Bayer Healthcare LLC in the U.S. District Court for the
Eastern District of Pennsylvania alleging that Bayers
Kogenate FS composition containing recombinant Factor VIII,
which is used to treat hemophilia, infringes upon the U.S.
patent owned by either Nattermann & Cie or Aventis Behring.
Bayer counterclaimed, seeking inter aliaa declaration of
patent invalidity and non-infringement, and asserting that
Bayers use of the patented process is pursuant to a
license. The proceedings are at an early stage. We believe that
we have meritorious defenses in these actions and intend to
defend them vigorously.

Aventis Behring LLC filed a suit on
December 4, 2003 against Bayer Corporation and Bayer
HealthCare LLC in the Court of Common Pleas of Montgomery
County, Pennsylvania, USA alleging that Aventis Behring has been
damaged as a result of Bayers breach of a contract to
supply Aventis Behring with agreed-upon quantities of
recombinant factor VIII. At the outset, we brought this
state court action to the attention of the federal district
court hearing the Natterman action described above, arguing this
breach of contract claim is a compulsory counterclaim in the
Natterman action and should be deemed waived since the deadline
for filing such claims in that action has passed, or
alternatively, that Aventis Behring should be required to bring
this claim in the Natterman action, rather than as an
independent action in state court. In response to federal court
directions the parties have filed briefs on this issue. We
believe we have meritorious defenses and claims in this action
and intend to defend it vigorously. Due to the considerable
uncertainty associated with these proceedings, it is currently
not possible to estimate potential liability.

Product liability proceedings

HIV/ HCV-related actions.During the past decade, Bayer
Corporation, as well as other fractionators of plasma products,
have been involved in lawsuits alleging that hemophiliacs became
infected with the human immunodeficiency virus (HIV), or
ultimately developed AIDS, by using clotting factor concentrates
derived from human plasma. Plaintiffs have brought actions on
these grounds in the United States, Ireland, Italy, Taiwan,
Argentina, Canada, Japan and Germany.

In the United States, a class action against
Bayer Corporation and three other defendants consolidated the
HIV-related claims of more than 6,000 claimants and
claimant groups. The parties resolved this class action through
a $600 million settlement. Bayer Corporations share
of this settlement was approximately $290 million. Bayer
Corporation has settled nearly 400 lawsuits by plaintiffs who
opted out of the class action. Two suits remain pending in the
United States. Although Bayer Corporation has prevailed in the
majority of cases that have proceeded to trial, plaintiffs were
successful in three cases. The juries in each of these cases
awarded damages not exceeding $2 million. In addition, in
1999, a Louisiana jury awarded a plaintiff damages of
$35 million. However, the trial court set this award aside,
and an appellate court upheld this decision. Bayer Corporation
has

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since settled this matter in the context of a
group settlement of nearly 100 Louisiana cases, of which Bayer
Corporations share was less than $50 million. Bayer
Corporation intends to defend aggressively the remaining
HIV-related lawsuits in various countries. We have made what we
believe to be appropriate provisions should these suits result
in judgments in favor of the plaintiffs.

In June 2003 a U.S. law firm filed a putative
class action against Bayer Corporation and other manufacturers
on behalf of non-U.S. residents claiming compensation for HIV/
HCV infections allegedly acquired through blood plasma products
manufactured in the U.S. In September 2003, plaintiffs amended
the complaint to include class action allegations on behalf of
U.S. residents claiming compensation for HCV, hepatitis C
virus, infections. The case has been transferred from the
Northern District of California to the U.S. District Court for
the Northern District of Illinois for coordinated discovery and
other pre-trial proceedings. In addition to the June 2003
matter, non-U.S. residents have filed and served three
additional cases claiming compensation for HIV/ HCV infections
allegedly acquired through blood plasma products manufactured in
the U.S. Two of these matters have been transferred to the
Northern District of Illinois. These matters are at an early
stage. We believe that we have meritorious defenses to these
actions and intend to defend them vigorously. Due to the
considerable uncertainty associated with these proceedings, it
is currently not possible to estimate potential liability.

Cerivastatin-related actions.In August 2001, Bayer voluntarily
ceased marketing Baycol, the cerivastatin anticholesterol
product, in response to reports of serious side effects in some
patients. As of December 31, 2003, 10,559 lawsuits are
pending in both federal and state courts, including putative
class actions. The actions in the United States have been based
primarily on theories of product liability, consumer fraud,
medical monitoring, predatory pricing and unjust enrichment.
These lawsuits seek remedies including compensatory and punitive
damages, disgorgement of funds received from the marketing and
sale of cerivastatin and the establishment of a trust fund to
finance the medical monitoring of former cerivastatin users. The
federal cases were transferred to the U.S. District Court for
the District of Minnesota for coordinated discovery and other
pre-trial proceedings. A motion for certification of nationwide
personal injury, medical monitoring and economic refund classes
was denied by this court on September 17, 2003. Similarly,
on December 15, 2003, the Circuit Court of Cook County,
Illinois denied a motion to certify a class action. On
June 16, 2002, the Oklahoma District Court of Pottawatomie
County certified a class of all Oklahoma residents who took
cerivastatin and sustained muscular/ skeletal injuries as a
result. Bayer appealed this ruling to the Oklahoma Court of
Appeals, which affirmed the lower courts class
certification ruling on June 20, 2003. On November 3, 2003,
the Oklahoma Supreme Court denied Bayers motion for a writ
of certiorari. The certification of a class is unrelated to a
determination of our liability. As of December 31, 2003,
approximately 80 actions have been initiated against other
companies of the Bayer Group in other countries, including class
actions in Canada. In August 2003, the Supreme Court of British
Columbia certified a class of all persons resident in British
Columbia who ingested cerivastatin. Bayer appealed this ruling
(see subsequent events footnote). Three U.S. cases have been
tried to date, all of which resulted in a verdict in our favor.

Due to the considerable uncertainty associated
with these proceedings, it is currently not possible to estimate
the potential liability. See Subsequent Events for
additional information relating to cerivastatin-related actions.
Without acknowledging any liability, we have settled
2,050 cases in the United States as of December 31,
2003, resulting in settlement payments of approximately
$779 million.

Bayer will continue to offer fair compensation to
people who experienced serious side effects while taking
cerivastatin on a voluntary basis and without concession of
liability. In cases where an examination of the facts indicates
that Baycolplayed no part in the patients medical
situation, or where a settlement is not achieved, Bayer will
continue to defend itself vigorously. Bayer believes it has
meritorious defenses in these actions. In some countries,
criminal proceedings have been initiated by the relevant
authorities. In the United States, Bayer co-promoted this
product with SmithKline Beecham Corporation. SmithKline Beecham
Corporation and Bayer Corporation have signed an allocation
agreement under which SmithKline Beecham has agreed to pay 5
percent of all settlements and compensatory damage judgments
arising out of actions based on the sale or distribution of
cerivastatin in the United States, with each party responsible
for paying its own attorneys fees.

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Phenylpropanolamine (PPA) actions.In late 2000, Bayer voluntarily
discontinued marketing over-the-counter cough and cold remedies
containing PPA in the United States in response to a
recommendation from the FDA that manufacturers voluntarily
discontinue marketing products containing PPA. Bayer also
voluntarily discontinued marketing products containing PPA in
Canada and in various Latin American countries in late 2000 and
in Spain in 2001. The FDA issued this recommendation after one
epidemiological study of a small number of patients suggested a
possible association between PPA and hemorrhagic stroke in women
of certain ages. As of December 31, 2003 approximately
1,487 lawsuits were pending in the United States against
Bayer Corporation. Of these, approximately 612 cases name Bayer
as the only manufacturing defendant. In the remaining
875 cases, one or more other manufacturers are also
defendants. As of December 31, 2003, Bayer AG has been
named as a defendant in 50 of these individual cases; however,
plaintiffs have agreed not to actively pursue their claims
against Bayer AG at this time. The MDL Panel has assigned
management of the federal court cases to the U.S. District Court
for the Western District of Washington. Additionally, two
purported class action suits against Bayer Corporation are
currently pending in Pennsylvania and New Jersey. There has been
little activity in these cases since they were filed in 2001.
Class certification was denied in a total of twelve cases. A
class certification was denied in an economic injury case
brought in California. Plaintiffs appealed but later voluntarily
dismissed their appeal, which the court approved in September of
2003. In another economic injury class action case, which was
part of the multi-district litigation proceeding, class
certification was denied and that decision affirmed on appeal.

The claims primarily relate to compensation for
alleged damage to health and personal injury, breach of
warranty, negligent and reckless misrepresentation, entitlement
to subsequent monitoring and reimbursement of the purchase
price, and conspiracy to defraud and fraudulently conceal.
Claims for punitive damages have also been filed. It is probable
that additional actions will be initiated in the United States
or in other jurisdictions where products containing PPA were
marketed. Bayer believes it has meritorious defenses to these
actions and intends to defend them vigorously. Bayer will, at
times, consider the option of settling litigation on a
case-by-case basis and without acknowledging any liability has
recently settled a number of cases.

Due to the considerable uncertainty associated
with these proceedings, it is currently not possible to estimate
potential liability and thus no provisions for such potential
liabilities have yet been made. Depending on the progress of the
litigation, Bayer may face payments that exceed our insurance
coverage and will continue to reconsider the need to establish
provisions, which may have a negative effect on the results of
our operations, financial positions and cash flows.

Thimerosal actions

As of December 31, 2003, Bayer Corporation
has been served in 24 lawsuits filed in various state and U.S.
federal courts by or on behalf of persons alleging injuries from
use of Bayer products containing Thimerosal or phenylmercuric
acetate, specifically immunoglobulin injectable products and
over-the-counter nasal sprays. Many of these cases involve
multiple unrelated plaintiffs.

Numerous manufacturers used mercury-containing
compounds as preservative agents in vaccines and other medical
and over-the-counter products. Plaintiffs allege that use of
products containing these compounds has caused autism,
neurodevelopmental disorders and other injuries. They are
requesting various remedies for the alleged resulting injuries
including compensatory, punitive and statutory damages and
funding for medical monitoring and research. Additional cases
may be filed in the future against Bayer and other companies
that sold products using mercury-containing compounds. The cases
against Bayer are at an early stage, and Bayer is contesting
them on both procedural and substantive grounds. Bayer believes
it has meritorious defenses in these actions and intends to
defend them vigorously. Due to the considerable uncertainty
associated with these proceedings, it is currently not possible
to estimate potential liability.

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Notes to the Consolidated Financial Statements
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Everest litigation

The purchaser of Bayer CropSciences global
Everest herbicide business, Arvesta, has filed a lawsuit in
California demanding rescission of the asset purchase agreement
in connection with the purchase of Everest and return of the
purchase price or, alternatively, monetary damages. Arvesta
alleges that Bayer CropScience withheld material information
concerning the value of certain claims resulting from Everest
use in Idaho and that Bayer CropScience misled Arvesta about the
amount of Everest that had been used in Canada in 2002 and
perhaps other years. Bayer CropScience is currently preparing
its responsive pleadings.

Imidacloprid actions

The French registration on Maize of the Bayer
CropScience product containing imidacloprid,
Gaucho®, is being challenged by the Union
Nationale de lApiculture Francaise (UNAF), a national
association of beekeepers in France, due to alleged bee
toxicity. The French Ministry of Agriculture refused to withdraw
the registration in January 2003 and UNAF appealed. An adverse
decision could adversely affect results of operations, financial
position or cash flows. The French Ministry of Agriculture has
recently requested an additional review of Imidacloprid product
registrations which is currently ongoing. No new adverse
findings have been presented to date.

In the U.S. owners of honeybees and honeybee
hives have filed a purported class action against Bayer in
federal court in Pennsylvania as well as a corresponding action
in Pennsylvania state court alleging that imidacloprid caused
damage to their honeybees, to the honey as well as to the wax.
The federal court dismissed without prejudice plaintiffs
motion to certify a class. These proceedings are at various
preliminary stages. It is not possible to estimate accurately
potential liability in these cases. Bayer believes it has
meritorious defenses in these actions and intends to defend them
vigorously.

BASF Fipronil Claim

BASF has notified Bayer CropScience AG of a
claim, which is based on the allegation that Bayer CropScience
AG in connection with the sale of its Fipronil business to BASF
willfully misled BASF by not disclosing updated business
developments with respect to Fipronil in Brazil and Korea in the
third quarter of 2002 and not disclosing updated business
expectations for 2003 and the following years. Discussions
between the parties are ongoing. Bayer believes it has
meritorious defenses in this action and intends to defend them
vigorously. Due to the considerable uncertainty associated with
these proceedings, it is currently no possible to estimate
potential liability.

Average wholesale price manipulation
proceedings

Sixteen pending lawsuits allege that a number of
pharmaceutical companies, including Bayer Corporation,
manipulated the average wholesale price (AWP) and/or
Medicaid best price of their products. The suits allege that
this manipulation resulted in overcharges to Medicare
beneficiaries, Medicaid recipients, state governmental health
programs, and private health plans. These suits generally seek
damages, treble damages, disgorgement of profits, restitution
and attorneys fees. Ten of the sixteen actions are private
class actions alleging injury to patients or payors. The
remaining six are brought by government entities. All of the
state court actions have been removed to federal court; two of
the cases have been remanded back to state court in Arizona and
Nevada.

The thirteen cases pending in the federal courts
have been consolidated in the U.S. District Court for the
District of Massachusetts for coordinated pretrial proceedings.
One of the federal suits names Bayer AG together with Bayer
Corporation as defendants.

In June 2003, plaintiffs filed an Amended Master
Consolidated Complaint governing most of the private party class
actions pending against Bayer. Bayer, along with other
defendants, moved to dismiss that complaint. (see subsequent
events footnote).

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Notes to the Consolidated Financial Statements
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Due to the considerable uncertainty associated
with these proceedings, it is not possible to accurately
estimate potential liability. Depending on the progress of the
proceedings, we will continue to reconsider the need to
establish provisions, which may have a negative effect on the
results of our operations, financial positions and cash flows.

Rubber-related actions

Bayer AG and certain of its subsidiaries are
the subjects of criminal and civil investigations being
conducted by the Antitrust Division of the U.S. Department of
Justice (DOJ), the Directorate General for
Competition of the European Commission (EC), and the
Canadian Competition Bureau (CCB) and, collectively,
the Competition Authorities). The Competition
Authorities are investigating potential violations of their
respective antitrust or competition laws involving certain of
Bayers rubber-related lines of business.

Since September 2002, the DOJ has undertaken
criminal grand jury investigations of potential antitrust
violations involving Bayers rubber chemicals, ethylene
propylene diene monomer (EPDM) synthetic rubber, and
acrylonitrile butadiene rubber (NBR) synthetic
rubber lines of business. The EC is conducting civil
investigations of potential violations of European competition
laws involving Bayers rubber chemicals, EPDM and NBR lines
of business. The CCB is conducting criminal investigations of
potential violations of Canadian competition laws involving
Bayers rubber chemicals, EPDM and NBR lines of business.

Bayer and certain of its subsidiaries have been
named, among others, as defendants in multiple putative class
action lawsuits in various state courts in the U.S. and as
defendants in lawsuits pending before various federal courts in
the U.S. In each state court action, the plaintiffs have alleged
violations based on the defendants alleged participation
in a conspiracy to fix prices. The state court plaintiffs seek
damages as indirect purchasers of the allegedly affected
products. In the federal court actions the plaintiffs allege the
defendants participation in a conspiracy to fix the prices
and/or to allocate markets and customers for the sale of the
allegedly affected products and seek damages as direct
purchasers of those products. These proceedings are at various
preliminary stages.

Bayer is aware that its competitors are subject
to investigations by the Competition Authorities involving
potential violations of antitrust or competition laws related to
additional rubber-related products. Private civil lawsuits may
arise out of these investigations, which may involve Bayer and
its competitors.

Because these cases, which may involve joint and
several liability among the defendants, in the aggregate allege
substantial, unquantified damages and also seek treble and
punitive damages and penalties, it is possible that the ultimate
liability could be materially adverse to our results of
operations, financial position or cash flows in one or more
periods. Additionally, due to the considerable uncertainty
associated with these proceedings, it is currently not possible
to accurately estimate potential liability. Depending on the
progress of the litigation, we will continue to reconsider the
need to establish or adjust provisions, which may have a
negative effect on the results of our operations, financial
positions and cash flows.

Polyester polyols
investigation

Bayers US subsidiary, Bayer Corporation, is
the subject of a criminal antitrust investigation by the
Antitrust Division of the U.S. Department of Justice. The
Division is investigating potential antitrust violations
involving certain of Bayer Corporations polyester polyols
lines of business. This matter is at an early stage. It is not
possible to estimate accurately potential liability in this
matter.

Securities litigation

Bayer AG, along with certain of its current and
former officers and members of the Bayer AG Board of
Management, and Bayer Corporation have been named as defendants
in a purported class action lawsuit pending in the U.S. District
Court for the Southern District of New York. The class action
alleges violations of the U.S. securities laws and asserts that
the defendants made false and misleading statements and
omissions with respect

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Notes to the Consolidated Financial Statements
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to the commercial prospects, safety and efficacy
of our cerivastatin anticholesterol products and with respect to
the extent of the potential product liability exposure following
our voluntary decision to cease marketing and to withdraw these
products in August 2001. The case seeks damages on behalf of
class members who allegedly purchased Bayer securities at
inflated prices. The case results from court consolidation on
June 27, 2003 of seven purported class action lawsuits that
had been filed on related grounds. In consolidating the seven
cases, the court appointed a lead plaintiff and lead
plaintiffs counsel. On October 31, 2003, the lead
plaintiff filed a consolidated amended complaint seeking
unspecified damages on behalf of a class of all persons who
purchased Bayer AG stock (including Bayer AG American
Depository Receipts) between March 6, 1998 and
February 21, 2003. Bayer AG as with the other
defendants, denies liability, believes that it has meritorious
defenses to this action and intends to defend itself vigorously.
Due to the considerable uncertainty associated with these
proceedings, it is currently not possible to estimate potential
liability.

German shareholder lawsuit

In June 2003 a shareholder of Bayer AG filed a
lawsuit in the regional court of Cologne, Germany
(Landgericht Köln) challenging certain resolutions
approved by the Shareholders Meeting of April 25,
2003, including the financial statements of Bayer AG (not
the consolidated financial statements) and consequently the
distribution of profits. In effect, the plaintiff sought to
prevent the implementation of our planned new corporate
structure. The lawsuit was withdrawn by the shareholder in July
2003.

Asbestos litigation

We are currently involved in asbestos litigation
in the United States, primarily as a premises defendant,
predominantly in the states in which Bayer has industrial sites.
The overwhelming majority of cases involving Bayer have been
filed in West Virginia and Texas and involve allegations of
exposure at Bayers sites. There are also some asbestos
cases pending against Bayer in Indiana and California. Texas law
and West Virginia law permit consolidated asbestos actions in
which multiple plaintiffs can sue multiple defendants for
asbestos-related conditions without specifying which plaintiff
has a claim against which defendant. While Bayer may be named as
a defendant, each plaintiff does not have to assert a claim
against Bayer.

The allegations as to Bayer and numerous other
premises defendants are that Bayer employed many contractors on
our industrial sites, yet failed to warn them or protect them
from the known hazards of asbestos exposures throughout the
1960s, 1970s and 1980s. Since premises owners
now form a new group of targeted corporate defendants in these
litigations, these types of actions may have an adverse impact
on our results of operations, financial position or cash flows.

One of our U.S. subsidiaries, Bayer CropScience,
Inc., is the legal successor to entities that sold
asbestos-containing products from the 1940s until 1976 and
is named as a defendant in asbestos-related litigation. Bayer
CropScience is and has been fully indemnified for its costs and
exposure in relation to this litigation by Union Carbide. Union
Carbide continues to accept Bayer CropSciences tender of
these cases, and it defends and settles them in Bayer
CropSciences name, in its own name and in the name of the
several predecessor companies to Bayer CropScience.

We believe that we have meritorious defenses in
these actions and are defending them vigorously. Without
acknowledging any liability, we have settled a number of these
cases in the past. We may, on a case-by-case basis, settle
additional cases for reasonable amounts when, in our judgment,
settlement is economically feasible given the risks and costs
inherent in the litigation. We have made what we believe to be
appropriate provisions should these suits result in judgments in
favor of the plaintiffs.

Plant Genetic Systems
litigation

Former shareholders of Plant Genetic Systems NV
(PGS) have initiated arbitration proceedings in the
Netherlands against AgrEvo, now Bayer CropScience GmbH.
Claimants sought damages of up to $400 million based on
alleged violations of a confidentiality agreement in connection
with the acquisition of PGS by AgrEvo

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Notes to the Consolidated Financial Statements
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in 1996, which allegedly prevented claimants from
obtaining a higher purchase price. By judgment of August 1,
2003, the Arbitration Court finally and completely rejected all
claims by former PGS shareholders.

Effect of New Accounting
Pronouncements

U.S. GAAP

In June 2001 the Financial Accounting Standards
Board (FASB) approved Statement of Financial
Accounting Standards (SFAS) 143,
Accounting for Obligations Associated with the Retirement
of Long-Lived Assets (SFAS 143), which
requires that the fair values of an obligation associated with
the retirement of long-lived assets be recognized in the period
in which such obligation is incurred if a reasonable estimate of
fair value can be made. When the liability is recorded, the
Group must capitalize the costs of the liability by increasing
the carrying amount of the long-lived asset. Over the estimated
life of the asset, the liability is accreted to its present
value and the related capitalized charge is depreciated over the
useful life of an asset. SFAS 143 is effective for
financial statements issued for fiscal years beginning after
June 15, 2002. The Group adopted the provisions of
SFAS 143 as of January 1, 2003, which did not have a
material impact on our financial position, results of operations
or cash flows.

In April 2002 SFAS 145, Rescission of
FASB Statements Nos. 4, 44 and 64, Amendment of FASB
Statement no. 13 and Technical Corrections was
issued. The statement updates, clarifies and simplifies existing
accounting standards related to the presentation of gains and
losses from certain extinguishments of debt, the accounting for
certain intangible assets and the accounting for certain
sale-leaseback transactions. Significant provisions of this
statement applicable to Bayer are effective for our 2003 fiscal
year. The adoption of SFAS 145 did not have a material
impact on our financial position, results of operations or cash
flows.

SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities
(SFAS 146), was issued in June 2002.
SFAS 146, which rescinds Emerging Issues Task Force
(EITF) Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring), requires a liability for costs associated
with exit or disposal activities to be recognized and measured
initially at fair value only when they are incurred rather than
at the date of a commitment to an exit or disposal plan.
SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Group
adopted the provisions of SFAS 146 as of January 1,
2003, which did not have a material impact on our financial
position, results of operations or cash flows.

In November 2002 the FASB published FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(FIN 45). FIN 45 expands on the accounting
guidance of other SFASs by extending the disclosures to be made
by a guarantor in its financial statements about its obligations
under certain guarantees, and it requires the guarantor to
recognize a liability for the fair value of an obligation
assumed under a guarantee. The disclosure requirements are
effective for financial years ending after December 15,
2002, and require disclosure of the nature of the guarantee, the
maximum potential amount of future payments that the guarantor
could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantors
obligations under the guarantee. FIN 45s provisions
for initial recognition and measurement should be applied
prospectively to guarantees issued or modified after
December 31, 2002. The Group adopted the provisions of
FIN 45 as of January 1, 2003, which did not have a
material impact on our financial position, results of operations
or cash flows.

In May 2003 the FASB published SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
This statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is
effective at the first interim period beginning after
June 15, 2003. The FASB issued FASB Staff Position
(FSP) 150-3 on November 7, 2003 to defer the
effective date for applying the provisions of SFAS 150 for
certain mandatorily redeemable non-controlling interests. The
Group adopted the provisions of FIN 150, and the related
FSPs, in 2003, which did not have a material impact on our
financial position, results of operations or cash flows.

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


In May 2003 the FASB EITF published
Issue 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which it will perform multiple
revenue generating activities. The Issue is effective for
revenue arrangements entered into for fiscal periods beginning
after June 15, 2003. The Group adopted the provisions of
EITF Issue 00-21 effective in the third quarter of 2003,
which did not have a material impact on our financial position,
results of operations or cash flows.

In April 2003 the FASB issued SFAS 149
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities (SFAS 149). This
Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under
SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 149 is to be applied
prospectively to contracts entered into or modified after
June 30, 2003 and for hedging relationships designated
after June 30, 2003. The Group adopted the provisions of
SFAS 149 effective in the third quarter of 2003, which did
not have a material impact on our financial position, results of
operations or cash flows.

In January 2003 the FASB published FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46
addresses the consolidation of entities for which control is
achieved through means other than through voting rights (such
entities are designated variable interest entities
or VIEs) by clarifying the application of ARB
No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. The primary objective of this interpretation
is to provide guidance on how to identify a VIE and to determine
when a VIEs assets, liabilities, noncontrolling interests
and result of operations need to be included in a companys
consolidated financial statements. For VIEs created after
January 31, 2003, the Group is required to apply the
measurement principals of FIN 46 in its 2003 financial
statements. For VIEs created or acquired before February 1,
2003, the measurement principals of FIN 46 becomes effective for
the Group as of January 1, 2004. In December 2003, the FASB
issued FIN 46-R, Consolidation of Variable Interest
Entities, in which a partial deferral of FIN 46, as
well as various other amendments to FIN 46, were approved.
The Group will adopt FIN 46-R in our 2004 fiscal year
reporting. We do not believe that the implementation of
FIN 46-R will have a material impact on our financial
position, results of operations or cash flows.

In May 2003 the FASB ratified the consensuses
reached by the Emerging Issues Task Force on EITF
Issue 01-08, Determining Whether an Arrangement is a
Lease (EITF 01-08). EITF 01-08
provides guidance in determining whether an arrangement should
be considered a lease subject to the requirements of FASB
Statement 13, Accounting for Leases. The
consensus of this EITF is to be applied to arrangements agreed
or committed to, modified, or acquired in business combinations
initiated after the beginning of the next reporting period
beginning after May 28, 2003. The Group will adopt this
standard effective January 1, 2004. We do not believe the
adoption of this standard will have a material impact on our
financial position, results of operations or cash flows.

In August 2003 the FASB ratified the consensus
reached by the Emergency Issue Task Force on EITF
Issue 03-11, Reporting Realized Gains and Losses on
Derivative Instruments That Are Subject to FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging
Activities, and Not Held for Trading Purposes as
Defined in EITF Issue No. 02-3, Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes
and Contracts Involved in Energy Trading and Risk Management
Activities (EITF 03-11). EITF 03-11
addresses whether realized gains and losses should be shown
gross or net in the income statement for contracts that are not
held for trading purposes, but are derivatives subject to
SFAS 133. The consensus of this EITF is to be applied to
derivative instruments entered into after the beginning of the
next reporting period beginning after August 13, 2003. The
Group will adopt this standard effective January 1, 2004.
We do not believe the adoption of this standard will have a
material impact on our financial position, results of operations
or cash flows.

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


In December 2003 the AICPA issued SOP 03-3,
Accounting for Loans or Certain Debt Securities Acquired
in a Transfer (SOP 03-3). SOP 03-3
provides guidance on accounting for differences between
contractual and expected cash flows from an investors
initial investment in loans or debt securities acquired in a
transfer if those differences are attributable, at least in
part, to credit quality. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 15, 2004.
The Group will adopt this standard effective January 1,
2005. We do not believe the adoption of this standard will have
a material impact on our financial position, results of
operations or cash flows.

In December 2003, the Medicare Prescription Drug,
Improvements and Modernization Act of 2003 (the Medicare
Act) was approved in the United States. The Medicare Act
provides for two new prescription drug benefit features under
Medicare. The Group provides post-retirement benefits to its
United States employees, the benefits provided are impacted by
the Medicare act. SFAS 106, Employers
Accounting for Postretirement Benefits Other Than Pensions
(SFAS 106), requires that enacted changes in
the law that take effect in future periods and that will affect
the future level of benefit coverage be considered in the
current period measurement for benefits expected to be provided
in those future periods. In response to the Medicare Act and the
requirements of SFAS 106, the Financial Accounting
Standards Board (FASB) released FASB Staff Position
No. 106-1, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (FSP 106-1).
FSP 106-1 provides a one-time election to defer accounting
for the effects of the Medicare Act until further guidance on
the accounting for the new Medicare features is released. The
Group has elected to defer the accounting for the effects of the
Medicare Act. Accordingly, the Groups consolidated
financial statements and the accompanying notes as of and for
the year ended December 31, 2003 do not reflect the effects
of the Medicare Act. Further guidance, when issued, could
require the Group to change previously reported information.

IFRS

In February 2004, the IASB issued International
Financial Reporting Standard (IFRS) 2, Share-based Payment,
on accounting for share-based payment transactions, including
grants of share options to employees. IFRS 2 specifies the
financial reporting by an entity when it undertakes a
share-based payment transaction and requires an entity to
reflect in its profit or loss and financial position the effects
of share-based payment transactions, including expenses
associated with transactions in which share options are granted
to employees. IFRS 2 is to be applied for fiscal years
starting on or after January 1, 2005. The Bayer Group is
currently evaluating the impact the standard will have on the
Groups net worth, financial position and results of
operations.

[45] Subsequent Events

On March 31, 2004, we purchased Crompton
Corporations 50 percent stake in the Gustafson seed
treatment business in the United States, Canada and Mexico for a
purchase price of $124 million (unaudited). This purchase
gave Bayer CropScience, which already held a 50 percent
stake in the U.S. and Canadian Gustafson joint ventures, full
ownership of Gustafsons NAFTA business.

Effect of New Accounting
Pronouncements

In March 2004, the IASB issued IFRS 3, Business
Combinations, replacing IAS 22, Business Combinations. IFRS 3
specifies that all business combinations are to be accounted for
by applying the purchase method of accounting, and as such,
eliminating the pooling method. Identifiable assets, liabilities
and contingent liabilities are to be recognized at their fair
value at the acquisition date. It requires that goodwill no
longer be amortized but tested annually for impairment. IFRS 3
is to be applied to business combinations for which the
agreement date is on or after March 31, 2004. For goodwill
and intangible assets acquired in a business combination for
which the agreement date was prior to March 31, 2004, the
standard must be applied prospectively from the beginning of the
first annual period beginning on or after March 31, 2004.
The Bayer Group is currently evaluating the impact the standard
will have on the Groups shareholders equity,
financial position and results of operations.

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


In March 2004, the IASB issued IFRS 4, Insurance
Contracts. This standard applies to virtually all insurance
contracts (including reinsurance contracts) that an entity
issues and to reinsurance contracts that it holds. IFRS 4 is to
be applied for annual periods beginning on or after
January 1, 2005. The Bayer Group is currently evaluating
the impact the standard will have on the Groups
shareholders equity, financial position and results of
operations.

In March 2004, the IASB issued IFRS 5,
Non-current Assets Held for Sale and Discontinued Operations.
IFRS 5 requires that assets that are intended for disposal be
recorded at the lower of the assets carrying amounts or
fair value less selling costs. The standard also addresses when
certain operating segments of a business should be classified as
discontinued operations. IFRS 5 is effective for periods
beginning on or after January 1, 2005. The Bayer Group is
currently evaluating the impact the standard will have on the
Groups shareholders equity, financial position and
results of operations.

In March 2004, the IASB issued an amendment to
IAS 39, Financial Instruments: Recognition and Measurement on
Fair Value Hedge Accounting for a Portfolio Hedge of Interest
Rate Risk. The amendment simplifies the implementation of IAS 39
by enabling fair value hedge accounting to be used more readily
for portfolio hedging of interest rate risk than under previous
versions of IAS 39. The amendments to the standard are effective
for annual periods beginning on or after January 1, 2005.
An entity shall apply the amendments to an earlier period if it
applies IAS 39 (as revised in 2003) and IAS 32, Financial
Instruments: Disclosure and Presentation, (as revised in 2003)
to that period. The Bayer Group is currently evaluating the
impact the amended standard will have on the Groups
shareholders equity, financial position and results of
operations.

In March 2004, in connection with the issuance of
IFRS 3, the IASB revised IAS 36, Impairment of Assets, and IAS
38, Intangible Assets. The main revisions require goodwill and
intangible assets with an indefinite useful life to be tested
for impairment annually, or more frequently if events or changes
in circumstances indicate a possible impairment, prohibit
reversal of impairment losses for goodwill, require an
intangible asset to be treated as having an indefinite life when
there is no foreseeable limit on the period over which the asset
is expected to generate net cash inflows for the entity, and
prohibits the amortization of such intangible assets. The
revised standards are effective for goodwill and intangible
assets acquired in business combinations for which the agreement
date is after March 31, 2004 and all other goodwill and
intangible assets for annual periods beginning on or after
March 31, 2004. The Bayer Group is currently evaluating the
impact the amended standards will have on the Groups
shareholders equity, financial position and results of
operations.

Moxifloxacin-related actions

In February 2004, Bayer AG and Bayer
Corporation received separate ANDA (IV)s from two generic
manufacturers seeking regulatory marketing approval for
allegedly bioequivalent versions of our respiratory tract
anti-infective product with the brand name Avelox®/
Avalox®. Both manufacturers seek the approval prior to the
expiry of the Bayer patents that, among other things, protect
moxifloxacin the active ingredient of Avelox®. Bayer
intends to take all appropriate legal action to enforce its
legal rights.

Product liability proceedings

HIV/ HCV-related actions.In the first quarter of 2004 non-U.S.
residents filed two additional cases claiming compensation for
HIV/ HCV infections allegedly acquired through blood plasma
products manufactured in the U.S. These matters are at an early
stage. We believe that we have meritorious defenses to these
actions and intend to defend them vigorously.

Cerivastatin-related actions.As of March 5, 2004, 9,948
lawsuits are pending in both federal and state courts, including
putative class actions. The actions in the United States have
been based primarily on theories of product liability, consumer
fraud, medical monitoring, predatory pricing and unjust
enrichment. These lawsuits seek remedies including compensatory
and punitive damages, disgorgement of funds received from the
marketing and sale of cerivastatin and the establishment of a
trust fund to finance the medical monitoring of former
cerivastatin users. On March 19, 2004, the Philadelphia
County Court of Common Pleas in Pennsylvania certified a medical
monitoring class of persons in Pennsylvania who took
cerivastatin and have not been diagnosed with

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


the diseases specified in the certification
order. We believe that we have meritorious defenses against
class certification and intend to appeal this ruling. The
certification of a class is unrelated to a determination of our
liability.

As of March 5, 2004, 93 actions have been
initiated against other companies of the Bayer Group in other
countries, including class actions in Canada. In August 2003,
the Supreme Court of British Columbia certified a class of all
persons resident in British Columbia who ingested cerivastatin.
Bayer appealed this ruling and a settlement agreement has been
signed in this matter. Subject to court approval, the settlement
agreement provides for a decertification of the class proceeding
for all persons included in the original class who did not
suffer from rhabdomyolysis. Bayer expects additional lawsuits to
be filed in the United States and elsewhere.

In negotiations with the insurance companies
concerning the cerivastatin litigation, an agreement was reached
with the majority of the insurers. The insurers had previously
proceeded only on a provisional basis under a customary
reservation of rights. The insurers that are parties to this
agreement have now withdrawn the reservations of rights. Thus,
Bayer expects the insurance coverage for cerivastatin to be
approximately US$1.2 billion. Based on the agreement
reached with the insurers and in consideration of further
expected settlements and further defense costs, the company has
taken accounting measures, which resulted in a charge to income
of EUR 300 million for the fiscal year 2003.

Due to the considerable uncertainty associated
with these proceedings, it is currently not possible to estimate
the potential liability and thus no provisions exceeding the
expected insurance coverage and the above referenced accounting
measures already taken have been made. Depending on the progress
of the litigation, Bayer may face payments that exceed our
expected insurance coverage and the above referenced accounting
measures and will continue to reconsider the need to establish
additional provisions, which may have a negative effect on the
results of our operations, financial positions and cash flows.
Without acknowledging any liability, we have settled 174 cases
between January 1 and March 5, 2004 in the United
States (a total of 2,224 cases through that date), resulting in
settlement payments of approximately $63 million
($842 million in total) (amounts unaudited).

In January and March 2004 Bayer signed settlement
agreements with lawyers representing plaintiffs in Baycollitigation pending in Canada. The agreements together
establish a procedure to settle claims of rhabdomyolysis for all
Canadian residents. To facilitate an efficient implementation of
the agreement, the parties have agreed to a settlement class
which is subject to approval by the courts.

In January 2004, Bayer Corporation received a
subpoena for documents principally relating to cerivastatin from
the Defense Criminal Investigative Service of the U.S.
Department of Defense Inspector General. Prior to the
withdrawal, Bayer had a contract with the Department to provide
it with a supply of cerivastatin. Preliminary conversations with
the Justice Department indicate that this is a joint Department
of Defense/ Food and Drug Administration investigation relating
to cerivastatin. Bayer is not aware of any charges or complaints
filed in connection with this inquiry. Bayer believes it has
acted responsibly and fulfilled its responsibilities to the
U.S. government, and will work cooperatively to provide the
information requested.

Phenylpropanolamine (PPA) actions.As of March 5, 2004 approximately
1,500 lawsuits are pending in the United States against Bayer
Corporation. Of these, approximately 850 cases name Bayer as the
only manufacturing defendant. In the remaining 650 cases, one or
more other manufacturers are also defendants. As of
March 5, 2004, Bayer AG has been named as a defendant
in 43 of these individual cases; however, plaintiffs have agreed
not to actively pursue their claims against Bayer AG at this
time.

Average wholesale price manipulation
proceedings

On February 24, 2004, the court granted the
defendants motion in part and denied it in part, dismissing the
first count of the ten count complaint. Bayer anticipates
commencing discovery in the near future.

Due to the considerable uncertainty associated
with these proceedings, it is not possible to accurately
estimate potential liability. Depending on the progress of the
proceedings, we will continue to reconsider the need

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


to establish provisions, which may have a
negative effect on the results of our operations, financial
positions and cash flows.

Securities litigation

Related to the securities litigations pending in
the U.S. District Court for the Southern District of New
York, defendants filed a motion to dismiss the consolidated
amended complaint on January 15, 2004. The court has not
yet ruled on this motion. Bayer AG as with the other defendants,
denies liability, believes that it has meritorious defenses to
this action and intends to defend itself vigorously.

Total remuneration of the Board of Management
and the Supervisory Board, advances and loans

The remuneration of the Board of Management for
2003 amounted to
4,590,646 (2002:
5,700,737).
Emoluments to retired members of the Board of Management and
their surviving dependants amounted to
10,184,254
(2002:
14,383,353).

Pension provisions for these individuals
amounting to
107,557,924
(2002:
106,152,766) are
reflected in the balance sheet of Bayer AG.

The remuneration of the Supervisory Board
amounted to
752,250 (2002:
1,293,750).

There were no loans to members of the Board of
Management or the Supervisory Board outstanding as of
December 31, 2003, nor any repayments of such loans during
the year.

Leverkusen, March 11, 2004

Bayer Aktiengesellschaft

The Board of Management


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