<PAGE>

     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 2002
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                      ------------------------------------
                                   FORM 20-F

<Table>
<S>         <C>                                                        <C>
(Mark One)
   [ ]      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
                                       OR
   [ ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                        Commission file number 001-16829
</Table>

                            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, GEBAUDE W1
                              KAISER-WILHELM-ALLEE
                           51368 LEVERKUSEN, GERMANY
                    (Address of principal executive offices)
                      ------------------------------------

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

<Table>
<Caption>
TITLE OF EACH CLASS:                              NAME OF EACH EXCHANGE ON WHICH REGISTERED:
--------------------                              ------------------------------------------
<S>                                               <C>
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**
</Table>

                      ------------------------------------

     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, 2001, 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 [ ]     Not applicable.

Indicate by check mark which financial statement item the registrant has elected
to follow:
                          Item 17 [ ]     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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                               TABLE OF CONTENTS

<Table>
<S>                                                           <C>
PART I
  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
  Item 5. Operating and Financial Review and Prospects......   60
  Item 6. Directors, Senior Management and Employees........   81
  Item 7. Major Shareholders and Related Party
     Transactions...........................................   90
  Item 8. Financial Information.............................   91
  Item 9. The Listing.......................................   97
  Item 10. Additional Information...........................   98
  Item 11. Quantitative and Qualitative Disclosures about
     Market Risk............................................  103
  Item 12. Description of Securities Other Than Equity
     Securities.............................................  106
PART II
  Item 13. Defaults, Dividend Arrearages and
     Delinquencies..........................................  113
  Item 14. Material Modifications to the Rights of Security
     Holders and Use of Proceeds............................  113
  Item 15. [Reserved].......................................  113
  Item 16. [Reserved].......................................  113
PART III
  Item 17. Financial Statements.............................  113
  Item 18. Financial Statements.............................  113
  Item 19. Exhibits.........................................  113
</Table>

                                        2
<PAGE>

FORWARD-LOOKING INFORMATION

     This annual report contains forward-looking statements that reflect our
plans and expectations. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance, achievements or financial position to be materially
different from any future results, performance, achievements or financial
position expressed or implied by these forward-looking statements. These factors
include:

     -  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 which may affect our actual
results, performance, achievements or financial position is contained in Item 3,
Key Information -- Risk Factors, Item 5, Operating and Financial Review and
Prospects and elsewhere in this annual report.

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 in Germany the judgment of a foreign court, 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
                                        3
<PAGE>

     -  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
<PAGE>

                                     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, 2001, from our consolidated financial
statements. We have prepared our consolidated financial statements in accordance
with International Accounting Standards, or IAS and where indicated, in
accordance with U.S. Generally Accepted Accounting Standards or U.S. GAAP. Note
44 to our consolidated financial statements included in Item 18 of this annual
report describes the reconciliation of significant differences between IAS and
U.S. GAAP.

     Since January 1, 1999, we have prepared our financial statements in
European Union euros (E). We originally prepared our consolidated financial
statements for the years ending December 31, 1997 and 1998, in German marks
(Deutsche Mark, or DM). We have restated these financial statements in euros,
converting German mark values to euro values at the irrevocably fixed conversion
rate of DM 1.95583 = E1.00. These restated financial statements depict the same
trends and relationships among our financial accounts as do the corresponding
original financial statements that we reported in German mark amounts prior to
the introduction of the euro. Unless otherwise indicated, we have expressed all
monetary amounts (except per share amounts) in the consolidated financial
statements and in the notes in millions of euros.

     In this annual report we have translated certain euro amounts into U.S.
dollar amounts at the rate of $0.8901 = E1.00, the noon buying rate of the
Federal Reserve Bank of New York on December 31, 2001. 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
<PAGE>

CONSOLIDATED INCOME STATEMENT DATA

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                            -----------------------------------------------------
                                             2001     2001     2000     1999    1998(1)   1997(1)
                                              $        E        E        E         E         E
                                            ------   ------   ------   ------   -------   -------
                                                    (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                         <C>      <C>      <C>      <C>      <C>       <C>
IAS:
NET SALES.................................  26,948   30,275   30,971   27,320   28,062    28,124
Of which discontinuing operations.........   1,190    1,337    2,356    3,748    6,418     6,522
OPERATING RESULT..........................   1,434    1,611    3,287    3,357    3,155     3,077
Of which discontinuing operations.........     328      369      223    1,218      409       520
Non-operating result......................    (442)    (496)    (297)    (521)    (427)     (465)
Income before income taxes................     992    1,115    2,990    2,836    2,728     2,612
Income taxes..............................    (137)    (154)  (1,148)    (818)  (1,113)   (1,102)
Income after taxes........................     855      961    1,842    2,018    1,615     1,510
Minority stockholders' interest...........       4        4      (26)     (16)      (1)       (6)
NET INCOME................................     859      965    1,816    2,002    1,614     1,504
Average number of shares in issue.........     730      730      730      730      730       727
Basic net income per share................    1.17     1.32     2.49     2.74     2.21      2.07
Diluted net income per share..............    1.17     1.32     2.49     2.74     2.21      2.07
Dividends per share.......................    0.80     0.90     1.40     1.30     1.02      0.97
U.S. GAAP:
Net income................................     711      800    1,783    1,967       --        --
Basic and diluted net income per share....    0.97     1.10     2.44     2.69       --        --
</Table>

---------------

(1)  The 1998 and 1997 figures have been restated from German marks into euro at
     the irrevocably fixed conversion rate of DM 1.95583 = E1.00.

CONSOLIDATED BALANCE SHEET DATA

<Table>
<Caption>
                                                                DECEMBER 31,
                                            -----------------------------------------------------
                                             2001     2001     2000     1999    1998(1)   1997(1)
                                              $        E        E        E         E         E
                                            ------   ------   ------   ------   -------   -------
                                                    (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                         <C>      <C>      <C>      <C>      <C>       <C>
IAS:
TOTAL ASSETS..............................  32,968   37,039   36,451   31,279   29,377    27,697
Of which discontinuing operations.........     934    1,049    2,000    1,749    5,513     5,757
Stockholders' equity......................  15,062   16,922   16,140   15,006   12,568    12,009
Liabilities...............................  17,819   20,019   20,074   16,097   16,598    15,465
Of which long-term financial
  obligations.............................   2,733    3,071    2,803    2,359    2,404     2,150
Of which discontinuing operations.........     273      307      821      688    2,462     2,302
U.S. GAAP:
Stockholders' equity......................  16,288   18,300   19,110   17,177       --        --
Total assets..............................  33,673   37,831   38,740   32,769       --        --
</Table>

---------------

(1)  The 1998 and 1997 figures have been restated from German marks into euro at
     the irrevocably fixed conversion rate of DM 1.95583 = E1.00.

                                        6
<PAGE>

DIVIDENDS

     The following table indicates the dividends per share paid from 1997 to
2001. 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.

<Table>
<Caption>
                                                             2001   2000    1999   1998   1997
                                                             ----   -----   ----   ----   ----
<S>                                                          <C>    <C>     <C>    <C>    <C>
Total dividend (E in millions).............................   657   1,022    949    747    710
Dividend per share (E).....................................  0.90    1.40   1.30   1.02   0.97
</Table>

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

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. For periods prior to the introduction of
the euro on January 1, 1999, we have converted the then-prevailing German
mark/U.S. dollar rates to a notional euro/dollar rate at the irrevocably fixed
euro/mark rate of E1.00 = DM 1.95583. 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.

<Table>
<Caption>
YEAR                                                      PERIOD END   AVERAGE    HIGH     LOW
----                                                      ----------   -------   ------   ------
<S>                                                       <C>          <C>       <C>      <C>
1997....................................................    1.0871     1.1287    1.2690   1.0398
1998....................................................    1.1733     1.1132    1.2178   1.0548
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
</Table>

<Table>
<Caption>
PREVIOUS SIX MONTHS                                            HIGH     LOW
-------------------                                           ------   ------
<S>                                                           <C>      <C>
December 2001...............................................  0.9044   0.8773
January 2002................................................  0.9031   0.8594
February 2002...............................................  0.8778   0.8613
March 2002..................................................  0.8836   0.8652
April 2002..................................................  0.9028   0.8750
May 2002....................................................  0.9373   0.9022
</Table>

                                        7
<PAGE>

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 not the only ones that may exist. 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.

CYCLICALITY MAY REDUCE OUR OPERATING MARGINS OR CAUSE OPERATING LOSSES

     Several of the industries in which Bayer operates are cyclical. In
particular, these industries include chemicals and polymers. 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. We cannot assure you that future
growth in demand will be sufficient to absorb current overcapacity or future
capacity additions without significant downward pressure on prices and adverse
effects on operating results.

     The agriculture sector is moreover subject to seasonal and weather factors
and fluctuations in crop prices, which can make its operations less predictable
than those of our other business segments.

ADVANCES IN BIOTECHNOLOGY MAY REDUCE DEMAND FOR SOME OF OUR OLDER PRODUCTS

     The growing importance of biotechnology, especially in the pharmaceutical
and crop protection fields, could reduce market demand for some traditional
products. In particular, new agrochemical compounds that achieve similar or
improved results with less toxicity and smaller doses may reduce market demand
for traditional chemical products.

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 those of the European Union. A proposed new EU chemicals policy
could mandate a significant increase in the testing and assessment of basic
chemicals and chemical intermediates, 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, we cannot assure you that stricter
regulatory regimes will not delay product development or restrict marketing and
sales.

     Our Pharmaceuticals and Consumer Care & Diagnostics segments 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. For example, 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,
as in the case of our cerivastatin anti-cholesterol drugs.

                                        8
<PAGE>

     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.

     Similarly, international negotiations currently ongoing at the World Trade
Organization may affect the agriculture policy of the European Union. For
example, a change in EU agricultural policy leading to an increase in "set
aside" acreage could reduce the overall market for agricultural products in the
European Union. Additionally, a radical review and reduction of pricing support
in the European Union could affect customer and pricing structure and harm our
operating results. It is impossible at present to determine precisely what
changes, if any, may occur or when. We expect the operating results of our Crop
Protection and Animal Health segments to reflect the uncertainties of this
industry.

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 for 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.

LITIGATION AND ADMINISTRATIVE CLAIMS COULD HARM OUR OPERATING RESULTS AND CASH
FLOWS

     We are or could become involved in a number of 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, we could be required to pay substantial damages and
related liabilities.

     In addition, we are currently subject to an investigation of alleged
underpayment of rebates to U.S. federal health programs. This investigation
could lead to criminal or civil proceedings against us. If such proceedings are
commenced and result in an adverse verdict, we would likely be required to pay
substantial damages and fines. In the worst case, we could be disqualified from
participating in U.S. federal health programs.

     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. We believe that these provisions
(together with insurance proceeds in cases where our liability would be covered
by insurance) would substantially cover judgments for damages against us in
these cases. We may also establish provisions for additional cases, if we
believe that developments in those proceedings make it appropriate to do so. We
cannot assure you, however, that our litigation provisions will be adequate or
that we will fully recover claims under our insurance policies. As a result,
adverse decisions in the legal proceedings in which we are involved could harm
our results of operations or cash flows in any given year.

                                        9
<PAGE>

THE LOSS OF PATENT PROTECTION MAY RESULT IN LOSS OF SALES TO COMPETING PRODUCTS

     During the life of its patent, 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 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 addition, in an effort to control public health crises, some
developing countries, such as South Africa and Brazil, have recently announced
plans for substantial reductions in scope of patent protection for
pharmaceutical products. 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. Furthermore, in
response to anthrax bioterror attacks in the United States in 2001, the U.S. and
Canadian governments contemplated compulsory licensing of our ciprofloxacin
antibiotic -- in effect, permission to generic manufacturers to market
ciprofloxacin before the expiry of our patent rights. Although we reached
agreements with the two governments intended to ensure adequate supplies of
ciprofloxacin while preserving our existing patent rights, we cannot assure you
that these or other governments would not impose compulsory licensing in future
in response to renewed or increased bioterror attacks. 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 void 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, Polyurethanes, Coatings & Colorants
and Chemicals segments), 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.

     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.

     In October 2001, we announced the acquisition, subject to regulatory
approval, of Aventis CropScience from Aventis SA and Schering AG for E7.25
billion. This price consists of both cash that we paid to Aventis and Schering
and outstanding debt of Aventis CropScience that we have assumed. This
acquisition marks the single largest acquisition in our history, and the
integration of Aventis CropScience with our Crop Protection segment will pose
formidable management challenges. Any failure to combine these businesses
successfully could harm our operating results. Also, the antitrust authorities
whose approval to consummate this acquisition we received have made their
approval conditional on our divesting a portion of the assets we acquire from
Aventis. To the extent that assets we are required to divest were an important
part in our assumptions about the business of the combined enterprise, we might
not be able to fully realize our objectives for the combined enterprise even if
we successfully implement the other aspects of our plan.

                                        10
<PAGE>

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 and achieve substantial
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.

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 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. 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, we cannot
assure you that this insurance will be adequate to cover fully all potential
hazards incident to our business.

     For more detailed information on environmental issues, see Item 4,
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, or

     -  where waste from our operations was disposed.

     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, 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.

     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.

                                        11
<PAGE>

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, 2001, we had entered into
forward foreign exchange contracts and currency swaps with a total notional
value of E2.75 billion. See Item 11, Quantitative and Qualitative Disclosures
About Market Risk.

                                        12
<PAGE>

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. In this annual report, "Bayer AG" refers solely to the ultimate parent
company of the consolidated Bayer Group.

     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.

     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. Farbenindustries AG. 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 1999, we have incurred capital expenditures as follows:

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Pharmaceuticals.............................................   415     553     525
Consumer Care & Diagnostics.................................   267     192     205
Crop Protection.............................................   215     233     184
Animal Health...............................................    49      50      33
Plastics & Rubber...........................................   592     652     575
Polyurethanes, Coatings & Colorants.........................   492     359     446
Chemicals...................................................   483     424     461
</Table>

     In 1999, we spent E0.4 billion on acquisitions. Major projects in 1999
included the acquisition of the plastic sheet businesses of the chemical
companies DSM-Axxis N.V. and Sheffield Plastics; the purchase of the business
and assets of Elastochem Inc.; and an 11.3 percent equity investment in LION
Bioscience AG. In 2000, we spent a total of E4.2 billion on acquisition
activity, mainly in further aligning our polymers and chemicals activities
toward specialties through the acquisitions of Lyondell Chemical Company's
polyols business, Sybron, CSM Holding, Inc. and Cytec's sizing and strength
paper chemicals business. In the life science area we strengthened

                                        13
<PAGE>

our crop protection business by acquiring the Flint(R) strobilurin product line.
In 2001, we spent E0.5 billion on acquisitions, including rights to manufacture
and market products that detect hepatitis C and HIV antibodies as well as the
corn herbicide Mikado(R). We also made a E93 million equity investment in
CuraGen.

     In October 2001, we entered into an agreement to acquire Aventis
CropScience from Aventis and Schering. The consummation of this transaction is
conditioned upon approvals of antitrust and competition authorities in the
United States and the European Union. The European Commission approved the
transaction in April 2002, and the United States Federal Trade Commission gave
its preliminary approval of the transaction under the terms of a consent order
on May 30, 2002. Both approvals are subject to the condition that we divest or
out-license some of the combined enterprise's products. See below, -- Crop
Protection -- Segment Strategy. The transaction was closed on June 3, 2002.

     In 1999, our major divestments included our flotation of 70 percent of the
former Agfa business segment; we sold the remaining 30 percent in June 2002. In
2000, the addition of a new partner in the DyStar joint venture reduced our
capital share in that joint venture to 35 percent; since then we consider DyStar
a non-core business and classify it under "Discontinuing Operations". We
continued to streamline our portfolio through 2000, divesting our animal health
biologicals, acrylic fibers and solar-grade silicon businesses, Troponwerke, and
Basics, our generic pharmaceuticals business in Germany. We divested our
investments in Myriad Genetics Inc. and in Schein Pharmaceuticals, a U.S.
generics business. In the first half of 2001, we also sold our acrylic fiber
product line and classified the remainder of our Fibers business group under
"Discontinuing Operations". In May 2002, we reclassified Fibers as part of our
continuing operations. See Item 5, Operating and Financial Review and Prospects
-- Overview. In May 2001, we sold our interest in the EC Erdolchemie joint
venture, which we had previously classified under "Discontinuing Operations". In
December 2001, our Supervisory Board approved plans to divest a number of
non-core businesses, including Haarmann & Reimer, Rhein Chemie and our 50
percent interest in PolymerLatex.

                                        14
<PAGE>

                                    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 comprises the parent company, Bayer AG of Leverkusen, Germany, and
over 250 consolidated subsidiaries. We are organized into seven business
segments -- Pharmaceuticals; Consumer Care & Diagnostics; Crop Protection;
Animal Health; Plastics & Rubber; Polyurethanes, Coatings & Colorants; and
Chemicals.

     At their annual meeting in April 2002, Bayer AG's shareholders approved a
plan to transform Bayer AG into a management holding company structure. The new
holding company structure, which evolves out of our historical "four pillar"
strategy, calls for the division of our business operations among four new,
wholly-owned operating subsidiaries. Each of these will comprise one or more
current business segments. The new subsidiaries:

     -  Bayer HealthCare AG (which will comprise the current Pharmaceuticals,
        Consumer Care & Diagnostics and Animal Health segments);

     -  Bayer CropScience AG (consisting of our Crop Protection segment);

     -  Bayer Polymers AG (which will comprise the current Plastics & Rubber and
        Polyurethanes, Coatings & Colorants segments); and

     -  Bayer Chemicals AG (which will comprise our current Chemicals segment).

     Under the plan, we have also created three additional subsidiaries. These
will act as service companies that support the four operating subsidiaries, as
well as Bayer AG.

     Under our plan for this new structure, we expect to transfer most of Bayer
AG's assets to the new subsidiaries. As a matter of German law, Bayer AG's
shareholders must approve these transfers. At the April 2002 meeting, the
shareholders approved the transfer of assets to Bayer CropScience AG, with
economic effect from January 1, 2002. At the annual shareholders' meeting for
2003, we expect to ask shareholders to approve the transfer of assets to the
other three operating companies, as well as to the three service companies.
Subject to shareholder approval, our transformation to the new holding company
structure will be complete when these asset transfers have been entered into the
commercial register following the 2003 shareholders' meeting. However, for tax
and accounting purposes, the transformation would have retroactive economic
effect as from January 1, 2003.

     Under the new structure, Bayer AG's Board of Management would continue to
determine the overall strategy of the Bayer Group and control resource
allocation. Bayer AG would nominate the management of the subsidiary Group
companies and set each company's performance criteria. These new entities will
be wholly owned by Bayer AG, although we may consider strategic partnerships,
particularly for our Health Care and Chemicals businesses. If we do form any
strategic partnerships, we would expect to maintain both majority ownership and
operational control.

     For the year ended December 31, 2001, Bayer reported total sales of E30.3
billion, an operating result of E1.6 billion, and net income of E965 million.
Sales from continuing operations amounted to E28.9 billion. As of December 31,
2001, we employed 116,900 people worldwide, including employees in our
discontinuing operations.

     The following table shows a breakdown by region of our sales in 2001:

<Table>
<Caption>
                                                                         SALES
REGION                                                -------------------------------------------
------                                                (EUROS IN MILLIONS)   (PERCENTAGE OF TOTAL)
<S>                                                   <C>                   <C>
Europe..............................................        12,999                  44.9
North America.......................................         9,806                  33.9
Asia/Pacific........................................         3,817                  13.2
Latin America/Africa/Middle East....................         2,316                   8.0
</Table>

     By continuing to align our portfolio strategically in favor of the more
profitable life sciences, we aim to increase Bayer's overall operating margin to
above 15 percent. We plan to achieve this shift in our portfolio

                                        15
<PAGE>

through both organic growth and selective life science acquisitions like those
of Chiron, Gustafson and Flint as well as the expected acquisition of Aventis
CropScience and the planned joint venture with Aventis Behring in the biological
products field. In our Health Care businesses we are aiming to win market share
and grow profitability without stifling our growth potential at the same time.

     We will strive to continue expanding the strong market position of our
Polymers businesses. After integrating Lyondell's polyol business, our main
focus will be on expansion in Asia, where we see opportunities for above-average
growth, and on developing new applications for our products. In the Chemicals
segment, we plan to focus on further improving our earnings potential. Our plan
for achieving this goal calls for the further streamlining of our portfolio and
the expansion of our specialties, including by means of selected acquisitions.

     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(R) initiative developed by
companies in the global chemical industry.

PHARMACEUTICALS

OVERVIEW

     Our Pharmaceuticals segment focuses on the development and marketing of
ethical pharmaceuticals (medications requiring a physician's prescription and
sold under a specific brand name) as well as biological products (for example,
blood plasma products). The following table shows the segment's performance for
the last three years.

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
External net sales..........................................  5,729   6,140   5,003
  Percentage of total sales (continuing operations).........   20.4    22.1    21.9
Intersegment sales..........................................     38      39      51
Operating result before exceptional items...................    383   1,165     922
  Percentage of total operating result (continuing
     operations)............................................   18.2    33.5    30.0
</Table>

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

<Table>
<Caption>
                                             2001                     2000                     1999
                                    ----------------------   ----------------------   ----------------------
                                     REVENUE    PERCENTAGE    REVENUE    PERCENTAGE    REVENUE    PERCENTAGE
                                    (EUROS IN   OF SEGMENT   (EUROS IN   OF SEGMENT   (EUROS IN   OF SEGMENT
PRODUCT                             MILLIONS)    REVENUE     MILLIONS)    REVENUE     MILLIONS)    REVENUE
-------                             ---------   ----------   ---------   ----------   ---------   ----------
<S>                                 <C>         <C>          <C>         <C>          <C>         <C>
Cipro.............................    1,964        34.3        1,785        29.1        1,519        30.4
Adalat............................      975        17.0        1,155        18.8        1,021        20.4
</Table>

SEGMENT STRATEGY

     We plan to hold all our Health Care businesses (including Pharmaceuticals,
Consumer Care & Diagnostics and Animal Health) through a single new,
wholly-owned subsidiary of Bayer AG. See -- Business. From January 1, 2002, we
have organized the Pharmaceuticals segment into two business groups,
Pharmaceutical Products and Biological Products.

     Bayer AG and Aventis S.A. have signed a non-binding letter of intent to
establish a joint venture for biological products. The proposed joint venture
would combine the operations of our Biological Products business group with
those of the Aventis subsidiary Aventis Behring L.L.C. Bayer would own a
majority interest in, and have operational control over the joint venture. We
would also have the option of acquiring the remaining

                                        16
<PAGE>

interest in the business at a later date. Currently, it is contemplated that
Bayer would have a call option in the fourth year of the venture, while Aventis
would have a put option in year five. No other options are currently
contemplated. The joint venture would have marketing rights in Kogenate and
related recombinant Factor VII blood-clotting products, which Bayer would
continue to manufacture. At present Bayer and Aventis are contemplating the
proposed transaction, but neither is obligated to proceed with these plans. If
both companies elect to proceed, we would expect to enter into a binding final
agreement during the summer of 2002, with closing expected in late 2002 or in
the first quarter of 2003, subject to any required regulatory approvals.

     Our strategic priorities for the Pharmaceuticals segment include:

     -  Completing the organizational adjustments made necessary by our
        voluntary withdrawal of Baycol/ Lipobay. Our strategy calls for us to
        evaluate potential strategic partnerships in order to maintain our
        costs, especially for research and development, at an acceptable level
        without stifling our potential for long-term growth.

     -  Preparing for the expected launch of our vardenafil erectile dysfunction
        product.

     -  Carrying out our planned biological products joint venture with Aventis
        Behring.

     In addition to our immediate priorities, life cycle management remains a
continuous element of our strategy. Successful life cycle management enables us
to extend the commercial success of established products.

MAJOR PRODUCTS

     Ciprofloxacin, marketed under the trademark Cipro(R) in the United States
and Ciproxin(R), Ciproxine(R), Ciprobay(R) and Ciflox(R) 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. Cipro is our leading pharmaceutical product.

     Avelox(R) (moxifloxacin), marketed in Germany under the name Avalox(R), is
an antibiotic used to treat common bacterial respiratory tract infections. We
currently market Avelox in 61 countries. Avelox 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.(R), a new intravenous
form of this product, in the United States. In May 2002, the product was
approved for Germany; we expect to being launch of the product in the near term.

     Adalat(R) 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.

     Kogenate(R) FS (Kogenate(R) Bayer in the EU) is a genetically engineered
recombinant version of the protein Factor VIII (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. Because recombinant products like Kogenate(R) 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(R). We produce recombinant fVIII under licenses from
Genentech and another licensor, which together give us worldwide production
rights.

     Glucobay(R), Precose(R) (in the United States) and Prandase(R) (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.

     Gamimune(R)/Polyglobin(R) is a plasma-derived concentrate of human
antibodies (Intra-Venous Immunoglobulin G, or IVIG) registered in 33 countries
worldwide, including the United States, Canada, Germany and Japan.

                                        17
<PAGE>

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(R) (a1-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
a1-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.

     We launched Nimotop(R) (nimodipine) globally in the mid-1980s. A member of
the dihydropyridmine class of calcium antagonists developed by Bayer
researchers, Nimotop improves the stability and function of nerve cells
following certain types of hemorrhage in the brain by inhibiting calcium influx
into the cells. Physicians use Nimotop to treat aneurysmatic sub-arachnoid
hemorrhage, a serious condition involving bleeding in the brain beneath its
outer protective membrane following the rupture of a blood vessel.

     We derive our Plasbumin(R) and Plasmanate(R) fluid management products from
fraction V of human plasma. These products draw fluid from body tissues into the
bloodstream, thereby helping to stabilize blood pressure and circulation in
patients who have lost large amounts of blood through trauma, disease or
surgery. Health care professionals use our fraction V products primarily in
treating shock victims.

     Trasylol(R) 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.

Marketing withdrawal of cerivastatin products

     Baycol(R)/Lipobay(R) (cerivastatin) is a statin, one of a class of
medications used to lower elevated blood levels of cholesterol and other lipids,
or fatty substances. We launched cerivastatin in its lower original dosages in
1997. We later obtained regulatory marketing approval for higher dosages, up to
0.8 mg.

     Statins are powerful medications that can reduce the risk of coronary heart
disease. However, they can also cause significant side effects, including
rhabdomyolosis. This is a serious condition which, in its most severe form, can
lead to life-threatening kidney failure. Rhabdomyolysis has been reported more
frequently in patients taking cerivastatin than other statins. This was
particularly true in patients taking cerivastatin in combination with
gemfibrozil, another lipid-lowering medication, and in patients taking
cerivastatin in the 0.8 mg dosage. We are currently aware of approximately one
hundred patients diagnosed with rhabdomyolysis while taking cerivastatin who
have died, as well as approximately 1,600 patients assessed with non-fatal cases
of rhabdomyolysis.

     We had provided prescription information that warned of the risk of
rhabdomyolysis and contained strong warnings and a contraindication against the
combination of cerivastatin and gemfibrozil. However, we continued to receive
reports of this condition in patients who had been taking cerivastatin.
Accordingly, we voluntarily ceased marketing cerivastatin in August 2001 and do
not intend to reintroduce the drug.

Kogenate production issues

     In late 2000 we received reports from the U.S. Food and Drug Administration
following FDA inspections at our Berkeley, California and Clayton, North
Carolina facilities. The FDA highlighted data validation, management and
record-keeping practice as the principal areas of concern, as well as technical
production issues. In responding to the reports, we conducted follow-up
investigations that identified certain technical problems affecting the
manufacture of recombinant fVIII products. In July 2001, after receiving our
response, the FDA issued a Warning Letter, identifying items requiring further
action. As a result of these issues, our total production of recombinant fVIII
products for 2001 was significantly less than in 2000, leading to periods of
shortage in these products on the market. We are continuing to take action to
rectify these issues. Although we cannot currently state when we will be able to
return to full production capacity, we expect an improvement in the supply of
these products by mid-2002.

                                        18
<PAGE>

Microbial resistance to antibiotics

     The development by microbes of resistance to antibiotics has been a cause
of concern for the medical and pharmaceutical communities in recent years.
Resistance development is a natural process. It is almost certainly impossible
to eliminate it altogether. Emergent ciprofloxacin or moxifloxacin resistance
could become a problem on an isolated, individual-patient basis. Nevertheless,
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 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. We have initiated the LIBRAINITIATIVE.COM project to
provide physicians and patients with information on how they can use antibiotics
appropriately.

Ciprofloxacin: increased demand and governmental agreements following bioterror
attacks

     Cipro (ciprofloxacin) has been approved for the treatment of anthrax since
2000 in the United States and, since November 2001, in Germany. In response to
higher demand for Cipro following anthrax bioterror attacks in the United
States, we increased our global production of this antibiotic to provide the
quantities required. We have entered into agreements with the governments of
several countries, including the United States and Canada, to provide high
volumes of Cipro if these countries require them.

MARKETS AND DISTRIBUTION

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................  1,629   1,698   1,571
North America...............................................  2,637   2,812   2,135
Asia/Pacific................................................  1,022   1,159     883
Latin America/Africa/Middle East............................    441     471     414
                                                              -----   -----   -----
  Total.....................................................  5,729   6,140   5,003
                                                              =====   =====   =====
</Table>

     The following table sets forth the segment's sales for the last three
years, broken down by key products.

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Cipro/Ciprobay..............................................  1,964   1,785   1,519
Adalat......................................................    975   1,155   1,021
Baycol/Lipobay..............................................    367     636     350
Gamimune N..................................................    343     350     287
Glucobay....................................................    312     311     277
Kogenate....................................................    250     491     377
Avelox......................................................    181     132      12
Trasylol....................................................    136     104      74
Prolastin...................................................    131     140      74
Nimotop.....................................................    120     129     127
Fraction V products.........................................    101     118     109
                                                              -----   -----   -----
  Sum of top eleven products................................  4,880   5,351   4,227
  All other products........................................    849     789     776
                                                              -----   -----   -----
  Total.....................................................  5,729   6,140   5,003
                                                              =====   =====   =====
</Table>

                                        19
<PAGE>

     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;

     -  in Europe, currency effects resulting from transactions in countries
        outside the euro zone;

     -  competition from large pharmaceutical companies in the North America
        market with substantial resources for research, product development and
        promotion;

     -  in Japan, regulation of pharmaceutical prices and mandatory price
        reductions stipulated by the Japanese Ministry of Health and Welfare;

     -  in Japan, extensive periods of time required historically for the
        development and the approval of new drug applications by the Japanese
        Ministry of Health and Welfare.

     We currently produce the active ingredients for our ethical pharmaceutical
products almost exclusively 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; Berkeley, California
and West Haven, Connecticut; and Shiga, Japan.

     We obtain the raw materials for our ethical active ingredients partly from
Bayer's Chemicals business segment and partly from third parties in Europe and
Asia. Strategic reserves of our products as well as the planned long-term
buildup of our production capacity help us ensure an unbroken 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 produce biological raw materials 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. The availability of raw plasma depends on the available donor base,
purchases from other fractionators, regulatory procedures and ongoing
consolidation with larger collectors.

     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 our erectile-dysfunction
medication vardenafil, currently in late-stage development. We plan to introduce
vardenafil to the market in the near to medium term, subject to obtaining
regulatory approvals following the U.S. Food and Drug Administration's
assessment. We expect the results of this assessment in the second half of 2002.

     We encounter competition in all of our geographical markets from large
national and international competitors. In the antibacterial products market,
our main competitors are GlaxoSmithKline, Pfizer and Abbott Laboratories.
Pfizer, Merck & Co. and AstraZeneca dominate the area of hypertension and
coronary heart disease therapy. The market leader for oral antidiabetics is
Bristol-Myers Squibb. Baxter, Bayer and Aventis are the leaders in the blood
coagulation market. Together with Novartis, these three companies also play the
major role in the markets for proteinase inhibitors and immunoglobulins.

RESEARCH AND DEVELOPMENT

     We allocate the largest portion of our research and development budget to
the Pharmaceuticals segment. Within this segment, 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
                                        20
<PAGE>

investment to yield high productivity. Our established areas of core competency
are bacterial infections as well as cardiovascular diseases and related
disorders such as lipid abnormalities and diabetes. Our current research and
development portfolio also includes the following therapeutic areas: cancer,
respiratory diseases (chronic obstructive pulmonary disease -- COPD -- and
asthma); neurological disorders (stroke, traumatic brain injury, chronic pain),
neurodegenerative disorders (Parkinson's disease and Alzheimer's disease),
benign prostate hyperplasia/urinary incontinence and viral infections (with a
particular focus on HIV, cytomegalovirus and hepatitis), as well as such
promising newly evolving markets as the treatment of erectile dysfunction.

     In recent years we have supplemented our internal research activities,
especially in the pharmaceuticals field, through research collaborations with
third parties. As a result of these collaborations, we have significantly
increased the number of new development candidates that we identify each year,
while reducing our research costs per candidate. See Item 4, Information on the
Company -- Research and Development -- Research Cooperations.

     The segment's largest research and development facilities are located in
Wuppertal, Germany; West Haven, Connecticut; Berkeley, California and Kyoto,
Japan.

Life cycle management

     We have adopted life cycle management measures to optimize our return on
investment for current major drugs. Life cycle management influences our
planning long before patents expire. These measures have contributed to the
maintenance of our leading position in antibacterials (Ciprofloxacin) as well as
in the cardiovascular area (Adalat). Adalat is a prime example of successful
life cycle management: the drug generated E975 million in sales 16 years after
the patent protection for nifedipine, its key component, expired.

New products

     In September 2001, we submitted our vardenafil product for the treatment of
erectile dysfunction to the U.S. FDA for approval. In December 2001, we filed
applications for approval in Japan and the European Union. FDA approval is
expected in the second half of 2002.

     Additional drug candidates in late Phase II and Phase III of clinical
development are Repinotan, Faropenem and a PDE IV inhibitor. The respective
indications are:

<Table>
<Caption>
PRODUCT/BRAND NAME                           PRINCIPAL APPLICATION                STATUS
------------------                           ---------------------                ------
<S>                                   <C>                                    <C>
Repinotan...........................  Acute ischemic stroke and traumatic    In phase III
                                      brain injury
Faropenem...........................  Bacterial infections                   In phase III
PDE IV inhibitor....................  Chronic Obstructive Pulmonary          Phase II complete
                                      Disease
</Table>

     Bayer AG licenses Faropenem from Suntory Limited on an exclusive basis
outside Japan and on a semi-exclusive basis in Japan. For Repinotan a further
efficacy study will be conducted before broadening the Phase III program to a
larger patient population is considered. Phase III clinical development of
Faropenem is progressing to further determine its efficacy and safety across
various types of bacterial infections. The Phase II program for the PDE IV
inhibitor in CODP has been completed. Various strategies for subsequent Phase
III development are under consideration.

                                        21
<PAGE>

CONSUMER CARE & DIAGNOSTICS

OVERVIEW

     Our Consumer Care & Diagnostics segment comprises the Consumer Care and
Diagnostics business groups.

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

<Table>
<Caption>
                                                              2001     2000     1999
                                                              -----    -----    -----
                                                                (EUROS IN MILLIONS)
<S>                                                           <C>      <C>      <C>
External net sales..........................................  4,104    3,888    3,364
  Percentage of total sales (continuing operations).........   14.6     14.0     14.7
Intersegment sales..........................................      2       --        1
Operating result before exceptional items...................    388      311      173
  Percentage of total operating result (continuing
     operations)............................................   18.5      8.9      5.6
</Table>

SEGMENT STRATEGY

     We plan to hold all our Health Care businesses (including Consumer Care &
Diagnostics, Pharmaceuticals and Animal Health) through a single new
wholly-owned subsidiary of Bayer AG. See -- Business.

     Our strategic priorities for the Consumer Care & Diagnostics segment are
improving profitability and gaining market share. In the Consumer Care business
group in particular, our goal is to achieve cost savings in the medium term by
consolidating production. We are also preparing for the divestment of Consumer
Care's household insecticide product lines.

CONSUMER CARE

OVERVIEW

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

MAJOR PRODUCTS

Analgesics

     The analgesics market comprises pain relief products both in oral form (for
example, pills and tablets) and for topical use (for example, creams 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(R) (Bayer(R) brand aspirin in the United States) is a nonsteroidal
anti-inflammatory drug (NSAID). It is used for pain relief and the prevention of
second 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(R) is a nonprescription strength of the analgesic naproxen sodium.
Bayer now markets Aleve in the United States through a joint venture with its
producer, Roche Laboratories. Aleve is a long-lasting pain reliever and can be
used for fever reduction.

     Our Midol(R) product family, which competes in the menstrual pain relief
category, comprises several unique product positions, e.g., Maximum Strength
Menstrual Formula, Teen Formula and Night Time Formula. We sell Midol products
only in the United States and Canada.

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
(e.g., nutritional or herbal products such as zinc supplements and echinacea) as
well as from preventive medicines available by prescription or under
development.

                                        22
<PAGE>

     Alka-Seltzer Plus(R) is an effervescent product to relieve symptoms
accompanying the common cold. We market Alka-Seltzer Plus in the United States
and Canada. Tabcin(R) is a line of products similar to Alka-Seltzer Plus; we
market it primarily in Latin America. In late 2000, in response to a
recommendation from the U.S. Food and Drug Administration to all manufacturers
of products containing phenylpropanolamine, we discontinued marketing
Alka-Seltzer Plus and similar products containing phenylpropanolamine in all of
Consumer Care's markets. We completed our launch of reformulated products with
Alka-Seltzer Plus in the United States in 2001 and expect to complete the
worldwide relaunch during 2002.

     Aleve(R) 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(R) 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.

     Mycelex(R) is a treatment for vaginal yeast infections. Mycelex was
previously available only with a prescription; it became an OTC medication in
1992.

     Rid(R) is a topical head lice treatment. 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 (e.g., anti-diarrheal brands extending
or re-positioning to cover the antacid segment) and possible future preventative
or curative therapies (e.g., products that eradicate or manage the ulcer-causing
bacterium H. pylori).

     Alka-Seltzer(R) was developed in the late 1920s by Miles Laboratories, Inc.
and began U.S. national distribution 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(R) 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(R) 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.

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 (e.g., 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) and
herbals segments.

     One-A-Day(R) 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 1998, One-A-Day

                                        23
<PAGE>

introduced a line of multivitamin/herbals blends to target specific health
concerns (e.g., Energy, Tension, Prostate and Menopause).

     Flintstones(R) are multivitamin dietary supplements containing (depending
on type) 10-19 essential nutrients for children ages 2-12. They were introduced
nationally in the U.S. in 1969. Bugs Bunny(R) 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(R) children's
vitamins in the United States in 2001.

MARKETS AND DISTRIBUTION

     Our Consumer Care business group now 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 business group's sales by region and total for the past three years are
as follows:

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................    467     465     434
North America...............................................    894     749     685
Asia/Pacific................................................    222     207     156
Latin America/Africa/Middle East............................    512     502     408
                                                              -----   -----   -----
  Total.....................................................  2,095   1,923   1,683
                                                              =====   =====   =====
</Table>

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Analgesics..................................................    775     731     640
Cough/Cold..................................................    177     110     150
Dermatologicals.............................................    246     225     172
Gastrointestinals...........................................    266     239     199
Nutritionals................................................    197     179     163
Other(1)....................................................    434     439     359
                                                              -----   -----   -----
  Total.....................................................  2,095   1,923   1,683
                                                              =====   =====   =====
</Table>

---------------

(1)  Includes Household products expected to be divested.

     Although the business group is not generally subject to seasonality, the
tendency of consumers to purchase more OTC medications in the cough/cold area
can have an impact on this business in the United States, Canada, Mexico and
Argentina, where these products form a significant part of our local OTC product
portfolio.

     Consumer Care procures many high-volume raw materials internally from other
Bayer business groups and companies. Our major externally procured high-volume
raw materials are sodium citrate, sodium bicarbonate, citric acid and ascorbic
acid. These are readily available commodities 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, aerosol cans and aluminum
foil. We diversify our raw materials sources internationally to help balance
currency exchange rate risk.

     The typical sales and marketing channels of the business group worldwide
are supermarket chains and other mass marketers. In Europe, however, pharmacies
are the usual distribution channel for OTC products.

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

                                        24
<PAGE>

RESEARCH AND DEVELOPMENT

     The Consumer Care business group focuses its research and development
activities on developing and implementing products and programs to contribute to
business growth, including:

     -  efficient development of new products to support current brands; and

     -  aggressive clinical and regulatory strategies to creatively pursue
        ingredient prescription-to-OTC transitions and technology programs.

     The business group's primary research and development facilities are
located in Morristown, New Jersey and Leverkusen and Monheim, Germany.

     We currently have four products in late stages of development. Depending on
approval by regulatory authorities and completion of internal prelaunch
activities, we expect to launch these products during 2002. These products are:

<Table>
<Caption>
PRODUCT/BRAND NAME                 PRINCIPAL APPLICATION                  STATUS
------------------                 ---------------------                  ------
<S>                            <C>                             <C>
Aspirin Dry Granules.........  Pain relief                     Registration approved, launch
                                                               expected in 2002
Aspirin + Pseudoephedrine....  Congestion, pain relief         Registration file submitted
Bayer Women's Aspirin Plus
  Calcium....................  Osteoporosis and heart          Launched in 2002
                               regimen
Alka-Seltzer Plus Nose +       Runny nose, sore throat         Launch expected in 2002
  Throat.....................
</Table>

     Bayer Corporation is involved in a 50 percent joint venture with
Hoffmann-LaRoche to market and sell Aleve, Mycelex, Femstat, Vanquish and Midol
in the United States. Both partners are actively involved in research and
development planning for these products.

DIAGNOSTICS

OVERVIEW

     With approximately 7,000 employees worldwide, Bayer 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 central laboratory, near patient testing, 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.

MAJOR PRODUCTS

Central Laboratory Testing

     The ADVIA(R) family of products is the centerpiece of our laboratory
testing portfolio, which provides a wide range of solutions for the central
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.

     In addition to our ADVIA products, we also offer the ACS:180(R) and Bayer
Immuno 1(R) immunodiagnostic analyzers as well as the Clinitek Atlas(R) urine
chemistry system for high volume urinalysis testing. For highly specific testing
of infectious diseases, we offer a family of DNA probes under the Versant(R)
brand for the testing of HIV and Hepatitis B and C. Our Versant products
represent our main focus in the field of nucleic acid diagnostics, or NAD
testing. NAD techniques detect nucleic acids such as DNA and RNA to diagnose
infections and other diseases.

                                        25
<PAGE>

Near Patient Testing

     We offer 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 Rapid(R) family of instruments and reagents for
the measurement of blood gases, electrolytes and coagulation.

     In the field of urinalysis, we offer the Multistix(R) family of reagent
strips for visual reading of up to 10 parameters and the Clinitek(R) line of
instruments for automated readings. We also offer the DCA 2000+(R) for use in
physicians' offices to complement our diabetes self-testing products. The DCA
2000+ analyzer allows doctors to rapidly assess the effectiveness of diabetic
patients' self- monitoring over a period of time.

Self-Testing

     Our key self-testing products include the Glucometer Dex/Esprit(R) blood
glucose meter that incorporates a 10-test cartridge to provide more convenience
to patients who test their blood sugar levels several times per day, and our
best-selling diagnostics product, the Glucometer Elite(R), a versatile blood
glucose meter that serves a wide spectrum of patient needs.

MARKETS AND DISTRIBUTION

     Our Diagnostics business group 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.

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................    697     700     607
North America...............................................    880     868     716
Asia/Pacific................................................    276     307     301
Latin America/Africa/Middle East............................    156      90      57
                                                              -----   -----   -----
  Total.....................................................  2,009   1,965   1,681
                                                              =====   =====   =====
</Table>

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Laboratory testing (excl. NAD)..............................    791     776     674
NAD testing.................................................     86      65      63
Near patient testing........................................    407     419     352
Self-testing................................................    722     705     592
Other.......................................................      3      --      --
                                                              -----   -----   -----
  Total.....................................................  2,009   1,965   1,681
                                                              =====   =====   =====
</Table>

     We market our laboratory testing and NAD products, as well as most of our
near patient testing products, directly to customers, which are primarily
laboratories and hospitals. We channel our self-testing products to the consumer
market through distributors and large pharmacy and retail chains. In the near
patient testing segment, we market urine chemistry strips primarily through
distributors.

     We manufacture or assemble a significant portion of our own products,
relying on a vendor management process to supply both raw materials and
sub-assemblies. In addition, we source a number of products from original
equipment manufacturer, or OEM, suppliers. Diagnostics sales typically slow down
in the third calendar quarter due to traditional vacation time in Europe and
North America, but show strong performance in the fourth quarter as customers
push to spend budgeted funding before the end of the year.

                                        26
<PAGE>

     Our primary competitors in the diagnostics market are:

     -  Laboratory testing: Abbott, Roche, Beckman Coulter, Dade Behring and
        Johnson & Johnson;

     -  NAD testing: Roche and Abbott;

     -  Near patient testing: Roche and Radiometer; and

     -  Self-testing: Roche, Johnson & Johnson (Lifescan) and Abbott.

RESEARCH AND DEVELOPMENT

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

     -  In Laboratory Testing, through internal development and in-sourcing of
        the ADVIA family of systems and in the expansion of high value assays.

     -  In NAD testing, through menu expansion of assays for infectious disease
        and cancer testing.

     -  In Near Patient Testing; through enhancements of our Rapid systems, a
        new hospital point-of-care platform, and new chemistry strips for
        urinalysis.

     -  In Self-Testing, through internal development and in-sourcing of mass
        market, user-friendly whole blood glucose systems and by focusing
        research in minimally- and non-invasive technologies.

     The business group's primary research and development facilities are
located in the United States: in Medfield and Cambridge, Massachusetts;
Tarrytown, New York; Elkhart, Indiana; and Emeryville, California.

     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:

<Table>
<Caption>
PRODUCT/BRAND NAME                 PRINCIPAL APPLICATION                  STATUS
------------------                 ---------------------                  ------
<S>                            <C>                             <C>
ADVIA IMS(R) Integrated
  Modular System.............  Modular platform, combining     Launch planned for 2003
                               immunodiagnostic and clinical
                               chemistry on a single
                               instrument with a broad assay
                               menu
ADVIA Centaur(R) and
  ACS:180(R) menu
  extension..................  Extension of immunoassay menu   Launch planned for 10
                               for disease diagnosis           additional methods in 2002
VERSANT HIV 3.0..............  Quantitative detection of HIV   Awaiting FDA approval trials
VERSANT HCV 3.0..............  Quantitative detection of       Undergoing FDA clinical
                               hepatitis C                     trials; approved outside the
                                                               United States
VERSANT HCV TMA..............  Qualitative detection of        Undergoing FDA clinical
                               hepatitis C                     trials; approved outside the
                                                               United States
RapidLab 800 Enhancement.....  Blood gas/electrolyte           Launch planned for 2003
                               analyzer for laboratory
                               testing
Multistix PRO................  Addition of proprietary         Released in US in February
                               microalbumin and creatine       2002
                               reagent pads for improved
                               screening for kidney
                               dysfunction
Next-generation Glucometer
  systems....................  "Less Pain" whole blood         Launch planned for 2003
                               glucose system
</Table>

                                        27
<PAGE>

CROP PROTECTION

OVERVIEW

     Our Crop Protection segment develops and markets conventional chemical crop
protection products (insecticides, fungicides and herbicides). Using functional
genomics, a discipline that analyses the functional effects of differing genetic
structures, we also develop new chemical structures for conventional active
ingredients, creating new modes of action for enhanced effectiveness against
pests, weeds and fungi. The following table shows the segment's performance for
the last three years.

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
External net sales..........................................  2,708   2,456   2,177
  Percentage of total sales (continuing operations).........    9.6     8.8     9.5
Intersegment sales..........................................    102      97      83
Operating result before exceptional items...................    453     401     383
  Percentage of total operating result (continuing
     operations)............................................   21.6    11.5    12.4
</Table>

     The following table shows our revenue during the past three years from the
product that we regard as material to the revenue of the Crop Protection segment
as a whole.

<Table>
<Caption>
                                             2001                     2000                     1999
                                    ----------------------   ----------------------   ----------------------
                                     REVENUE    PERCENTAGE    REVENUE    PERCENTAGE    REVENUE    PERCENTAGE
                                    (EUROS IN   OF SEGMENT   (EUROS IN   OF SEGMENT   (EUROS IN   OF SEGMENT
PRODUCT                             MILLIONS)    REVENUE     MILLIONS)    REVENUE     MILLIONS)    REVENUE
-------                             ---------   ----------   ---------   ----------   ---------   ----------
<S>                                 <C>         <C>          <C>         <C>          <C>         <C>
Imidacloprid (Confidor, Gaucho,
  Admire, Provado)*...............     608         22.5         560         22.8         464         21.3
</Table>

---------------

* Also used in our Animal Health segment's Advantage product.

SEGMENT STRATEGY

     We plan to incorporate our Crop Protection business as a separate
wholly-owned subsidiary of Bayer AG, to be named Bayer CropScience AG.
See -- Business. Bayer CropScience will combine our current business and the
business that we expect to acquire upon completion of the Aventis CropScience
acquisition (see below).

     We intend to continue expanding our crop protection franchise through
ongoing life cycle management. In the Home Garden Market we seek to be a market
leader by fully utilizing our existing portfolio and product pipeline, as well
as through strategic joint ventures and acquisitions.

     Historically, we concentrated our product development activities on
research in innovative chemistry. With the consummation of the Aventis
CropScience acquisition, we will complement our historical expertise with an
additional agrobiological emphasis.

     In October 2001, we agreed to acquire Aventis CropScience from its current
owners, Aventis and Schering. In April 2002, the European Commission gave its
approval for the transaction and, on May 30, 2002, the United States Federal
Trade Commission gave its preliminary approval of the transaction under the
terms of a consent order. Both approvals are subject to the condition that we
divest or out-license a number of products. These conditions require us, among
other things, to: divest Aventis CropScience's Fipronil business worldwide, with
a right to obtain a co-exclusive license for non-agricultural uses worldwide,
except for Europe; divest five Aventis fungicides in Europe and grant a
world-wide, non-exclusive license for the Aventis seed treatment products;
divest the sugar beet herbicide Metamitron in Europe; divest the broad-spectrum
pyrethroid insecticides Cyfluthrin (Baythroid(R)) and beta-cyfluthrin
(Bulldock(R)); divest the sugar beet herbicide (Goltix(R)); divest the
insecticide Acetamiprid in Europe and North America; divest the wheat herbicide
Everest worldwide; and divest Aventis CropScience's cotton defoliant business
Folex in the U.S. The total sales value of all divestments is about

                                        28
<PAGE>

E650 to 700 million of which about 25 percent comes from the former Bayer Crop
Protection business and 75 percent from the former Aventis CropScience. The
acquisition of Aventis CropScience was closed on June 3, 2002, and we do not
expect to make additional major acquisitions in our Crop Protection segment in
the near term.

MAJOR PRODUCTS

Insecticides

     Imidacloprid is an active ingredient in a new class of chemicals
(chloronicotinyls syn. neonicotinoids). It helps control many 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. We use imidacloprid in our Gaucho(R), Confidor(R), Admire(R) and
Provado(R) brand products. We launched imidacloprid in 1991 and now market it in
more than 120 countries for use on over 140 crops.

     Cyfluthrin (Baythroid(R)) and beta-cyfluthrin (Bulldock(R)) are
broad-spectrum pyrethroid insecticides. Although used primarily against biting
insects, they are also effective against various sucking pests. Cyfluthrin and
beta-cyfluthrin are registered for use on cotton as well as a broad range of
other crops, including potatoes, soybeans, cereals, sugarcane and sunflowers.
Both products are being divested in Europe under the commitments given to the
European Commission.

Fungicides

     Folicur(R) and Raxil(R) contain tebuconazole, a fungicide compound that
prevents the targeted fungus from synthesizing vital components of its cell
membrane. Tebuconazole can be used as spray (Folicur and related product
brands), as a seed treatment (Raxil) 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
raising certain crops, particularly oilseed rape.

     Flint(R) contains trifloxystrobin, a strobilurin-type fungicide used
primarily to protect cereals, and a variety of other crops. Strobilurins are a
class of broad-spectrum fungicide developed from a chemical originally isolated
from the mushroom Strobilurus tenacellus. Trifloxystrobin represents an
important new addition to Bayer's fungicide portfolio, supplementing our
triazole-based products and extending our capabilities in the specialty cereal
fungicide sector.

Herbicides

     Sencor(R) is our major brand of metribuzin herbicide. Introduced in 1972,
metribuzin is used against broadleaf weeds and grasses. The product can be used
on potatoes, tomatoes and more than 36 different crops. Despite metribuzin's
maturity, we have extended its lifecycle by using the product as a mix partner
with other key herbicides.

     Flufenacet(R), introduced in 1998, is effective in low dosages to protect
numerous crops, including corn, soybeans, potatoes, cereals and rice, against
grass weeds. Axiom(R), Domain(R) and Epic(R), our major flufenacet brands in the
United States, are innovative solutions for a changing market environment. For
example, Domain, a flufenacet/metribuzin mix, is a specific herbicide developed
for the protection of "Roundup Ready" soybeans, which have been genetically
modified to resist certain herbicides.

     Goltix(R), launched in 1978, is a specialty herbicide used primarily on
sugar beets to control a range of broadleaf and some grass weeds. Goltix is
being divested in Europe under the commitments given to the European Commission.

                                        29
<PAGE>

Garden/Professional Care (GPC)

     Premise(R) is an imidacloprid-based termiticide launched in 1996 in the
United States. Premise provides excellent termite control with low toxicity, has
favorable soil characteristics and is odorless. Our goal is to establish Premise
as the leading liquid termiticide worldwide.

     We launched Merit(R), an imidacloprid-based compound for the turf and
ornamental market, in 1994 in the United States. Merit is a low-toxicity
insecticide of the new chloronicotinyl class. It is broad-spectrum, systemic and
effective in low doses in controlling soil-inhabiting and crown-inhabiting
insects on turf grass, as well as sucking and biting insects on ornamental
plants.

MARKETS AND DISTRIBUTION

     Europe has traditionally been Bayer's strongest crop protection market,
accounting for 38 percent of our sales in 2001. We are seeking to achieve sales
balance by increasing our market significance in other, non-European markets.
For example, in 2001 the NAFTA region accounted for 25 percent of our Crop
Protection business, up from 19 percent as recently as 1998.

     The segment's sales by region and total for the past three years are as
follows:

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................  1,022     886     881
North America...............................................    614     557     442
Asia/Pacific................................................    527     517     399
Latin America/Africa/Middle East............................    545     496     455
                                                              -----   -----   -----
  Total.....................................................  2,708   2,456   2,177
                                                              =====   =====   =====
</Table>

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Insecticides................................................  1,059   1,026     929
Fungicides..................................................    821     722     638
Herbicides..................................................    538     451     416
GPC.........................................................    290     257     194
                                                              -----   -----   -----
  Total.....................................................  2,708   2,456   2,177
                                                              =====   =====   =====
</Table>

     Because nearly 80 percent of Bayer's crop protection business is located in
the northern hemisphere, our business is affected by the seasonality of the
various crop cycles.

     We obtain the bulk of our raw materials from within the Bayer Group. We
also enter into minor long-term contracts with non-Bayer companies.

     We typically market our Crop Protection products through a one- to two-step
marketing distribution system. Under this system, we sell to wholesalers, who in
turn sell to retailers, as well as to large-scale retailers. The retailers
supply end users with our products as well as with advice on their use. We
believe that our new e-commerce platform, launched in the United States in late
2000, will fit well into this marketing strategy, helping us to improve service
while satisfying customer demand.

     Our main competitors in the insecticide, fungicide and herbicide businesses
are Syngenta, Monsanto, BASF, Dow AgroSciences and DuPont. Scotts is our primary
competitor in the home garden business while Syngenta and Dow AgroSciences are
our main competitors in professional garden care products.

                                        30
<PAGE>

RESEARCH AND DEVELOPMENT

     The Crop Protection segment focuses its research and development activities
on developing new active ingredients for insecticides, fungicides and
herbicides. We also seek to develop new formulations for existing active
ingredients, expanding their applicability to additional crops and countries and
thereby augmenting their sales potential.

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

     During 2001, we began the launch process of four new active ingredients. We
expect to launch two additional active ingredients in 2002. These products are:

<Table>
<Caption>
PRODUCT/ BRAND NAME                                        APPLICATION           STATUS
-------------------                                        -----------           ------
<S>                                                        <C>           <C>
Iprovalicarb.............................................  Fungicide     Launched in 2001
Thiacloprid..............................................  Insecticide   Launched in 2001
Fentrazamide.............................................  Herbicide     Launched in 2001
Flucarbazone-Sodium......................................  Herbicide     Launched in 2001
Propoxycarbazone-Sodium (proposed).......................  Herbicide     Launch expected in 2002
Methoxyfenozide..........................................  Insecticide   Launch expected in 2002
</Table>

ANIMAL HEALTH

OVERVIEW

     Our Animal Health segment develops and markets such animal health products
as veterinary medicines, environmental health products and nutritionals for the
health care of both companion animals and commercial livestock/poultry. In
addition, the segment develops products for insect and rodent control. The
following table shows the segment's performance for the last three years.

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
External net sales..........................................   988     999     917
  Percentage of total sales (continuing operations).........   3.5     3.6     4.0
Intersegment sales..........................................     5       6       6
Operating result before exceptional items...................   172     157     137
  Percentage of total operating result (continuing
     operations)............................................   8.2     4.5     4.5
</Table>

SEGMENT STRATEGY

     We plan to hold all our Health Care businesses (including Animal Health,
Pharmaceuticals and Consumer Care & Diagnostics) through a single new
wholly-owned subsidiary of Bayer AG. We expect that, during 2002, our new Bayer
CropScience subsidiary will take responsibility for distributing the
environmental health products that are currently part of Animal Health's
portfolio. See -- Business.

     Animal Health plans to cooperate closely with the Pharmaceuticals segment
in research and development efforts in order to bring to the market new active
ingredients and products to combat disease in animals.

MAJOR PRODUCTS

Parasiticides

     Advantage(R) is a flea control product in easy-to-use, spot-application
form.

     The Droncit(R) and Drontal(R) product family offers solutions for the
control of tapeworm and roundworm.

     Bayticol(R) is a topical product against major tick species that attack
livestock animals.

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

                                        31
<PAGE>

Antimicrobials

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

Biologicals

     The Bayovac(R) vaccine family comprises two 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.
Because animals vaccinated using traditional products cannot be distinguished
from animals exposed to the natural disease (and thus potential carriers), many
countries bar them from import.

Environmental health products

     Our family of Cyfluthrin products, which comprises several distinct brands
such as Blattanex(R) and Tempo(R), targets various flying insects.

MARKETS AND DISTRIBUTION

     The Animal Health business covers worldwide markets, including emerging
markets such as China, Vietnam and others in South-East Asia. We organize the
activities of the segment along the lines of its market activities, into
livestock, companion animal and environmental health.

     The segment's sales by region and total for the past three years are as
follows:

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................   278     267     268
North America...............................................   362     356     329
Asia/Pacific................................................   163     184     157
Latin America/Africa/Middle East............................   185     192     163
                                                               ---     ---     ---
  Total.....................................................   988     999     917
                                                               ===     ===     ===
</Table>

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Parasiticides...............................................   455     443     390
Antimicrobials..............................................   208     191     167
Biologicals.................................................    45      81      95
Environmental health products...............................   130     125      99
Nutritionals................................................    69      78      68
Others......................................................    81      81      98
                                                               ---     ---     ---
  Total.....................................................   988     999     917
                                                               ===     ===     ===
</Table>

     On a worldwide basis, the activities of the Animal Health segment are not
subject to any significant seasonal effects. Other business entities belonging
to the Bayer Group are the primary suppliers of materials for Animal Health.

     Depending on local legislation, Animal Health products may be available to
end users on a prescription or non-prescription basis. End users purchase
prescription products from veterinarians or pharmacies. Non-prescription
products are available through retailers, cooperatives or directly to
integrators in the livestock segment; to pet shops and other specialized
channels in the companion animal market; and on the mass markets. We often use
third-party distributors in these markets.

                                        32
<PAGE>

     Our main competitors in the animal health business are Merial, Pfizer
Animal Health and Intervet.

RESEARCH AND DEVELOPMENT

     The Animal Health segment focuses its research and development activities
on antimicrobials, parasiticides and pain and cancer remedies. A particular goal
of our research and development efforts is to provide the segment with
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 see our greatest current challenge in the highly competitive but
attractive field of parasiticides, where we are developing various treatments
and treatment combinations for a variety of indications.

     We currently have four products or product families in late stages of
development. Subject to regulatory approval, we expect to launch these products
by 2002-2003. These products are:

<Table>
<Caption>
PRODUCT/BRAND NAME                                    INDICATION                     STATUS
------------------                                    ----------                     ------
<S>                                     <C>                                      <C>
Baycox Piglet.........................  Coccidiosis control in swine             In registration
Pyrethroid spray......................  Tick control in dogs                     Phase III
Endoparasiticide and ectoparasiticide
  combinations........................  Control of fleas, heartworm and          Phase III
                                        roundworm in cats and dogs
Cancer remedy.........................  Cancer therapy in dogs                   Phase III
</Table>

PLASTICS & RUBBER

OVERVIEW

     Our Plastics & Rubber segment comprises the business groups Plastics and
Rubber. The following table shows the segment's performance for the last three
years.

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
External net sales..........................................  5,581   5,816   4,627
  Percentage of total sales (continuing operations).........   19.9    20.9    20.3
Intersegment sales..........................................    116     122     114
Operating result before exceptional items...................    288     560     443
  Percentage of total operating result (continuing
     operations)............................................   13.7    16.1    14.4
</Table>

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

SEGMENT STRATEGY

     We plan to hold our Plastics & Rubber and Polyurethanes, Coatings &
Colorants segments through a single new wholly-owned subsidiary of Bayer AG that
will be responsible for all Bayer's Polymers businesses. See -- Business.

     Our goal is to continue expanding our global leadership 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 sifting out
any weaknesses in our existing product portfolio, implementing efficient cost
structures, eliminating capacity constraints and further exploiting our regional
growth potential.

                                        33
<PAGE>

PLASTICS

OVERVIEW

     With its broad product portfolio, our Plastics business group is one of the
leading global suppliers and manufacturers of engineering thermoplastics. 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

Amorphic thermoplastics

Polycarbonates

     Polycarbonates are plastics that are highly stable across a wide
temperature range. Polycarbonates almost completely dominate the field of
optical data storage media, such as recordable CDs and DVDs, and are widely used
throughout the electrical/electronics segments in general. The construction
industry is also a major user of polycarbonates. Makrolon(R) is our leading
polycarbonate product. Its key characteristics include high transparency, heat
resistance and toughness. It can be both sterilized and recycled. Our other
polycarbonates include the APEC(R) range.

Styrenics

     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. Novodur(R), an
acrylonitrile/butadiene/styrene copolymers, is our leading stryrenic. Other
styrenics include Lustran SAN(R), Bayblend(R), Triax(R) and Centrex(R).

Fabricated Products

     We also produce plastic films and sheeting with a broad range of
characteristics for a wide variety of applications. These materials consist of
polycarbonate, polycarbonate blends and mixtures of polycarbonates with other
engineering thermoplastics. We market these materials under trade names as
Makrofol(R), Bayfol(R), and Solartuff(R).

Semi-crystalline polymers

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 ABS systems. Durethan(R) is our range of engineering
thermoplastics based on PA 6, PA 66 and their copolyamides. The products in our
Pocan(R) range are semicrystalline thermoplastic polyesters that show high
resistance to chemicals, heat distortion and stress cracking.

Thermoplastic polyurethanes

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

                                        34
<PAGE>

MARKETS AND DISTRIBUTION

     We sell the products of our Plastics business group to some 6,500 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 group's external sales, by region and total, for the past
three years are as follows:

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................  1,572   1,574   1,352
North America...............................................    846     994     768
Asia/Pacific................................................    735     730     495
Latin America/Africa/Middle East............................    221     222     155
                                                              -----   -----   -----
  Total.....................................................  3,374   3,520   2,770
                                                              =====   =====   =====
</Table>

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Amorphic polymers (polycarbonates, styrenics and structural
  fabricates)...............................................  2,767   2,918   2,247
Semi-crystalline polymers (polyamides, polyesters and
  thermoplastic polyurethanes)..............................    607     602     523
                                                              -----   -----   -----
  Total.....................................................  3,374   3,520   2,770
                                                              =====   =====   =====
</Table>

     The market for engineering thermoplastics is characterized by constant
pressure on margins and growing price competition due to globalization,
consolidation and increasing customer purchasing power. Outside the
polycarbonates market, the primary driver of competition is price. Our major
customers also expect global presence, 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, overcapacity remains a problem for
manufacturers worldwide. Although several producers have cancelled or postponed
expansion plans, capacity continues to increase. We expect that the industry
will continue to consolidate and that new, low-cost technologies will replace
small, increasingly obsolete facilities.

     Bayer does not produce basic petrochemicals. The principal raw materials of
our Plastics business group 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, obtain a portion of the chlorine for our
polycarbonates from within the Bayer Group. We produce Bisphenol-A (another key
polycarbonate component) 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, listing
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 are coming to rely increasingly on e-commerce. For
example, together with such other leading thermoplastics suppliers as BASF, Dow,
DuPont and Celanese/Ticona, Bayer created omnexus, a neutral market place
offering products and services across the full spectrum of technical
thermoplastics business, from injection molding to extrusion.

     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.

                                        35
<PAGE>

RESEARCH AND DEVELOPMENT

     The Plastics business group focuses its research and development activities
on process development in polycarbonates, styrenics and semi-crystalline
thermoplastics. We are introducing a new poly carbonate manufacturing process to
mass production, standardizing worldwide processes for the manufacture of
emulsion ABS, and 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.

     This business group's primary research and development facilities are
located in Krefeld and Dormagen, Germany; Pittsburgh, Pennsylvania; Springfield,
Massachusetts; and Moxi, India.

     We currently have seven products in late stages of development. We expect
to launch these products during 2002. These products are:

<Table>
<Caption>
PRODUCT/BRAND NAME                              APPLICATION                          STATUS
------------------                              -----------                          ------
<S>                               <C>                                        <C>
Surface-modified Makrolon.......  Automotive, construction                   Start commercialization
Melt polycarbonate..............  Optical/ophthalmic lenses                  Start commercialization
Bayblend FR 3000 series.........  Business machines/information technology   Start commercialization
Durethan with structural          Automotive                                 Start commercialization
  Viscosity.....................
Reinforced Pocan blends.........  Automotive exterior parts                  Start commercialization
Structural hybrid components....  Automotive                                 Start commercialization
Light-stable Desmopan...........  Instrument panels                          Start commercialization
</Table>

RUBBER

OVERVIEW

     As a leading supplier of raw materials, our Rubber business group is 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 from our subsidiary
Rhein Chemie and latices from PolymerLatex, a joint venture with Degussa AG. We
are currently contemplating divesting Rhein Chemie as well as our interest in
PolymerLatex.

MAJOR PRODUCTS

Solid Rubber

     We produce a wide range of synthetic rubber products. Our customers may
process our rubber materials into end products, or blend them with other
synthetic rubbers or natural rubber to form additional compounds. Our products
offer customers an array of varying characteristics, including workability,
hardness, flexibility and wear, heat and chemical resistance, to suit their
specific needs. The tire industry is a major user of our rubber products. Our
rubber products also serve a wide variety of other applications, from hoses,
cable and wire sheathing through footwear soles to 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 through heat, oxidation and chemicals, and to alter the consistency
and properties of rubber products.

PolymerLatex and Rhein Chemie

     PolymerLatex produces an extensive range of high-grade polymer dispersions
for a wide variety of applications. Our subsidiary Rhein Chemie produces a wide
variety of substances used in rubber manufacture and processing. We no longer
regard PolymerLatex and Rhein Chemie as part of our core Rubber business.

                                        36
<PAGE>

MARKETS AND DISTRIBUTION

     The main markets for the Rubber business group are Europe and North
America. The tire and automotive industries generate about 60 percent of the
business group's revenue, both from new car production and replacement tires.

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................  1,060   1,033     920
North America...............................................    720     762     559
Asia/Pacific................................................    307     367     275
Latin America/Africa/Middle East............................    120     134     103
                                                              -----   -----   -----
  Total.....................................................  2,207   2,296   1,857
                                                              =====   =====   =====
</Table>

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Solid Rubber................................................  1,420   1,468   1,168
Rubber Chemicals............................................    288     314     280
PolymerLatex................................................    190     184     156
Rhein Chemie................................................    293     318     230
Other.......................................................     16      12      23
                                                              -----   -----   -----
  Total.....................................................  2,207   2,296   1,857
                                                              =====   =====   =====
</Table>

     Our Rubber business group is not subject to significant seasonality.

     In procuring many of our chemical raw materials, we benefit from
integration with the other companies of the Bayer Group.

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

     -  Solid Rubber: Goodyear, Exxon, Enichem, DOW and Nippon Zeon; and

     -  Rubber Chemicals: Flexsys and Crompton.

RESEARCH AND DEVELOPMENT

     The Rubber business group focuses its research and development activities
on creating new products, improving processing technology and improving testing
methods. The business group's primary research and development facilities are
located in Leverkusen and Dormagen, Germany, and Sarnia, Ontario.

     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 tire field, we concentrate on
improvements in rolling resistance, wet grip and wear. In the non-tire
automotive industry, the primary goal is developing rubber parts that have
longer durability at higher operating temperatures.

                                        37
<PAGE>

     We currently have five products in late stages of development. We expect to
launch these products during 2002. These products are:

<Table>
<Caption>
PRODUCT/ BRAND NAME                     APPLICATION                       STATUS
-------------------                     -----------                       ------
<S>                            <C>                             <C>
Therban HT...................  Heat stabilizing system         Field test through end users
Therban XT...................  Improved hot abrasion and       Sampling to customers and
                               Adhesion                        initial sales
Therban LT...................  Improved low temperature        Field test through end users
                               performance for seals and       and initial sales
                               belts
Vulcuren.....................  Natural Rubber/Truck tire       Trial product, sampling to
                                                               customers
Modified S-SBR...............  Tire tread                      First plant trials
</Table>

POLYURETHANES, COATINGS & COLORANTS

OVERVIEW

     Our Polyurethanes, Coatings & Colorants segment comprises the Polyurethanes
and the Coatings and Colorants business groups. The following table shows the
segment's performance for the last three years.

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
External net sales..........................................  5,207   5,076   3,904
  Percentage of total sales (continuing operations).........   18.6    18.3    17.1
Intersegment sales..........................................    138     462     482
Operating result before exceptional items...................    146     518     657
  Percentage of total operating result (continuing
     operations)............................................    6.9    14.9    21.4
</Table>

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

SEGMENT STRATEGY

     We plan to hold Polyurethanes, Coatings & Colorants and the Plastics &
Rubber segment through a single new wholly-owned subsidiary of Bayer AG that
will be responsible for all Bayer's Polymers businesses. See -- Business.

     Our goal is to continue expanding our global position in high-value added
polymers. In 2000 we balanced our existing portfolio by acquiring Lyondell's
polyol business. We now plan to focus on capacity expansion in Asia, where we
see opportunities for above-average growth.

POLYURETHANES

OVERVIEW

     Our Polyurethanes business group focuses on the development, production and
marketing of raw materials, 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(R), Desmophen(R), Baydur(R) and Bayflex(R). The
characteristics of a given polyurethane depend on both the raw materials 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

                                        38
<PAGE>

requirements. When we have perfected a formulation for a specific end product,
we deliver the components to the customer, which 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 raw
materials include furniture, mattresses, automotive components, sport and
leisure equipment and construction.

MARKETS AND DISTRIBUTION

     Europe and the NAFTA nations remain the primary markets for our
Polyurethanes business group, although Asia is growing in importance.

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................  1,340   1,218     984
North America...............................................  1,237   1,175     781
Asia/Pacific................................................    416     394     198
Latin America/Africa/Middle East............................    200     343     212
                                                              -----   -----   -----
  Total.....................................................  3,193   3,130   2,175
                                                              =====   =====   =====
</Table>

     The following table sets forth the business group's sales for the last
three years, broken down by product type.

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
TDI.........................................................    575     583     446
MDI.........................................................  1,177     980     886
Polyethers..................................................    953   1,226     529
Others......................................................    488     341     314
                                                              -----   -----   -----
  Total.....................................................  3,193   3,130   2,175
                                                              =====   =====   =====
</Table>

     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 business group's 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 of our are commodity petrochemical products. We
typically purchase these on the open market, 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 Polyurethanes business group sells its 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.

                                        39
<PAGE>

     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.

     Our main competitors are DOW, BASF and Huntsman.

RESEARCH AND DEVELOPMENT

     The Polyurethanes business group focuses its 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;

     -  new applications for polyurethanes and polyurethane raw materials; and

     -  reducing costs and improving quality in production processes.

     The business group's primary research and technical development facilities
are located in Dormagen and Leverkusen, Germany, Pittsburgh, Pennsylvania, and
South Charleston, West Virginia.

     The main field of innovation in the polyurethane field is currently the
development of new or improved polyether polyol types and blends as well as new
processes. The business group concentrates its research and development efforts
with respect to aromatic isocyanates on improving existing products and
technologies for their manufacture.

     We currently have various polyether polyol products in late stages of
development. We expect to launch these products during 2002.

COATINGS AND COLORANTS

OVERVIEW

     Our Coatings and Colorants business group develops and markets a wide
variety of products that serve as raw materials for lacquers, coatings, sealants
and adhesives and colorants for plastics and building materials.

MAJOR PRODUCTS

Resins and Hardeners

     Lacquers are formed through the combination of a resin with a hardener. We
offer a variety of resins (e.g., Desmophen(R) and Bayhydrol(R)) and hardeners
(e.g., Desmodur L(R), Desmodur N(R), Bayhydur(R), and Crelan(R)). This variety
enables us to provide custom-tailored solutions for a number of different
applications.

Special raw materials

     Our special raw material unit produces such specialty products as
Impranil(R)/Imprafix(R), our polyurethane coating systems for textiles.

Adhesive raw materials

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

Colorants

     Bayferrox(R) is our iron oxide-based colorant, available in a variety of
colors for a wide range of uses. For example, it imparts the characteristic
reddish tone of roofing tiles.

                                        40
<PAGE>

MARKETS AND DISTRIBUTION

     Our Coatings and Colorants business group is a major producer of raw
materials for lacquers and adhesives as well as of organic and inorganic dyes
and pigments. The primary ultimate end-users of our products are the automotive,
furniture and plastics industries; other users include the textile, shoe, paint
and building industries.

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................    961     934     886
North America...............................................    555     523     433
Asia/Pacific................................................    336     311     257
Latin America/Africa/Middle East............................    162     178     153
                                                              -----   -----   -----
  Total.....................................................  2,014   1,946   1,729
                                                              =====   =====   =====
</Table>

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Resins......................................................    253     211     185
Aliphatic isocyanates.......................................    553     543     469
Aromatic isocyanates........................................    230     223     199
Special raw materials.......................................    186     161     141
Adhesive raw materials......................................    242     240     212
Colorants...................................................    550     568     523
                                                              -----   -----   -----
  Total.....................................................  2,014   1,946   1,729
                                                              =====   =====   =====
</Table>

     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, 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 are not
significantly dependent on any single raw material or supplier of raw materials.

     We coordinate and carry out our sales and marketing from our head office in
Leverkusen, Germany, as well as through our various national subsidiaries. In
addition, e-commerce is becoming increasingly important in our marketing
activities. Our key account managers handle our globally active major customers
directly.

     We regard the following companies as the chief competitors of our Coatings
and Colorants business group:

     -  Lacquer hardeners: Solutia;

     -  Aliphatic isocyanates: Rhodia;

     -  Organic pigments: Ciba and Clariant; and

     -  Inorganic pigments: Rockwood, formerly known as Laporte.

RESEARCH AND DEVELOPMENT

     The Coatings and Colorants business group focuses its research and
development activities on developing new technologies for the production of our
lacquer resins as well as our aliphatic and aromatic isocyanates that are
environmentally friendly and sparing in their use of natural resources. We are
also exploring ways of reducing

                                        41
<PAGE>

the amount of solvent needed for our aliphatic isocyanates and optimizing the
production of our iron-oxide based inorganic pigments.

     The business group's primary research and development facilities are
located in Leverkusen, Dormagen and Uerdingen, Germany and in Bushy Park, South
Carolina and Pittsburgh, Pennsylvania.

CHEMICALS

OVERVIEW

     The Chemicals segment comprises the Basic and Fine Chemicals, Specialty
Products, H.C. Starck and Wolff Walsrode business groups.

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
External net sales..........................................  3,749   3,410   2,855
  Percentage of total sales (continuing operations).........   13.4    12.3    12.5
Intersegment sales..........................................    456     466     478
Operating result before exceptional items...................    271     370     360
  Percentage of total operating result (continuing
     operations)............................................   12.9    10.6    11.7
</Table>

     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 the further
improvement of our margins. We aim to achieve this goal by streamlining our
portfolio and by expanding our specialties, including by means of selected
acquisitions. Recent examples are H.C. Starck's acquisition of the U.S.-based
CSM Holding, Inc. as well as our acquisition of the sizing and strength paper
chemicals business of Cytec Industries Inc., with which we expect to give our
Specialty Products business group access to the U.S. market for process
chemicals, thereby strengthening its global position in paper sizing agents. In
keeping with our strategy of focusing on our core activities in 2001, we sold
our non-core H-acid dyestuff intermediates business as well as our intellectual
property in solar-grade silicon production. In December 2001, we announced plans
to divest the Haarmann & Reimer business group, as we no longer consider it to
be part of the Chemical's segments core activities.

BASIC AND FINE CHEMICALS

OVERVIEW

     Our Basic and Fine Chemicals business group focuses on the development,
manufacture and marketing of a wide range of basic chemicals as well as a
growing range of high specification, customized fine chemicals for use in
advanced industrial sectors such as life sciences.

     "Basic" chemicals are produced in bulk quantities using few synthesis
steps. Their raw materials are basic organic and inorganic substances (e.g.
benzene or sodium chloride). We produce most of our basic chemicals in
dedicated, continuous-process manufacturing plants using advanced technologies
to optimize production and quality.

     "Fine" chemicals are high added-value, multi-step synthesis products made
to exact specifications by sophisticated and complex chemical synthesis
processes. Fine 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 partnership as well as custom-
        tailored research and manufacturing; typical examples are life science
        intermediates for the pharmaceutical and agrochemical industries.

                                        42
<PAGE>

     The product range of the Basic and Fine Chemicals business group contains
approximately 2,700 individual products and articles for thousands of
applications.

MARKETS AND DISTRIBUTION

     The business group's principal markets are industrial intermediates, custom
manufacturing and fine chemicals for the photographic, electronics and life
science industries.

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   ----
                                                              (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................    666     622   560
North America...............................................    167     194   184
Asia/Pacific................................................    122     129    86
Latin America/Africa/Middle East............................     70      61    56
                                                              -----   -----   ---
  Total.....................................................  1,025   1,006   886
                                                              =====   =====   ===
</Table>

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   ----
                                                              (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Fine chemicals..............................................    282     343   289
Basic chemicals.............................................    518     509   460
Inorganic basic chemicals...................................    225     154   137
                                                              -----   -----   ---
  Total.....................................................  1,025   1,006   886
                                                              =====   =====   ===
</Table>

     Our Basic and Fine Chemicals business group is not seasonal. Basic
chemicals are more influenced by fluctuations in raw material prices (e.g.
toluene, benzene) than are fine chemicals, primarily because our basic chemical
operations make greater use of petrochemicals, whose prices are driven by
changing oil prices.

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

     The business group's chief competitors in the various industrial
intermediates segments are Solutia, Clariant, BASF and Tessenderlo. In various
fine chemicals segments, we compete against Lonza, DSM, Clariant and Rhodia.

RESEARCH AND DEVELOPMENT

     The Basic and Fine Chemicals business group's focus on research and
development is twofold. In the field of bulk chemicals, our priority is the
improvement of the manufacturing process of industrial intermediates. In life
science intermediates and biodegradable polymers, we concentrate both on
improving the manufacturing process and on developing new technologies and
applications.

     The business group's primarily research and development facilities are
located in Leverkusen, Germany.

SPECIALTY PRODUCTS

OVERVIEW

     In contrast to other chemicals business lines, our Specialty Products
typically display a high degree of "custom tailoring" for the specific needs of
their users. Specialty Products serves a broad range of industries, including
textile and paper manufacture; leather, plastic and wood products; agricultural
products; pharmaceuticals; and water treatment.

                                        43
<PAGE>

     Specialty Products offers its customers thousands of compounds designed to
fulfil their specific needs. We have a variety of broad product families, each
of which contains several product lines. Each product line represents numerous
individual compounds that are related as to general chemical composition and
area of function.

MARKETS AND DISTRIBUTION

     The specialty chemicals market is highly segmented. Market participants
range from small local suppliers to multinational concerns. In recent years this
market has been consolidating, with heavy mergers and acquisition activity. We
believe that this business group's products are, because of their specialized
nature, less subject to commoditization than other chemical products, and that
Specialty Products' profitability may be more sustainable than that of the
broader chemicals market.

     Given the individualized nature of its products, the business group's
marketing activities focus on individual customer requirements. Specialty
Products has a worldwide network of local subsidiaries and production sites.
This network uses an internal sales force. Technicians back up our marketing
efforts by assisting customers in creating tailor-made solutions and providing
them with commercial and technical assistance.

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................    644     607     565
North America...............................................    379     239     204
Asia/Pacific................................................    244     257     210
Latin America/Africa/Middle East............................    202     209     170
                                                              -----   -----   -----
  Total.....................................................  1,469   1,312   1,149
                                                              =====   =====   =====
</Table>

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Textile, paper and leather chemicals........................  1,040     891     782
Polymer additives, material protection, ion exchange resins
  and water treatment chemicals.............................    429     421     367
                                                              -----   -----   -----
  Total.....................................................  1,469   1,312   1,149
                                                              =====   =====   =====
</Table>

     The market for specialty chemicals is not generally subject to seasonality.
Fluctuations in the business cycle and rising oil prices affect this market to a
lesser degree than they affect the market for basic chemicals.

     Specialty Products acquires a major part of the raw materials it uses
internally, from other companies 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. The Specialty Products
business has not historically been affected by shortages; rising oil prices have
thus far had a moderate impact on production cost.

     We regard Avecia, BASF, Ciba Specialty Chemicals, Clariant, Rhodia and Rohm
& Haas as our principal competitors across a number of the Specialty Products
business group's activities.

RESEARCH AND DEVELOPMENT

     The Specialty Products business group focuses its research and development
activities on:

     -  new products for the textile industry;

     -  high-performance data storage media for information technology;

     -  improved ion exchange resins for waste treatment and metal recovery;

                                        44
<PAGE>

     -  new surface sizing agents for the paper industry;

     -  new biocides for material protection; and

     -  environmentally friendly formulations of products for the paper and
        leather industries.

     The business group's primary research and development facilities are
located in Leverkusen, Germany; Ede, the Netherlands; and Woodbridge,
Connecticut.

     We currently have approximately 160 products in late stages of development.
We expect to launch these products during 2002 and 2003.

H.C. STARCK

OVERVIEW

     Our subsidiary H.C. Starck GmbH develops, produces and markets metallic and
ceramic powders and mill products for various markets and applications. In a
major expansion in November 2000, H.C. Starck acquired CSM Holding, Inc.,
bringing the group seven new production sites, primarily for molybdenum and
tungsten products. In November 2001, we also created H.C. Starck Ceramics GmbH &
Co. KG from the merger of our existing industrial ceramics subsidiary with TeCe
Technical Ceramics of Selb, Germany, which we had acquired in January 2001.
Beginning in January 2002, we are concentrating all of Bayer's electronic
chemicals business in the H.C. Starck business group.

MAJOR PRODUCTS

Metallic products

     We produce a wide range of products from such metals as tungsten,
molybdenum, tantalum and niobium and their various compounds for industrial
customers. Our customers use these products in making machine tools, electrical
components, and a variety of specialized products, from medical devices through
lamp filaments to optical lenses.

Battery intermediates

     Ampergy(R) 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 as well as in
large-scale industrial batteries.

Metallic chemical products

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

     Amperkat(R) is the trade name for our line of chemical catalysts. The
chemical industry uses these products in a variety of applications, such as
plastics production, hydration processes and the desulphurization of exhaust
gases in coal-burning power stations.

Thermal spray powders

     Amperit(R) 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 are primarily from the machine tool and
aeronautics industries.

                                        45
<PAGE>

Ceramic products

     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
component intermediates for use in advanced ceramics.

MARKETS AND DISTRIBUTION

     World tungsten demand is growing. The hard metals market in the United
States and Japan, however, is declining. Although the market for battery
intermediates continues to grow, extreme from nickel hydroxide alternatives is
currently causing a dramatic price decrease. However, we do not believe this
phenomenon will affect the growth of our newly developed nickel dihydroxide and
lithium nickelate intermediates.

     Beginning in 1999, the mobile communications, computer, entertainment and
automotive industries fuelled a rapid increase in demand for passive electronic
components (e.g., capacitors and surface filters) made from tantalum, niobium
and ceramic. In response, manufacturers increased capacity during 2000. This
increase caused a corresponding increase in demand for our metallic powders,
especially tantalum, during the first half of 2001. More recently, however, the
worldwide electronics market has weakened, leading to decreases in sales of
these metals. We cannot predict when this market may recover.

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

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................   325     280     193
North America...............................................   234     143     109
Asia/Pacific................................................   208     196     106
Latin America/Africa/Middle East............................    44      46      27
                                                               ---     ---     ---
  Total.....................................................   811     665     435
                                                               ===     ===     ===
</Table>

     China is the primary source for the raw materials for tungsten products. In
the past, China has 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. Our acquisition of CSM Holding substantially
strengthened our procurement channels for molybdenum.

     H.C. Starck has its own internal 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 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. We expect to open a new liaison
office in Italy in early 2002. 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: Bergla, Cabot Group (including its associated joint
        ventures), Molymet, OMG, Osram Sylvania, Union Miniere;

     -  Battery intermediates: OMG, Tanaka;

     -  Chemical catalysts: Activated Metals, Degussa, Grace;

     -  Ceramic products: ACC, Denky Kagaku, SB Boron; and

     -  Thermal spray powders: Praxair, Sulzer Metco, Woka.

                                        46
<PAGE>

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 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 secondary batteries, fuel cells and other
energy storage and power generation applications.

     The business group's primary research and development facilities are
located in Germany, the United States (tantalum products) and Japan (tantalum
products and battery intermediates).

     We currently have three products in late stages of development, and expect
to begin their launch during 2002. These products are:

<Table>
<Caption>
PRODUCT/BRAND NAME                                                      APPLICATION
------------------                                                      -----------
<S>                                                            <C>
Niobium powder..............................................   Capacitors
High-capacity tantalum powder...............................   Capacitors
Alternative (ferrous, nickel, cobalt) binders...............   Diamond tools and hard metals
</Table>

WOLFF WALSRODE

OVERVIEW

     We operate the Wolff Walsrode business group primarily through Wolff
Walsrode AG, our wholly-owned subsidiary, assisted by other companies of the
Bayer Group. The business group develops and markets cellulose derivatives,
primarily for use in building materials, industrial coatings and inks,
pharmaceuticals, food and health care products, as well as various plastic
films.

     To prepare for divestments of a significant portion of Wolff's films
businesses, we have organized the business group into five new operating
subsidiaries. These subsidiaries are owned by Wolff Walsrode AG, which now
serves as a holding company. In 2001, we sold Covexx, which had been responsible
for our former Combithen and Combitherm food packaging film lines. In January
2002, Wolff's former Epurex thermoplastic polyurethane films business was
integrated into Bayer's Plastics business group.

MAJOR PRODUCTS

Cellulose Derivatives

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

     Walsroder NC(R) 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(R) 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.

Plastic films

     Walothen(R) is a class of films for food and cigarette packaging and paper
lamination.

     Walopur(R) is a class of films with high elasticity, mechanical strength
and resistance against chemicals. Our customers use Walopur in automobile
engines and for many other technical applications.

     Walotex(R) is a membrane film for textile lamination. It permits water
vapor transmission through the textile, making the textile "breathable".

     Walsroder(R) is a casing for the production of a wide range of sausages.

                                        47
<PAGE>

MARKETS AND DISTRIBUTION

     Wolff competes in the building materials, industrial coatings, flexible
packaging ink and life sciences markets as well as in specialized industrial
fields. We market our plastic films primarily for use in food packaging,
including sausage casings, and for technical applications in the automotive and
textile industries.

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Europe......................................................   301     295     293
North America...............................................    79      76      55
Asia/Pacific................................................    20      19      14
Latin America/Africa/Middle East............................    44      37      23
                                                               ---     ---     ---
  Total.....................................................   444     427     385
                                                               ===     ===     ===
</Table>

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

<Table>
<Caption>
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               (EUROS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Cellulose derivatives.......................................   210     195     166
Plastic films...............................................   221     229     216
Other.......................................................    13       3       3
                                                               ---     ---     ---
  Total.....................................................   444     427     385
                                                               ===     ===     ===
</Table>

     Wolff generally conducts direct sales operations in Germany and the United
States for its cellulose products and in Germany for its plastic films. Outside
these areas, we ordinarily sell through Bayer's worldwide sales organization,
although we do sometimes use independent distributors.

     The main raw material for our cellulose derivatives is chemical-grade
cellulose derived from wood pulp. Because pulp producers have been expanding
capacity in recent years, we have not had any significant problems with
availability. The raw materials for our plastic films include a variety of
polymers. These polymers are readily available, but can be subject to price
volatility caused by fluctuation in the price of oil.

     Because many of its customers are producers of building materials, our
cellulose derivatives business has traditionally been subject to seasonality
tied to the seasonality of the building trade. Our sales outside Europe,
however, have tended increasingly to balance this effect. Although our plastic
films business is not generally seasonal, our sales of Walsroder sausage casings
are strongest in autumn.

     Our chief competitors in the cellulose derivatives business are Hercules
(Aqualon), Dow, Clariant, Bergerac NC/SNPE, NEC/ICI, TNC, Nitroquimica
Brasileira, Noviant and Akzo. In the plastic films business, our main
competitors are Exxon Mobil (BOPP films), Alusuisse (converted films), J.P.
Stevens (TPU films) and Kalle Nalo (sausage casings).

RESEARCH AND DEVELOPMENT

     In addition to conducting research and development for its core businesses,
Wolff Walsrode is the Bayer Group's competence center for cellulose chemistry.
Cellulose is a natural product made from renewable materials. The research and
development challenge isto convert this substance into Wolff's derivative
specialty products while continually improving production processes. In
response, Wolff has created a new polysaccharide pilot plant facility to serve
as an interface between the laboratory, manufacturing and the market.

     Wolff's primary research and development facilities are in Bomlitz,
Germany, near its traditional home base of Walsrode. In addition, we carry out a
portion of the application development work for our films business in

                                        48
<PAGE>

South Deerfield, Massachusetts. We currently have eight products in late stages
of development. We expect to launch these products during 2002. These products
are:

<Table>
<Caption>
PRODUCT/BRAND NAME                      APPLICATION                       STATUS
------------------                      -----------                       ------
<S>                            <C>                             <C>
New Walocel M additive (based
  on methyl cellulose).......  High performance tile           Pilot plant, application
                               adhesives                       testing
New Walocel M additive (based
  on methyl cellulose).......  Joint compounds (wall board     Pilot plant, application
                               setting)                        testing
New grade of methyl
  cellulose..................  Formulation of                  Pilot plant, application
                               pharmaceuticals                 testing
Very high viscous
  carboxymethyl cellulose
  (Walocel C)................  Additives for pet food          Pre-marketing
Phthalate-free plastified
  nitrocellulose.............  Wood coatings and printing      Pre-marketing
                               inks
Free-flowing
  nitrocellulose.............  Wood coatings and printing      In market introduction
                               inks
Breathable membrane films
  based on polyurethanes.....  Textiles, leisurewear           Pre-marketing
High-strength polyurethane
  films......................  Automotive airbags              In-marketing introduction
</Table>

                                        49
<PAGE>

                            RESEARCH AND DEVELOPMENT

     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. Focusing primarily on the life
sciences, and especially on pharmaceuticals research, our research collaboration
program brings together over 20 major research partners to create a pool of
expertise covering the entire research cycle, from discovery of biological
mechanisms through characterization of new active compounds to identification of
a novel development candidate. We regard research collaboration as indispensable
to maintain of a continuous flow of innovative active ingredients for human and
animal health and crop protection products.

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

<Table>
<Caption>
RESEARCH CYCLE                                 DISCIPLINE/TECHNIQUE                PARTNERS
--------------                                 --------------------                --------
<S>                                         <C>                           <C>
Understanding the disease mechanism;        Genomics (mapping the         Millennium; Genome
identifying new targets for pharmaceutical  expression of a gene in an    Therapeutics; Incyte;
research; designing the new molecular       organism or tissue);          Affymetrix; CuraGen; Oxford
target                                      Functional genomics           Glycoscience; Exelixis;
                                            (functional analysis of       Paradigm
                                            genetic data); Proteomics
                                            (mapping protein expression
                                            and function in an organism
                                            or tissue)
                                            Bioinformatics (applying      LION Bioscience; Incyte
                                            the tools of information      Exelixis; Paradigm
                                            technology to biological
                                            data analysis)
Screening the candidate substances          High throughput screening,    CyBio; Novalon; Greiner
                                            or HTS (rapid, automated
                                            testing of compounds for
                                            potential effectiveness
                                            against a given target)
                                            Toxico-CuraGen Pharmacogeno
                                            mics (increasing the
                                            quality and probability of
                                            success of drug candidates)
Increasing the pool of potential drug       Combinatorial chemistry/      ArQule; ComGenex; Oxford
candidates by small-chemical molecules and  Substance synthesis           Asymmetry; Genzyme
macromolecules (proteins, peptides)         (techniques for increasing
                                            the number and diversity of
                                            test compounds)
                                            Pool of Bayer biomolecules    Genzyme; Morphosys
                                            (e.g., soluble proteins,
                                            monoclonal antibodies)
</Table>

     In recent years we have created a framework of research collaborations to
which we have committed expenses totaling approximately E1 billion. These
collaborations together with our internal research efforts have given us access
to nearly one million substances; the HTS 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.

     Three of our partnerships -- those with Millennium Inc., LION Bioscience
and CuraGen -- are of particular importance. Although our relationship with each
of our individual research partners is important to us, it is the cooperative
structure as a whole that is a key element of our strategy. With the exception
of the three collaborations mentioned above, we do not regard our arrangements
with any single partner as material from a financial or business perspective for
the Bayer Group as a whole.

                                        50
<PAGE>

MILLENNIUM

     Together with Millennium, we have created what we believe to be the world's
biggest collaborative effort to use the tools of genomics to identify new drug
targets. Through this collaboration, we expect Millennium to provide us with 225
disease-relevant proprietary target genes and approximately 100 complete assay
systems for high-throughput screening. Our goal is to produce approximately 30
development candidates for new treatments in areas relevant to Bayer's
pharmaceutical research.

     We expect to spend up to $465 million in our collaboration with Millennium.
This includes our $96 million equity investment in the company as well as
payments under a five-year, performance-dependent research. This agreement has a
maximum value of $369 million, consisting of an initial $44 million payment for
technology transfer at the commencement of the collaboration and yearly payments
thereafter in an aggregate amount of up to $325 million. The agreement is
scheduled to expire on October 31, 2003, though we have the option of
terminating it earlier in case of non-performance by Millennium. One goal of our
collaboration is to obtain technology and know-how to enable us continue the
genomics program independently after the completion of the collaboration.

LION BIOSCIENCE

     We have established two collaboration projects with LION Biosciences, 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 works
exclusively for Bayer, providing our life sciences effort with a strong IT
platform and software development program and allowing us to review
drug-relevant target gene data for further use in our laboratories. In its first
twelve months of operations, LBRI delivered more than 200 disease-related
targets 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 of biological and chemical data.

     We expect to invest a total of $82.5 million in our collaborations with
LION. Under the first agreement, which is scheduled to end in 2004, we acquired
an 11 percent equity stake in LION for $30 million. LION also receives annual
payments that will total $25 million as well as more than $6 million in license
fees for developing software. We have an option to acquire LBRI when both
collaboration projects are complete. Under the second project, scheduled to end
in 2003, LION receives an aggregate payment of $21.5 million to develop
software.

CURAGEN

     We have initiated two collaborative projects with CuraGen. In the first
project, CuraGen has agreed to provide 80 drug targets during an initial five
years period. The goal is to bring approximately 12 candidates for obesity and
diabetes treatment to clinical development over a 15-year period. During this
period, we will share the risks and expenses of pre-clinical and clinical
development (up to $1.34 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. The five-year project has a total expected value of $124
million, consisting of our $85 million equity investment in, and $39 million in
committed funding to, CuraGen.

                                        51
<PAGE>

                        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,
Avalox, Cipro 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.

                                        52
<PAGE>

     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:

     -  later-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, Avalox, Cipro, and Imidacloprid.

<Table>
<Caption>
                                                               MARKET
                                  -----------------------------------------------------------------
PRODUCT                           GERMANY   FRANCE   U.K.   ITALY   SPAIN   JAPAN   U.S.A.   CANADA
-------                           -------   ------   ----   -----   -----   -----   ------   ------
<S>                               <C>       <C>      <C>    <C>     <C>     <C>     <C>      <C>
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
Avalox
  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
Cipro
  Active ingredient.............     --      2004    2002   2009      --      --     2003     2004*
  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
</Table>

---------------

* 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 and Rid, 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.

                                        53
<PAGE>

                            GOVERNMENTAL REGULATION

     Our business is subject to significant government regulation. Many of our
products must be examined and approved by regulatory agencies for safety and
effectiveness before we may market them. In addition, all our operations must
comply with applicable environmental regulations.

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 FDA regulates many of our products, primarily in our
Health Care businesses. In addition, our pharmaceutical facilities typically
require regulatory approval and are subject to periodic re-inspection.

PHARMACEUTICAL PRODUCTS

     Pharmaceutical products must receive regulatory approval before they can be
marketed in most countries. 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 typically takes approximately
10 years. After identifying a candidate pharmaceutical compound, the
manufacturer tests it in clinical Phase I on a small group of healthy volunteers
for safety, side effects and pharmacological profile. In clinical Phase II, a
pharmaceutical compound is tested on a limited number of volunteers (both
patients and healthy persons) for safety, efficacy and appropriate dosage. In
clinical Phase III, a pharmaceutical compound is tested in a larger diverse
group of patient volunteers to assess safety, efficacy, side effects and dosage
in a statistically significant fashion. The results of these clinical trials are
then submitted to appropriate regulatory authorities to obtain approval to sell
the drug. After commercial launch, the manufacturer is typically required to
monitor adverse reactions and report any to the appropriate authorities.

     In the United States, the FDA administers and executes requirements
covering the testing, approval, safety, effectiveness, manufacturing, labeling
and marketing of prescription pharmaceuticals. Over the years, FDA requirements
have increased the amount of time and money necessary to develop new products
and bring them to market. In 1997, the U.S. Congress enacted the Food and Drug
Administration Modernization Act to streamline regulatory procedures and improve
the regulation of drugs, medical devices and food. The legislation was
principally designed to expedite the premarket review process for new products.
A key provision of the legislation is the re-authorization of the Prescription
Drug User Fee Act of 1992, which permits the continued collection of user fees
from prescription drug manufacturers to augment FDA resources earmarked for the
review of human drug applications. This helps provide the resources necessary to
ensure the timely approval of safe and effective new drugs.

     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). Each member state of the European
Union has two members on each committee. The committee makes a recommendation
based on a review by appointed officials known as the rapporteur and
co-rapporteur, who are part of the CPMP/CVMP. Following the committee's
recommendation, the European Commission issues its formal decision, which is
valid throughout the European Union without further action. If successful, the
drug may be marketed within all member states of the European Union. The other
method is the Mutual Recognition
                                        54
<PAGE>

Procedure, in which one country makes the principal evaluation. The other member
states then have 90 days to decide if they accept or reject the decision made by
the reference member state. If a country does not follow the decision of the
reference country, the applicant may refer the process to the CPMP for review as
in the centralized procedure, or may withdraw that country from the procedure.
The formal decision will be made by the European Commission based on this
evaluation.

     In Japan, two issues complicate the approval process 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. Due to these
issues, parts of Phase II and of Phase III of the clinical program generally
need to be repeated in Japan. This could mean a delay of two or three years in
introducing a drug developed outside of Japan to the Japanese market.

     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.

     In recent years, the European Union, 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. The process is
called the International Conference on Harmonization. For the foreseeable
future, however, we will need to obtain approval in each market.

CONSUMER CARE AND DIAGNOSTICS PRODUCTS

     Many of the products of Consumer Care, such as over-the-counter
medications, are subject to regulations similar to those in the Pharmaceuticals
segment. In the United States, the FDA and, in part, the Federal Trade
Commission oversee the marketing, manufacturing and labeling of dietary
supplements, including vitamins.

     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, 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 European Union, 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, i.e., 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

                                        55
<PAGE>

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.

CROP PROTECTION AND ANIMAL HEALTH PRODUCTS

     The FDA's Center for Veterinary Medicine is responsible for ensuring that
animal drugs and medicated feeds 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 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 Western Europe. In the
United States, the EPA registers chemicals released into the environment,
whether they are used for crop protection or for public health. The EPA
concentrates on the effects of crop protection products on the environment and
on the safety of fish, wildlife and water resources. The USDA regulates
plant-based crop protection products for environmental safety, while the FDA
regulates them for food safety.

     Because humans may be exposed to these products (e.g., 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
agency for product approval. There are no statutory time frames in the United
States for registration of new crop protection products. The standard time
frames for a pesticide not regulated under an EPA priority are typically 36 to
48 months. For a pesticide with an EPA priority, this time frame is shortened to
an average of 24 months.

PROPOSED NEW EU REGULATIONS

     The European Union is currently contemplating a new policy for basic
chemicals and chemical intermediates. This would require companies that
manufacture and import chemicals to compile dossiers on chemical substances,
describing exposure during production and application and noting potential
risks, such as environmental or health risks. Although we cannot accurately
predict the final form of the new regulations or the related costs we would
incur in complying with them, we expect that these costs would be substantial.

ENVIRONMENTAL REGULATION

     The production and distribution of many Bayer products involves the use,
storage, transportation 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
        waste; and

     -  maintenance of safe conditions in the workplace.

     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 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

                                        56
<PAGE>

predict the effect these regulations will have on us. We cannot assure you that
soil or groundwater contamination will not occur or be discovered.

     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. 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 do not believe that any of our German sites have unexpected levels of
contamination. Nevertheless, we could discover unexpected contamination,
especially given that some sites have been in operation for over 100 years.
Consistent with German law and agreements with governmental agencies, we are
addressing known contamination in Germany. We record a provision for known
environmental liabilities when we are obligated to remediate a facility. This
provision includes all costs that we are likely to incur and that we can
reasonably estimate. We do not record provisions for potential liabilities
because we cannot accurately estimate the costs for investigation and clean-up.
If we discover such liabilities, the costs for removal or clean-up could be
significant. See Note 29 to our consolidated financial statements.

     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, 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 and
information related to individual sites. Taking into consideration our
experience and currently known facts, we currently known, 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, 2001, we had reserved
E200 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.

                                        57
<PAGE>

                            ORGANIZATIONAL STRUCTURE

     Bayer AG is the ultimate parent company of the Bayer Group. The Group
currently operates in seven segments comprising 14 business groups. In addition
to its seven segments, Bayer has 17 central divisions, comprised of corporate
and central service divisions, that provide key support and administrative
services. The corporate divisions/staffs are Corporate Planning and Controlling;
Finance; Legal, Patents, Licenses and Insurance; Corporate Communications;
Information Management; Executive Personnel; Corporate Auditing; Quality,
Environment and Safety Policy; Taxes and eCommerce. The central service
divisions consist of Procurement and Logistics; Information Systems; Human
Resources; Enterprise Accounting and Reporting, Site Services, Central Research;
and Central Technology.

     At their annual meeting in April 2002, Bayer AG's shareholders approved
plans to transform Bayer AG into a management holding company structure. Subject
to obtaining the necessary additional shareholder approvals, we expect to
complete implementation of this new structure during 2003. See "-- Business."
Under the new structure, our businesses will be divided among four independent
subsidiaries. In addition to these four operating companies, we will have three
new service companies. The tasks of the current central service divisions and
various corporate divisions will be divided in part among the three new service
companies and in part among the headquarters staff of each operating company and
the holding company.

SUBSIDIARIES

     The following table lists Bayer AG's principal consolidated subsidiaries
and its beneficial ownership interest in each.

<Table>
<Caption>
COMPANY NAME AND PLACE OF BUSINESS                            BAYER'S INTEREST (%)
----------------------------------                            ---------------------
<S>                                                           <C>
GERMANY
H.C. Starck GmbH, Goslar....................................           100
Wolff Walsrode AG, Walsrode.................................           100
Bayer Chemie Service GmbH, Leverkusen.......................           100
Bayer Vital GmbH, Leverkusen................................           100
Bayer Industrieprodukte GmbH & Co. KG, Leverkusen...........           100
Bayer Buna GmbH, Marl.......................................           100

OTHER EUROPEAN COUNTRIES
Bayer Hispania, S.A., Spain.................................           100
Bayer S.p.A., Italy.........................................           100
Quimica Farmaceutica Bayer, S.A., Spain.....................           100
Bayer Rubber N.V., Belgium..................................           100
Bayer plc, U.K. ............................................           100
Bayer Antwerpen N.V., Belgium...............................           100
Bayer Pharma S.A., France...................................          99.9
Bayer International S.A., Switzerland.......................          99.7
Bayer S.A., France..........................................          99.9
Bayer B.V., Netherlands.....................................           100
Bayer A/S, Denmark..........................................           100

NORTH AMERICA
Bayer Corporation, United States............................           100
Bayer Inc., Canada..........................................           100

ASIA / PACIFIC
Bayer (India) Ltd., India...................................          55.3
Bayer Yakuhin Ltd., Japan...................................           100
Sumika Bayer Urethane Co., Ltd., Japan......................            60
</Table>

                                        58
<PAGE>

<Table>
<Caption>
COMPANY NAME AND PLACE OF BUSINESS                            BAYER'S INTEREST (%)
----------------------------------                            ---------------------
<S>                                                           <C>
Bayer Ltd., Japan...........................................           100
Bayer Australia Ltd., Australia.............................          99.9
Bayer (South East Asia) Pte Ltd., Singapore.................           100
Nihon Bayer Agrochem K.K., Japan............................          99.5
Bayer Thai Co. Ltd., Hong Kong..............................           100
Bayer China Co., Ltd., Hong Kong............................          99.3

LATIN AMERICA / AFRICA / MIDDLE EAST
Bayer de Mexico, S.A. de C.V., Mexico.......................           100
Bayer S.A., Argentina.......................................          99.9
Bayer S.A., Brazil..........................................          99.9
Bayer (Proprietary) Ltd., South Africa......................           100
</Table>

                         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, the Americas, 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 does
ownership (e.g., German-law hereditary building rights or Erbbaurechte and
granted land-use rights in Asian countries).

                                   E-COMMERCE

     The "New Economy" emphasizes the use of new technologies to improve
existing business relationships and generate new ones. The internet is
revolutionizing sales and procurement channels and significantly changing the
way we co-operate with our partners across the entire process and value chain,
(e.g., in research and development, engineering, marketing and logistics).

     We have charged our core worldwide team of more than 100 e-commerce experts
to guide the Bayer Group to leadership in this emerging field. By year-end 2001,
we had achieved an e-commerce based transactional volume of more than E250
million. We expect this figure to grow significantly over the next few years.

     As a company organized under the laws of an EU member state, we are
required to comply with the EU Directive on Legal Aspects of Information Society
Services (The Electronic Commerce Directive), Directive 2000/31/EC and the
Directive of the European Parliament and of the Council concerning the
processing of personal data and the protection of privacy in the
telecommunications sector, Directive 1997/66/EC. We believe that we comply with
these directives. Compliance has not had a material impact on our business.

                                        59
<PAGE>

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 IAS, 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.

     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 250 consolidated subsidiaries. We are organized into seven business
segments -- Pharmaceutical & Biological Products; Consumer Care & Diagnostics;
Crop Protection; Animal Health; Plastics & Rubber; Polyurethanes, Coatings &
Colorants; and Chemicals. Over the course of the next year, we expect to
complete the implementation of plans to transform Bayer AG into a holding
company that will hold our operating businesses through four newly-formed direct
operating subsidiaries. See "Business" in Item 4, Information on the Company.

     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 1999, we spent E0.4 billion on acquisitions, including the
plastic sheet businesses of DSM-Axxis, N.V. and Sheffield Plastics Inc.; the
purchase of Elastochem Inc.; and an 11.3 percent equity investment in Lion
Bioscience. In 2000, we spent a total of E4.2 billion to acquire Lyondell
Chemical Company's polyols business, Sybron Chemicals Inc., CSM Holding, Inc.
and Cytec Industries Inc.'s sizing and strength paper chemicals business. In the
life sciences area we also acquired the Flint line of strobilurin fungicides and
the remaining outstanding shares of Misung Ltd. In 2001, we spent a total of
E514 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(R) 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. In April 2002, the European Commission
gave its approval for the transaction, and in May 2002, the United States
Federal Trade Commission gave its preliminary approval of the transaction. Both
approvals are subject to the condition that we divest or out-license a number of
products. See "Segment Strategy" in Item 4, Information on the Company -- Crop
Protection. We closed this transaction on June 3, 2002.

     We selectively divest businesses and assets that no longer fit in our
strategic plan. In 1999, we sold 70 percent of our former Agfa photographic
business segment, primarily in an initial public offering of Agfa shares, and we
sold our remaining 30 percent stake on June 4, 2002 for a gain of about E200
million. In 2000, we reduced our interest in the DyStar textile dyes joint
venture to 35 percent when BASF became a joint venture partner. We now consider
DyStar a non-core business and classify it under "Discontinuing Operations". We
continued to streamline our portfolio through 2000, divesting our animal health
biologicals and solar-grade silicon businesses as well as our generic
pharmaceuticals businesses in the United States and Germany, and in Myriad
Genetics Inc. and Troponwerke. In May 2001, we sold our interest in the EC
Erdolchemie joint venture, which we had previously classified under
"Discontinuing Operations." During the first half of 2001, we also sold our
former acrylic fiber product lines and classified the remainder of the Fibers
business group as "Discontinuing
                                        60
<PAGE>

Operations". In May 2002, we decided to retain our Fibers business as part of
polymers. We will include the Fibers business in our continuing operations for
all periods beginning with the second quarter of 2002. In December 2001, our
Supervisory Board approved plans to divest a number of non-core businesses,
including Haarmann & Reimer, Rhein Chemie and our 50 percent interest in
PolymerLatex.

OPERATING RESULTS 2001, 2000 AND 1999

     We derive revenue primarily from the sale of consumer and industrial
products and, to a lesser extent, from the sale of services. The primary factors
that affect our revenue include the introduction of new products and our ability
to manage the life-cycles of existing products. Our business during 2001 was
affected by widespread economic weakness in the world markets as well as, more
specifically, strong downward pressure on prices. Despite the general price
trend, however, in certain markets we were able to continue the previous year's
achievement of price increases, which contributed one percent to our growth in
sales. See below, -- 2001 compared with 2000 -- Net sales. We recognize sales
upon delivery of goods or rendering of services to third parties. We defer
revenues from contracts that contain customer acceptance provisions until
customer acceptance occurs or the contractual acceptance period has lapsed.
Mergers and acquisition activities also affect our revenue. As a diversified
global company we often enter into numerous merger and acquisition transactions
that, taken as a whole, can have a significant effect. Fluctuations of exchange
rates between the euro and non-euro currencies can affect our revenue. In recent
years these fluctuations (especially in the euro-U.S. dollar exchange rate) have
had a significant and generally positive effect on our revenue. For a
description of measures that we have adopted for controlling exchange rate risk,
see Item 11, Quantitative and Qualitative Disclosures about Market Risk.

     The single most important factor that affects our costs 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 Erdolchemie joint venture,
which had been our one significant venture into this area, to Deutsche BP, our
former joint venture partner. We had classified EC Erdolchemie as a
discontinuing operation in 1999. 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. Other significant factors that affect our costs include labor as
well as trigger or milestone payments under various joint ventures and
cooperations. In recent years, the integration of an enterprise management
system has increased our general administration expenses. We began this
integration in 1998 and expect to complete it by 2004.

     Acquisitions and divestitures during 2001 and 2000 had a positive effect on
net sales of E0.9 billion. This activity affected the comparison between the two
years' sales figures as follows:

<Table>
<Caption>
                                                               CHANGE IN 2001 FROM 2000
                                                               ------------------------
                                                                 (EUROS IN MILLIONS)
<S>                                                            <C>
Acquisitions
  Sybron Chemicals Inc. (acquired 2000).....................              206
  Polyols business of Lyondell (acquired 2000)..............              202
  CSM Group (acquired 2000).................................              133
  Fungicide product lines, especially Flint(R)..............              104
  Full consolidation of Sumika Bayer Urethane Co. Ltd.......               99
  Paper chemicals business of Cytec Industries (acquired
     2000)..................................................               83
  Mikado(R) corn herbicide..................................               46
  Other.....................................................              110
                                                                         ----
                                                                          983
</Table>

                                        61
<PAGE>

<Table>
<Caption>
                                                               CHANGE IN 2001 FROM 2000
                                                               ------------------------
                                                                 (EUROS IN MILLIONS)
<S>                                                            <C>
Divestitures
  Covexx Films..............................................              (61)
  U.S. livestock vaccines business..........................              (30)
  Other.....................................................              (33)
                                                                         (124)
                                                                         ----
Net effect on sales from continuing operations..............              859
                                                                         ====
</Table>

     We spent E214 million on restructuring in 2001, E200 million in 2000 and
E449 million in 1999. Our largest single restructuring expense in 2001, E43
million, related to the restructuring of our styrenics business in North America
and Europe. E39 million related to the ongoing integration of the Lyondell
polyols business. Our program to improve profitability in the Pharmaceuticals
segment resulted in a restructuring charge of E26 million. In 2000, E61 million
of our restructuring expenses related to the continuing integration of Chiron
Diagnostics, which we acquired in 1998, and E48 million to our integration of
the Lyondell polyols business, which we acquired in spring 2000. The
streamlining of the styrenics activities of our Plastics business group required
a further E32 million in 2000. In 1999, our integration of Chiron accounted for
E111 million of restructuring expense, while we spent E169 million on
streamlining our styrenics business.

     We recognize research and development costs in accordance with IAS 38.

BAYER GROUP

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

<Table>
<Caption>
                                                      CHANGE FROM              CHANGE FROM
                                                     PREVIOUS YEAR            PREVIOUS YEAR
                                             2001         (%)         2000         (%)         1999
                                            ------   -------------   ------   -------------   ------
                                                              (EUROS IN MILLIONS)
<S>                                         <C>      <C>             <C>      <C>             <C>
Net sales.................................  30,275        (2.2)      30,971       13.4        27,320
Gross profit..............................  12,851       (10.2)      14,318       15.5        12,396
  as percentage of sales(%)...............    42.4          --         46.2         --          45.4
Operating result..........................   1,611       (51.0)       3,287       (2.1)        3,357
  as percentage of sales(%)...............     5.3          --         10.6         --          12.3
Income before income taxes................   1,115       (62.7)       2,990        5.4         2,836
Net income................................     965       (46.9)       1,816       (9.3)        2,002
  as percentage of sales(%)...............     3.2          --          5.9         --           7.3
</Table>

     The following table shows a geographical breakdown of our sales from
continuing operations.

<Table>
<Caption>
                                                      CHANGE FROM              CHANGE FROM
                                                     PREVIOUS YEAR            PREVIOUS YEAR
                                             2001         (%)         2000         (%)         1999
                                            ------   -------------   ------   -------------   ------
                                                              (EUROS IN MILLIONS)
<S>                                         <C>      <C>             <C>      <C>             <C>
Europe....................................  11,659        3.2        11,299       11.7        10,116
North America.............................   9,473        1.3         9,352       27.4         7,338
Asia/Pacific..............................   4,660       (3.3)        4,819       36.5         3,531
Latin America/Africa/Middle East..........   3,146        0.3         3,145       21.6         2,587
</Table>

2001 COMPARED WITH 2000

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.

                                        62
<PAGE>

     Our net sales from continuing operations increased by E0.3 billion in 2001,
a growth of 1.1 percent. The primary internal factors that contributed to sales
growth were portfolio changes and price increases. In 2001, portfolio changes
accounted for E0.8 billion of the increase in net sales. This effect also
included sales from businesses we acquired during the previous year, which
therefore generated income for us during only part of 2000. Additionally, price
increases accounted for approximately E0.3 billion of the increase in net sales.
These positive developments were reduced by lower volumes of E0.9 billion.
However, we did increase sales despite the many negative developments during
2001. We estimate that the withdrawal of Lipobay/Baycol reduced our sales by
approximately E0.7 billion. Including discontinuing operations, our net sales
decreased 2.2 percent from 2000.

     Sales in our Pharmaceuticals segment decreased 6.7 percent in 2001 to E5.7
billion. Sales in our Consumer Care & Diagnostics segment increased 5.6 percent
to E4.1 billion. Sales in our Crop Protection segment increased 10.3 percent, to
E2.7 billion, while the Animal Health segment declined 1.1 percent to E988
million. Sales in our Plastics & Rubber segment decreased 4.0 percent to E5.6
billion. Sales in the Polyurethanes, Coatings & Colorants segment increased 2.6
percent to E5.2 billion. Our Chemicals segment achieved sales of E3.7 billion,
an increase of 9.9 percent. See below, -- Segment Data, for a more detailed
discussion of the results of each of our business segments.

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.

     Despite a sales increase of 1.1 percent, our gross profit from continuing
operations decreased 8.4 percent in 2001. Cost of goods sold, which increased
9.7 percent, cut into our margins.

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.

     Our result from continuing operations in 2001 before exceptional items
decreased by E1.4 billion, or 42.2 percent, from the previous year, to E1.9
billion. We attribute this decrease primarily to unfavorable world economic
conditions generally, as well as to adverse factors affecting our Health Care
businesses, primarily the withdrawal of Lipobay/Baycol, which caused a decrease
of E0.3 billion. After net exceptional charges of E0.6 billion, the decrease in
operating result was 59.5 percent. We attribute two thirds of these exceptional
items to our Health Care businesses, largely also to our withdrawal of Lipobay
/Baycol, and spent most of the remainder on restructuring and site
consolidation.

     Our operating result of E0.4 billion from discontinuing operations
comprised E73.0 million from Haarmann & Reimer, a loss of E37 million from our
Fibers business, and E333 million from EC Erdolchemie (made up of a E17 million
share of the joint venture's results prior to the sale and E0.3 billion
resulting from the sale of our interest in May 2001). We plan to divest Haarmann
& Reimer. The sale of our interest in EC Erdolchemie in April 2001 added E0.3
billion to our E17 million share of the joint venture's results prior to the
sale. Combining continuing and discontinuing operations, our operating result
for 2001 declined 51.0 percent.

     In 2001, our selling expenses increased 5.2 percent, while research and
development expenses increased 7.3 percent and general administration expenses
increased 11.6 percent. The primary causes of these developments were the
implementation of a strategic marketing organization at Pharma and a general
increase of advertisement expenses for selling expenses; life-cycle management
and increase of strategic R&D know-how in the United States for research and
development expenses; and higher SAP expenses and additional expenses for new
business and companies for general administration expenses. Research and
development activities in our Pharmaceuticals segment contributed
disproportionately to our increase in research and development expense. We
allocate the largest portion of our research and development budget to
Pharmaceuticals, and this segment often shows the greatest increase from year to
year as well. Given the particularly strong emphasis on research, we expect that
this segment will continue to be the primary driver of our overall research and
development costs. Our

                                        63
<PAGE>

other net operating expenses increased 10.3 percent, largely because of higher
restructuring expenses and additional write-downs of receivables.

Non-Operating Result

     Non-operating result represents income and expenses from investments in
affiliated companies, interest result and other non-operating result.

     Our non-operating loss for 2001 increased 67.0 percent over the previous
year, largely because our income (net) from investments in affiliated companies
was lower. Our net interest expense rose from E311 million to E349 million. This
increase reflected reduced interest income, rather than an increase in interest
expense. Our net exchange gain of E49.0 million in 2001, compared with a net
exchange loss of E21 million in the previous year, offset the effect of our
increased net interest expense.

Income Before Income Taxes

     Our income before taxes from continuing operations in 2001 decreased 73.1
percent from the previous year to E0.8 billion. Including discontinuing
operations, the decrease in income was 62.7 percent.

Income Taxes

     Our income tax expense decreased 86.6 percent during 2001, due to our lower
earnings as well as to tax-free income. Our effective tax rate fell to 13.8
percent from the 2000 rate of 38.4 percent. With respect to our taxable income
only, our effective tax rate during 2001 was 34.0 percent.

Net Income

     After a net income from minority interests of E26 million in 2000, we
reported a net loss of E4 million in 2001, reflecting lower earnings. After
minority interests, our net income from continuing operations decreased E1.0
billion, or 61.0 percent, to E0.6 billion (E0.88 per share) from E1.6 billion
(E2.26 per share) in 2000. Including discontinuing operations, our net income in
2001 decreased 46.9 percent.

2000 COMPARED WITH 1999

Net Sales

     Our net sales from continuing operations increased 21.4 percent in 2000, to
E29 billion. The primary internal factors contributing to this increase were
increased sales volumes, accounting for 7.0 percent of the increase; acquisition
activity, primarily our acquisition of Lyondell's polyols business, which
contributed 3.2 percent; and increased sales prices, which contributed 2.3
percent. In addition, translation of non-euro denominated revenue caused more
than one third of this growth in net sales. Including discontinuing operations,
our net sales increased 13.4 percent from 1999.

     Sales in our Pharmaceuticals segment increased 22.7 percent in 2000. Sales
in our Consumer Care & Diagnostics segment increased 15.6 percent to E3.9
billion. Sales in our Crop Protection segment increased 12.8 percent. Sales in
our Animal Health segment increased 8.9 percent in 2000. Sales in our Plastics &
Rubber segment advanced 25.7 percent in 2000. Sales in our Polyurethanes,
Coatings & Colorants segment increased 30.0 percent. Sales in our Chemicals
segment increased 19.4 percent.

Gross Profit

     Our gross profit from continuing operations increased 22.0 percent in 2000.
The primary causes of this increase were an increase in unit volume coupled with
higher selling prices. Our margin improved despite a sharp increase in raw
materials prices. These increases affected all our segments, primarily those
with Polymers and Chemicals activities. Increases in the price of crude oil were
the primary cause of the increased cost of our raw materials, although the
effect on the market for individual raw materials varied. Prices for several of
our raw materials, including acrylonitrile, benzol, butadiene, phenol and
styrol, more than doubled from the beginning of

                                        64
<PAGE>

1999. Increased raw materials costs caused more than half of the 20.9 percent
increase in our costs of goods sold in 2000. Currency translation effects also
added significantly to this increase.

Operating Result

     Our result from continuing operations in 2000 before exceptional items
increased E0.5 billion, or 18.7 percent, from the previous year, to E3.2
billion. We attribute this increase primarily to the performance of our
Pharmaceuticals segment. Currency translation effects also contributed
significantly to this increase. After net exceptional charges of E145 million,
mainly for restructuring, the increase was 43.2 percent.

     Our result from discontinuing operations comprised E99 million from
Erdolchemie GmbH, E68 million from Haarman & Reimer, E51 million from the Fibers
business and E5 million from DyStar. Combining continuing and discontinuing
operations, our operating result for 2000 declined 2.1 percent. This decline
from the operating result for 1999 reflected the exceptional gain in that year
of E1.03 billion from our sale of shares in Agfa's IPO.

     In 2000, our selling expenses increased 22.2 percent, while research and
development expenses increased 11.7 percent and general administration expenses
increased 24.6 percent. Currency translation effects caused approximately half
of these increases. Increased costs for shipping and advertising were additional
factors in our increased selling expenses. Integration of a new enterprise
management system contributed to the increase in general administration
expenses. By contrast, our other net operating expenses decreased 14.5 percent,
largely because of a decline in restructuring expenses.

Non-Operating Result

     Our non-operating loss for 2000 decreased 43.0 percent over the previous
year. This improvement was due to an increase of E314 million in income from
affiliated companies, primarily as a result of gains from the sale of our
interests in Schein Pharmaceutical and Myriad Genetics. This increase was
offset, in part, by an increase in net interest expense of E115 million due to
issuances of debt securities, particularly commercial paper, to finance capital
expenditures and acquisitions.

Income Before Income Taxes

     Our income before taxes from continuing operations in 2000 increased E1.1
billion, or 68.3 percent, from the previous year, to E2.8 billion due primarily
to lower exceptional expenses in 2000. Including discontinuing operations, the
increase in income was 5.4 percent.

Income Taxes

     Our income tax expense increased 40.3 percent from 1999. Our effective tax
rate increased to 38.4 percent from the 1999 rate of 28.8 percent. We attribute
this increase primarily to the fact that the 1999 effective tax rate reflected
tax-free income from the sale of Agfa shares.

Net Income

     Minority shareholders' interest in 2000 increased 62.5 percent from 1999.
The primary reason for this change was improved profitability from our
partly-owned subsidiaries, particularly Bayer Yakuhin Ltd., a Japanese
pharmaceutical producer in which we had a 75.6 percent interest in 2000 (and
which has since become our wholly-owned subsidiary). Bayer Yakuhin achieved
significant increases in both net sales and net income.

     After minority interests, our net income from continuing operations in 2000
increased E0.8 billion, or 86.8 percent, to E1.6 billion (E2.26 per share) in
2000 from E0.9 billion (E1.21 per share) in 1999. Including discontinuing
operations, our net income in 2000 decreased 9.3 percent.

                                        65
<PAGE>

SEGMENT DATA

PHARMACEUTICALS

<Table>
<Caption>
                                                        CHANGE FROM             CHANGE FROM
                                                       PREVIOUS YEAR           PREVIOUS YEAR
                                               2001         (%)        2000         (%)        1999
                                               -----   -------------   -----   -------------   -----
                                                                (EUROS IN MILLIONS)
<S>                                            <C>     <C>             <C>     <C>             <C>
Net sales (external).........................  5,729        (6.7)      6,140        22.7       5,003
Intersegment sales...........................     38        (2.6)         39       (23.5)         51
                                               -----       -----       -----       -----       -----

Operating result before exceptional items....    383       (67.1)      1,165        26.4         922
Operating result.............................     51       (95.6)      1,160        39.4         832
</Table>

2001 compared with 2000

     Sales in our Pharmaceuticals segment decreased 6.7 percent in 2001. Sales
in the ethical pharmaceuticals area, which makes up the bulk of the segment,
decreased 3.0 percent to E4.8 billion. Our withdrawal of Lipobay/ Baycol was the
most significant factor in this decline. Sales in the smaller biological
products area declined 21.9 percent to E0.95 billion, reflecting a E24 million
decline in sales volume for plasma products. Our Kogenate production problems
were the primary cause of this decline. Disregarding the effect of the
Lipobay/Baycol withdrawal and the Kogenate production problems, Pharmaceuticals'
sales increased 2.1 percent, reflecting strong growth of in sales of Avelox.
Demand for Cipro also increased during the fourth quarter of 2001, with
worldwide sales up 10.0 percent for the year as a whole. We believe that a large
portion of this increased demand resulted from Cipro's approval for the
treatment of anthrax, which was used in bioterrorist attacks against the United
States last year. Sales of Adalat declined 16.0 percent to E975 million due to
generic competition.

     The segment's operating result before exceptional items decreased to E383
million in 2001, a change of 67.1 percent from 2000. We attribute this
development primarily to the problems with biological products and the market
withdrawal of Lipobay/Baycol. This event, together with the other exceptional
items, led to net charges amounting to E332 million. We expect to divest our
holdings in several generic pharmaceutical companies.

2000 compared with 1999

     Sales in our Pharmaceuticals business group increased 22.7 percent in 2000
to E6.1 billion. Of this amount, E4.9 billion represented sales of ethical
pharmaceuticals, an increase of 22.1 percent from 1999. We attributed this
increase largely to new products and new dosage formulations of existing
products. Sales of our three best-selling ethical pharmaceutical products
alone -- Ciprobay/Cipro, Adalat and Lipobay/Baycol -- were E3.6 billion.
Approximately E1.2 billion of 2000 sales were of biological products, up 25.5
percent from the previous year.

     The operating result before exceptional items increased to 1.2 billion in
2000, an increase of 26.4 percent over 1999. We incurred net exceptional charges
of E5 million in 2000.

CONSUMER CARE & DIAGNOSTICS

<Table>
<Caption>
                                                        CHANGE FROM             CHANGE FROM
                                                       PREVIOUS YEAR           PREVIOUS YEAR
                                               2001         (%)        2000         (%)        1999
                                               -----   -------------   -----   -------------   -----
                                                                (EUROS IN MILLIONS)
<S>                                            <C>     <C>             <C>     <C>             <C>
Net sales (external).........................  4,104        5.6        3,888       15.6        3,364
Intersegment sales...........................      2         --            0         --            1
                                               -----       ----        -----       ----        -----

Operating result before exceptional items....    388       24.8          311       79.8          173
Operating result.............................    341       92.7          177         --           16
</Table>

                                        66
<PAGE>

2001 compared with 2000

     Sales in our Consumer Care & Diagnostics segment increased 5.6 percent. Of
this amount, E2.1 billion reflected sales in Consumer Care, an increase of 8.9
percent. We attribute this growth to the successful launch of a reformulated
Alka-Seltzer Plus in North America and the continued growth in demand for Aleve
Cold & Sinus. The Diagnostics business group achieved sales of E2.0 billion, up
2.2 percent from the previous year, primarily through growth in the business
group's nucleic acid diagnostics activities.

     In 2001 we continued the segment's cost-cutting efforts. Because
Diagnostics operates primarily in the United States while a large proportion of
its sales are outside the United States, the relatively high value of the U.S.
dollar requires us to contain costs effectively. The segment's operating result
before exceptional items increased to E388 million in 2001, a change of 24.8
percent from 2000. We attribute this development primarily to the recovery of
the Alka-Seltzer-Plus net sales after the withdrawal of Alka-Seltzer-Plus in
2000 and its subsequent re-launch in the United States during 2001. We expect to
complete the worldwide re-launch of our reformulated products that formerly
contained phenlypropanolamine during 2002. We incurred net exceptional charges
of 47 million, compared to 134 million in 2000, which were primarily for
restructuring measures partly also related to Alka-Seltzer-Plus.

2000 compared with 1999

     Consumer Care & Diagnostics posted sales of E3.9 billion in 2000, an
increase of 15.6 percent from the previous year. Of this amount, E1.9 billion
was from our Consumer Care business group, an increase of 14.3 percent from
1999. We attribute these sales increases primarily to the introduction of new
products, chiefly Aleve Cold & Sinus, Alka-Seltzer Heartburn and Aspirin
Migraine. The Diagnostics business group's sales were E2.0 billion, a 16.9
percent increase from 1999. The major cause of this increase was a growth in
revenue from former Chiron products.

     We initiated cost-cutting measures in this segment, eliminating less
productive facilities and divesting unprofitable product lines. The operating
result before exceptional items increased to E0.3 billion in 2000, an increase
of 79.8 percent over 1999. We incurred net exceptional charges of E134 million.
These charges resulted from restructuring charges and from our decision to stop
marketing Alka-Seltzer Plus and similar cold remedies containing
phenylpropanolamine. Our restructuring measures also resulted in exceptional
income of E20 million from several smaller divestitures, which partly offset the
exceptional charges.

CROP PROTECTION

<Table>
<Caption>
                                                        CHANGE FROM             CHANGE FROM
                                                       PREVIOUS YEAR           PREVIOUS YEAR
                                               2001         (%)        2000         (%)        1999
                                               -----   -------------   -----   -------------   -----
                                                                (EUROS IN MILLIONS)
<S>                                            <C>     <C>             <C>     <C>             <C>
Net sales (external).........................  2,708       10.3        2,456       12.8        2,177
Intersegment sales...........................    102        5.2           97       16.9           83
                                               -----       ----        -----       ----        -----

Operating result before exceptional items....    453       13.0          401        4.7          383
Operating result.............................    453       12.7          402       (6.9)         432
</Table>

2001 compared with 2000

     In 2001, Crop Protection's sales increased 10.3 percent. We attribute more
than half this increase to our acquisitions of the Flint line of fungicides and
the corn herbicide Mikado.

     The segment's operating result before exceptional items increased to E453
million in 2001, a change of 13.0 percent from 2000. We attribute this
development primarily to higher sales and an additional income stemming from a
patent dispute with Syngenta.

                                        67
<PAGE>

2000 compared with 1999

     In 2000, as in the previous year, stiff competition, low commodity prices
and depressed farm incomes created difficulties in the agricultural sector.
Nevertheless, Crop Protection's sales increased 12.8 percent to E2.5 billion. In
addition to currency exchange rate fluctuations, we attribute this increase
primarily to growth in demand for Confidor and Gaucho, our imidacloprid-based
insecticides.

     The operating result before exceptional items increased 4.7 percent in
2000. The primary factors driving this positive development were our
imidacloprid products.

ANIMAL HEALTH

<Table>
<Caption>
                                                           CHANGE FROM            CHANGE FROM
                                                          PREVIOUS YEAR          PREVIOUS YEAR
                                                   2001        (%)        2000        (%)        1999
                                                   ----   -------------   ----   -------------   ----
                                                                  (EUROS IN MILLIONS)
<S>                                                <C>    <C>             <C>    <C>             <C>
Net sales (external).............................  988         (1.1)      999         8.9        917
Intersegment sales...............................    5        (16.7)        6          --          6
                                                   ---        -----       ---        ----        ---

Operating result before exceptional items........  172          9.6       157        14.6        137
Operating result.................................  172         (5.5)      182        80.2        101
</Table>

2001 compared with 2000

     Animal Health's sales declined 1.1 percent. Most of this decrease resulted
from the divestiture of our U.S. biological products business. The BSE crisis in
Europe and Japan and the foot and mouth disease crisis in Europe and Latin
America also had a negative impact on sales. Growth in sales of our Advantage
parasiticide in North America and Japan helped mitigate the effect of these
negative developments.

     The segment's operating result before exceptional items increased to E172
million in 2001, a change of 9.6 percent from 2000. We attribute this
development primarily to higher sales for Advantage.

2000 compared with 1999

     Animal Health's sales grew 8.9 percent, to E999 million. We attribute this
increase primarily to demand for the anti-flea preparation Advantage. Increased
generic competition drove down prices, however. These lower prices slightly
offset our sales growth. The effects of divesting our U.S. biologicals business
were offset by the strengths of the segment's other U.S. activities.

     Animal Health's operating result before exceptional items increased 14.6
percent in 2000. This increase reflected improvements in Animal Health. The
primary factors driving this positive development were our products for
livestock.

PLASTICS & RUBBER

<Table>
<Caption>
                                                        CHANGE FROM             CHANGE FROM
                                                       PREVIOUS YEAR           PREVIOUS YEAR
                                               2001         (%)        2000         (%)        1999
                                               -----   -------------   -----   -------------   -----
                                                                (EUROS IN MILLIONS)
<S>                                            <C>     <C>             <C>     <C>             <C>
Net sales (external).........................  5,581        (4.0)      5,816        25.7       4,627
Intersegment sales...........................    116        (4.9)        122         7.0         114
                                               -----       -----       -----       -----       -----

Operating result before exceptional items....    288       (48.6)        560        26.4         443
Operating result.............................    238       (53.8)        515       102.8         254
</Table>

                                        68
<PAGE>

2001 compared with 2000

     Sales of our Plastics & Rubber segment declined 4.0 percent. Plastics, with
2001 sales of E3.4 billion, and Rubber, with sales of E2.2 billion, accounted
for approximately equal proportions of this decrease. Plastics sales declined
due to lower volumes in North America and price pressure in Europe and Asia.
Rubber declined due to business conditions in North America and Asia.

     The segment's operating result before exceptional items decreased to E288
million in 2001, a change of 48.6 percent from 2000. We attribute this
development primarily to a fall in prices, a decrease in volume and idle plant
expenses. We incurred net exceptional charges of E50 million. These charges were
primarily for the restructuring of our styrenics business.

2000 compared with 1999

     Sales of our Plastics & Rubber segment increased 25.7 percent to 5.8
billion. Of this amount, E3.5 billion, or an increase of 27.1 percent, was in
Plastics while E2.3 billion, or an increase of 23.6 percent, was in Rubber.
Increased demand and volumes as well as currency exchange rate fluctuations
caused most of the increase. In addition, we were able to implement price
increases in the Plastics business group, although prices held stable or
declined slightly in Rubber.

     We achieved a 26.4 percent increase in the operating result before
exceptional items despite lower demand and weak pricing in many of the markets
that this segment serves. Severe increases in raw material and energy costs
(which we were able to pass on to customers only to a limited extent) were the
primary obstacle to a more substantive increase. Because of a rise in crude oil
prices, our most severe price increases were for energy and
petrochemical-derived raw materials.

POLYURETHANES, COATINGS & COLORANTS

<Table>
<Caption>
                                                        CHANGE FROM             CHANGE FROM
                                                       PREVIOUS YEAR           PREVIOUS YEAR
                                               2001         (%)        2000         (%)        1999
                                               -----   -------------   -----   -------------   -----
                                                                (EUROS IN MILLIONS)
<S>                                            <C>     <C>             <C>     <C>             <C>
Net sales (external).........................  5,207         2.6       5,076        30.0       3,904
Intersegment sales...........................    138       (70.1)        462        (4.1)        482
                                               -----       -----       -----       -----       -----

Operating result before exceptional items....    146       (71.8)        518       (21.2)        657
Operating result.............................     46       (90.3)        473       (23.6)        619
</Table>

2001 compared with 2000

     Sales of our Polyurethanes, Coatings & Colorants segment grew by 2.6
percent. The Polyurethanes business group contributed E3.2 billion, an increase
of 2.0 percent from 2000, while Coatings and Colorants contributed E2.0 billion,
up 3.5 percent from the previous year. Our acquisition of Lyondell helped
mitigate the effects of increasingly stiff polyurethanes competition. Our
acquisition of Sybron Chemicals enabled us to increase Coatings and Colorant's
sales despite below-expectation sales performance in North America and, in the
second half of the year, in Europe.

     The segment's operating result before exceptional items decreased to E146
million in 2001, a change of 71.8 percent from 2000. We attribute this
development primarily to price increases in raw materials and a decrease in
volumes. We incurred net exceptional charges of E100 million. These charges were
primarily for restructuring programs in the United States.

2000 compared with 1999

     Sales of our Polyurethanes, Coatings & Colorants segment grew by 30.0
percent to E5.1 billion. Of this amount, E3.1 billion represented sales in the
Polyurethanes business group, an increase of 44.0 percent from 1999. Coatings
and Colorants' sales increased by 12.6 percent to E1.9 billion. Increased demand
and volumes as

                                        69
<PAGE>

well as currency exchange rate fluctuations caused a significant part of the
increase, while prices generally held stable or declined slightly. Sales in
Polyurethanes increased due our acquisition of Lyondell's polyols business.
Other factors contributing to the segment's growth were increased sales volumes
of existing products as well as our ability to increase prices for certain
products.

     Resulting from lower demand and weak pricing in many of the markets that
this segment serves, the operating result before exceptional items of
Polyurethanes, Coatings & Colorants decreased 21.2 percent. Increases in raw
material and energy costs, primarily related to the price of crude oil, limited
operating profit. We also bore additional expenses arising from integrating
Lyondell's polyols business.

CHEMICALS

<Table>
<Caption>
                                                        CHANGE FROM             CHANGE FROM
                                                       PREVIOUS YEAR           PREVIOUS YEAR
                                               2001         (%)        2000         (%)        1999
                                               -----   -------------   -----   -------------   -----
                                                                (EUROS IN MILLIONS)
<S>                                            <C>     <C>             <C>     <C>             <C>
Net sales (external).........................  3,749         9.9       3,410       19.4        2,855
Intersegment sales...........................    456        (2.1)        466       (2.5)         478
                                               -----       -----       -----       ----        -----

Operating result before exceptional items....    271       (26.8)        370        2.8          360
Operating result.............................    203       (48.5)        394       27.9          308
</Table>

2001 compared with 2000

     Our Chemicals segment comprises the Basic and Fine Chemicals, Specialty
Products, H.C. Starck and Wolff Walsrode business groups.

     The segment's 9.9 percent increase in sales during 2001 was chiefly the
result of acquisitions in the business group Specialty Products. The Basic and
Fine Chemicals business group increased sales 1.9 percent to E1.0 billion. We
attribute this increase largely to the strong performance of the business
group's Inorganic Basic Chemicals unit, as well as to increase in products
synthesized for the agrochemical and pharmaceutical markets. Specialty Products
achieved an increase in sales of 12.0 percent to E1.5 billion as the result of
our acquisitions of Sybron Chemicals and the paper chemicals business of Cytec
Industries. Our H.C. Starck business group increased sales 22.0 percent to E811
million. This increase was due to acquisitions, which offset a decline in sales
to the electronics and optics industries caused by significant consolidation in
the electronics market. Wolff Walsrode achieved a sales increase of 4.0 percent
to E444 million. Wolff's growth in market share in the United States, Latin
America and Eastern Europe, especially in the methylcellulose business, more
than offset declines in western Europe.

     The segment's operating result before exceptional items decreased 26.8
percent in 2001 to E271 million. We attribute this decrease to adverse cyclical
effects and to write-downs of tantalum inventory at H.C. Starck. We incurred net
exceptional charges of E68 million. These charges were primarily in connection
with the sale of our interest in ChemDesign Corporation.

2000 compared with 1999

     The Chemicals segment's 19.4 percent increase in sales during 2000 reflects
sales growth across its business groups that was generally moderate and steady.
The exception to this pattern was H.C. Starck, which in relative terms
significantly outperformed the other groups within the segment. In the segment's
Basic and Fine Chemicals business group, sales rose to E1.0 billion (a 13.5
percent increase); Specialty Products' sales increased to E1.3 billion (up 14.2
percent). Sales increased at H.C. Starck to E665 million (52.9 percent) and at
Wolff Walsrode to E427 million (10.9 percent). Throughout the segment, higher
volumes and increased demand contributed to sales growth of E555 million, as did
currency exchange rate fluctuations, which accounted for approximately a third
of this increase. The product families contributing most significantly to this
trend were H.C. Starck's tantalum products as well as chemicals for the
electronics industry. The continuing strong growth in sales of chemicals for the
microelectronics and telecommunications sectors, which particularly benefited
the

                                        70
<PAGE>

segment's H.C. Starck business group, offset the effect of disappointing sales
of life sciences intermediates, a market weakened by unfavorable conditions in
the agricultural sector. Despite growth in volume and demand, prices for our
products generally remained stable or eroded. We were able to pass the
increasing expense of raw materials on to customers only in exceptional cases.

     Growth in the Chemicals segment's operating result before exceptional items
lagged behind its growth in sales at 2.8 percent. The primary factor affecting
the operating result of the Chemicals segment was a severe increase in raw
materials prices, which had a particularly strong adverse effect on our Basic
and Fine Chemicals business group.

LIQUIDITY AND CAPITAL RESOURCES 2001, 2000 AND 1999

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. We use cash
in financing activities primarily to retire debt and pay dividends. At December
31, 2001, we had cash, cash equivalents and working capital totaling E9.0
billion. We believe that our working capital is sufficient for our present
requirements. 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:

<Table>
<Caption>
                                                       CHANGE FROM              CHANGE FROM
                                                      PREVIOUS YEAR            PREVIOUS YEAR
                                              2001         (%)         2000         (%)         1999
                                             ------   -------------   ------   -------------   ------
                                                               (EUROS IN MILLIONS)
<S>                                          <C>      <C>             <C>      <C>             <C>
Gross operating cash flow..................   2,923       (29.8)       4,164        30.5        3,192
  Thereof discontinuing operations.........      97       (69.4)         317       (11.5)         358
Changes in working capital.................     936          --       (1,073)         --            1
Net cash provided by operating
  activities...............................   3,859        24.8        3,091        (3.2)       3,193
  Thereof discontinuing operations.........     159       (47.4)         302        (5.0)         318

Net cash provided by (used in)
  investing activities.....................  (2,132)      (65.6)      (6,189)         --           71
  Thereof discontinuing operations.........     295          --         (298)         --        2,165

Net cash provided by (used in)
  financing activities.....................  (1,549)         --          772          --       (1,669)
  Thereof discontinuing operations.........      36          --           11       (94.4)         198

Change in cash and cash equivalents........     178          --       (2,326)         --        1,595
Cash and cash equivalents at beginning
  of period................................     491       (82.5)       2,812       137.5        1,184
Change in scope of consolidation...........      42          --           (3)         --           19
Exchange rate movements....................       8          --            8       (42.9)          14
Cash and cash equivalents at end of year...     719        46.4          491       (82.5)       2,812

Marketable securities and other
  instruments..............................      52       (75.6)         213       (35.1)         328
Liquid assets as per balance sheets........     771         9.5          704       (77.6)       3,140
</Table>

CASH FROM OPERATING ACTIVITIES

     Cash from operating activities was E2.9 billion in 2001, E4.2 billion in
2000 and E3.2 billion in 1999. Gross cash decreased 29.8 percent, mainly due to
lower operating results. In 2000, the gross cash provided by operating
activities increased 30.5 percent from 1999. We attribute this increase mainly
to the higher operating result from continuing operations in 2000.

                                        71
<PAGE>

     Due to a E0.9 billion reduction in working capital, net operating cash flow
in 2001 increased to E3.9 billion or 24.8 percent. We achieved this improvement
primarily through our project, begun in 2001, to reduce inventories and improve
the collection of receivables.

     In 2000, business expansion led to a substantial increase in working
capital and thus a reduction of E0.1 billion, or 3.2 percent, in net cash
provided by operating activities. The higher working capital reflected both
growth in inventories of 0.8 billion and an increase in trade accounts
receivable to E0.5 billion. An increase in trade accounts payable to E0.4
billion partly offset these two factors. In 1999, net cash provided by operating
activities increased 15.3 percent from the previous year, primarily because
working capital had been higher in 1998 than in 1999. Total working capital
increased by E1.1 billion during 2000, having remained essentially stable from
1998 to 1999.

INVESTING ACTIVITIES

     Bayer's principal liquidity requirement in recent years has been for
acquisitions and for purchases of property, plant and equipment. During the same
period, our primary sources of cash inflows from investing activities have been
sales of property, plant and equipment; interest and dividends received; and
marketable securities. The net cash outflow for investing activities amounted to
E2.1 billion in 2001. Additions to property, plant and equipment and intangible
assets resulted in a cash outflow of E2.6 billion. Cash outflow for acquisitions
amounted to E0.5 billion. Sales of property, plant and equipment led to a cash
inflow of E0.5 billion, while that from interest and dividend receipts and from
marketable securities amounted to E0.5 billion. In 2000, we had a net cash
outflow for investing activities of E6.2 billion. We had cash receipts of E0.6
billion from sales of property, plant and equipment and from inflows from
interest and dividend receipts and from marketable securities. This figure only
slightly offset our E4.1 billion for acquisitions and E2.6 billion for additions
to property, plant, equipment and investments during 2000. There was a net cash
inflow from investing activities of E0.1 billion in 1999. The E2.2 billion in
proceeds from our sale of Agfa shares and our E0.6 billion in proceeds from the
sale of companies formerly owned by Agfa-Gevaert N.V. at the beginning of 1999
led to a net cash inflow of E2.6 billion. This inflow plus E0.4 billion in
interest receipts and proceeds from redemptions of marketable securities offset
cash outflows of E2.6 billion for capital expenditures and E0.3 billion for
acquisitions.

FINANCING ACTIVITIES

     Financing activities led to a net cash outflow of E1.5 billion in 2001,
which comprises mainly the E1.0 billion dividend payment for 2000 and E0.5
billion in interest payments. Financing activities in 2000 provided us with a
net cash inflow of E0.8 billion, with net borrowings of E2.1 billion and
dividend and interest payments of E1.3 billion. In 1999, we had a net cash
outflow of E1.7 billion from financing activities. We used part of the operating
cash flow to reduce net borrowings by E0.6 billion. Bayer Corporation, Bayer
AG's wholly-owned U.S. subsidiary, redeemed on maturity $300 million of 7.75
percent Notes issued in 1994. Disbursements for payment of Bayer AG's dividend
for 1998 came to E0.8 billion; interest payments totaled E0.3 billion.

     See "-- Borrowings" below for a discussion of the times our existing debt
will mature and of our potential plans for obtaining future financing by issuing
new debt.

     We believe that we have sufficient borrowing capacity to meet our
foreseeable needs. To provide flexible short- to medium-term funding, we
established a $5 billion global commercial paper program and a E2 billion
European Medium-Term Note program in 2000, which we increased to E8 billion in
2001. Our committed and uncommitted bank lines of credit at the end of 2001
amounted to more than 5 billion. In addition to these sources of funding, we may
issue debt securities in the capital markets to meet our longer-term funding
requirements.

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 E2.6 billion in each of 2001, 2000 and 1999.

                                        72
<PAGE>

     Our major capital expenditures since 1999 included:

<Table>
<Caption>
YEAR         SEGMENT                                  DESCRIPTION
----         -------                                  -----------
<S>    <C>                    <C>
2001   Pharmaceuticals        -- Construction of a facility for packaging and storage of
                                 biological products, Berkeley, California
                              -- Construction of research facility in West Haven,
                                 Connecticut, United States and Kyoto, Japan (completed 2001)
       Consumer Care &        -- Expansion of solids plants, Bitterfeld, Germany and
       Diagnostics               Lerma, Mexico
       Crop Protection        -- Construction of a multi-purpose facility for crop
                                 protection products, Dormagen, Germany
                              -- Insecticides production facility, Dormagen, Germany
       Plastics & Rubber      -- Expansion of polycarbonate capacities (production of
                                 bisphenol A and Makrolon(R)), 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, Brunsbuttel,
                                 Germany (completed 2001)
       Polyurethanes,         -- Expansion of isocyanate capacities including precursors,
       Coatings & Colorants      Uerdingen and Brunsbuttel, 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, Bornlitz, Germany
                              -- Expansion of the molybdenum facility, Laufenburg, Germany
2000   Pharmaceuticals        -- Construction of process development pilot plant,
                                 Wuppertal, Germany (completed 2000)
       Consumer Care &        -- Expansion of solids plant, Bitterfeld, Germany
       Diagnostics
       Crop Protection        -- Fungicides production facility, Dormagen, Germany
                                 (completed 2000)
                              -- Expansion of solids formulation plant (parasiticides,
                                 insecticides, rodenticides), Belford Roxo, Brazil
       Plastics & Rubber      -- Expansion of polycarbonate capacities (Makrolon(R) and
                                 bisphenol A), Map Ta Phut, Thailand
                              -- Construction of Therban(R) facility, Leverkusen, Germany
                                 (completed 2000)
       Polyurethanes,         -- Facility for continuous production of long chain
       Coatings & Colorants      polyethers by our proprietary IMPACT process, Channelview,
                                 Texas
                              -- Expansion of coating raw materials production,
                                 Leverkusen, Germany
       Chemicals              -- Construction of sulfuric acid facility, Leverkusen,
                                 Germany
                              -- Expansion/modification of electrolysis plant, Leverkusen,
                                 Germany
                              -- Construction of polyaspartic acid facility, Leverkusen,
                                 Germany
                              -- Expansion of tantalum production at H.C.Starck, Germany
                                 and Japan
</Table>

                                        73
<PAGE>

<Table>
<Caption>
YEAR         SEGMENT                                  DESCRIPTION
----         -------                                  -----------
<S>    <C>                    <C>
1999   Pharmaceuticals        -- Expansion of capacities for Kogenate(R), Berkeley,
                                 California
                              -- Modernization and expansion of blood plasma facilities,
                                 Clayton, North Carolina
                              -- Launch of plant for Avelox(R)/Avalox(R), Leverkusen,
                                 Germany (Completed 1999)
       Consumer Care &        -- Expansion of production capacities for urine chemistry
       Diagnostics               systems, Mishawaka, Indiana
       Crop Protection        -- Construction of multi-purpose facility for crop
                                 protection products, Dormagen, Germany
       Animal Health          -- Expansion and start-up of new production facilities for
                                 animal health products in Shawnee, Kansas (completed 1999)
       Plastics & Rubber      -- Expansion of bisphenol A and Makrolon(R) capacities,
                                 Antwerp, Belgium
                              -- Modernization/Expansion of (halo)butyl rubber facilities,
                                 Sarnia, Ontario
       Polyurethanes,         -- Expansion of TDA/TDI capacity, Baytown, Texas
       Coatings & Colorants
       Chemicals              -- Expansion of fine chemicals production, Leverkusen,
                                 Germany
                              -- Modernization and expansion of tantalum/niobium facility,
                                 Map Ta Phut, Thailand (completed 1999)
                              -- Ion exchange resin facility, Bitterfeld, Germany
                                 (completed 1999)
</Table>

COMMITMENTS

OFF BALANCE SHEET ARRANGEMENTS

     The Group does not have any non-consolidated special-purpose entities or
other off-balance sheet arrangements.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

     The tables below summarize all of the Group's contractual and commercial
obligations. The timing of payments for collaborative agreements assumes that
milestones or other conditions are met.

<Table>
<Caption>
                                                                                                        AFTER 5
CONTRACTUAL OBLIGATIONS                        TOTAL   1 YEAR   2 YEARS   3 YEARS   4 YEARS   5 YEARS    YEARS
-----------------------                        -----   ------   -------   -------   -------   -------   -------
<S>                                            <C>     <C>      <C>       <C>       <C>       <C>       <C>
Long-term Debt, including Capital Leases.....  7,380   4,309      291      1,665      355        86       674
Operating Leases.............................    557     188       91         69       56        86        67
Capital Expenditures.........................    354     354
                                               -----   -----      ---      -----      ---       ---       ---
TOTAL CONTRACTUAL OBLIGATIONS................  8,291   4,851      382      1,734      411       172       741
                                               =====   =====      ===      =====      ===       ===       ===
</Table>

<Table>
<Caption>
                                                                                                        AFTER 5
OTHER COMMERCIAL COMMITMENTS                   TOTAL   1 YEAR   2 YEARS   3 YEARS   4 YEARS   5 YEARS    YEARS
----------------------------                   -----   ------   -------   -------   -------   -------   -------
<S>                                            <C>     <C>      <C>       <C>       <C>       <C>       <C>
Collaborative Agreements.....................   732     218       215       88        81        84         46
</Table>

     Payments for guarantees and endorsements of bills and of warranties of E193
million have been excluded from the other commercial commitments table above, as
we do not expect to make any payments under these commercial commitments.

INVESTMENTS

     We expect to spend E7.25 billion (including the assumption of debt of E1.9
billion) to acquire Aventis' CropScience business. In addition to the effect of
the CropScience acquisition, we expect that our capital expenditures will
increase slightly over the next several years in order to maintain existing
facilities, to meet changing regulatory, health, safety and environmental law
requirements, to achieve process improvement and to facilitate the launch and
manufacture of new products.

                                        74
<PAGE>

     For 2001, we had originally planned investments totaling E3.1 billion. In
light of world economic developments in that year, our actual spending was E2.6
billion. As in recent years, the main focus of our capital spending was in our
Polymers business, in particular the expansion of polycarbonates capacities in
Asia, Europe and North America.

OTHER COMMITMENTS

     In 2001, our minimum non-discounted future lease payments relating to
long-term lease and rental arrangements totaled E1.73 billion, compared with
E883 million in the previous year. Of this amount, E1.17 billion represented
future payments under financial leases (E285 million in 2000).

     Our financial commitment for orders placed under purchase agreements
relating to planned or ongoing capital expenditure projects totaled E354 million
in 2001. We expect to pay the majority of this amount in 2002. In 2000, this
figure was E446 million and in 1999, E391 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
other specific conditions by our research partners. In 2001, the total amount of
these commitments was E732 million. For 2000, the figure had been E683 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.

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. We do not use derivative instruments for
trading or other speculative purposes.

     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 use interest rate swaps to convert a small portion of our floating
rate investments into, in effect, fixed rate investments. Short-term interest
rate hedging contracts (including interest and principal currency swaps) totaled
E2.0 billion in 2001, E0.3 billion in 2000 and E1.3 billion in 1999. In 2001,
hedges maturing in more than one year represented E2.5 billion, in 2000, E3.2
billion and in 1999, E1.4 billion, respectively.

     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 effects of currency fluctuations have been positive in recent years,
increasing our total sales by E0.1 billion in 2001, E2.2 billion in 2000 and
E0.6 billion in 1999. This effect was mainly due to an increase of the value of
the U.S. dollar compared to the euro (the average relative value of one euro in
2001 was $0.90, compared with average values of $0.93 in 2000 and $1.07 in
1999).
                                        75
<PAGE>

     We hedge a portion of our 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, 2001, we had entered into forward foreign exchange contracts and
currency swaps with a nominal value of E2.75 billion, compared to E3.42 billion
in 2000 and E2.34 billion in 1999.

     Our aggregate direct transaction risk from sales and purchases in foreign
currencies was approximately E3.4 billion at December 31, 2001, consisting
primarily of dollars ($2.3 billion), Japanese yen (Y70 billion) and British
pounds sterling (L0.1 billion). Since the introduction of the euro on January 1,
1999, we no longer face transaction risk in member currencies of the euro zone.

     For more information, see Item 11, Quantitative and Qualitative Disclosures
about Market Risk and Item 12, Descriptions of Securities Other Than Equity
Securities.

INFLATION, SEASONALITY AND CYCLICALITY

     Inflation has not had a material effect on our operating results in recent
years. Seasonality affects only a few of our business lines, and does not
materially affect our business as a whole. However, a number of our business
groups are subject to cyclicality, either directly or because of the effect of
cyclicality on their customers' businesses, especially in agricultural products.
A general slowdown in worldwide agriculture has affected our Crop Protection and
Animal Health segments as well as our Chemicals segment's sales to customers in
the agrochemicals business. Nevertheless, our diversified palette provides some
protection from cyclicality. In recent years, for example, strong demand for our
Chemicals products from the electronics industry has offset weakening demand
from the agricultural sector.

RESEARCH AND DEVELOPMENT

     The following table sets forth our total research and development
expenditures during the last three full years.

<Table>
<Caption>
                                                        CHANGE FROM             CHANGE FROM
                                                       PREVIOUS YEAR           PREVIOUS YEAR
                                               2001         (%)        2000         (%)        1999
                                               -----   -------------   -----   -------------   -----
<S>                                            <C>     <C>             <C>     <C>             <C>
Research and development expenditure:
  Amount (in millions of euros)..............  2,559        6.9        2,393        6.3        2,252
  As a percentage of sales...................    8.5         --          7.7         --          8.2
</Table>

     We typically allocate the largest portion of our research and development
expenses to our Health Care businesses, primarily in the Pharmaceuticals
segment. In 2001, Pharmaceuticals accounted for 48.5 percent of our total
research and development spending (2000: 45.8 percent; 1999: 42.3 percent).

     For a more detailed discussion of our research and development activities
and policies, see Item 4, Information on the Company -- Research and
Developmentas well as 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 the International Accounting Standards, or
IAS, issued by the International Accounting Standards Board (IASB). See Note 44
to our consolidated financial statements for a reconciliation of the significant
differences between IAS and U.S. GAAP.

                                        76
<PAGE>

NEW ACCOUNTING STANDARDS

IAS

     The following new or revised accounting standards and interpretations were
implemented in 2001:

<Table>
<Caption>

<S>                                         <C>
IAS 12 (revised 2000)....................   Income Taxes
IAS 19 (revised 2000)....................   Employee Benefits
IAS 39...................................   Financial Instruments: Recognition and
                                            Measurement
IAS 40...................................   Investment Property
SIC 17...................................   Equity-Cost of an Equity Transaction
SIC 19...................................   Reporting Currency: Measurement and
                                            Presentation
</Table>

     IAS 12 (revised 2000) "Income Taxes" requires that current and deferred
income taxes be measured at the tax rates applicable to undistributed earnings.
The income tax consequences of dividends should be recognized when the related
dividend is recognized in the financial statements.

     IAS 19 (revised 2000) "Employee Benefits" requires that plan assets should
include certain assets for insurance policies that satisfy the same conditions
as other plan assets, and that have economic effects similar to those other plan
assets.

     IAS 39 "Financial Instruments: Recognition and Measurement" requires that
all financial assets and financial liabilities, including derivatives, be
recognized on the balance sheet. This will involve recording on the balance
sheet the unrealized gains on the available-for-sale and derivative portfolios.
As of the adoption of IAS 39 on January 1, 2001, the after tax amount added to
stockholders' equity was E0.9 billion.

     IAS 40 "Investment Property" prescribes the accounting treatment for
investment property and related disclosure requirements.

     SIC 17 "Equity -- Cost of an Equity Transaction" requires that we account
for transaction costs of an equity transaction as a deduction from equity, net
of any related income tax benefit, unless the transaction fails to be completed,
in which case it should be expensed.

     SIC 19 "Reporting Currency -- Measurement and Presentation of Financial
Statements under IAS 21 and IAS 29" provides additional guidance on determining
the reporting currencies of foreign subsidiaries.

     The adoption of these standards did not have a material impact on our
financial position or results of operation in 2001.

U.S. GAAP

     In June 2001, the Financial Accounting Standards Board approved SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets".
SFAS 141 requires the purchase method of accounting to be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill, and requires
unallocated negative goodwill to be written off immediately as an exceptional
gain. We will apply SFAS 141 to all business combinations for which purchase
agreements are signed after June 30, 2001. SFAS 142 addresses the accounting for
goodwill and identifiable intangible assets subsequent to their acquisition.
Amortization of goodwill will discontinue upon adoption of SFAS 142. In
addition, goodwill recorded as a result of business combinations completed
during the six-month period ended December 31, 2001 will not be amortized. All
goodwill and intangible assets will be tested for impairment in accordance with
the provision of this statement. We began applying the provisions of SFAS 142 on
January 1, 2002. We have not completed our analysis of these standards and,
accordingly, has not determined what effect the adoption of SFAS 141 and 142
will have on the Group's financial position, results of operations or cash
flows.

     In June 2001, the Financial Accounting Standards Board approved SFAS 143
"Accounting for Asset Retirement Obligations". SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be
                                        77
<PAGE>

recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS 143 is effective for
fiscal periods beginning after June 15, 2002. Early adoption is encouraged and
initial application of this Statement shall be as of the beginning of an
entity's fiscal year. We began applying SFAS 143 beginning January 1, 2003. We
have not completed our analysis of this standard and, accordingly, have not
determined what effect the adoption of SFAS 143 will have on our financial
position, results of operations or cash flows.

     In August 2001, the Financial Accounting Standards Board approved SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
retains the requirements of SFAS 121 to recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and measure an impairment loss as the difference between the carrying
amount and fair value of the asset. SFAS 144 requires a probability-weighted
cash flow estimation approach and establishes a "primary-asset" approach to
determine the cash flow estimation period for groups of assets and liabilities.
SFAS 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged. We
began applying SFAS 144 on January 1, 2002. We have not completed our analysis
of this standard and, accordingly, have not determined what effect the adoption
of SFAS 144 will have on our financial position, results of operations or cash
flows.

     In 2001, the Emerging Issues Task Force (EITF) reached consensus on EITF
00-14 "Accounting for Certain Sales Incentives" and EITF 00-25 "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products", which address the recognition, measurement and income statement
presentation classification of certain sales incentives, and the statement of
earnings of consideration from a vendor to an entity that purchases the vendor's
products for resale, respectively. We have not yet completed our analysis of the
impact of these statements on our financial information presented in accordance
with U.S. GAAP.

CURRENCY OF PRESENTATION

     On January 1, 1999, the euro became the common currency of the 11 member
states of the European Union (including Germany) participating in the European
Monetary Union. The conversion rates between the euro and the national "legacy"
currencies were irrevocably fixed; the official German mark/euro rate was DM
1.95583 per E1.00. Legacy currency banknotes and coins remained in circulation
during an initial transition period. On January 1, 2002, new euro-denominated
notes and coins entered circulation and the legacy currencies were withdrawn
from circulation. Euro notes and coins are now the sole legal tender in these
countries.

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 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 requires
management to compare the carrying value of the assets to the expected
discounted future cash flows from the

                                        78
<PAGE>

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.

     Although we believe that our estimates of useful lives and estimations of
discounted future cash flows are appropriate, changes in assumptions or
circumstances could impact our future reported results.

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 44 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 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. We believe that is
unlikely that the ultimate outcome of such pending litigation will be decided
unfavorably to us. Accordingly, we do not believe that the outcome of legal
proceedings will have a material adverse effect on our financial position,
profitability or liquidity.

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,
                                        79
<PAGE>

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 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.

                                        80
<PAGE>

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 appoints and supervises the members of the Board
of Management. 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 by the Supervisory Board 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, profitability and on the
current business of Bayer AG, as well as on any exceptional matters which 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.

     Committees of the Board of Management oversee various aspects of the
management of Bayer as a whole, with the committee chairmen holding primary
responsibility. Individual Board members serve as representatives with primary
responsibility for our various business segments and as representatives for the
various geographic regions in which we operate.

                                        81
<PAGE>

     The following table shows the members of the Board of Management, their
ages, positions and the years in which their current terms expire.

<Table>
<Caption>
NAME AND AGE                                                  POSITION   CURRENT TERM EXPIRES
------------                                                  --------   --------------------
<S>                                                           <C>        <C>
Werner Wenning (55).........................................  Chairman           2007
Dr. Attila Molnar (53)......................................  Director           2002
Dr. Frank Morich (48).......................................  Director           2002
Dr. Udo Oels (58)...........................................  Director           2006
Werner Spinner (53).........................................  Director           2008
Klaus Kuhn (50).............................................  Director           2007
Dr. Richard Pott (48).......................................  Director           2007
</Table>

     Werner Wenning became 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
Dresdner Bank Lateinamerika AG, Gerling-Konzern Versicherungs-Beteiligungs AG
and Rheinhyp Rheinische Hypothekenbank AG. Until May 2001, he served as a member
of the supervisory board of Gerling-Konzern Allgemeine Versicherungs-AG. He is
also the vice president of the Deutsches Aktieninstitut e.V. and a member of the
Presidium of the Cologne Chamber of Industry and Commerce.

     Dr. Attila Molnar has served on the Board of Management since 1999.
Currently, he chairs the Human Resources Committee and is a member of the
Technology and Environment Committee. He is the representative of the Board of
Management responsible for the North America and Mexico regions. Dr. Molnar also
represents the Agriculture businesses. Prior to joining the Board, Dr. Molnar
was the general manager of Bayer's former Organic Chemicals business group from
1996 to 1999 and became the general manager of the Basic and Fine Chemicals
business group in 1999, before joining the Board of Management later that year.
We expect Dr. Molnar to leave the Board of Management in July 2002 in order to
become president of Bayer Corporation, our U.S. subsidiary, as well as Senior
Bayer Executive with responsibility for the United States.

     Dr. Frank Morich has been a member of the Board of Management since 2000.
He is chairman of the Research and Development Committee and a member of the
Marketing and Logistics and the Technology and Environment Committees. He
represents the Health Care businesses on the Board. Dr. Morich served as head of
product development for our Pharmaceuticals segment from 1995 to February 1998
and then, until he joined the Board, as head of our Consumer Care business
group. We expect Dr. Morich to leave the Board of Management in July 2002 in
order to become chairman of the board of Bayer HealthCare AG, the new subsidiary
that we plan to incorporate to operate our Pharmaceuticals, Consumer Care,
Diagnostics, Biological Products and Animal Health businesses.

     Dr. Udo Oels joined the Board of Management in 1996 and currently chairs
the Technology and Environment Committee. He is also a member of the Research
and Development and the Corporate Coordination Committees. He is the
representative for the China region.

     Werner Spinner has been a member of the Board of Management since 1998. He
currently chairs the Marketing and Logistics Committee and is a member of the
Finance Committee. He also represents the Polymers businesses as well as the Far
East region. Prior to joining the Board, Mr. Spinner was the general manager of
the Consumer Care business group from 1994 to 1998.

     Klaus Kuhn is Bayer's chief financial officer. Prior to joining the Board
in May 2002, Mr. Kuhn 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. Kuhn worked with Schering AG, most recently as head
of finance. Mr. Kuhn is also a member of the board of directors of Agfa-Gevaert
N.V.

     Dr. Richard Pott joined 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

                                        82
<PAGE>

number of positions, most recently as head of the Strategic Planning Department
and then as head of Corporate Planning and Controlling. Dr. Pott is slated to
oversee strategy and human resources when Bayer makes the transition to its
planned holding company structure.

SUPERVISORY BOARD

     Under the German Stock Corporation law, 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 appoint and supervise the Board of Management. The Supervisory Board may not
make management decisions, but the Board of Management's standard operating
procedures (Geschaftsordnung) may require the prior consent of the Supervisory
Board for specified transactions, including:

     -  the acquisition or disposition of investments above a specified
        threshold;

     -  the acquisition, disposition or encumbrance of real property;

     -  the creation of new business units or the disposition of existing units;

     -  the issuance of bonds, entering into of credit agreements, or grant of
        guaranties, sureties (Burgschaften) and loans, except to subsidiaries;
        and

     -  the establishment of branch offices (Zweigniederlassungen).

     Our shareholders elect 10 members of the Supervisory Board at the annual
meeting of shareholders. Pursuant to the Co-Determination Act of 1976, our
employees elect the remaining 10 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.

     Any member elected by the shareholders in 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 relevant class
of employees. Unless not 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 and in such vote the chairman of the Supervisory
Board has a second vote. In order to constitute a quorum at least half of the
total members of the Supervisory Board must be present in the meeting or
participate in the voting by giving a written vote.

     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.

                                        83
<PAGE>

     The following table shows the current members of the Supervisory Board,
their principal occupations and the year in which they were first elected or
appointed. Employee representatives are identified by an asterisk.

<Table>
<Caption>
NAME                                POSITION            PRINCIPAL OCCUPATION         FIRST ELECTED
----                                --------            --------------------         -------------
<S>                               <C>             <C>                                <C>
Dr. Manfred Schneider...........  Chairman        Former chairman of the                 2002
                                                  management board, Bayer AG
*Erhard Gipperich...............  Vice Chairman   Lathe operator                         1998
Dr. Paul Achleitner.............  Member          Member of the management board,        2002
                                                  Allianz AG
Dr. Josef Ackermann.............  Member          Chairman of the management             2002
                                                  board, Deutsche Bank AG
*Petra Brayer...................  Member          Chemical laboratory assistant          1999
*Karl-Josef Ellrich.............  Member          Business administrator,                2000
                                                  health insurance fund
Prof. Dr. Hans-Olaf Henkel......  Member          President of the Leibniz               2002
                                                  Association
*Karl-Heinz Huchthausen.........  Member          Business administrator                 2002
Dr. h.c. Martin Kohlhaussen.....  Member          Chairman of the supervisory            1992
                                                  board, Commerzbank AG
John Christian Kornblum.........  Member          Chairman of Lazard & Co.               2002
*Petra Kronen...................  Member          Chemical Laboratory Assistant          2000
*Rolf Nietzard..................  Member          Chemical Laboratory Technician         1996
Dr. Heinrich von Pierer.........  Member          President and Chief Executive          1993
                                                  Officer of Siemens AG
Dr. Wolfgang Reitzle............  Member          Member of the management board,        2002
                                                  Linde AG
*Wolfgang Schenk................  Member          Engineer                               2002
*Waltraud Schlaefke.............  Member          Chemical laboratory technician         1992
*Hubertus Schmoldt..............  Member          Chairman of German Mine,               1995
                                                  Chemical and Power Workers'
                                                  Union
*Dieter Schulte.................  Member          Chairman of German Unions              1997
                                                  Federation
*Dr. Eugen Velker...............  Member          Chemist                                2000
*Siegfried Wendlandt............  Member          North Rhine District Secretary         2001
                                                  of German Mine, Chemical and
                                                  Power Workers' Union
*Reinhard Wendt.................  Member          Insurance administrator                2002
*Thomas de Win..................  Member          Business administrator                 2002
Prof. Dr. Ernst-L. Winnacker....  Member          President of German Research           1997
                                                  Association
Dr. Hermann Wunderlich..........  Member          Former Vice Chairman of                1996
                                                  management board
</Table>

SUPERVISORY BOARD COMMITTEES

     Currently, the Supervisory Board has the following committees:

     -  The nomination committee (Vermittlungsausschuss), established pursuant
        to sec. 27 (3) of the Co-Determination Act, consists of the chairman and
        vice chairman of the Supervisory Board, as well as one shareholder
        representative and one employee representative. 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.

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<PAGE>

        Pursuant to sec. 5 (1) of the Standard Operating Procedures
        (Geschaftsordnung) of the Supervisory Board, the Vermittlungsausschuss
        also serves as the Presidium, i.e. a sub-body of the Supervisory Board
        to which the Supervisory Board may delegate some of its functions. Among
        the Presidium's responsibilities in this capacity is to advise the
        Supervisory Board as a whole in connection with the Supervisory Board's
        function as audit committee. The current members of the nomination
        committee are Mr. Schneider, Mr. Gipperich, Mr. von Pierer and Mr.
        Schmoldt.

     -  The personnel committee (Personalausschuss) established pursuant to
        sec. 5 (2) 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 sec. 112 of the German Stock Corporation Act, the
        approval of agreements with Supervisory Board members pursuant to
        sec. 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 sec. 89 and sec. 115 of the German Stock Corporation
        Act. The current members of the personnel committee are Mr. Schneider,
        Mr. Gipperich, Mr. Kohlhaussen and Mr. de Win.

     -  The investment committee (Beteiligungsausschuss) established pursuant to
        sec. 5 (3) of the Standard Operating Procedures of the Supervisory
        Board. This committee consists of four members of the Supervisory Board;
        its primary purpose is to make recommendations to the Supervisory Board
        with respect to the acquisition or disposal of investments, where the
        Standard Operating Procedures of the Board of Management condition these
        transactions on the Supervisory Board's approval. The investment
        committee may grant preliminary approval to such transactions, thereby
        permitting the Board of Management to proceed with a transaction subject
        to final approval by the Supervisory Board.

     -  The social policy committee (sozialpolitischer Ausschuss) established
        pursuant to sec. 5(6) of the Standard Operating Procedures of the
        Supervisory Board. The social policy committee advises the Supervisory
        Board on developments in social policy in Germany and abroad that could
        be important for Bayer.

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 who beneficially owns
shares of Bayer AG owns one percent or more of all outstanding shares.

COMPENSATION

     In 2001, we paid salary and bonus compensation totaling E8,153,562 (2000:
E10,387,801) to the members of our Board of Management. Of this amount,
E3,780,301 represented base salary and fixed bonus and E4,373,261 represented
variable bonus. The variable bonus for a given year is tied to the amount of
Bayer AG's dividend for that year. Emoluments to retired members of the Board of
Management and their surviving dependents amounted to E8,355,270 (2000:
E8,923,934). We paid E1,293,750 (2000: E2,078,680) in compensation to the
members of the Supervisory Board.

     In 2000, we implemented our Stock Option Program, under which we may grant
"option rights" to members of the Board of Management. The number of shares 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. See below, "-- Employee
Option Plans -- Stock Option Program".

     There were no loans to members of the Board of Management or Supervisory
Board outstanding as of December 31, 2001.

                                        85
<PAGE>

     We pay retired former members of the Board of Management a monthly pension
equal to 80 percent of the monthly base salary received while in service. If we
increase the base salary of current Board members, we adjust the pension
payments to retired members accordingly.

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 for 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 discounted
present value of the compensation they would have received through the normal
expiration date of their employment contracts. In addition, they would receive a
severance payment equal to their annual compensation for a period of from two to
four years. 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 would retain full pension rights.

EMPLOYEE OPTION PLANS

     In May 2000, we implemented a three-tier program to provide employees and
management 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 be eligible for the stock option and stock incentive programs and for
Module 1 of the stock participation program, 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, 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, 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 one
option right for each 20 shares deposited. These deposited shares are "locked
up"; 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 he or she
has fulfilled the performance criteria. Any unexercised option rights expire at
the end of this two-year period.

     We apply three criteria to determine whether the participant is eligible to
exercise option rights granted in any given tranche and, if so, the number of
shares received upon exercise. Two of these criteria measure the relative
performance of the Bayer AG share; the third measures the individual
contribution of the participant.

     -  If the Bayer AG share's total return has been at least 30 percent from
        the starting date of the tranche, each option right entitles the
        participant to one share for each three percentage points of total
        return, up
                                        86
<PAGE>

        to a maximum of 50 shares. This number may be modified by the
        application of the third, individual performance-based criterion.

     -  If the Bayer AG share's total return exceeds the total return of the Dow
        Jones Euro Stoxx 50(SM) performance index since the starting date of the
        tranche, each option right entitles the participant to one share for
        each percentage point by which the Bayer AG share has outperformed the
        index, up to a maximum of 50 shares. Again, this number is subject to
        modification by the third criterion.

     -  We calculate the cash value the participant has added to the business
        operations for which he or she is responsible. We do this by comparing
        the average growth in cash value for these operations over that
        tranche's holding period with the average growth in cash value for the
        Bayer Group as a whole during the three years prior to the starting date
        of the tranche. The result of this calculation is a factor between 0 and
        2.

     We multiply the number of the participant's option rights by the number of
shares to which he is or she is entitled under each the first two criteria. We
then multiply the result by the factor produced by the third criterion. If the
participant is not entitled to any shares under the first and second criteria,
or if the factor produced by the third criterion is 0, the participant receives
no shares under the program.

     In 2001, participants in our stock option program have received a total of
1,639 option rights. The number of shares that these participants may receive
upon exercise of their option rights would vary between a minimum of zero shares
and, assuming maximum results for all participants on all three performance
criteria described above, a maximum of 327,800 shares.

     German law generally requires specific shareholder approval for the
issuance of shares to members of a corporation's board of management. To the
extent that we are unable to issue shares under the stock option program to
participating members of our Board of Management at the time they are entitled
to exercise their option rights, therefore, the option rights would function as
share appreciation rights. Instead of shares, the participant would receive the
cash value of the shares to which the option rights would otherwise entitle him
or her, based on the trading price of the Bayer AG share at the time of
exercise.

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 his or her performance-related bonus for the
preceding fiscal year. The number of incentive shares the participant receives
depends on the number of Bayer AG shares deposited at the start of the tranche
as well as on the total return 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.

     Each tranche of the stock incentive program has a ten-year term. There are
three incentive share distribution dates during this period. On these dates, the
participant receives incentive shares as follows:

<Table>
<Caption>
                                                          INCENTIVE SHARES RECEIVED
DISTRIBUTION DATE AT END OF                               (PER 10 DEPOSITED SHARES)
---------------------------                               -------------------------
<S>                                                       <C>
Second year............................................               2
Sixth year.............................................               4
Tenth year.............................................               4
</Table>

     Participants receive incentive shares only if the total return of the Bayer
AG share has outperformed the Dow Jones Euro Stoxx 50(SM) performance 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 2001, participants are eligible
to receive a total of 80,380 shares on the tranche's future distribution

                                        87
<PAGE>

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 number of bonus shares 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.

     Each tranche of Module 1 has a term of ten years and entitles the
participant to receive incentive shares 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
incentive shares as follows on the distribution dates:

<Table>
<Caption>
                                                          INCENTIVE SHARES RECEIVED
DISTRIBUTION DATE AT END OF                               (PER 10 DEPOSITED SHARES)
---------------------------                               -------------------------
<S>                                                       <C>
Second year............................................               1
Sixth year.............................................               2
Tenth year.............................................               2
</Table>

     Based on the number of Bayer AG shares that participants in Module 1 of the
stock participation program have deposited in the tranche for 2001, participants
are eligible to receive a total of 322,180 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 Module 2 each participant may purchase 10 Bayer AG
shares per year at a tax-free discount of E15.34 per share under the then market
price. 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 2001, 2000 and 1999 by area of primary activity and
an approximate breakdown of employees as of December 31, 2001, 2000 and 1999 by
geographical region:

<Table>
<Caption>
              EMPLOYEES BY ACTIVITY
--------------------------------------------------
                               AVERAGE FOR
                       ---------------------------
                        2001      2000      1999
                       -------   -------   -------
<S>                    <C>       <C>       <C>
Technology...........   60,168    59,923    59,356
Marketing............   33,768    33,191    33,186
Administration.......    8,972     9,426     9,567
Research.............   11,150    11,007    11,520
                       -------   -------   -------
Total................  114,058   113,547   113,629
                       =======   =======   =======
</Table>

<Table>
<Caption>
              BREAKDOWN BY REGION
-----------------------------------------------
                          AS OF DECEMBER 31,
                       ------------------------
                        2001     2000     1999
                       ------   ------   ------
<S>                    <C>      <C>      <C>
Europe...............  64,600   65,700   65,800
North America........  23,200   24,100   23,100
Asia/Pacific.........  12,600   12,100   11,100
Latin America/
Africa/Middle East...  11,000   11,400   11,500
Corporate............     600      600      700
</Table>

LABOR RELATIONS

     The union-organized workers at our German facilities belong to several
unions, the most important of which is IG BCE, the German Mine, Chemical and
Power Workers' Union. We do not negotiate collective bargaining agreements with
these unions to cover our workers. Instead, in accordance with German practice,
unions

                                        88
<PAGE>

negotiate agreements with industry-wide employers' associations, in our case the
German Chemical Industry Association.

     In Germany, employers and unions generally negotiate collective bargaining
agreements annually. The current agreement that covers our workers has a term of
13 months, beginning April 2002. It grants workers a lump-sum payment of E85 in
the first month of the agreement and a subsequent 3.3 percent pay increase over
the life of the agreement. A German collective bargaining agreement governs the
employment of all workers of the categories organized in the relevant union,
whether or not the individual worker is a union member.

     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 contracts, are organized in six pay
grades.

     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 us and our staff at the facility level. A joint works council
(Gesamtbetriebsrat) serves a similar purpose at the company-wide level. The
rights and responsibilities of works councils are set forth in the German Works
Council Constitution Act (Betriebsverfassungsgesetz). Members of our works
councils share responsibility with us for managing staff-related issues as well
as such working conditions as:

     -  working hours;

     -  vacation guidelines;

     -  employee facilities (e.g., subsidized cafeterias); and

     -  distribution guidelines for performance-related bonuses.

     A works council has no authority, however, to negotiate with an employer on
wage and salary compensation or other issues covered by the collective
bargaining agreements between employers' associations and labor unions. Under
German labor law, employees may legally strike only in an effort to obtain more
favorable terms in the collective bargaining process. Accordingly, works
councils have no legal authority to call a work stoppage.

     On December 12, 2000 we entered into an agreement
(Standortsicherungsvereinbarung) with our joint works council to further job
stability at several of our most important German sites. This agreement became
effective on January 1, 2001. Under the agreement, the joint works council
agreed to the reduction or elimination of certain social benefits that we
previously provided. These included additional vacation days, additional
payments and paid breaks. The council also granted us increased flexibility in
setting working hours. In exchange, we agreed that we would not, except in
exceptional circumstances, lay off employees at our Leverkusen, Dormagen,
Uerdingen, Elberfeld and Brunsbuttel sites for operational reasons before
December 31, 2004. If exceptional circumstances arise that are beyond our
control and lead to employee overcapacity, we have agreed to negotiate with the
joint works council to create a solution that will serve the interests of
company and 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 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) are entitled to receive an additional
monthly pension payment (Zusatzrente). As of December 2001, this salary
threshold was E53,378. Bayer AG finances these additional pension payments in
total by pension reserves.

                                        89
<PAGE>

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
Versicherungs-Aktiengesellschaft, has informed us that it holds 5.92 percent of
Bayer AG's outstanding shares. No other shareholder has notified us that it has
crossed any of the Securities Trading Act's thresholds.

     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 "Share Ownership" in Item 6, Directors, Senior Management and
Employees.

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;

     -  enterprises in which we have significant influence or which have
        significant influence over us;

     -  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.

INTERESTS OF EXPERTS AND COUNSEL

     Not applicable.

                                        90
<PAGE>

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 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. 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.

PATENT VALIDITY CHALLENGES AND INFRINGEMENT PROCEEDINGS; PATENT-RELATED
ANTITRUST ACTIONS

     In the United States, Bayer AG and its U.S. subsidiary Bayer Corporation
are plaintiffs or co-plaintiffs 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 containing the active ingredients ciprofloxacin or
nifedipine 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 had 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 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.

                                        91
<PAGE>

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(R). 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
expires 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. Shortly after settling this suit, we applied to the U.S. Patent and
Trademark Office for a reexamination of our patent. The Patent and Trademark
Office reissued the patent in February 1999.

     In April 1999, Danbury Pharmacal Inc., an affiliate of Schein
Pharmaceutical, Inc., filed an ANDA (IV) alleging that our ciprofloxacin patent
was invalid. Mylan Pharmaceuticals, Inc., an affiliate of Mylan Laboratories,
Inc., filed an ANDA (IV) challenging our ciprofloxacin patent in September 1999.
To protect and enforce our patent rights, Bayer AG together with Bayer
Corporation as licensee filed two lawsuits against Danbury Pharmacal and Schein
Pharmaceutical and one lawsuit against Mylan Pharmaceuticals and Mylan
Laboratories in 1999, and a second lawsuit against Mylan Pharmaceuticals and
Mylan Laboratories in 2000. Reddy Cheminor, Inc. intervened as an additional
defendant in the Danbury/Schein suits. All these suits were consolidated for
pre-trial proceedings and trial before the U.S. federal District Court for the
District of New Jersey.

     In their responses the defendants alleged the invalidity and
unenforceability of our reexamined patent on several grounds. They then moved
for summary judgment on the invalidity issue, and we filed a cross-motion for
partial summary judgment. In February 2001, the district court denied the
defendants' motion and granted our cross-motion. The court subsequently entered
a final judgment in our favor, confirming the validity and enforceability of the
patent. The defendants appealed this judgment to the Court of Appeals for the
Federal Circuit, which heard oral arguments on January 7, 2002.

     In addition, Bayer AG and Bayer Corporation filed a patent infringement
action in May 2001 against Carlsbad Technology, Inc., arising from Carlsbad's
ANDA (IV) filing seeking regulatory approval of its generic version of Cipro(R).
Carlsbad filed two motions for summary judgment. The first motion alleged as a
matter of patent procedure that Bayer's patent as it relates to ciprofloxacin
should expire in October 2002 and not, as determined by the Patent and Trademark
Office, in December 2003. Bayer filed a cross-motion for summary judgment that
the expiration date is in December 2003. In its second motion, Carlsbad alleged
that ciprofloxacin was obvious in light of the prior art. The federal District
Court for the Southern District of California denied both Carlsbad motions in
October, 2001 and granted summary judgment to Bayer on its cross-motion.
Carlsbad has appealed the decision denying the first motion to the Court of
Appeals for the Federal Circuit. A trial regarding the arguments of obviousness
raised in Carlsbad's second motion was held in April and May 2002. The court has
not yet made a ruling. Carlsbad has withdrawn all other defenses it had
originally raised challenging the validity and enforceability of Bayer AG's
ciprofloxacin patent.

     If we lost our patent protection for ciprofloxacin, or if the expiration of
the patent were accelerated to October 2002, we believe that we would forego
significant revenue. We intend to continue taking vigorous action to maintain
our ciprofloxacin patent rights in the United States through their normal expiry
in December 2003.

     Antitrust actions.  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 defendant in twenty of these
cases, including the individual lawsuit and the consumer protection group
lawsuit; it has 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 defendant in one or more of these
lawsuits. The plaintiffs in these suits allege that they are direct or indirect
purchasers of Cipro(R) who were damaged because Bayer's settlement of the Barr
ANDA (IV) litigation prevented generic
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<PAGE>

manufacturers from selling a generic version of Cipro(R). The plaintiffs allege
that the defendants violated various federal antitrust and state business,
antitrust, unfair trade practices and consumer protection statutes, and seek
treble damages and injunctive relief.

     These proceedings are at an early stage. None of the relevant courts have
certified a class. The Judicial Panel for Multidistrict Litigation, or MDL
Panel, transferred 35 of these cases to the U.S. federal District Court for the
Eastern District of New York for coordinated pre-trial proceedings. The federal
court ordered nine of those cases remanded to various state courts in October
2001. Nine cases are currently pending in a California state court. Bayer is
also involved in state court proceedings occurring in Florida, New York, Kansas,
Tennessee and Wisconsin.

     The Barr settlement is also the subject of ongoing antitrust investigations
by the U.S. Federal Trade Commission and a number of state attorneys general.

     Because these cases 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 material to our results of operations and
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.

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(R) CC and
Pfizer, Inc.'s brand-name product Procardia(R) 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(R) XL under
a license from Bayer, Bayer AG and Bayer Corporation became Pfizer's
co-plaintiffs in the infringement actions relating to that product.

     In August 1997, Bayer AG and Bayer Corporation filed a patent infringement
suit against Elan Pharmaceutical Research Corp. and Elan's parent company, Elan
Corp., plc, arising from Elan's ANDA (IV) for a drug product containing
nifedipine in a 30mg dosage form. In March 1999, the U.S. federal District Court
for the Northern District of Georgia granted summary judgment against us,
holding that the particular generic product for which Elan sought marketing
approval as described in its ANDA would not violate our patent. In May 2000, the
U.S. Court of Appeals for the Federal Circuit affirmed this decision.

     In March 2001, the same district court granted summary judgment against
Bayer AG and Bayer Corporation in a second ANDA (IV) related suit (60 mg dosage
form) that we had filed against Elan and later in another action that we had
filed against Elan, Biovail Labs, Inc., Biovail Corp. International and Teva
Pharmaceuticals USA, Inc., arising from these parties' commercial sale of an
allegedly bio-equivalent nifedipine product. We appealed these decisions to the
Court of Appeals for the Federal Circuit. The Federal Circuit vacated these
decisions of the District Court and remanded the cases to the District Court for
further proceedings.

     Bayer AG and Bayer Corporation have also filed four ANDA (IV) related
lawsuits against Biovail and two lawsuits arising from the commercial sale of
nifedipine products by Biovail and Teva. These suits are currently stayed before
the U.S. federal District Court for the District of Puerto Rico.

     As defendants have prevailed in some of these lawsuits, it is possible that
they may also prevail in the trials and appeals that may take place in the
future. We believe, however, that we have meritorious claims in the pending
cases, and intend to prosecute these claims vigorously. Because some of our
nifedipine dosages have already begun to face generic competition, we do not
believe that an adverse result in the pending cases would result in a material
amount of additional foregone revenue.

     Antitrust actions.  Biovail has filed an antitrust lawsuit against Bayer
AG, Bayer Corporation and Pfizer in the U.S. federal District Court for the
District of Western Pennsylvania. Biovail is seeking a declaratory judgment that
Bayer's nifedipine patents are invalid. Biovail also seeks damages under federal
and state antitrust statutes

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<PAGE>

alleging, among other things, that Bayer illegally asserted its patent rights.
The district court has stayed this litigation pending resolution of the
nifedepine-related patent infringement actions against Biovail.

     This proceeding is at an early stage. However, we believe that we have
meritorious defenses to the antitrust allegations, and we intend to defend this
case vigorously.

PRODUCT LIABILITY PROCEEDINGS

     HIV-related actions.  During the past decade, our U.S. subsidiary 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 also satisfactorily settled
nearly 400 lawsuits by plaintiffs who opted out of the class action. Seven 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.

     Although 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. These provisions are not material to the Bayer Group.

     Cerivastatin-related actions.  In August 2001, we voluntarily ceased
marketing our cerivastatin anticholesterol products in response to reports of
serious side effects in some patients. See Item 4, Information about the
Company -- Health Care -- Pharmaceuticals -- Products. Since this withdrawal,
about 1,700 lawsuits, many of them putative class actions, have been initiated
in the United States against Bayer Corporation and Bayer AG. The actions in the
United States have been 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 are being transferred to the U.S. federal
District Court for the District of Minnesota for coordinated discovery and other
pre-trial proceedings. In addition, several actions have been initiated against
other companies of the Bayer Group in other countries. We expect additional
lawsuits to be filed in the United States and elsewhere. If the plaintiffs in
these actions were to be successful, it is possible that the ultimate liability
could be material to our results of operations and cash flows. We believe that
we have meritorious defenses in these actions and are defending them vigorously.
Without acknowledging any liability, we have settled a small 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 any litigation.

     Phenylpropanolamine (PPA) actions.  In late 2000, Bayer Corporation
discontinued marketing Alka-Seltzer Plus effervescent medicines containing PPA
in the United States, Canada and various Latin American countries in response to
a recommendation from the U.S. Food and Drug Administration to all manufacturers
of drugs and medicines containing PPA. 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. More
than 540 class and individual lawsuits have been initiated in the United States
against Bayer Corporation. The MDL Panel has assigned management of the federal
court cases to the U.S. federal District Court for the Western District of
Washington. It is probable that additional actions will be initiated there or in
other jurisdictions where products containing PPA were marketed. Bayer
Corporation believes it has meritorious defenses to these actions and intends to
defend them vigorously.
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MEDICAID REBATE PROGRAM ALLEGATIONS

     Our U.S. subsidiary, Bayer Corporation, is currently under investigation by
the U.S. Attorney's Office for the District of Massachusetts. The investigation,
which is assisted by the Department of Health & Human Services, focuses
primarily on allegations that Bayer Corporation improperly underpaid rebates
under the Medicaid Rebate Program during a period from 1995 to 2000.

     These investigations could lead the government to bring criminal or civil
actions, or both, against Bayer Corporation. If the government brought such
actions and obtained a conviction or verdict against Bayer Corporation, we would
likely be required to reimburse the government the amount of the alleged
underpayment. We would also become liable to pay civil and/or criminal fines or
penalties, which could be substantial. Although we believe this outcome to be
unlikely, in the worst case a conviction or adverse verdict could result in the
exclusion of Bayer Corporation from participation in federal health programs.
Bayer Corporation is providing information to the government and otherwise
cooperating with the investigation. Bayer Corporation believes that its
practices complied in all material respects with all applicable laws and is
therefore seeking to persuade the government to discontinue its investigation.
If the government does bring civil or criminal charges against Bayer
Corporation, Bayer Corporation intends to defend itself vigorously.

AVERAGE WHOLESALE PRICE MANIPULATION PROCEEDINGS

     Seven pending lawsuits allege that a number of pharmaceutical companies,
including Bayer Corporation, manipulated the average wholesale 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. We expect that six of
these actions will be consolidated before the U.S. federal court for the
District of Massachusetts. The remaining case, in which the State of Nevada is
plaintiff, has been removed to federal court in Nevada but may be subject to
remand to a state court. Bayer Corporation has not yet responded to the
complaints in these actions, but intends to defend itself vigorously.

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 allocate to retained earnings (Gewinnrucklagen) up to 50
percent of the net income of Bayer AG for the fiscal year that remains after
deducting amounts to be allocated to legal and statutory reserves and losses
carried forward. 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.

     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.
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<PAGE>

     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 "Dividends" in Item 3, Key Information.

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ITEM 9. THE LISTING

LISTING DETAILS

     Bayer AG's shares trade on the New York Stock Exchange under the symbol BAY
in the form of American Depositary Shares, or ADSs. Each ADS represents one
share. The ADSs are evidenced by American Depositary Receipts (ADRs) issued by
The Bank of New York, as Depositary, under a Deposit Agreement dated as of
January 16, 2002, among us, the Depositary and the registered holders of ADRs
from time to time.

     The primary market for trading in Bayer AG shares has previously been the
Frankfurt Stock Exchange. The shares are also listed on the other seven German
stock exchanges as well as most European stock exchanges and the Tokyo Stock
Exchange.

     The table below sets forth, for the periods indicated, the reported high
and low quoted prices per Bayer AG share on the Frankfurt Stock Exchange and on
the New York Stock Exchange.

<Table>
<Caption>
                                                              FRANKFURT STOCK   NEW YORK STOCK
                                                                 EXCHANGE          EXCHANGE
                                                              ---------------   ---------------
                                                               HIGH     LOW      HIGH     LOW
                                                              ------   ------   ------   ------
                                                                (IN EUROS)       (IN DOLLARS)
<S>                                                           <C>      <C>      <C>      <C>
1997........................................................  41.16    28.12
1998........................................................  49.80    29.40
1999........................................................  47.65    29.74
2000:
  First quarter.............................................  49.40    39.51
  Second quarter............................................  47.63    38.52
  Third quarter.............................................  49.17    40.20
  Fourth quarter............................................  56.50    41.82
2001:
  First quarter.............................................  58.00    44.79
  Second quarter............................................  50.15    42.42
  Third quarter.............................................  47.25    23.90
  Fourth quarter............................................  39.00    29.41
2002:
  First quarter(1)..........................................  40.80    33.90    36.00    28.91
PREVIOUS SIX MONTHS:
  December 2001.............................................  37.30    34.42
  January 2002(1)...........................................  38.60    35.30    34.50    30.75
  February 2002.............................................  37.38    33.30    32.56    28.91
  March 2002................................................  40.80    37.35    36.00    32.00
  April 2002................................................  40.10    35.70    35.85    31.86
  May 2002..................................................  36.81    34.20    33.51    32.17
</Table>

---------------

(1)  From January 24, 2002 for New York Stock Exchange.

     The average daily volume of Bayer shares traded on the Frankfurt Stock
Exchange for the years 2001, 2000 and 1999 was 3,495,113; 2,549,929 and
2,182,661, respectively. The average daily trading volume during the first
quarter of 2002 was 3,281,609 on the Frankfurt Stock Exchange and (from January
24) 36,987 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 our Registration Statement on Form 20-F as filed
with the Securities and Exchange Commission on January 15, 2002.

     Because the current authorized capital I and II as described in the
Registration Statement were scheduled to expire on April 30, 2002, our
shareholders created a new authorized capital I and II at their annual meeting
on April 26, 2002. The new authorized capital I is in the amount of E150,000,000
and the new authorized capital II is in the amount of E100,000,000. Both
authorizations are valid through April 26, 2007. The terms of the new authorized
capital I and II are otherwise substantially identical to those described in our
Registration Statement. The new authorized capital I and II will become
effective upon recordation of the shareholders' resolutions in the commercial
register. We expect that the district court (Amtsgericht) at Leverkusen, which
maintains the commercial register that includes Bayer, will effect the recording
of our authorized capital within approximately 8 to 10 weeks after the
shareholders' meeting.

     At their April 26, 2002 annual meeting, the shareholders also extended
until October 25, 2003 the Board of Management's authorization to repurchase
Bayer AG shares. 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. See "Employee option plans" in Item 6, Directors, Senior
Management and Employees -- Compensation.

MATERIAL CONTRACTS

     In connection with our planned acquisition of Aventis CropScience, we
entered into two Stock Purchase Agreements, each dated October 2, 2001, with the
current shareholders of Aventis CropScience. The first agreement was with
Aventis S.A. and Hoechst AG. The second was with Schering AG and SCIC Holdings
LLC. Exhibits 4.1 and 4.2 to this Annual Report incorporate by reference these
agreements as previously filed with the Commission.

     We are not otherwise 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.

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<PAGE>

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.

     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

     As of January 1, 2002, we are required to withhold tax on dividends in
respect of the 2001 fiscal year 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. The surtax amounts to 1.375 percent (5.5 percent x 25 percent) of the
gross dividend amount. The surtax will equal 1.1 percent (5.5 percent x 20
percent) of the gross dividend paid out in 2002 and thereafter. 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. 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.

     Under Section 904(g) of the U.S. Internal Revenue Code of 1986, as amended
(the "Code"), dividends paid by a foreign corporation that is treated as more
than 50 percent owned by U.S. persons may be treated as U.S. source income
(rather than foreign source income). Such treatment may adversely affect
Qualified Holders' ability to use foreign tax credits. It is possible that we
may be treated as more than 50 percent owned by United States persons for the
purposes of Section 904(g) of the Code.

     The United States Treasury has expressed concerns that parties to whom ADSs
are released may be taking actions that are inconsistent with the claiming of
foreign tax credits for Qualified Holders of ADSs. Accordingly, the
creditability of German withholding tax on dividends could be affected by future
actions that may be taken by the United States Treasury.

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<PAGE>

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 fur
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.

     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 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. The Internal Revenue Service will send the
certification directly to the German tax authorities. 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 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

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<PAGE>

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 deductibility of capital losses is subject
to significant limitations. If you are an individual Qualified Holder of Bayer
AG shares, capital gains generally will be subject to tax at preferential rates,
provided certain holding periods are met.

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 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 (VERMOGENSTEUER)

     The Income Tax Treaty provides that you will not be subject to German
capital tax (Vermogensteuer) with respect to the Bayer AG shares. As a result of
a judicial decision, the German capital tax (Vermogensteuer) 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 at a current rate of up to 30 percent unless you (1) are a
corporation or other exempt recipient or (2) provide a taxpayer identification
number and certifies 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
                                       101
<PAGE>

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 withholdings 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.

                                       102
<PAGE>

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 euro and the British pound.

     -  Interest rate fluctuations.  We are exposed to changes in interest
        rates. Our primary interest rate exposure is to fluctuations in
        short-term U.S. interest rates, especially commercial paper market
        rates.

     -  Credit risk.  We are exposed to credit risk with respect to the
        counterparties in our transactions, and

     -  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. These risks are similar to the risks to which we were exposed in the
prior year.

     From time to time, we enter into hedging arrangements to mitigate our
exposure to currency and interest risks. 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 limited extent.
If increasing liquidity and lower fees render these hedging arrangements less
costly, we would consider using them more often.

     Our primary tools for hedging 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 derivatives. We use these instruments only to hedge risks arising from
our business operations and from related investments and financing transactions.
We do not use derivatives for trading or other speculative purposes. In 2000, we
began to manage foreign currency risks on anticipated or pending transactions.

SENSITIVITY ANALYSIS

     The sensitivity analyses included in the risk sections below present the
hypothetical loss in pre-tax income, cash flows or fair value of the financial
instruments and derivative financial instruments that we held as of December 31,
2001 and 2000, and 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 of a financial
instrument will change due to movements in market rates of interest. This risk
primarily affects receivables and payables 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 investments and 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. Because their rates are fixed, these loans are exposed to interest
rate fluctuation risk. We do not make these loans for financial purposes,
however, and therefore do not hedge their interest rate risk.

                                       103
<PAGE>

Derivative financial instruments

     Derivative financial instruments are our main method of interest rate
hedging. We use interest rate swaps to convert a small portion of our floating
rate investments into, in effect, fixed rate investments. 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.

     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 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, 2001 and 2000;
the fair values quoted disregard any opposite movements in the values of the
underlying transactions.

<Table>
<Caption>
                                                              NOTIONAL AMOUNT   FAIR VALUE
                                                              ---------------   -----------
                                                                      DECEMBER 31,
                                                              -----------------------------
                                                               2001     2000    2001   2000
                                                              ------   ------   ----   ----
                                                                   (EUROS IN MILLIONS)
<S>                                                           <C>      <C>      <C>    <C>
Interest rate hedging contracts.............................  4,485    3,495    (60)   (133)
</Table>

     At December 31, 2001, the notional amount of our short-term interest rate
hedging contracts (including interest and principal currency swaps) totaled E2.0
billion (2000: E0.3 billion); those maturing after more than one year totaled
E2.5 billion (2000: E3.2 billion).

Sensitivity Analysis

     An estimated hypothetical negative effect of 100 basis points, or one
percent per year, in interest rates would result in an increase in interest cost
per year of approximately E45 million (2000: E40 million) based on our debt
position at year-end.

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.
Upon the introduction of the euro on January 1, 1999, however, the relative
values between the "legacy" currencies of the EU member states participating in
the third stage of European Monetary Union were irrevocably fixed. Although
these legacy currencies are scheduled to remain in circulation until July 2002,
we no longer face currency-related risks in relation to member currencies of the
Euro Zone.

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 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. 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 as long
as prices remain unchanged.

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 income
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

                                       104
<PAGE>

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 British pound sterling and the Japanese yen. 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 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 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 to use a mixture of instruments, basing
the specific mix at any time on our technical and fundamental analysis of market
conditions.

     The table below shows the notional amounts and fair values of the currency
derivatives we held as of December 31, 2001 and 2000:

<Table>
<Caption>
                                                             NOTIONAL AMOUNT      FAIR VALUE
                                                             ---------------     -------------
                                                                       DECEMBER 31,
                                                             ---------------------------------
                                                             2001      2000      2001     2000
                                                             -----     -----     ----     ----
                                                                    (EUROS IN MILLIONS)
<S>                                                          <C>       <C>       <C>      <C>
Forward exchange contracts and currency swaps..............  2,749     3,415     (28)     133
Currency options...........................................    279        87       *        1
</Table>

---------------

* Less than E1 million

     At December 31, 2001, we estimated that our aggregate annual direct
transaction risk from sales and purchases in foreign currencies was
approximately E3.4 billion, which consisted primarily of U.S. dollars ($2.3
billion), Japanese yen (Y70 billion) and British pounds sterling (L0.1 billion).
For 2002, we do not anticipate a significant change in these levels of risk with
respect to our current business operations. However, the businesses that we
would acquire upon consummation of the Aventis CropScience transaction could be
exposed to higher levels of risk associated with sales and purchases in foreign
currencies.

     The following table shows the effective exchange rates (including hedging
cost and premium) between the euro and the major world currencies with respect
to which we contracted hedging transactions, compared with the market average
rates for these currencies for 2001 and 2000:

<Table>
<Caption>
                                                         2001                             2000
                                       -----------------------------------------   -------------------
                                                   % CHANGE   MARKET    % CHANGE               MARKET
CURRENCY VS. EURO                      EFFECTIVE   VS. 2000   AVERAGE   VS. 2000   EFFECTIVE   AVERAGE
-----------------                      ---------   --------   -------   --------   ---------   -------
<S>                                    <C>         <C>        <C>       <C>        <C>         <C>
U.S. dollar..........................   0.9014       (3.7)    0.8956      (3.0)     0.9359     0.9236
Japanese yen.........................   108.34        9.1     108.68       9.3       99.31      99.47
British pound sterling...............   0.6177        1.1     0.6219       2.0      0.6108     0.6095
</Table>

Sensitivity Analysis

     Applying a hypothetical adverse change of 10 percent in foreign currency
exchange rates, we estimate the hypothetical loss in cash flows of derivative
and non-derivative financial instruments and foreign currency denominated
balance sheet positions at December 31, 2001 to be approximately E50 million
(2000: 120 million).

                                       105
<PAGE>

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 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, buying additional
quantities on the spot markets as needed. The most important of our raw
materials affected by price fluctuations are:

<Table>
<Caption>

<S>            <C>              <C>      <C>
1.3-butadiene  ACN              Benzene  Cyclohexane
Phenol         Propylene oxide  Styrene  Toluene
</Table>

     These products are derived from crude oil, therefore their prices are
affected by the market price of crude oil.

     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.

     We did not hold any significant market risk sensitive commodity instruments
at December 31, 2001.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

DEBT SECURITIES

     As of December 31, 2001 the following debt securities, issued by our
wholly-owned subsidiaries, were outstanding:

<Table>
<Caption>
                                                                                INTEREST RATE
ISSUER(1)                      SECURITY            CURRENCY        AMOUNT            (%)          TERM
---------                      --------            --------        ------       -------------     ----
                                                                (IN MILLIONS)
<S>                     <C>                      <C>            <C>             <C>               <C>
Bayer Capital Corp.
  B.V., Netherlands...  Bonds with warrants      Swiss francs        250               2.5        2002
                        attached(2)
Bayer Corp............  Notes                    U.S. dollar         400               6.5        2002
Bayer Corp............  Notes                    U.S. dollar         200             7.125        2015
Bayer Corp............  Bonds                    Swiss francs        200          Floating(3)     2002
Bayer Corp............  Revenue Bonds            U.S. dollar        20.6               3.5        2009
Bayer Corp............  Revenue Bonds            U.S. dollar          25               4.0        2027
Bayer Corp............  Notes                    U.S. dollar         350              6.65        2028
Bayer Corp............  Bonds                    U.S. dollar         250              6.24        2028
Bayer Corp............  Money Market Puttable    U.S. dollar         500              4.75        2011
                        Reset Securities
Bayer Ltd., Japan.....  Bonds                    Swiss francs        400              3.75        2005
Bayer AG(5)...........  European Medium-Term     various             864(6)             --        --
                        Notes
</Table>

---------------

(1)  Bayer AG guarantees the principal amount and interest payments of the debt
     securities issued by Bayer Capital Corp. B.V. and Bayer Ltd. described in
     the table above. Bayer AG and Bayer Corporation have entered into support
     agreements with respect to the debt securities issued by Bayer Corporation.
     Under these agreements, Bayer Corporation can obtain funds from Bayer AG to
     make payments on these securities if unable to make the payments itself.

                                       106
<PAGE>

(2)  The warrants entitling bondholders to exchange these bonds for shares of
     Bayer AG expired on August 28, 1997.

(3)  At December 31, 2001, these bonds bore interest at 2.1663%. They matured
     and were paid in April 2002.

(4)  This interest rate will be reset after February 15, 2008.

(5)  Under our European MTN program, Bayer AG as well as Bayer Corporation,
     Bayer Capital Corp. B.V. and Bayer Ltd. (Japan) can issue a variety of debt
     securities in all major currencies.

(6)  The figure listed in the table above is the principal amount in euros of
     securities issued under our European MTN (or EMTN) program outstanding at
     December 31, 2001. In October 2001, we filed a registration statement with
     the Luxembourg exchange in connection with the increase of the maximum
     outstanding principal amount under this program from E2 billion to E8
     billion. Under this program, Bayer AG and the three subsidiaries named in
     Note 5 may issue debt securities in tranches up to a maximum of E8 billion
     in principal amount outstanding (or its equivalent in other currencies).

     On April 10, 2002, we issued two series of debt securities under our EMTN
program in total principal amounts of E3 billion and E2 billion. The first
series of securities is due April 10, 2007 and bears interest at an annual rate
of 5.375 percent. The second series is due April 10, 2012 and bears interest at
an annual rate of 6.000 percent. Including these two series, the total principal
amount outstanding under our EMTN program is E5.9 billion.

WARRANTS AND RIGHTS

     For a description of the option and stock participation plans that we have
established for management and employees, see Item 6, Directors, Senior
Management and Employees -- Compensation -- Employee Option Plans. There are
otherwise no currently outstanding warrants, rights or other securities
convertible into or exchangeable for shares of Bayer AG.

OTHER SECURITIES

     None.

AMERICAN DEPOSITARY SHARES

     Bayer AG, The Bank of New York, as Depositary, and the registered holders
of American Depositary Receipts, or ADRs, and the owners of a beneficial
interest in book-entry ADRs, will enter into a Deposit Agreement under which the
ADSs are to be issued. The following section summarizes the material terms of
the Deposit Agreement. The following is only a summary and does not purport to
be complete and is subject to and qualified in its entirety by reference to the
Deposit Agreement, including the form of ADRs. Terms used in this summary and
not otherwise defined will have the meanings provided for in the Deposit
Agreement. The following is a summary of the agreement. Because it is a summary,
it does not contain all the information that may be important to you. For more
complete information, you should read the entire agreement and the ADR. Copies
of these documents are available for inspection at the Corporate Trust Office of
The Bank of New York, 101 Barclay Street, New York, NY 10286 (temporarily
located at One Wall Street, New York, New York 10286).

AMERICAN DEPOSITARY RECEIPTS

     The Bank of New York will issue the ADSs. The ownership interest in each
share will be represented by one ADS. The shares (or the right to receive
shares) will be deposited by Bayer AG with Dresdner Bank AG, its Custodian in
Germany. Each ADS will also represent securities, cash or other property
deposited with The Bank of New York but not distributed to ADR holders. The
Deposit Agreement refers to the deposited shares together with these other
securities, cash or property as "deposited securities". The principal executive
office of the Depositary is located at One Wall Street, New York, NY 10286.

     You may hold ADRs either directly or indirectly through your broker or
other financial institution. If you hold ADRs directly, you are an ADR holder.
This description assumes you hold your ADRs directly. If you hold the ADRs
indirectly, you must rely on the procedures of your broker or other financial
institution to assert the
                                       107
<PAGE>

rights of ADR holders described in this section. You should consult with your
broker or financial institution to find out what those procedures are.

     Because The Bank of New York will actually hold the shares, you must rely
on it to exercise the rights of a shareholder. The obligations of Bayer AG and
The Bank of New York are set out in a deposit agreement among Bayer AG, The Bank
of New York and you, as an ADR holder. The agreement and the ADRs are generally
governed by New York law.

SHARE DIVIDENDS AND OTHER DISTRIBUTIONS

     The Bank of New York has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on shares or other deposited
securities after deducting its fees and expenses. You will receive these
distributions in proportion to the number of shares your ADRs represent.

     Cash.  The Bank of New York will convert any cash dividend or other cash
distribution Bayer AG pays on the shares into U.S. dollars, if it can do so on a
reasonable basis and can transfer the U.S. dollars to the United States. If that
is not possible or if any approval from any government is needed and can not be
obtained, the agreement allows The Bank of New York to distribute the foreign
currency only to those ADR holders to whom it is possible to do so. It will hold
the foreign currency it cannot convert for the account of the ADR holders who
have not been paid. It will not invest the foreign currency and it will not be
liable for the interest.

     Before making a distribution, any withholding taxes that must be paid under
German law will be deducted. See Item 10, Additional
Information -- Taxation -- Taxation of Dividends. The Bank of New York will
distribute only whole U.S. dollars and cents and will round fractional cents to
the nearest whole cent. If the exchange rates fluctuate during a time when The
Bank of New York cannot convert the foreign currency, you may lose some or all
of the value of the distribution.

     Shares.  The Bank of New York may distribute new ADRs representing any
shares Bayer AG may distribute as a dividend or free distribution, if Bayer AG
furnishes it promptly with satisfactory evidence that it is legal to do so. The
Bank of New York will only distribute whole ADRs. It will sell shares which
would require it to use a fractional ADR and distribute the net proceeds in the
same way as it does with cash. If The Bank of New York does not distribute
additional ADRs, each ADR will also represent the new shares.

     Rights to receive additional shares.  If Bayer AG offers holders of its
ordinary shares any rights to subscribe for additional shares or any other
rights, The Bank of New York may, after consultation to the extent practicable
with Bayer AG, make these rights available to you. Bayer AG must first instruct
The Bank of New York to do so and furnish it with satisfactory evidence that it
is legal to do so. If Bayer AG does not furnish this evidence and/or give these
instructions, and The Bank of New York decides it is practical to sell the
rights, The Bank of New York will sell the rights and distribute the proceeds,
in the same way as it does with cash. The Bank of New York may allow rights that
are not distributed or sold to lapse. In that case, you will receive no value
for them.

     If The Bank of New York makes rights available to you, upon instruction
from you, it will exercise the rights and purchase the shares on your behalf.
The Bank of New York will then deposit the shares and issue ADSs to you. It will
only exercise rights if you pay it the exercise price and any other charges the
rights require you to pay.

     U.S. securities laws may restrict the sale, deposit, cancellation and
transfer of the ADRs issued after exercise of rights. For example, you may not
be able to trade the ADRs freely in the United States. In this case, The Bank of
New York may issue the ADRs under a separate restricted deposit agreement which
will contain the same provisions as the agreement, except for the changes needed
to put the restrictions in place.

     Other Distributions.  The Bank of New York will send to you anything else
Bayer AG distributes on deposited securities by any means it thinks is legal and
fair, as promptly as practicable and after consultation, to the extent
practicable, with Bayer AG. If it cannot make the distribution in that way, The
Bank of New York has a choice. It may decide to sell what Bayer AG distributed
and distribute the net proceeds in the same way as it does with cash or it may
decide to hold what Bayer AG distributed, in which case the ADSs will also
represent the newly distributed property.

                                       108
<PAGE>

     The Bank of New York is not responsible if it decides that it is unlawful
or impractical to make a distribution available to any ADR holders. Bayer AG has
no obligation to register ADRs, shares, rights or other securities under the
Securities Act. Bayer AG also has no obligation to take any other action to
permit the distribution of ADSs, shares, rights or anything else to ADR holders.
This means that you may not receive the distribution Bayer AG makes on its
shares or any value for them if it is illegal or impractical for Bayer AG to
make them available to you.

DEPOSIT, WITHDRAWAL AND CANCELLATION

     The Bank of New York will issue ADRs if you or your broker deposit shares
or evidence of rights to receive shares with the Custodian. Upon payment of its
fees and expenses and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, The Bank of New York will register the appropriate
number of ADRs in the names you request and will deliver the ADRs at its
Corporate Trust Office to the persons you request.

     You may turn in your ADRs at The Bank of New York's Corporate Trust Office.
Upon payment of its fees and expenses and of any taxes or charges, such as stamp
taxes or stock transfer taxes or fees, The Bank of New York will deliver (1) the
underlying shares to an account designated by you and (2) any other deposited
securities underlying the ADR at the office of the Custodian. Or, at your
request, risk and expense, The Bank of New York will deliver the deposited
securities at its Corporate Trust Office.

VOTING RIGHTS

     Upon receipt of notice from Bayer AG, The Bank of New York will notify you
of the upcoming vote and arrange to deliver Bayer AG's voting materials to you.
The materials will (1) describe the matters to be voted on and (2) explain how
you, on a certain date, may instruct The Bank of New York to vote the shares or
other deposited securities underlying your ADRs as you direct. For instructions
to be valid, The Bank of New York must receive them on or before the date
specified. The Bank of New York will try, as far as practical, subject to German
law and the provisions of Bayer AG's Articles of Association, to vote or to have
its agents vote the shares or other deposited securities as you instruct. The
Bank of New York will only vote or attempt to vote as you instruct. However, if
The Bank of New York does not receive your voting instructions, it will give a
proxy to vote your shares to a designated representative of Bayer AG.

     Bayer AG cannot assure you that you will receive the voting materials in
time to ensure that you can instruct The Bank of New York to vote your shares.
In addition, The Bank of New York and its agents are not responsible for failing
to carry out voting instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise your right to vote
and there may be nothing you can do if your shares are not voted as you
requested.

                                       109
<PAGE>

FEES AND EXPENSES

<Table>
<Caption>
ADR holders must pay:                                               For:
---------------------                                               ----
<S>                                             <C>
$5.00 (or less) per 100 ADSs                    Each issuance of an ADS, including as a
                                                result of a distribution of shares or rights
                                                or other property Each cancellation of an
                                                ADS, including if the agreement terminates
$.02 (or less) per ADS                          Any cash payment
Registration or Transfer Fees                   Transfer and registration of shares on the
                                                share register of the Foreign Registrar from
                                                your name to the name of The Bank of New York
                                                or its agent when you deposit or withdraw
                                                shares
Expenses of The Bank of New York                Conversion of foreign currency to U.S.
                                                dollars Cable, telex and facsimile
                                                transmission expenses
Taxes and other governmental charges The Bank   As necessary
  of New York or the Custodian have to pay on
  any ADR or share underlying an ADR, for
  example, stock transfer taxes, stamp duty
  or withholding taxes
</Table>

PAYMENT OF TAXES

     You will be responsible for any taxes or other governmental charges payable
on your ADRs or on the deposited securities underlying your ADRs. The Bank of
New York may refuse to transfer your ADRs or allow you to withdraw the deposited
securities underlying your ADRs until such taxes or other charges are paid. It
may apply payments owed to you or sell deposited securities underlying your ADRs
to pay any taxes owed and you will remain liable for any deficiency. If it sells
deposited securities, it will, if appropriate, reduce the number of ADRs to
reflect the sale and pay to you any proceeds, or send to you any property,
remaining after it has paid the taxes.

RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS

<Table>
<Caption>
If Bayer AG:                                                        Then:
------------                                                        -----
<S>                                             <C>
Changes the nominal or par value of its         The cash, shares or other securities received
  shares                                        by
Reclassifies, splits up or consolidates any     The Bank of New York will become deposited
  of the deposited securities                   securities. Each ADR will automatically
Distributes securities on the shares that are   represent its equal share of the new
  not distributed to you                        deposited securities.
Recapitalizes, reorganizes, merges,             The Bank of New York may, and will if Bayer
  liquidate, sells all or substantially all     AG asks it to, distribute some or all of the
  of its assets, or takes any similar action    cash, shares or other securities it received.
                                                It may also issue new ADRs or ask you to
                                                surrender your outstanding ADRs in exchange
                                                for new ADRs, identifying the new deposited
                                                securities.
</Table>

AMENDMENT AND TERMINATION

     Bayer AG may agree with The Bank of New York to amend the agreement and the
ADRs without your consent for any reason. If the amendment adds or increases
fees or charges, except for taxes and other governmental charges or registration
fees, cable, telex or facsimile transmission costs, delivery costs or other such
expenses, or prejudices an important right of ADR holders, it will only become
effective 30 days after The Bank of New York notifies you of the amendment. At
the time an amendment becomes effective, you are considered, by continuing to
hold your ADR, to agree to the amendment and to be bound by the ADRs and the
agreement is amended.
                                       110
<PAGE>

     The Bank of New York will terminate the agreement at the direction of Bayer
AG by mailing notice of termination to registered holders at least 30 days prior
to the date fixed for termination in the notice. The Bank of New York may also
terminate the agreement if The Bank of New York has told Bayer AG that it would
like to resign and Bayer AG has not appointed a new depositary bank within 60
days.

     After termination, The Bank of New York and its agents will be required to
do only the following under the agreement: (1) collect distributions on the
deposited securities and (2) deliver shares and other deposited securities upon
cancellation of ADRs. At any time after the expiration of one year after the
date of termination, The Bank of New York may sell any remaining deposited
securities by public or private sale. After that, The Bank of New York will hold
the proceeds of the sale, as well as any other cash it is holding under the
agreement for the pro rata benefit of the ADR holders that have not surrendered
their ADRs. It will not invest the money and will have no liability for
interest. The Bank of New York's only obligations will be to account for the
proceeds of the sale and other cash. After termination our only obligations will
be with respect to indemnification and to pay certain amounts to The Bank of New
York.

LIMITATIONS ON OBLIGATIONS AND LIABILITY TO ADR HOLDERS

     The agreement expressly limits Bayer AG's obligations and the obligations
of The Bank of New York, and it limits Bayer AG's liability and the liability of
The Bank of New York. Bayer AG and The Bank of New York:

     -  are only obligated to take the actions specifically set forth in the
        agreement without negligence or bad faith;

     -  are not liable if either is prevented or delayed by law or circumstances
        beyond their control from performing their obligations under the
        agreement;

     -  are not liable if either exercises discretion permitted under the
        agreement;

     -  have no obligation to become involved in a lawsuit or other proceeding
        related to the ADRs or the agreement on your behalf or on behalf of any
        other party; and

     -  may rely upon any documents they believe in good faith to be genuine and
        to have been signed or presented by the proper party.

     In the agreement, Bayer AG and The Bank of New York agree to indemnify each
other under certain circumstances.

REQUIREMENTS FOR DEPOSITARY ACTIONS

     Before The Bank of New York will issue or register transfer of an ADR, make
a distribution on an ADR, or withdrawal of shares, The Bank of New York may
require:

     -  payment of stock transfer or other taxes or other governmental charges
        and transfer or registration fees charged by third parties for the
        transfer of any shares or other deposited securities;

     -  production of satisfactory proof of the identity and genuineness of any
        signature or other information it deems necessary; and

     -  compliance with regulations it may establish, from time to time,
        consistent with the agreement, including presentation of transfer
        documents.

     The Bank of New York may refuse to deliver, transfer, or register transfers
of ADRs generally when the books of The Bank of New York or Bayer AG are closed,
or at any time if The Bank of New York or Bayer AG thinks it advisable to do so.

     You have the right to cancel your ADRs and withdraw the underlying shares
at any time except:

     -  when temporary delays arise due to closing of the transfer books of The
        Bank of New York or Bayer AG or the deposit of Shares in connection with
        voting at a shareholders' meeting, or the payment of dividends;

                                       111
<PAGE>

     -  when you or other ADR holders seeking to withdraw shares owe money to
        pay fees, taxes and similar charges; or

     -  when it is necessary to prohibit withdrawals in order to comply with any
        laws or governmental regulations that apply to ADRs or to the withdrawal
        of shares or other deposited securities.

     This right of withdrawal may not be limited by any other provision of the
agreement.

PRE-RELEASE OF ADRS

     In certain circumstances, subject to the provisions of the agreement, The
Bank of New York may issue ADRs before deposit of the underlying shares. This is
called a pre-release of the ADR. The Bank of New York may also deliver shares
upon cancellation of pre-released ADRs (even if the ADRs are cancelled before
the pre-release transaction has been closed out). A pre-release is closed out as
soon as the underlying shares are delivered to The Bank of New York. The Bank of
New York may receive ADRs instead of shares to close out a pre-release. The Bank
of New York may pre-release ADRs only under the following conditions: (1) before
or at the time of the pre-release, the person to whom the pre-release is being
made must represent to The Bank of New York in writing that it or its customer
owns the shares or ADRs to be deposited; (2) the pre-release must be fully
collateralized with cash or other collateral that The Bank of New York considers
appropriate; and (3) The Bank of New York must be able to close out the
pre-release on not more than five business days' notice. In addition, The Bank
of New York will limit the number of ADRs that may be outstanding at any time as
a result of pre-release, although The Bank of New York may disregard the limit
from time to time, if it thinks it is appropriate to do so.

                                       112
<PAGE>

                                    PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS

     Not applicable.

ITEM 15. [RESERVED]

ITEM 16. [RESERVED]

                                    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-66, incorporated herein by reference.

ITEM 19. EXHIBITS

     Documents filed as exhibits to this Annual Report:

<Table>
<S>           <C>
Exhibit 1.1   Articles of Association (Satzung) of Bayer AG, as amended to
              date, in English translation.*
Exhibit 2.2   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. We agree to furnish 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   Stock Purchase Agreement dated October 2, 2001 among Aventis
              S.A., Hoechst AG, and Bayer AG.**
Exhibit 4.2   Stock Purchase Agreement dated as of October 2, 2001, among
              Schering Aktiengesellschaft, SCIC Holdings LLC and Bayer
              AG.***
Exhibit 8.1   Subsidiaries as of the end of the year covered by this
              report: See "Organizational Structure" in Item 4,
              Information on the Company. We agree to furnish to the
              Securities and Exchange Commission upon request by the
              Commission a list or diagram of our subsidiaries indicating
              as to each subsidiary named: (a) its country or other
              jurisdiction of incorporation or organization, (b) its
              relationship to Bayer AG, and (c) the percentage of voting
              securities owned or other basis of control by its immediate
              parent if any.
</Table>

---------------

*   Incorporated by reference to Exhibit 1.1 to the Registration Statement on
    Form 20-F of Bayer AG filed with the Commission on January 15, 2002.

**  Incorporated by reference to Exhibit 2.3 to the Annual Report on Form 20-F
    of Aventis, SEC File Number 001-10378, filed with the Commission on April 8,
    2002, for which confidential treatment was requested.

*** Incorporated by reference to Exhibit 1 to the Report on Form 6-K of Schering
    AG, SEC File Number 001-16143, filed with the Commission on March 13, 2002,
    for which confidential treatment was requested.

                                       113
<PAGE>

                                   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/ WERNER WENNING
                                             -----------------------------------
                                             Name: Werner Wenning
                                             Title:  Chairman of the Board of
                                                     Management

                                             /s/ ROLAND HARTWIG
                                             -----------------------------------
                                             Name: Dr. Roland Hartwig
                                             Title:  General Counsel

                                             Date: June 24, 2002

                                       114
<PAGE>

                                  BAYER GROUP

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<S>                                                           <C>
Independent Auditors' Report................................   F-2
Consolidated Financial Statements:
  Consolidated Statements of Income for the years ended
     December 31, 2001, 2000 and 1999.......................   F-3
  Consolidated Balance Sheets as of December 31, 2001 and
     2000...................................................   F-4
  Consolidated Statements of Changes in Stockholders' Equity
     for the years ended
     December 31, 2001, 2000 and 1999.......................   F-5
  Consolidated Statements of Cash Flows for the years ended
     December 31, 2001, 2000 and 1999.......................   F-6
  Notes to the Consolidated Financial Statements............   F-7
</Table>

                                       F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
and Stockholders of Bayer AG

     We have audited the accompanying consolidated balance sheet of Bayer AG and
its subsidiaries (the "Group") as of December 31, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2001. 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 Bayer AG at
December 31, 2001, and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with International Accounting Standards.

     International Accounting Standards vary in certain significant respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of consolidated
net income for the years ended December 31, 2001, 2000 and 1999, and the
determination of consolidated stockholders' equity as of December 31, 2001 and
2000, to the extent summarized in Note 44 to the consolidated financial
statements.

Essen, Germany
February 26, 2002
(June 21, 2002, as to Note 44)

PwC Deutsche Revision
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft

<Table>
<S>                                               <C>
               /s/ ALBRECHT                                     /s/ SCHILLING
------------------------------------------        ------------------------------------------
               P. Albrecht                                       J. Schilling
            Wirtschaftsprufer                                 Wirtschaftsprufer
</Table>

                                       F-2
<PAGE>

                 BAYER GROUP CONSOLIDATED STATEMENTS OF INCOME

<Table>
<Caption>
                                                          NOTE     2001       2000       1999
                                                          ----    -------    -------    -------
                                                                           (E MILLION)
<S>                                                       <C>     <C>        <C>        <C>
NET SALES...............................................   [1]     30,275     30,971     27,320
Net sales from discontinuing operations.................   [6]     (1,337)    (2,356)    (3,748)
Net sales from continuing operations....................           28,938     28,615     23,572
Cost of goods sold......................................          (16,542)   (15,077)   (12,473)
                                                                  -------    -------    -------
GROSS PROFIT............................................           12,396     13,538     11,099
                                                                  -------    -------    -------
Selling expenses........................................   [2]     (6,980)    (6,637)    (5,433)
Research and development expenses.......................   [3]     (2,488)    (2,319)    (2,077)
General administration expenses.........................             (988)      (885)      (710)
Other operating income..................................   [4]        480        425        659
Other operating expenses................................   [5]     (1,178)    (1,058)    (1,399)
                                                                  -------    -------    -------
OPERATING RESULT FROM CONTINUING OPERATIONS.............            1,242      3,064      2,139
                                                                  -------    -------    -------
Operating result from discontinuing operations..........   [6]        369        223        188
Income from the Agfa divestiture........................                                  1,030*
OPERATING RESULT........................................   [7]      1,611      3,287      3,357
                                                                  -------    -------    -------
Income (Expenses) from investments in affiliated
  companies -- net......................................   [8]         54        283        (31)
Interest expense -- net.................................   [9]       (349)      (311)      (196)
Other non-operating expenses -- net.....................  [10]       (201)      (269)      (294)
                                                                  -------    -------    -------
NON-OPERATING RESULT....................................             (496)      (297)      (521)
                                                                  -------    -------    -------
INCOME BEFORE INCOME TAXES..............................            1,115      2,990      2,836
                                                                  -------    -------    -------
Income taxes............................................  [11]       (154)    (1,148)      (818)
                                                                  -------    -------    -------
INCOME AFTER TAXES......................................              961      1,842      2,018
                                                                  -------    -------    -------
Minority stockholders' interest.........................  [13]          4        (26)       (16)
                                                                  -------    -------    -------
NET INCOME..............................................              965      1,816      2,002
                                                                  -------    -------    -------
BASIC AND DILUTED EARNINGS PER SHARE (E)................  [14]       1.32       2.49       2.74
                                                                  =======    =======    =======
</Table>

---------------

* The income from the sale of Agfa-Gevaert shares was tax-free.

                                       F-3
<PAGE>

                    BAYER GROUP CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                               NOTE   DEC. 31, 2001   DEC. 31, 2000
                                                               ----   -------------   -------------
                                                                               (E MILLION)
<S>                                                            <C>    <C>             <C>
ASSETS
NONCURRENT ASSETS
Intangible assets...........................................   [18]       5,014           4,843
Property, plant and equipment...............................   [19]      13,543          13,345
Investments.................................................   [20]       3,145           2,156
                                                                         ------          ------
                                                                         21,702          20,344
                                                                         ------          ------
CURRENT ASSETS
Inventories.................................................   [21]       5,818           6,095
Receivables and other assets
  Trade accounts receivable.................................   [22]       5,415           6,244
  Other receivables and other assets........................   [23]       2,447           2,414
                                                                         ------          ------
                                                                          7,862           8,658
                                                                         ------          ------
LIQUID ASSETS...............................................   [24]
  Marketable securities and other instruments...............                 52             213
  Cash and cash equivalents.................................                719             491
                                                                         ------          ------
                                                                            771             704
                                                                         ------          ------
                                                                         14,451          15,457
                                                                         ------          ------
DEFERRED TAXES..............................................   [11]         608             413
                                                                         ------          ------
DEFERRED CHARGES............................................   [25]         278             237
                                                                         ------          ------
                                                                         37,039          36,451
                                                                         ======          ======
of which discontinuing operations...........................   [35]       1,049           2,000
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...........................................              9,841           9,047
Net income..................................................                965           1,816
Other Comprehensive Income
  Currency translation adjustment...........................                759             465
  Miscellaneous items.......................................                545               0
                                                                         ------          ------
                                                               [26]      16,922          16,140
                                                                         ------          ------
MINORITY STOCKHOLDERS' INTEREST.............................   [27]          98             237
                                                                         ------          ------
LIABILITIES
Long-term liabilities
  Long-term financial obligations...........................   [30]       3,071           2,803
  Miscellaneous long-term liabilities.......................   [32]         140             196
  Provisions for pensions and other post-employment
     benefits...............................................   [28]       4,407           4,254
  Other long-term provisions................................   [29]       1,288           1,208
                                                                         ------          ------
                                                                          8,906           8,461
                                                                         ------          ------
Short-term liabilities
  Short-term financial obligations..........................   [30]       4,309           3,862
  Trade accounts payable....................................   [31]       1,993           2,016
  Miscellaneous short-term liabilities......................   [32]       1,832           2,274
  Short-term provisions.....................................   [29]       1,477           1,701
                                                                         ------          ------
                                                                          9,611           9,853
                                                                         ------          ------
                                                                         18,517          18,314
                                                                         ------          ------
of which discontinuing operations...........................   [35]         307             821
                                                                         ------          ------
DEFERRED TAXES..............................................   [11]       1,238           1,595
                                                                         ------          ------
DEFERRED INCOME.............................................   [34]         264             165
                                                                         ------          ------
                                                                         37,039          36,451
                                                                         ======          ======
</Table>

                                       F-4
<PAGE>

     BAYER GROUP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<Table>
<Caption>
                                                        CAPITAL      CAPITAL
                                            NUMBER      STOCK OF   RESERVES OF   RETAINED    NET
                                           OF SHARES    BAYER AG    BAYER AG     EARNINGS   INCOME
                                          -----------   --------   -----------   --------   ------
                                                       (E MILLION, EXCEPT SHARE DATA)
<S>                                       <C>           <C>        <C>           <C>        <C>
DEC. 31, 1998...........................  730,341,920    1,867        2,945       7,121      1,614
CHANGES IN STOCKHOLDERS' EQUITY
  RESULTING FROM CAPITAL CONTRIBUTIONS
  AND DIVIDEND PAYMENTS
  Capital contributions.................                     3           (3)
  Dividend payments.....................                                                      (747)
                                                         -----        -----                 ------
                                                             3           (3)                  (747)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
  NOT RECOGNIZED IN INCOME
  Exchange differences..................
  Other differences.....................                                            (23)
                                                                                  -----
                                                                                    (23)
CHANGES IN STOCKHOLDERS' EQUITY
  RECOGNIZED IN INCOME
  Allocation to retained earnings.......                                            867       (867)
  Income after taxes for 1999...........                                                     2,002
                                                                                  -----     ------
                                                                                    867      1,135
                                          -----------    -----        -----       -----     ------
DEC. 31, 1999...........................  730,341,920    1,870        2,942       7,965      2,002
CHANGES IN STOCKHOLDERS' EQUITY
  RESULTING FROM CAPITAL CONTRIBUTIONS
  AND DIVIDEND PAYMENTS
  Capital contributions.................
  Dividend payments.....................                                                      (949)
                                                                                            ------
                                                                                              (949)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
  NOT RECOGNIZED IN INCOME
  Exchange differences..................
  Other differences.....................                                             29
                                                                                  -----
                                                                                     29
CHANGES IN STOCKHOLDERS' EQUITY
  RECOGNIZED IN INCOME
  Allocation to retained earnings.......                                          1,053     (1,053)
  Income after taxes for 2000...........                                                     1,816
                                                                                  -----     ------
                                                                                  1,053        763
                                          -----------    -----        -----       -----     ------
DEC. 31, 2000...........................  730,341,920    1,870        2,942       9,047      1,816
CHANGES IN STOCKHOLDERS' EQUITY
  RESULTING FROM CAPITAL CONTRIBUTIONS
  AND DIVIDEND PAYMENTS
  Capital contributions.................
  Dividend payments.....................                                                    (1,022)
                                                                                            ------
                                                                                            (1,022)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
  NOT RECOGNIZED IN INCOME
  Exchange differences..................
  Other differences.....................
CHANGES IN STOCKHOLDERS' EQUITY
  RECOGNIZED IN INCOME
  Allocation to retained earnings.......                                            794       (794)
  Income after taxes for 2001...........                                                       965
                                                                                  -----     ------
                                                                                    794        171
                                          -----------    -----        -----       -----     ------
DEC. 31, 2001...........................  730,341,920    1,870        2,942       9,841        965
                                          ===========    =====        =====       =====     ======

<Caption>
                                           CURRENCY                         TOTAL
                                          TRANSLATION   MISCELLANEOUS   STOCKHOLDERS'
                                          ADJUSTMENT        ITEMS          EQUITY
                                          -----------   -------------   -------------
                                                (E MILLION, EXCEPT SHARE DATA)
<S>                                       <C>           <C>             <C>
DEC. 31, 1998...........................      (979)            0           12,568
CHANGES IN STOCKHOLDERS' EQUITY
  RESULTING FROM CAPITAL CONTRIBUTIONS
  AND DIVIDEND PAYMENTS
  Capital contributions.................                                        0
  Dividend payments.....................                                     (747)
                                                                           ------
                                                                             (747)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
  NOT RECOGNIZED IN INCOME
  Exchange differences..................     1,206                          1,206
  Other differences.....................                       0              (23)
                                             -----                         ------
                                             1,206                          1,183
CHANGES IN STOCKHOLDERS' EQUITY
  RECOGNIZED IN INCOME
  Allocation to retained earnings.......                                        0
  Income after taxes for 1999...........                                    2,002
                                                                           ------
                                                                            2,002
                                             -----           ---           ------
DEC. 31, 1999...........................       227             0           15,006
CHANGES IN STOCKHOLDERS' EQUITY
  RESULTING FROM CAPITAL CONTRIBUTIONS
  AND DIVIDEND PAYMENTS
  Capital contributions.................
  Dividend payments.....................                                     (949)
                                                                           ------
                                                                             (949)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
  NOT RECOGNIZED IN INCOME
  Exchange differences..................       238                            238
  Other differences.....................                       0               29
                                             -----                         ------
                                               238                            267
CHANGES IN STOCKHOLDERS' EQUITY
  RECOGNIZED IN INCOME
  Allocation to retained earnings.......                                        0
  Income after taxes for 2000...........                                    1,816
                                                                           ------
                                                                            1,816
                                             -----           ---           ------
DEC. 31, 2000...........................       465             0           16,140
CHANGES IN STOCKHOLDERS' EQUITY
  RESULTING FROM CAPITAL CONTRIBUTIONS
  AND DIVIDEND PAYMENTS
  Capital contributions.................
  Dividend payments.....................                                   (1,022)
                                                                           ------
                                                                           (1,022)
OTHER CHANGES IN STOCKHOLDERS' EQUITY
  NOT RECOGNIZED IN INCOME
  Exchange differences..................       294                            294
  Other differences.....................                     545              545
                                             -----           ---           ------
                                               294           545              839
CHANGES IN STOCKHOLDERS' EQUITY
  RECOGNIZED IN INCOME
  Allocation to retained earnings.......                                        0
  Income after taxes for 2001...........                                      965
                                                                           ------
                                                                              965
                                             -----           ---           ------
DEC. 31, 2001...........................       759           545           16,922
                                             =====           ===           ======
</Table>

                                       F-5
<PAGE>

               BAYER GROUP CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                             NOTE     2001      2000      1999
                                                             ----    ------    ------    ------
                                                                            (E MILLION)
<S>                                                          <C>     <C>       <C>       <C>
Operating result...........................................           1,611     3,287     3,357
Income taxes currently payable.............................            (637)     (873)     (834)
Depreciation and amortization..............................           2,516     2,139     1,811
Change in long-term provisions.............................            (193)     (316)     (167)
Gains on retirements of noncurrent assets..................            (374)      (73)     (975)
                                                                     ------    ------    ------
GROSS CASH PROVIDED BY OPERATING ACTIVITIES................           2,923     4,164     3,192
                                                                     ------    ------    ------
(Increase) Decrease in inventories.........................             146      (750)      134
(Increase) Decrease in trade accounts receivable...........             638      (548)     (459)
Increase (Decrease) in trade accounts payable..............              73       351       (11)
Changes in other working capital...........................              79      (126)      337
                                                                     ------    ------    ------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................  [39]     3,859     3,091     3,193
                                                                     ------    ------    ------
of which discontinuing operations..........................  [42]       159       302       318
Cash outflows for additions to property, plant and
  equipment................................................          (2,617)   (2,647)   (2,632)
Cash inflows from sales of property, plant and equipment...             521       322        63
Cash inflows and outflows related to investments...........             109       (45)    2,632
Cash outflows for acquisitions.............................            (502)   (4,125)     (347)
Interest and dividends received............................             138       191       146
Cash inflows from marketable securities....................             219       115       209
                                                                     ------    ------    ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES........  [40]    (2,132)   (6,189)       71
                                                                     ------    ------    ------
of which discontinuing operations..........................  [42]       295      (298)    2,165
Capital contributions......................................               0         2        10
Bayer AG dividend and dividend payments to minority
  stockholders.............................................          (1,028)     (953)     (770)
Issuances of debt..........................................           2,514     3,952     1,222
Retirements of debt........................................          (2,551)   (1,893)   (1,831)
Interest paid after taxes..................................            (484)     (336)     (300)
                                                                     ------    ------    ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........  [41]    (1,549)      772    (1,669)
                                                                     ------    ------    ------
of which discontinuing operations..........................  [42]        36        11       198
                                                                     ------    ------    ------
CHANGE IN CASH AND CASH EQUIVALENTS DUE TO BUSINESS
  ACTIVITIES...............................................             178    (2,326)    1,595
                                                                     ------    ------    ------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............             491     2,812     1,184
                                                                     ------    ------    ------
Change in cash and cash equivalents due to changes in scope
  of consolidation.........................................              42        (3)       19
Change in cash and cash equivalents due to exchange rate
  movements................................................               8         8        14
                                                                     ------    ------    ------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................  [43]       719       491     2,812
                                                                     ------    ------    ------
Marketable securities and other instruments................              52       213       328
                                                                     ------    ------    ------
LIQUID ASSETS AS PER BALANCE SHEETS........................             771       704     3,140
                                                                     ======    ======    ======
</Table>

                                       F-6
<PAGE>

       NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP

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. They comply with the European Union's guidelines on
consolidation of financial statements (Directive 83/349/EEC).

     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.

     In compliance with IAS 37, provisions are established for contingent
liabilities if available information indicates that an asset has been impaired
or a liability has been incurred, and the amount of the impairment loss can be
estimated with sufficient reliability.

     Certain income statement and balance sheet 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 stated as short-term if
they mature within one year. Income received such as royalties, rental income,
interest income or dividend income is recognized on an accrual basis.

     Changes in recognition and valuation principles are explained in the Notes.
The previous year's figures are restated accordingly. Accounting policies for
individual categories of items in the income statement and balance sheet are
included in the relevant notes.

     In a few instances, estimates and assumptions have 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.

EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS

     The consolidated financial statements of the Bayer Group for the 2001
fiscal year comply with the following new or revised International Accounting
Standards (IAS) and interpretations of the Standing Interpretations Committee
(SIC) that the Group implemented for the first time in 2001:

IAS 12 (Revised 2000)        Income Taxes

IAS 19 (Revised 2000)        Employee Benefits

IAS 39                       Financial Instruments: Recognition and Measurement

IAS 40                       Investment Property

SIC-17                       Equity -- Cost of an Equity Transaction

SIC-19                       Reporting Currency -- Measurement and Presentation
                             of Financial Statements under IAS 21 and IAS 29

     The adoption of these standards did not have any significant impact on
Bayer's financial position or its results of operations during 2001 or on the
comparability of its 2001 and 2000 consolidated financial statements.

     The following new interpretations will be implemented in 2002. Those
applicable for the first time as of December 31, 2001 (marked *) did not have
any effect on the 2001 financial statements.

SIC-27                       Evaluating the Substance of Transactions Involving
                             the Legal Form of a Lease*

SIC-28                       Business Combinations -- "Date of Exchange" and
                             Fair Value of Equity Instruments*

SIC-29                       Disclosure -- Service Concession Arrangements*
                                       F-7
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

SIC-30                       Reporting Currency -- Translation from Measurement
                             Currency to Presentation Currency

SIC-31                       Revenue -- Barter Transactions Involving
                             Advertising Services*

SIC-33                       Consolidation and Equity Method -- Potential Voting
                             Rights and Allocation of Ownership Interests

     A series of related transactions legally amounting to a lease contract
should be accounted for as a single transaction according to SIC-27 (Evaluating
the Substance of Transactions Involving the Legal Form of a Lease). This applies
particularly in cases where the substance of the transactions cannot be
adequately understood without reference to the series of transactions as a
whole.

     If a company pays for an acquisition with its own shares, determination of
the "date of exchange" is crucial to valuation. According to SIC-28 (Business
Combinations -- "Date of Exchange" and Fair Value of Equity Instruments), the
"date of exchange" is the day on which the agreed transaction is executed and
the acquirer gains control over the net assets and business activities of the
acquired unit. The cost of acquisition is based on the publicly quoted price of
the equity instruments on that day.

     The disclosure requirements for agreements under which the reporting
enterprise is granted a concession to provide public services such as drinking
water supplies are defined in SIC-29 (Disclosure -- Service Concession
Arrangements). All aspects of such concession arrangements should be disclosed.

     Where a company's financial statements are published in a currency other
than the measurement currency, SIC-30 (Reporting Currency -- Translation from
Measurement Currency to Presentation Currency) provides that the statements be
translated by the method specified in IAS 21 for foreign companies whose
activities are not an integral part of those of the reporting enterprise
("foreign entities").

     Rules for realizing revenues from advertising-related barter transactions
are given in SIC-31 (Revenue -- Barter Transactions Involving Advertising
Services).

     According to SIC-33 (Consolidation and Equity Method -- Potential Voting
Rights and Allocation of Ownership Interests), potential voting rights that
currently can be exercised without restriction, such as those conferred by stock
subscription rights or stock purchase options, must be taken into account in
determining whether one company controls or significantly influences another.
However, the actual ownership interests held must continue to be used for the
consolidation.

     The adoption of these new interpretations is not expected to have a
material effect on Bayer's financial statements.

COMPANIES CONSOLIDATED

     The financial statements of the Bayer Group as of December 31, 2001 include
Bayer AG and 49 German and 189 foreign consolidated subsidiaries in which Bayer
AG, directly or indirectly, has a majority of the voting rights. The total
number of consolidated companies has risen by 10 from the previous year.
Excluded from consolidation are 85 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.

     We have included 12 joint ventures -- 29 fewer in total than in the
previous year -- by proportionate consolidation in compliance with IAS 31
(Financial Reporting of Interests in Joint Ventures). The decline in the number
of included joint ventures is due mainly to the inclusion of DyStar GmbH,
Frankfurt am Main, Germany,

                                       F-8
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

by the equity method starting in 2001. The effect of joint ventures on the Group
balance sheet and income statement is as follows:

<Table>
<Caption>
                                                              E MILLION
                                                              ---------
<S>                                                           <C>
Noncurrent assets...........................................     230
Current assets..............................................     184
Pension provisions..........................................      (7)
Other provisions............................................     (10)
Financial obligations.......................................     (77)
Remaining liabilities.......................................     (78)
                                                                 ---
NET ASSETS..................................................     242
                                                                 ===
Income......................................................     499
Expenses....................................................     443
                                                                 ---
INCOME AFTER TAXES..........................................      56
                                                                 ===
</Table>

     While 11 companies are stated at equity, 58 companies that in aggregate are
of minor importance are stated at their carrying amounts.

     Consolidated for the first time are 27 companies, including those that
belonged to the Cleveland, Ohio-based CSM group, which we acquired at the end of
2000. As a consequence of divestitures and mergers the number of consolidated
companies was reduced by 47.

ACQUISITIONS/DIVESTITURES

     Acquisitions are accounted for by the purchase method.  Accordingly, the
results of operations of the acquired businesses are included in the
consolidated financial statements as of the respective dates of acquisition. The
purchase prices of the foreign acquisitions are translated at the exchange rates
in effect at the respective dates of acquisition.

     In 2001 a total of E514 million was spent on acquisitions, which were paid
for in cash, not with shares of the company. These acquisitions led to goodwill
of E50 million, including E45 million in additional goodwill resulting from the
Lyondell polyols acquisition. The goodwill amounts are being amortized by the
straight-line method over periods not exceeding 20 years.

     In June 2001, Bayer Corporation, United States, acquired at a cost of E116
million development, manufacturing and distribution rights for products to
detect antibodies to the hepatitis C virus (HCV) and HIV from the strategic
cooperation between Ortho-Clinical Diagnostics Inc., Raritan, New Jersey, and
Chiron Corporation, Emeryville, California. This acquisition expands the
Diagnostics Business Group's portfolio of immunodiagnostic agents, strengthening
its laboratory testing segment. The rights are being amortized over an estimated
useful life of 12 years.

     Bayer expanded its crop protection business in Europe on February 1, 2001
by acquiring MIKADO(R), a leading corn herbicide, from Syngenta AG, Basel,
Switzerland, for E115 million. The transaction covers business in the European
Union and EFTA (European Free Trade Association) countries as well as patents,
registrations, trademark rights, and production and formulation expertise. The
acquired intangible assets are being amortized over an estimated useful life of
10 years.

     Bayer AG has purchased a E93 million equity interest in CuraGen
Corporation, New Haven, Connecticut, a leading biotech company. The objective of
the collaboration agreement concluded with CuraGen in mid-January 2001 is to
jointly develop and market novel drugs to treat obesity and diabetes. The
intention is also to use special genomics-based technologies to evaluate
substances in Bayer's early pharmaceutical research pipeline regarding their
suitability for further clinical development.

                                       F-9
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     On May 1, 2001, Bayer Corporation, United States, increased its equity
ownership in PharmaNetics Inc., Raleigh, North Carolina, by a further E25
million for the Diagnostics Business Group. The existing distribution agreement
with PharmaNetics was expanded to cover Theranostic tests (rapid diagnostic
testing during drug therapy), a core component of the technology platform
offered by PharmaNetics Inc. The agreement includes non-exclusive rights in the
U.S. and exclusive rights elsewhere for the Diagnostics Business Group to
distribute Theranostic tests.

     In February 2001, Bayer acquired a E17 million equity interest in PPL
Therapeutics plc, Edinburgh, United Kingdom. PPL Therapeutics is a biotech
company involved in the discovery, development, production and marketing of
genetically modified proteins for therapeutic purposes and food products. The
Pharmaceuticals Business Group and PPL Therapeutics have concluded an agreement
under which Bayer will pursue the clinical development of, and acquire, global
exclusive marketing rights to the company's major product, rAAT (recombinant
alpha-1-antitrypsin). PPL Therapeutics intends to manufacture the product in a
new facility currently scheduled for construction.

     On February 12, 2001, the Pharmaceuticals Business Group purchased a E16
million equity interest in Avigen Inc., Alameda, California, a leading biotech
company. The investment gives Bayer global, exclusive marketing and distribution
rights to the gene therapy Coagulin-B(TM) developed by Avigen Inc. for the
treatment of hemophilia B by gene transfer. Avigen Inc. intends to meet global
demand for Coagulin-B(TM) from manufacture in a new production facility
scheduled for construction.

     On March 15, 2001, Bayer Corporation concluded an agreement on HIV and
hepatitis C virus (HCV) tests with the biotech company Innogenetics N.V., Ghent,
Belgium, for the Diagnostics Business Group. For E12 million Bayer acquired
exclusive worldwide distribution and marketing rights, including rights to
further developments in the future, for the HIV and HCV product lines
manufactured by Innogenetics. These intangible assets are being amortized over
an estimated useful life of 10 years.

     H.C. Starck GmbH, Goslar, Germany, a subsidiary of Bayer AG, acquired TeCe
Technical Ceramics GmbH & Co. KG, Selb, Germany from Deutsche Shell GmbH for E9
million effective January 1, 2001. The acquisition complements H.C. Starck's
activities in surface technology and ceramics. The very good manufacturing
conditions and geographical advantages support H.C. Starck's aim of expanding
its position in the U.S. market. The acquired goodwill of E4 million is being
amortized in the Bayer Group financial statements over an estimated useful life
of 5 years.

     In December 2001, the Consumer Care Business Group of Bayer's Mexican
subsidiary Bayer de Mexico, S.A. de C.V. purchased the marketing rights to
Cevalin(R), a leading vitamin C brand, and the well-known disinfectant
Merthiolate(R) from Eli Lilly. The rights will be amortized over an estimated
useful life of 10 years.

     Significant DIVESTITURES in 2001 were as follows:

     Bayer sold its 50 percent interest in EC Erdolchemie GmbH, Cologne, Germany
to the other joint venture partner Deutsche BP AG, Hamburg, Germany, effective
May 1, 2001, following approval from the E.U. Commission. The proceeds of the
sale amounted to E476 million. Future raw material supplies from Erdolchemie to
Bayer are contractually assured, as is the provision of services by Bayer to
Erdolchemie.

     Bayer Group company Wolff Walsrode AG sold its subsidiary Covexx Films,
Walsrode, Germany, a company specializing in high-performance films, to Wipak,
part of the Wihuri group of Finland, effective June 1, 2001.

     Effective April 1, 2001, Bayer AG sold the H-acid production facilities on
its Brunsbuttel site to Rutgers Elbechemie GmbH, a subsidiary of Rutgers VTF AG.
Bayer sold its interest in ChemDesign Corporation, Fitchburg, Massachusetts, to
Chestnut Acquisition Corporation, Mendham, New Jersey, a subsidiary of Chestnut
Investments LLC, Mendham, New Jersey, effective November 30, 2001. ChemDesign
manufactures organic chemicals mainly for the agrochemical and photographic
industries.

                                       F-10
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     As part of the planned divestiture of Bayer's fibers activities, the
Dralon(R) business was sold to the Fraver group of Biella, Italy, at the
beginning of the year.

     Acquisitions and divestitures of businesses affected the Group's assets and
liabilities as of the dates of acquisition or divestiture as follows:

<Table>
<Caption>
                                                                ACQUISITIONS    DIVESTITURES
                                                                ------------    ------------
                                                                        (E MILLION)
<S>                                                             <C>             <C>
2001
Noncurrent assets...........................................         505             366
Current assets (excluding liquid assets)....................          18             357
Liquid assets...............................................          --              --
                                                                   -----           -----
ASSETS......................................................         523             723
                                                                   =====           =====
Pension provisions..........................................          --             (88)
Other provisions............................................          (1)            (50)
Financial obligations.......................................          --              (5)
Remaining liabilities.......................................          (8)            (12)
                                                                   -----           -----
LIABILITIES.................................................          (9)           (155)
                                                                   =====           =====
</Table>

<Table>
<Caption>
                                                                ACQUISITIONS    DIVESTITURES
                                                                ------------    ------------
                                                                        (E MILLION)
<S>                                                             <C>             <C>
2000
Noncurrent assets...........................................       3,846             136
Current assets (excluding liquid assets)....................         728              90
Liquid assets...............................................          39              --
                                                                   -----           -----
ASSETS......................................................       4,613(*)          226
                                                                   =====           =====
Pension provisions..........................................          15              29
Other provisions............................................          51               2
Financial obligations.......................................         188              --
Remaining liabilities.......................................         159              48
                                                                   -----           -----
LIABILITIES.................................................         413(**)          79
                                                                   =====           =====
</Table>

---------------

(*)  including E2,623 million from Lyondell
(**) including E39 million from Lyondell

     Lists of Bayer AG's direct and indirect holdings have been included in the
Leverkusen commercial register. They also are available directly from Bayer AG
on request.

     The principal companies included in the consolidated financial statements
are listed in the following table:

<Table>
<Caption>
                                                                BAYER'S INTEREST
COMPANY NAME AND PLACE OF BUSINESS                                    (%)
----------------------------------                              ----------------
<S>                                                             <C>
GERMANY
H. C. Starck GmbH, Goslar...................................           100
Wolff Walsrode AG, Walsrode.................................           100
Bayer Chemie Service GmbH, Leverkusen.......................           100
Bayer Vital GmbH, Leverkusen................................           100
Bayer Industrieprodukte GmbH & Co. KG, Leverkusen...........           100
Bayer Buna GmbH, Marl.......................................           100
</Table>

                                       F-11
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

<Table>
<Caption>
                                                                BAYER'S INTEREST
COMPANY NAME AND PLACE OF BUSINESS                                    (%)
----------------------------------                              ----------------
<S>                                                             <C>
OTHER EUROPEAN COUNTRIES
Bayer Hispania, S.A., Spain.................................           100
Bayer S.p.A., Italy.........................................           100
Quimica Farmaceutica Bayer, S.A., Spain.....................           100
Bayer Rubber N.V., Belgium..................................           100
Bayer plc, U.K..............................................           100
Bayer Antwerpen N.V., Belgium...............................           100
Bayer Pharma S.A., France...................................          99.9
Bayer International S.A., Switzerland.......................          99.7
Bayer S.A., France..........................................          99.9
Bayer B.V., Netherlands.....................................           100
Bayer A/S, Denmark..........................................           100
NORTH AMERICA
Bayer Corporation, United States............................           100
Bayer Inc., Canada..........................................           100
ASIA/PACIFIC
Bayer (India) Ltd., India...................................          55.3
Bayer Yakuhin Ltd., Japan...................................           100
Sumika Bayer Urethane Co., Ltd., Japan......................            60
Bayer Ltd., Japan...........................................           100
Bayer Australia Ltd., Australia.............................          99.9
Bayer (South East Asia) Pte Ltd., Singapore.................           100
Nihon Bayer Agrochem K.K., Japan............................          99.5
Bayer Thai Co. Ltd., Thailand...............................           100
Bayer China Co., Ltd., Hong Kong............................          99.3
LATIN AMERICA/AFRICA/MIDDLE EAST
Bayer de Mexico, S.A. de C.V., Mexico.......................           100
Bayer S.A., Argentina.......................................          99.9
Bayer S.A., Brazil..........................................          99.9
Bayer (Proprietary) Ltd., South Africa......................           100
</Table>

FOREIGN CURRENCY TRANSLATION

     The financial statements for 2001 are drawn up in euros (E).

     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 foreign consolidated companies 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. Goodwill as well
as any fair value adjustments arising on the acquisition of entities located
outside the European Monetary Union are treated as assets and liabilities of
such entities and translated at closing rates.

     Where the operations of a foreign company 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 rate on the
date of addition, along with any relevant amortization, depreciation and
write-downs. All other balance sheet items are translated at closing rates.
                                       F-12
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

Income and expense items (except amortization, depreciation and write-downs) are
translated at average rates for the year.

     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:

<Table>
<Caption>
                                                 CLOSING RATE               AVERAGE RATE
                                           ------------------------   ------------------------
                                            2001     2000     1999     2001     2000     1999
                                           ------   ------   ------   ------   ------   ------
                                                                  (E1)
<S>                                  <C>   <C>      <C>      <C>      <C>      <C>      <C>
U.S.A. ............................  USD     0.88     0.93     1.00     0.90     0.93     1.07
U.K. ..............................  GBP     0.61     0.62     0.62     0.62     0.61     0.66
Japan..............................  JPY   115.33   106.92   102.73   108.74    99.74   121.05
Canada.............................  CAD     1.41     1.40     1.46     1.39     1.37     1.59
Switzerland........................  CHF     1.48     1.52     1.61     1.51     1.56     1.60
</Table>

CONSOLIDATION METHODS

     Capital consolidation is performed according to IAS 22 (Business
Combinations) by offsetting investments in subsidiaries against the underlying
equities 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.

     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 is able to exercise operational control,
generally through an ownership interest greater than 50 percent.

     The equity method is used to account for investments in material entities
in which Bayer AG exerts significant influence, generally through an ownership
interest between 20 and 50 percent.

     Intercompany profits and losses on transactions with companies included at
equity were immaterial in 2001, 2000 and 1999.

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). 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 foreign consolidated companies 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-13
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

NOTES TO THE STATEMENTS OF INCOME

[1]  NET SALES

     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.

     While total reported sales declined 2001 by E0.7 billion, to E30.3 billion
(2000: E31.0 billion; 1999: E27.3 billion), sales from continuing operations
increased by E0.3 billion to E28.9 billion (2000: E28.6 billion; 1999: E23.6
billion). In 2001, a E0.9 billion decrease due to lower volumes was offset by
positive contributions of E0.3 billion from higher selling prices, E0.1 billion
from favorable shifts in exchange rates and E0.8 billion 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:

<Table>
<Caption>
2001                                                            E MILLION
----                                                            ---------
<S>                                                             <C>
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 ON SALES FROM CONTINUING OPERATIONS..............       859
                                                                  ====
</Table>

                                       F-14
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     2000 sales increased by E3.7 billion compared with 1999, to E31.0 billion.
Sales from continuing operations advanced by E5.0 billion, to E28.6 billion. The
increase in 2000 comprised E1.6 billion from higher volumes, E0.5 billion from
improvement in selling prices, E2.2 billion from favorable shifts in exchange
rates and E0.7 billion from the net positive effect of acquisitions and
investitures. Acquisition and divestitures during 2000 and 1999 affected the
comparison between the two years-sales figures by the following amounts:

<Table>
<Caption>
2000                                                            E MILLION
----                                                            ---------
<S>                                                             <C>
ACQUISITIONS
Polyols business (from Lyondell)............................        646
Plastic sheet business (from DSM on April 1, 1999)..........         80
Purchase of further interest in Misung Ltd., Pyongtaek,
  South Korea...............................................         58
Sybron Chemicals Inc., Birmingham, New Jersey, United
  States....................................................         35
Paper chemicals business (from Cytec Industries)............         14
                                                                 ------
                                                                    833
                                                                 ------
DIVESTITURES
U.S. livestock vaccines business to Intervet
  International.............................................        (27)
Troponwerke GmbH & Co. KG...................................        (24)
Other.......................................................        (34)
                                                                 ------
                                                                    (85)
                                                                 ------
NET EFFECT ON SALES FROM CONTINUING OPERATIONS..............        748
                                                                 ------
Sale of 70 percent of the shares of the Agfa-Gevaert group
  (May 31, 1999)............................................     (1,801)
                                                                 ------
                                                                 (1,053)
                                                                 ======
</Table>

     1999 sales declined by 0.7 billion compared with 1998, to E27.3 billion.
Sales growth of E1.4 billion from higher volumes and E0.6 billion from exchange
rate fluctuations was offset by declines of E0.5 billion from price changes and
E2.2 billion from the net effect of acquisitions and divestitures, which is
comprised as follows:

<Table>
<Caption>
1999                                                            E MILLION
----                                                            ---------
<S>                                                             <C>
ACQUISITIONS
Chiron Diagnostics (from Chiron in 1998)....................        504
Plastic sheet business (from DSM)...........................         72
Seed treatment business in U.S.A. and Canada (from Gustafson
  in 1998)..................................................         49
pbi Home & Garden Limited, U.K. (from Sumitomo
  Corporation)..............................................         18
Elastochem Inc., U.S.A......................................         11
Other.......................................................         14
                                                                 ------
                                                                    668
                                                                 ------
DIVESTITURES
Agfa-Gevaert group..........................................     (2,548)
Titanium dioxide (placed into joint venture with Kerr-McGee
  in 1998)..................................................       (131)
Silicones (placed into joint venture with GE Plastics in
  1998).....................................................       (113)
Citric acid (to Tate & Lyle in 1998)........................       (102)
Other.......................................................        (19)
                                                                 ------
                                                                 (2,913)
                                                                 ------
OTHER CHANGES IN COMPANIES CONSOLIDATED.....................         78
                                                                 ------
                                                                 (2,167)
                                                                 ======
</Table>

                                       F-15
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

[2]  SELLING EXPENSES

     Selling expenses include E782 million (2000: E776 million; 1999: E609
million) in shipping and handling costs.

     They also include advertising and promotion costs, expensed in the period
in which they are incurred. These costs amount to E1,389 million (2000: E1,331
million; 1999: E1,083 million).

[3]  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.

[4]  OTHER OPERATING INCOME

     Among the items of other operating income from continuing operations for
2001 are E68 million (2000: E83 million; 1999: E117) from reversals of
unutilized provisions, E74 million (2000: E74 million; 1999: E15 million) from
retirements of noncurrent assets, and E25 million (2000: E25 million; 1999: E34
million) from sideline operations.

     The cost of goods sold incurred for sideline operations has been offset
against the corresponding revenues to more clearly reflect the earnings
position. Also included here is E45 million in income resulting from an
agreement concluded with Syngenta to settle a patent dispute over thiomethoxam.

[5]  OTHER OPERATING EXPENSES

     Included in other operating expenses for continuing operations in 2001 are
E90 million (2000: E35 million; 1999: E52 million) in write-downs of
receivables, E94 million (2000: E77 million; 1999: E139 million) in amortization
of acquired goodwill and E15 million (2000: E25 million; 1999: E53 million) in
losses from the sale of property, plant and equipment.

     In addition, E214 million (2000: E200 million; 1999: E449 million) was
spent on restructuring. Further details of restructuring expenses are given in
Note 29.

[6]  DISCONTINUING OPERATIONS

     Bayer sold its 50 percent interest in EC Erdolchemie GmbH, Cologne, to the
joint venture partner Deutsche BP AG, Hamburg, effective May 1, 2001. The
operating result of Erdolchemie for 2001 shown in the following table comprises
the result of the business group's operations up to the date of divestiture and
the income from the sale of the 50 percent interest.

     In April 2001 Bayer decided to divest the remaining activities of its
Fibers Business Group, including the production facilities for Dorlastan(R)
spandex fibers and Perlon(R) monofilaments.

     In the course of its reorganization Bayer plans to divest the Haarmann &
Reimer business group, whose activities it now regards as non-core. It is
therefore intended to sell the wholly owned subsidiary Haarmann & Reimer GmbH, a
manufacturer of fragrances and flavors based in Holzminden, Germany.

     The non-operating results and the income taxes attributable to Haarmann &
Reimer, Fibers, Erdolchemie, DyStar and Agfa are reflected in the corresponding
items of the income statement.

                                       F-16
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     A breakdown of the results of discontinuing operations is given below.

<Table>
<Caption>
                                                   EC                   FS                   HR
                                           ------------------   ------------------   ------------------
                                           2001   2000   1999   2001   2000   1999   2001   2000   1999
                                           ----   ----   ----   ----   ----   ----   ----   ----   ----
                                                                   (E MILLION)
<S>                                        <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>
NET SALES................................   233    635    456    232    506    391    872    865    775
Cost of goods sold.......................  (196)  (481)  (368)  (205)  (383)  (307)  (481)  (489)  (437)
Selling expenses.........................   (16)   (45)   (44)   (26)   (50)   (45)  (199)  (197)  (157)
Research and development expenses........     0     (2)    (1)    (8)    (9)    (9)   (63)   (54)   (54)
General administration expenses..........    (3)    (9)    (8)   (11)    (8)   (11)   (38)   (39)   (44)
Other operating income...................   316      7     17      1     10      9     23     14     17
Other operating expenses.................    (1)    (6)    (6)   (20)   (15)    (5)   (41)   (32)   (60)
OPERATING RESULT FROM DISCONTINUING
  OPERATIONS.............................   333     99     46    (37)    51     23     73     68     40
Non-operating result.....................    (1)    (1)    (2)    (1)     1     (4)    (4)    (6)    (4)
Equity-method income (loss)..............
INCOME (LOSS) BEFORE INCOME TAXES........   332     98     44    (38)    52     19     69     62     36
Income taxes.............................    (6)     0    (10)    (3)    (2)     0    (35)   (30)   (20)
INCOME (LOSS) AFTER TAXES................   326     98     34    (41)    50     19     34     32     16
</Table>

<Table>
<Caption>
                                                  DYSTAR             AGFA                 TOTAL
                                            ------------------   -------------   -----------------------
                                            2001   2000   1999   2000    1999    2001     2000     1999
                                            ----   ----   ----   ----   ------   -----   ------   ------
                                                                    (E MILLION)
<S>                                         <C>    <C>    <C>    <C>    <C>      <C>     <C>      <C>
NET SALES.................................          350    325           1,801   1,337    2,356    3,748
Cost of goods sold........................         (223)  (241)         (1,098)   (882)  (1,576)  (2,451)
Selling expenses..........................          (68)   (65)           (388)   (241)    (360)    (699)
Research and development expenses.........           (9)   (10)           (101)    (71)     (74)    (175)
General administration expenses...........          (21)   (27)            (81)    (52)     (77)    (171)
Other operating income....................            6      4           1,055     340       37    1,102
Other operating expenses..................          (30)   (10)            (55)    (62)     (83)    (136)
OPERATING RESULT FROM DISCONTINUING
  OPERATIONS..............................            5    (24)          1,133     369      223    1,218
Non-operating result......................          (18)    (7)             (6)     (6)     (24)     (23)
Equity-method income (loss)...............    6                   72       (17)      6       72      (17)
INCOME (LOSS) BEFORE INCOME TAXES.........    6     (13)   (31)   72     1,110     369      271    1,178
Income taxes..............................   (3)      1     (4)  (26)      (24)    (47)     (57)     (58)
INCOME (LOSS) AFTER TAXES.................    3     (12)   (35)   46     1,086     322      214    1,120
</Table>

[7]  OPERATING RESULT

     In accordance with IAS 14 (Segment Reporting), a breakdown of certain data
in the financial statements is given by segment and geographical region. The
segments and regions are the same as those used for internal reporting. The aim
is to provide users of the financial statements with information regarding the
profitability and future prospects of the Group's various activities. To allow a
more accurate appraisal of continuing operations, the discontinuing operations
are shown separately.

     The Bayer Group is managed on the basis of business groups, which are
aggregated into reportable segments according to economic characteristics,
products, production processes, customer relationships and methods of
distribution. There are currently 14 business groups, which are aggregated here
into 7 reportable segments.

                                       F-17
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     The segments shown as CONTINUING OPERATIONS embrace the following
activities:

<Table>
<Caption>
SEGMENT                                ACTIVITY
-------                                --------
<S>                                    <C>
HEALTHCARE
  Pharmaceutical & Biological          Development and marketing of ethical pharmaceuticals
     Products
  Consumer Care & Diagnostics          Development and marketing of over-the-counter medications,
                                       nutritional supplements, insecticides and insect repellants
                                       and products for central laboratory, near patient testing,
                                       and self-testing applications
AGRICULTURE
  Crop Protection                      Development and marketing of chemical insecticides,
                                       fungicides and herbicides
  Animal Health                        Development and marketing of veterinary medicines,
                                       environmental health products, and nutritionals for the
                                       health care of companion animals and commercial
                                       livestock/poultry
POLYMERS
  Plastics & Rubber                    Manufacture and supply of engineered plastics and supplier
                                       of raw materials, rubber chemicals and modifiers to the
                                       rubber and tire industry
  Polyurethanes and Coatings &         Development, production and marketing of raw materials,
     Colorants                         formulations and systems used in producing polyurethane
                                       polymers, lacquers, coatings, sealants, adhesives and
                                       colorants.
CHEMICALS                              Manufacture and marketing of bulk and specialty chemicals,
                                       metal and ceramic powders and cellulose derivatives
</Table>

     The reconciliation line reflects intersegment items and income and expenses
not allocable to the segments, such as central R&D expenses, corporate costs,
and revenues and expenses from sideline operations. The intersegment sales
reflect intragroup transactions effected at transfer prices fixed on an
arm's-length basis. The reconciliation line also reflects those assets and
liabilities that cannot be allocated to the reportable segments.

     Business activities which Bayer has already divested or intends to divest
are shown as discontinuing operations. These are the worldwide DyStar business
group; the Erdolchemie business group located in Europe, the worldwide Agfa
business segment, the worldwide Fibers business and the worldwide Haarmann &
Reimer business.

     The business segment and regional 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 other operating income comprises that reflected in the income
        statement, including such income from discontinuing operations.

     -  Comparability of the operating results of different years may be
        restricted by exceptional items relating particularly to restructuring
        measures and acquisitions or divestitures of companies or businesses.
        For this reason the operating result before exceptional items is shown
        in addition.

     -  The return on sales before exceptional items is the ratio of the
        operating result before exceptional items to external sales.

     -  Expenses included in exceptional items mainly relate to restructuring
        measures affecting the operating business.

                                       F-18
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     -  The return on sales including exceptional items is the ratio of the
        operating result including exceptional items to external sales.

     -  Gross cash flow is the excess of cash receipts over cash disbursements
        before application of funds.

     -  The capital invested comprises all the assets that serve a business
        segment and are required to yield a return, less interest-free
        liabilities. It is stated as of December 31.

     -  The CFROI is the ratio of the gross cash flow to the average capital
        invested for the year.

     -  The equity items are those reflected in the balance sheet and income
        statement. They are allocated to the business segments where possible.
        Equity-method income reconciles to the income statement line item
        "Income (Expenses) from investments in affiliated companies -net", as
        follows:

<Table>
<Caption>
                                                                     2001    2000    1999
                                                                     ----    ----    ----
                                                                         (E MILLION)
       <S>                                                           <C>     <C>     <C>
       Equity-method income........................................   26      71     (28)
       Dividends and similar income................................   15      18       9
       Income from profit and loss transfer agreements.............    *       1       1
       Gains from the sale of investments in affiliated
         companies.................................................   16     204       0
       Losses from the sale of investments in affiliated
         companies.................................................   (3)     (1)     (2)
       Write-downs of investments in affiliated companies..........    0     (10)    (11)
                                                                      --     ---     ---
       Income (Expenses) from investments in affiliated companies
         (net).....................................................   54     283     (31)
                                                                      ==     ===     ===
</Table>

       ----------------------

       * less than E1 million

     -  Capital expenditures, amortization and depreciation relate to intangible
        assets, property, plant and equipment.

     -  The research and development expenses are those reflected in the income
        statement.

                                       F-19
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

KEY DATA BY BUSINESS SEGMENT
<Table>
<Caption>
                                    PHARMACEUTICALS      CONSUMER
                                     & BIOLOGICAL         CARE &             CROP            ANIMAL         PLASTICS &
                                       PRODUCTS         DIAGNOSTICS       PROTECTION         HEALTH           RUBBER
                                    ---------------   ---------------   ---------------   -------------   ---------------
BUSINESS SEGMENTS                    2001     2000     2001     2000     2001     2000    2001    2000     2001     2000
-----------------                   ------   ------   ------   ------   ------   ------   -----   -----   ------   ------
                                                                         (E MILLION)
<S>                                 <C>      <C>      <C>      <C>      <C>      <C>      <C>     <C>     <C>      <C>
Net sales (external).............    5,729    6,140    4,104    3,888    2,708    2,456     988     999    5,581    5,816
-- Change in E...................    (6.7%)   22.7%     5.6%    15.6%    10.3%    12.8%   (1.1%)   8.9%    (4.0%)   25.7%
-- Change in local currencies....    (6.7%)   11.9%     5.0%     5.4%    10.7%     3.9%   (1.1%)  (1.4%)   (5.0%)   19.5%
Intersegment sales...............       38       39        2        0      102       97       5       6      116      122
Other operating income...........       62       90       49       51      102       38      13      41       87       28
Operating result before
 exceptional items...............      383    1,165      388      311      453      401     172     157      288      560
Return on sales before
 exceptional items...............     6.7%    19.0%     9.5%     8.0%    16.7%    16.3%   17.4%   15.7%     5.2%     9.6%
Exceptional items................     (332)      (5)     (47)    (134)       0        1       0      25      (50)     (45)
Operating result.................       51    1,160      341      177      453      402     172     182      238      515
Return on sales including
 exceptional items...............     0.9%    18.9%     8.3%     4.6%    16.7%    16.4%   17.4%   18.2%     4.3%     8.9%
Gross cash flow..................      229    1,048      534      371      550      397     163     160      587      802
Capital invested.................    5,352    5,267    3,799    3,650    3,884    3,664     645     725    6,405    6,456
CFROI............................     4.2%    21.3%    14.0%    10.4%    13.9%    14.0%   22.8%   20.0%     8.9%    12.7%
Equity-method income.............        0        0        0        0        0        0       0       0        0       (1)
Equity-method investments........       16       20        0        0        0        0       0       0       27       23
Total assets.....................    5,303    5,291    3,956    3,480    3,488    3,218     734     768    5,867    6,176
Capital expenditures.............      415      553      267      192      215      233      49      50      592      652
Amortization and depreciation....      364      273      291      256      247      143      40      40      482      446
Liabilities......................    1,869    2,202    1,271    1,158    1,130      947     379     337    1,339    1,696
Research and development
 expenses........................    1,242    1,096      252      266      292      276      98      94      134      128
Number of employees (as of Dec.
 31).............................   26,800   27,200   14,900   15,100   10,900   11,000   3,900   3,900   17,900   18,500

<Caption>
                                   POLYURETHANES,
                                     COATINGS &
                                      COLORANTS         CHEMICALS
                                   ---------------   ---------------
BUSINESS SEGMENTS                   2001     2000     2001     2000
-----------------                  ------   ------   ------   ------
                                              (E MILLION)
<S>                                <C>      <C>      <C>      <C>
Net sales (external).............   5,207    5,076    3,749    3,410
-- Change in E...................    2.6%    30.0%     9.9%    19.4%
-- Change in local currencies....    2.1%    23.4%    10.0%    13.3%
Intersegment sales...............     138      462      456      466
Other operating income...........      51       42       53       35
Operating result before
 exceptional items...............     146      518      271      370
Return on sales before
 exceptional items...............    2.8%    10.2%     7.2%    10.9%
Exceptional items................    (100)     (45)     (68)      24
Operating result.................      46      473      203      394
Return on sales including
 exceptional items...............    0.9%     9.3%     5.4%    11.6%
Gross cash flow..................     614      754      379      497
Capital invested.................   8,051    8,011    4,774    4,665
CFROI............................    7.5%    10.7%     7.7%    11.0%
Equity-method income.............       0        0        0        5
Equity-method investments........     773      616       13       18
Total assets.....................   7,493    7,568    4,216    4,421
Capital expenditures.............     492      359      483      424
Amortization and depreciation....     604      466      334      293
Liabilities......................   2,311    1,737    1,797    1,813
Research and development
 expenses........................     186      151      114      105
Number of employees (as of Dec.
 31).............................  15,100   16,100   19,500   20,500
</Table>

<Table>
<Caption>
                                                                             CONTINUING        DISCONTINUING
                                                        RECONCILIATION       OPERATIONS         OPERATIONS         BAYER GROUP
                                                        ---------------   -----------------   ---------------   -----------------
BUSINESS SEGMENTS                                        2001     2000     2001      2000      2001     2000     2001      2000
-----------------                                       ------   ------   -------   -------   ------   ------   -------   -------
<S>                                                     <C>      <C>      <C>       <C>       <C>      <C>      <C>       <C>
Net sales (external)..................................     872      830    28,938    28,615    1,337    2,356    30,275    30,971
-- Change in E........................................                       1.1%     21.4%                       (2.2%)    13.4%
-- Change in local currencies.........................                       0.8%     12.1%                       (2.5%)     4.5%
Intersegment sales....................................    (857)  (1,192)
Other operating income................................      63      100       480       425      340       37       820       462
Operating result before exceptional items.............    (246)    (273)    1,855     3,209       76      247     1,931     3,456
Return on sales before exceptional items..............                       6.4%     11.2%                        6.4%     11.2%
Exceptional items.....................................     (16)      34      (613)     (145)     293      (24)     (320)     (169)
Operating result......................................    (262)    (239)    1,242     3,064      369      223     1,611     3,287
Return on sales including exceptional items...........                       4.3%     10.7%                        5.3%     10.6%
Gross cash flow.......................................    (230)    (182)    2,826     3,847       97      317     2,923     4,164
Capital invested......................................     556      441    33,466    32,879    1,392    2,183    34,858    35,062
CFROI.................................................                       8.3%     12.6%                        8.2%     12.7%
Equity-method income..................................      12       (5)       12        (1)      14       72        26        71
Equity-method investments.............................     158      182       987       859      179      487     1,166     1,346
Total assets..........................................   4,933    3,529    35,990    34,451    1,049    2,000    37,039    36,451
Capital expenditures..................................      40       23     2,553     2,486       64      161     2,617     2,647
Amortization and depreciation.........................      41       73     2,403     1,990      113      149     2,516     2,139
Liabilities...........................................   9,616    9,363    19,712    19,253      307      821    20,019    20,074
Research and development expenses.....................     170      203     2,488     2,319       71       74     2,559     2,393
Number of employees (as of Dec. 31)...................   3,000    1,600   112,000   113,900    4,900    8,200   116,900   122,100
</Table>

                                       F-20
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

KEY DATA BY BUSINESS SEGMENT
<Table>
<Caption>
                                          PHARMACEUTICAL       CONSUMER
                                           & BIOLOGICAL         CARE &             CROP                             PLASTICS &
                                             PRODUCTS         DIAGNOSTICS       PROTECTION       ANIMAL HEALTH        RUBBER
                                          ---------------   ---------------   ---------------   ---------------   ---------------
BUSINESS SEGMENTS                          2000     1999     2000     1999     2000     1999     2000     1999     2000     1999
-----------------                         ------   ------   ------   ------   ------   ------   ------   ------   ------   ------
                                                                                (E MILLION)
<S>                                       <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Net sales (external)....................   6,140    5,003    3,888    3,364    2,456    2,177      999      917    5,816    4,627
-- Change in E..........................   22.7%    15.3%    15.6%    25.1%    12.8%     6.5%     8.9%     3.5%    25.7%     6.8%
-- Change in local currencies...........   11.9%    11.2%     5.4%    21.7%     3.9%     3.5%    (1.4%)    0,2%    19.5%     5.6%
Intersegment sales......................      39       51        0        1       97       83        6        6      122      114
Other operating income..................      90      105       51       33       38       98       41       12       28      116
Operating result before exceptional
 items..................................   1,165      922      311      173      401      383      157      137      560      443
Return on sales before exceptional
 items..................................   19.0%    18.4%     8.0%     5.1%    16.3%    17.6%    15.7%    14.9%     9.6%     9.6%
Exceptional items.......................      (5)     (90)    (134)    (157)       1       49       25      (36)     (45)    (189)
Operating result........................   1,160      832      177       16      402      432      182      101      515      254
Return on sales including exceptional
 items..................................   18.9%    16.6%     4.6%     0.5%    16.4%    19.8%    18.2%    11.0%     8.9%     5.5%
Gross cash flow.........................   1,048      828      371      245      397      395      160      134      802      555
Capital invested........................   5,267    4,723    3,650    3,438    3,664    2,346      725      794    6,456    6,129
CFROI...................................   21.3%    19.5%    10.4%     7,1%    14.0%    17.6%    20.0%    17.7%    12.7%     9.8%
Equity-method income....................       0       (8)       0        0        0        2        0        0       (1)       0
Equity-method investments...............      20       25        0        0        0       10        0        0       23       13
Total assets............................   5,291    4,535    3,480    3,247    3,218    2,410      768      812    6,176    5,163
Capital expenditures....................     553      525      192      205      233      184       50       33      652      575
Amortization and depreciation...........     273      268      256      260      143       95       40       59      446      425
Liabilities.............................   2,202    1,661    1,158    1,090      947      744      337      208    1,696    1,535
Research and development expenses.......   1,096      953      266      240      276      277       94       93      128      119
Number of employees (as of Dec. 31).....  27,200   27,100   15,100   15,200   11,000   10,700    3,900    4,100   18,500   18,100

<Caption>
                                          POLYURETHANES,
                                            COATINGS &
                                             COLORANTS         CHEMICALS
                                          ---------------   ---------------
BUSINESS SEGMENTS                          2000     1999     2000     1999
-----------------                         ------   ------   ------   ------
                                                     (E MILLION)
<S>                                       <C>      <C>      <C>      <C>
Net sales (external)....................   5,076    3,904    3,410    2,855
-- Change in E..........................   30.0%     7.6%    19.4%     0.2%
-- Change in local currencies...........   23.4%     5.5%    13.3%     2.0%
Intersegment sales......................     462      482      466      478
Other operating income..................      42       84       35      100
Operating result before exceptional
 items..................................     518      657      370      360
Return on sales before exceptional
 items..................................   10.2%    16.8%    10.9%    12.6%
Exceptional items.......................     (45)     (38)      24      (52)
Operating result........................     473      619      394      308
Return on sales including exceptional
 items..................................    9.3%    15.9%    11.6%    10.8%
Gross cash flow.........................     754      681      497      382
Capital invested........................   8,011    4,557    4,665    4,350
CFROI...................................   10.7%    15,7%    11.0%     9,1%
Equity-method income....................       0        0        5        0
Equity-method investments...............     616        0       18        7
Total assets............................   7,568    4,178    4,421    3,814
Capital expenditures....................     359      446      424      461
Amortization and depreciation...........     466      243      293      177
Liabilities.............................   1,737    1,337    1,813    1,822
Research and development expenses.......     151      127      105       92
Number of employees (as of Dec. 31).....  16,100   15,300   20,500   20,200
</Table>

<Table>
<Caption>
                                                                           CONTINUING        DISCONTINUING
                                                    RECONCILIATION         OPERATIONS          OPERATIONS         BAYER GROUP
                                                   ----------------    ------------------    --------------    ------------------
BUSINESS SEGMENTS                                   2000      1999      2000       1999      2000     1999      2000       1999
-----------------                                  ------    ------    -------    -------    -----    -----    -------    -------
<S>                                                <C>       <C>       <C>        <C>        <C>      <C>      <C>        <C>
Net sales (external)...........................       830       725     28,615     23,572    2,356    3,748     30,971     27,320
-- Change in E.................................                          21.4%       8.9%                        13.4%      (2.6%)
-- Change in local currencies..................                          12.1%       6.4%                         4.5%      (4.7%)
Intersegment sales.............................    (1,192)   (1,215)
Other operating income.........................       100       111        425        659       37       72        462        731
Operating result before exceptional items......      (273)     (372)     3,209      2,703      247    1,231      3,456      3,934
Return on sales before exceptional items.......                          11.2%      11.5%                        11.2%      14.4%
Exceptional items..............................        34       (51)      (145)      (564)     (24)     (13)      (169)      (577)
Operating result...............................      (239)     (423)     3,064      2,139      223    1,218      3,287      3,357
Return on sales including exceptional items....                          10.7%       9.1%                        10.6%     12.3 %
Gross cash flow................................      (182)     (386)     3,847      2,834      317      358      4,164      3,192
Capital invested...............................       441       522     32,879     26,859    2,183    2,119     35,062     28,978
CFROI..........................................                          12.6%      11.0%                        12.7%      11.3%
Equity-method income...........................        (5)       (5)        (1)       (11)      72      (17)        71        (28)
Equity-method investments......................       182       210        859        265      487      448      1,346        713
Total assets...................................     3,529     5,371     34,451     29,530    2,000    1,749     36,451     31,279
Capital expenditures...........................        23        30      2,486      2,459      161      173      2,647      2,632
Amortization and depreciation..................        73        89      1,990      1,616      149      195      2,139      1,811
Liabilities....................................     9,363     7,012     19,253     15,409      821      688     20,074     16,097
Research and development expenses..............       203       176      2,319      2,077       74      175      2,393      2,252
Number of employees (as of Dec. 31)............     1,600     1,500    113,900    112,200    8,200    8,200    122,100    120,400
</Table>

                                       F-21
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

KEY DATA BY BUSINESS REGION
<Table>
<Caption>

                                              EUROPE                             NORTH AMERICA
                                 --------------------------------       --------------------------------
REGIONS                           2001         2000         1999         2001         2000         1999
-------                          ------       ------       ------       ------       ------       ------
                                                               (E MILLION)
<S>                              <C>          <C>          <C>          <C>          <C>          <C>
Net sales (external) -- by
 market........................  11,659       11,299       10,116        9,473        9,352        7,338
Net sales (external) -- by
 point of Origin...............  12,999       12,916       11,590        9,806        9,699        7,482
-- Change in E.................    0.6%        11.4%         2.1%         1.1%        29.6%        17.2%
-- Change in local
 currencies....................    0.5%        10.9%         2.1%        (1.9%)       14.1%        13.4%
Interregional sales............   3,154        3,018        2,452        1,927        1,603        1,062
Other operating income.........     312          256          547           70           62           33
Operating result before
 exceptional Items.............   1,707        2,216        2,182           23          729          578
Return on sales before
 exceptional Items.............   13.1%        17.2%        18.8%         0.2%         7.5%         7.7%
Exceptional items..............    (272)          20         (241)        (278)        (144)        (203)
Operating result...............   1,435        2,236        1,941         (255)         585          375
Return on sales including
 exceptional Items.............   11.0%        17.3%        16.7%        (2.6%)        6.0%         5.0%
Gross cash flow................   2,037        2,096        2,076          632        1,521          864
Capital invested...............  16,355       15,849       13,228       12,808       13,025       10,019
CFROI..........................   12.5%        15.2%        16.0%         4.7%        12.2%         9.1%
Equity-method income...........      12            0           (5)           0            0           (8)
Equity-method investments......     351          255          197          618          582           39
Total assets...................  17,298       15,988       15,248       12,652       12,859        9,331
Capital expenditures...........   1,620        1,440        1,363          560          749          874
Amortization and
 depreciation..................   1,227          971          736          918          818          659
Liabilities....................   9,769        8,736        7,408        6,407        6,627        4,461
Research and development
 expenses......................   1,559        1,342        1,215          690          681          601
Number of employees (as of Dec.
 31)...........................  64,600       65,700       65,800       23,200       24,100       23,100

<Caption>
                                                                                LATIN AMERICA /
                                          ASIA / PACIFIC                      AFRICA / MIDDLE EAST
                                 --------------------------------       --------------------------------
REGIONS                           2001         2000         1999         2001         2000         1999
-------                          ------       ------       ------       ------       ------       ------
                                                               (E MILLION)
<S>                              <C>          <C>          <C>          <C>          <C>          <C>
Net sales (external) -- by
 market........................   4,660        4,819        3,531        3,146        3,145        2,587
Net sales (external) -- by
 point of Origin...............   3,817        3,761        2,644        2,316        2,239        1,856
-- Change in E.................    1.5%        42.2%        32,4%         3.4%        20.6%        (3.0%)
-- Change in local
 currencies....................    7.3%        26.5%        17,2%         2.5%         7.8%        (6.2%)
Interregional sales............     226          228          152          116           98           61
Other operating income.........      48           64           37           50           43           42
Operating result before
 exceptional Items.............     241          404          209          219          213          133
Return on sales before
 exceptional Items.............    6.3%        10.7%         7.9%         9.5%         9.5%         7.2%
Exceptional items..............     (14)         (21)         (12)         (30)           0          (57)
Operating result...............     227          383          197          189          213           76
Return on sales including
 exceptional Items.............    5.9%        10.2%         7.5%         8.2%         9.5%         4.1%
Gross cash flow................     312          357          169          225          228          148
Capital invested...............   2,711        2,628        2,192        1,607        1,433        1,386
CFROI..........................   11.3%        14.3%         9.0%        14.5%        16.4%        11.2%
Equity-method income...........       0           (1)           2            0            0            0
Equity-method investments......       2            2           11           16           20           18
Total assets...................   3,132        3,085        2,683        1,834        1,723        1,588
Capital expenditures...........     255          199          127          118           98           94
Amortization and
 depreciation..................     150          118           94          104           83          124
Liabilities....................   1,382        1,489        1,512          673          672          731
Research and development
 expenses......................      68           83           72            9           10           13
Number of employees (as of Dec.
 31)...........................  12,600       12,100       11,100       11,000       11,400       11,500
</Table>
<Table>
<Caption>

                                                        RECONCILIATION           CONTINUING OPERATIONS
                                                   ------------------------   ---------------------------
REGIONS                                             2001     2000     1999     2001      2000      1999
-------                                            ------   ------   ------   -------   -------   -------
                                                                        (E MILLION)
<S>                                                <C>      <C>      <C>      <C>       <C>       <C>
Net sales (external) -- by Market................                              28,938    28,615    23,572
Net sales (external) -- by point of origin.......                              28,938    28,615    23,572
-- Change in E...................................                                1.1%     21.4%      8.9%
-- Change in local currencies....................                                0.8%     12.1%      6.4%
Interregional sales..............................  (5,423)  (4,947)  (3,727)
Other operating income...........................                                 480       425       659
Operating result before exceptional Items........    (335)    (353)    (399)    1,855     3,209     2,703
Return on sales before exceptional Items.........                                6.4%     11.2%     11.5%
Exceptional items................................     (19)       0      (51)     (613)     (145)     (564)
Operating result.................................    (354)    (353)    (450)    1,242     3,064     2,139
Return on sales including exceptional items......                                4.3%     10.7%      9.1%
Gross cash flow..................................    (380)    (355)    (423)    2,826     3,847     2,834
Capital invested.................................     (15)     (56)      34    33,466    32,879    26,859
CFROI............................................                                8.3%     12.6%     11,0%
Equity-method income.............................                                  12        (1)      (11)
Equity-method investments........................                                 987       859       265
Total assets.....................................   1,074      796      680    35,990    34,451    29,530
Capital expenditures.............................       0        0        1     2,553     2,486     2,459
Amortization and depreciation....................       4        0        3     2,403     1,990     1,616
Liabilities......................................   1,481    1,729    1,297    19,712    19,253    15,409
Research and development expenses................     162      203      176     2,488     2,319     2,077
Number of employees (as of Dec. 31)..............     600      600      700   112,000   113,900   112,200

<Caption>
                                                        DISCONTINUING
                                                          OPERATIONS                  BAYER GROUP
                                                   ------------------------   ---------------------------
REGIONS                                             2001     2000     1999     2001      2000      1999
-------                                            ------   ------   ------   -------   -------   -------
                                                                        (E MILLION)
<S>                                                <C>      <C>      <C>      <C>       <C>       <C>
Net sales (external) -- by Market................   1,337    2,356    3,748    30,275    30,971    27,320
Net sales (external) -- by point of origin.......   1,337    2,356    3,748    30,275    30,971    27,320
-- Change in E...................................                               (2.2%)    13.4%     (2.6%)
-- Change in local currencies....................                               (2.5%)     4.5%     (4.7%)
Interregional sales..............................
Other operating income...........................     340       37       72       820       462       731
Operating result before exceptional Items........      76      247    1,231     1,931     3,456     3,934
Return on sales before exceptional Items.........                                6.4%     11.2%     14.4%
Exceptional items................................     293      (24)     (13)     (320)     (169)     (577)
Operating result.................................     369      223    1,218     1,611     3,287     3,357
Return on sales including exceptional items......                                5.3%     10.6%     12.3%
Gross cash flow..................................      97      317      358     2,923     4,164     3,192
Capital invested.................................   1,392    2,183    2,119    34,858    35,062    28,978
CFROI............................................                                8.2%     12.7%     11.3%
Equity-method income.............................      14       72      (17)       26        71       (28)
Equity-method investments........................     179      487      448     1,166     1,346       713
Total assets.....................................   1,049    2,000    1,749    37,039    36,451    31,279
Capital expenditures.............................      64      161      173     2,617     2,647     2,632
Amortization and depreciation....................     113      149      195     2,516     2,139     1,811
Liabilities......................................     307      821      688    20,019    20,074    16,097
Research and development expenses................      71       74      175     2,559     2,393     2,252
Number of employees (as of Dec. 31)..............   4,900    8,200    8,200   116,900   122,100   120,400
</Table>

                                       F-22
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

[8]  INCOME FROM INVESTMENTS IN AFFILIATED COMPANIES -- NET

     This comprises the following items:

<Table>
<Caption>
                                                                2001    2000    1999
                                                                ----    ----    ----
                                                                    (E MILLION)
<S>                                                             <C>     <C>     <C>
Dividends and similar income................................      15      18       9
-  of which E12 million (2000: E8 million; 1999: E2 million)
   from subsidiaries
Income from profit and loss transfer agreements.............       *       1       1
-  of which less than E1 million (2000: E1 million; 1999: E1
   million) from subsidiaries
Income (Expense) from companies included at equity..........      26      71     (28)
Gains from the sale of investments in affiliated
  companies.................................................      16     204       0
Losses from the sale of investments in affiliated
  companies.................................................      (3)     (1)     (2)
Write-downs of investments in affiliated companies..........       0     (10)    (11)
                                                                ----    ----    ----
                                                                  54     283     (31)
                                                                ====    ====    ====
</Table>

---------------
* less than E1 million

     In the previous year this item contained the E65 million gain from the sale
of the 11 percent interest in Myriad Genetics, Salt Lake City, Utah, E142
million gain from the sale of the 25 percent interest in Schein Pharmaceutical
Inc., Florham Park, New Jersey and the equity income from the Agfa-Gevaert
group.

[9]  INTEREST EXPENSE -- NET

     Interest income and expense comprises:

<Table>
<Caption>
                                                                2001    2000    1999
                                                                ----    ----    ----
                                                                    (E MILLION)
<S>                                                             <C>     <C>     <C>
Income from other securities and loans included in
  investments...............................................       9      10      16
Other interest and similar income...........................     108     143     150
-  of which E1 million (2000: E4 million; 1999: E3 million)
   from subsidiaries
Interest and similar expenses...............................    (466)   (464)   (362)
-  of which E5 million (2000: E24 million; 1999: E4 million)
   to subsidiaries
                                                                ----    ----    ----
                                                                (349)   (311)   (196)
                                                                ====    ====    ====
</Table>

     Finance leases are capitalized under property, plant and equipment in
compliance with IAS 17 (Leases). The interest portion of the lease payments,
amounting to E9 million in 2001, 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
2001 to E30 million (2000: E28 million; 1999: E32 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.

                                       F-23
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

[10] OTHER NON-OPERATING EXPENSE -- NET

     This item comprises:

<Table>
<Caption>
                                                              2001    2000    1999
                                                              ----    ----    ----
                                                                  (E MILLION)
<S>                                                           <C>     <C>     <C>
Interest portion of interest-bearing provisions.............  (274)   (272)   (275)
Net Exchange gain (loss)....................................    49     (21)    (27)
Miscellaneous non-operating expenses........................   (28)    (18)    (13)
Miscellaneous non-operating income..........................    52      42      21
                                                              ----    ----    ----
                                                              (201)   (269)   (294)
                                                              ====    ====    ====
</Table>

     Miscellaneous non-operating income includes E25 million (2000: E18 million;
1999: E9 million) in gains from the sale of marketable securities.

[11] INCOME TAXES

     This item comprises the income taxes paid or accrued in the individual
countries, plus deferred 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 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.

     The breakdown of pre-tax income and income tax expense by origin is as
follows:

<Table>
<Caption>
                                                              2001     2000     1999
                                                              -----    -----    -----
                                                                    (E MILLION)
<S>                                                           <C>      <C>      <C>
Income before income taxes
-- Germany..................................................    971    1,482    2,087
-- Other countries..........................................    144    1,508      749
                                                              -----    -----    -----
                                                              1,115    2,990    2,836
                                                              =====    =====    =====
Income taxes paid or accrued
-- Germany..................................................    122      442       71
-- Other countries..........................................    502      321      429
                                                              -----    -----    -----
                                                                624      763      500
Deferred taxes
-- from temporary differences...............................   (272)     383      305
-- from loss carry-forwards.................................   (198)       2       13
                                                              -----    -----    -----
                                                               (470)     385      318
                                                              -----    -----    -----
                                                                154    1,148      818
                                                              =====    =====    =====
</Table>

     A valuation allowance is recognized against tax loss carryforwards when it
is not sufficiently certain that this income will be realized.

     Changes in tax rates diminished deferred tax expense for 2001 by E8 million
(2000: E21 million; 1999: E41 million increase).

     Deferred taxes -- computed according to IAS 12 (Income Taxes) -- result
primarily from temporary differences between the accounting and tax balance
sheets of the individual consolidated companies with regard to the recognition
and/or valuation of certain items.

                                       F-24
<PAGE>
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:

<Table>
<Caption>
                               DEC. 31, 2001                 DEC. 31, 2000                 DEC. 31, 1999
                        ---------------------------   ---------------------------   ---------------------------
                        DEFERRED TAX   DEFERRED TAX   DEFERRED TAX   DEFERRED TAX   DEFERRED TAX   DEFERRED TAX
                           ASSETS      LIABILITIES       ASSETS      LIABILITIES       ASSETS      LIABILITIES
                        ------------   ------------   ------------   ------------   ------------   ------------
                                                              (E MILLION)
<S>                     <C>            <C>            <C>            <C>            <C>            <C>
Intangible assets.....        438            177            87             72            101             28
Property, plant and
  equipment...........        243          1,672            68          1,745             18          1,409
Investments...........         20             88             2             79             10             40
Inventories...........        267             86           298             86            266             92
Receivables...........        122             53           116             51             76             28
Other current
  assets..............         11            189            51            132              5             74
Pension provisions....        357            247           327            202            265            131
Other provisions......        166             74           144             46            210             26
Other liabilities.....        158             30           163             40            150             32
Loss carry-forwards...        282             --            82             --             76             --
Valuation allowance
  for loss
  carry-forwards......        (78)            --           (67)            --            (67)            --
                           ------         ------         -----          -----          -----          -----
                            1,986          2,616         1,271          2,453          1,110          1,860
Set-off*..............     (1,378)        (1,378)         (858)          (858)          (703)          (703)
                           ------         ------         -----          -----          -----          -----
                              608          1,238           413          1,595            407          1,157
                           ======         ======         =====          =====          =====          =====
</Table>

---------------

* 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 2001, deferred tax assets of E9 million and deferred tax liabilities of
E10 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 2001 by E88 million (2000: E7 million; 1999: E9 million).

     The value of existing loss carryforwards by expiration date is as follows:

<Table>
<Caption>
                                                        DEC. 31, 2001    DEC. 31, 2000    DEC. 31, 1999
                                                        -------------    -------------    -------------
                                                                          (E MILLION)
<S>                                                     <C>              <C>              <C>
One year............................................           6                3               --
Two years...........................................          11               20                3
Three years.........................................          16               11               20
Four years..........................................          50               22               11
Five years and thereafter...........................         653              196              174
                                                             ---              ---              ---
                                                             736              252              208
                                                             ===              ===              ===
</Table>

     Deferred tax assets of E204 million (2000: E15 million; 1999: E9 million)
are recognized on the E540 million (2000: E48 million; 1999: E27 million) of
loss carryforwards that represent income likely to be realized in the future.
Recognition of these deferred tax assets results in deferred tax income of E198
million.

     Deferred tax liabilities have not been recognized for temporary differences
associated with investments in foreign subsidiaries of E3,030 million (2000:
E2,887 million, 1999: E2,617 million) as Bayer has determined that 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. For most countries, double taxation
agreements ensure that any withholding taxes paid can be deducted from the tax
base or the tax to be paid in Germany.

                                       F-25
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     The actual income tax expense for 2001 of E154 million (2000: E1,148
million, 1999: E818 million) is E259 million (2000: E31 million, 1999: E394
million) less than the E413 million (2000: E1,179 million, 1999: E1,212 million)
that would result from applying to the pre-tax income of the Group a tax rate of
37.1 percent (2000: 39.5 percent, 1999: 42.7 percent), which is the weighted
average of the theoretical tax rates for the individual Group companies.

     The reconciliation of theoretical to actual income tax expense for the
Group is as follows:

<Table>
<Caption>
                                                      2001              2000              1999
                                                 ---------------   ---------------   ---------------
                                                 E MILLION    %    E MILLION    %    E MILLION    %
                                                 ---------   ---   ---------   ---   ---------   ---
<S>                                              <C>         <C>   <C>         <C>   <C>         <C>
Theoretical income tax expense.................     413      100     1,179     100     1,212     100
Lower taxes due to tax-free income.............    (283)     (68)     (151)    (13)     (434)    (36)
Higher taxes due to non-tax-deductible
  expenses.....................................      47       11        93       8        90       7
Other tax effects..............................     (23)      (5)       27       2       (50)     (4)
                                                   ----      ---     -----     ---     -----     ---
ACTUAL INCOME TAX EXPENSE......................     154       38     1,148      97       818      67
                                                   ====      ===     =====     ===     =====     ===
Effective tax rate in %........................    13.8               38.4              28.8
                                                   ----              -----             -----
</Table>

[12] OTHER TAXES

     Other taxes amounting to E247 million (2000: E229 million; 1999: E189
million) are included in the cost of goods sold, selling expenses, research and
development expenses or general administration expenses. These are mainly
property-related taxes.

[13] MINORITY STOCKHOLDERS' INTEREST

     Minority interest in income amounts to E6 million (2000: E29 million; 1999:
E16 million), and minority interest in losses to E10 million (2000: E3 million;
1999: E0 million), adding E4 million to (2000: subtracting E26 million from;
1999: subtracting E16 million from) income after taxes.

[14] EARNINGS PER SHARE

     Earnings per share are determined according to IAS 33 (Earnings Per Share)
by dividing the net income by the average number of shares.

     In 2001, in 2000 and in 1999 the number of shares remained constant at
730,341,920. Earnings per share were E1.32 (2000: E2.49; 1999: E2.74).

     There were no subscription rights outstanding in 2001, in 2000 or in 1999,
and therefore no dilutive potential shares.

[15] COST OF MATERIALS

     The total cost of materials for continuing operations amounted to E11,057
million (2000: E10,040 million; 1999: E7,041 million), comprising E10,361
million (2000: E9,380 million; 1999: E6,495 million) in expenses for raw
materials, supplies and goods purchased for resale, and E696 million (2000: E660
million; 1999: E546 million) in expenses for purchased services.

     The cost of materials for the discontinuing operations was E533 million
(2000: E1,168 million; 1999: E2,101 million). While Erdolchemie incurred costs
of E153 million (2000: E545 million; 1999: E371 million) entirely for raw
materials and supplies, Haarmann & Reimer accounted for E344 million (2000: E393
million; 1999: E333 million), including E10 million (2000: E10 million; 1999: E4
million) for purchased services. Fibers accounted for E36 million (2000: E126
million; 1999: E92 million), including E10 million (2000: E23 million; 1999: E20
million) for purchased services. In 2000, DyStar accounted for E104 million
(1999: E125 mil-

                                       F-26
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

lion), which included E1 million (1999: E1 million) for purchased services. In
1999 Agfa accounted for E1,180 million, which included E14 million for purchased
services.

[16] PERSONNEL EXPENSES

     Personnel expenses for continuing operations rose in 2001 by E281 million
to E7,576 million. Of the increase, E43 million is due to exchange rate
fluctuations.

     The breakdown of personnel expenses is as follows:
<Table>
<Caption>
                                                                        DISCONTINUING OPERATIONS
                                       CONTINUING         -----------------------------------------------------
                                       OPERATIONS                 EC                   FS               HR
                                  ---------------------   ------------------   ------------------   -----------
                                  2001    2000    1999    2001   2000   1999   2001   2000   1999   2001   2000
                                  -----   -----   -----   ----   ----   ----   ----   ----   ----   ----   ----
<S>                               <C>     <C>     <C>     <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>
Wages and salaries..............  6,005   5,814   5,210   18..    55     56     32     54     54    188    184
Social Expenses.................  1,571   1,481   1,347   5..     15     22      6     13     12     47     39
Of which pension expenses.......  [430]   [397]   [353]   [2]... [5]    [12]   [*]    [3]    [1]    [14]   [8]
                                  -----   -----   -----    --     --    ---     --     --     --    ---    ---
                                  7,576   7,295   6,557   23..    70     78     38     67     66    235    223
                                  =====   =====   =====    ==     ==    ===     ==     ==     ==    ===    ===

<Caption>
                                  DISCONTINUING OPERATIONS
                                  -------------------------
                                   HR      DYSTAR      AGFA
                                  ----   -----------   ----
                                  1999   2000   1999   1999
                                  ----   ----   ----   ----
<S>                               <C>    <C>    <C>    <C>
Wages and salaries..............  164     67     64    417
Social Expenses.................   30     13     12    161
Of which pension expenses.......  [1]    [3]    [3]    [76]
                                  ---     --     --    ---
                                  194     80     76    578
                                  ===     ==     ==    ===
</Table>

---------------

* less than E1 million

[17] NUMBER OF EMPLOYEES

     The average number of employees in continuing operations, classified by
corporate functions, was as follows:

<Table>
<Caption>
                                                               2001       2000       1999
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Marketing...................................................   33,768     33,191     33,186
Technology..................................................   60,168     59,923     59,356
Research....................................................   11,150     11,007     11,520
Administration..............................................    8,972      9,426      9,567
                                                              -------    -------    -------
                                                              114,058    113,547    113,629
                                                              =======    =======    =======
Of which trainees...........................................    2,641      2,667      2,618
                                                              -------    -------    -------
</Table>

     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 2001 was 1,075 (2000: 1,048; 1999:
1,121).

     The figures in the above table do not include people employed in
discontinuing operations. In 2001, Haarmann & Reimer employed on average 3,660
people (2000: 3,742; 1999: 3,882); Fibers employed on average 1,169 people
(2000: 1,643; 1999: 1,645).

[18] 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.

     Goodwill, including that resulting from capital consolidation, is
capitalized in accordance with IAS 22 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 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.

     Self-created intangible assets are not capitalized.

                                       F-27
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     Certain development costs relating to the application development stage of
internally developed software are capitalized in the Group balance sheet. These
costs are amortized over their useful life from the date they are placed in
service. Changes in intangible assets in 2001 were as follows:

<Table>
<Caption>
                                                      ACQUIRED
                                                    CONCESSIONS,
                                                 INDUSTRIAL PROPERTY
                                                   RIGHTS, SIMILAR
                                                 RIGHTS AND ASSETS,
                                                    AND LICENSES        ACQUIRED    ADVANCE
                                                     THEREUNDER         GOODWILL    PAYMENTS    TOTAL
                                                 -------------------    --------    --------    -----
                                                                     (E MILLION)
<S>                                              <C>                    <C>         <C>         <C>
Gross carrying amounts, Dec. 31, 2000........           4,566            1,289         71       5,926
Exchange differences.........................             146               31          2         179
Changes in scope of consolidation............             (17)              50         --          33
Acquisitions.................................             266               50         --         316
Capital expenditures.........................             362               --         44         406
Retirements..................................            (155)             (22)        (2)       (179)
Transfers....................................              72                1        (73)         --
                                                        -----            -----        ---       -----
GROSS CARRYING AMOUNTS, DEC. 31, 2001........           5,240            1,399         42       6,681
                                                        -----            -----        ---       -----
Accumulated amortization and write-downs,
  Dec. 31, 2000..............................             772              311         --       1,083
Exchange differences.........................              27                7         --          34
Changes in scope of consolidation............              (9)              (3)        --         (12)
Amortization and write-downs in 2001.........             554              115         --         669
-  of which write-downs......................             [2]             [--]       [--]         [2]
Write-backs..................................              (1)              --         --          (1)
Retirements..................................            (100)              (6)        --        (106)
Transfers....................................              --               --         --          --
                                                        -----            -----        ---       -----
ACCUMULATED AMORTIZATION AND WRITE-DOWNS,
  DEC. 31, 2001..............................           1,243              424         --       1,667
                                                        -----            -----        ---       -----
NET CARRYING AMOUNTS, DEC. 31, 2001..........           3,997              975         42       5,014
                                                        -----            -----        ---       -----
Net carrying amounts, Dec. 31, 2000..........           3,794              978         71       4,843
                                                        =====            =====        ===       =====
</Table>

     The exchange differences are the differences between the carrying amounts
at the beginning and the end of the year that result from translating foreign
companies' figures at the respective different exchange rates and changes in
their assets during the year at the average rate for the year.

[19] 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. Writedowns 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.

                                       F-28
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     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.

     When assets are retired, 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:

<Table>
<S>                                                          <C>
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...................................................    4 to 8 years
Computer equipment.........................................    3 to 5 years
Furniture and fixtures.....................................   4 to 10 years
</Table>

     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.
The leased assets are depreciated over their estimated useful life except where
subsequent transfer of title is uncertain, in which case they are depreciated
over their estimated useful life or the respective lease term, whichever is
shorter. The future lease payments are recorded as financial obligations.

                                       F-29
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     Changes in property, plant and equipment in 2001 were as follows:

<Table>
<Caption>
                                                                                     CONSTRUCTION IN
                                                                                      PROGRESS AND
                                                                       FURNITURE,        ADVANCE
                                                      MACHINERY AND   FIXTURES AND     PAYMENTS TO
                                          LAND AND      TECHNICAL        OTHER         VENDORS AND
                                          BUILDINGS     EQUIPMENT      EQUIPMENT       CONTRACTORS     TOTAL
                                          ---------   -------------   ------------   ---------------   ------
                                                                      (E MILLION)
<S>                                       <C>         <C>             <C>            <C>               <C>
Gross carrying amounts, Dec. 31, 2000...    7,978        19,986          2,513            1,262        31,739
Exchange differences....................       91           318             20               32           461
Changes in scope of consolidation.......     (165)         (991)           (51)             (60)       (1,267)
Acquisitions............................       --            --             --               --            --
Capital expenditures....................       78           373            250            1,510         2,211
Retirements.............................     (144)         (732)          (349)             (29)       (1,254)
Transfers...............................      310           590            117           (1,017)           --
                                            -----        ------          -----           ------        ------
GROSS CARRYING AMOUNTS, DEC. 31, 2001...    8,148        19,544          2,500            1,698        31,890
                                            -----        ------          -----           ------        ------
Accumulated depreciation and
  write-downs, Dec. 31, 2000............    4,092        12,583          1,712                7        18,394
Exchange differences....................       31           153             12               --           196
Changes in scope of consolidation.......     (114)         (811)           (41)              --          (966)
Depreciation and write-downs in 2001....      274         1,276            286               11         1,847
-  of which write-downs.................     [--]          [38]            [1]             [11]          [50]
Retirements.............................     (118)         (710)          (296)              --        (1,124)
Transfers...............................        3            (5)             2               --            --
                                            -----        ------          -----           ------        ------
ACCUMULATED DEPRECIATION AND
  WRITE-DOWNS, DEC. 31, 2001............    4,168        12,486          1,675               18        18,347
                                            -----        ------          -----           ------        ------
NET CARRYING AMOUNTS, DEC. 31, 2001.....    3,980         7,058            825            1,680        13,543
                                            -----        ------          -----           ------        ------
Net carrying amounts, Dec. 31, 2000.....    3,886         7,403            801            1,255        13,345
                                            =====        ======          =====           ======        ======
</Table>

     The exchange differences are as defined for intangible assets.

     Capitalized property, plant and equipment includes assets with a total net
value of E588 million (2000: E199 million) held under finance leases. The gross
carrying amounts of these assets total E1,229 million (2000: E277 million).
These assets are mainly machinery and technical equipment with a carrying amount
of E425 million (gross amount E975 million) and buildings with a carrying amount
of E106 million (gross amount E141 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.

     Also included are products leased to other parties under operating leases
with a carrying amount of E381 million (2000: E247 million), the gross carrying
amount of the assets concerned being E753 million (2000: E717 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

     Investments in non-consolidated subsidiaries and other affiliated companies
are generally carried individually at cost. Where other affiliated companies or
other securities included in investments are classified as held-to-maturity
investments or available-for-sale financial assets, they are recognized in
compliance with IAS 39 (Financial Instruments: Recognition and Measurement) at
amortized cost or fair value. Where evidence exists that

                                       F-30
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

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.

     The cost of acquisition of investments in companies included at equity is
adjusted annually in line with any changes in these companies' total
stockholders' equity. In the first-time consolidation, differences between the
cost of acquisition and the underlying equities at the dates of acquisition of
the investments are allocated to assets or liabilities by the same method
applied to fully consolidated subsidiaries. Loans receivable that are
interest-free or bear low rates of interest are carried at present value; other
loans receivable are carried at nominal value.

     Changes in investments in 2001 were as follows:

<Table>
<Caption>
                                                                  INVESTMENTS IN OTHER
                                                                  AFFILIATED COMPANIES     LOANS TO
                                                                 ----------------------     OTHER
                                 INVESTMENTS IN     LOANS TO     ASSOCIATED     OTHER     AFFILIATED     OTHER      OTHER
                                  SUBSIDIARIES    SUBSIDIARIES   COMPANIES    COMPANIES   COMPANIES    SECURITIES   LOANS   TOTAL
                                 --------------   ------------   ----------   ---------   ----------   ----------   -----   -----
                                                                           (E MILLION)
<S>                              <C>              <C>            <C>          <C>         <C>          <C>          <C>     <C>
Gross carrying amounts, Dec.
  31, 2000.....................        232               3         1,469         157           14          150       243    2,268
Fair value, January 1, 2001....         --              --            --       1,328           --            4        --    1,332
Exchange differences...........          3              --            34           2           (1)           6         1       45
Changes in scope of
  consolidation................        (98)             (3)          105           4           --            1       (13)      (4)
Changes of Fair Values.........         --              --            --        (768)          --           (4)       --     (772)
Acquisitions...................          8              --            24         140           --           --        --      172
Other additions................         41              --           158          35           --           37        31      302
Retirements....................         (4)             --           (37)        (20)          --          (18)      (35)    (114)
Transfers......................         --              --          (463)        463           --           20       (20)      --
                                      ----            ----         -----        ----         ----         ----      ----    -----
GROSS CARRYING AMOUNTS, DEC.
  31, 2001.....................        182              --         1,290       1,341           13          196       207    3,229
Accumulated write-downs, Dec.
  31, 2000.....................         14              --            83          --           --            1        14      112
Exchange differences...........         --              --            --          --           --           --        (1)      (1)
Changes in scope of
  consolidation................         --              --           (25)         --           --           --        --      (25)
Write-downs in 2001............         --              --             2          --           --            2        --        4
Write-backs....................         --              --            (2)         --           --           --        (1)      (3)
Retirements....................         --              --            --          --           --           (3)       --       (3)
Transfers......................         --              --            --          --           --            3        (3)      --
                                      ----            ----         -----        ----         ----         ----      ----    -----
ACCUMULATED WRITE-DOWNS, DEC.
  31, 2001.....................         14              --            58          --           --            3         9       84
                                      ----            ----         -----        ----         ----         ----      ----    -----
NET CARRYING AMOUNTS, DEC. 31,
  2001.........................        168              --         1,232       1,341           13          193       198    3,145
                                      ----            ----         -----        ----         ----         ----      ----    -----
Net carrying amounts, Dec. 31,
  2000.........................        218               3         1,386         157           14          149       229    2,156
                                      ====            ====         =====        ====         ====         ====      ====    =====
</Table>

     The exchange differences are as defined for intangible assets.

     The additions to investments in associated companies relate mainly to a
manufacturing company being established jointly with Lyondell and the first-time
inclusion of DyStar GmbH at equity. The difference between the equity interest
in the underlying net assets of companies included at equity and their at-equity
accounting values is E45 million (2000: E91 million). It relates primarily to
goodwill. Since Bayer no longer exerts significant influence over Agfa-Gevaert
N.V., Belgium, Bayer's 30 percent interest in this company, which was previously
valued at equity, is included at fair value under investments in other
companies.

[21] INVENTORIES

     Raw materials, supplies, and goods purchased for resale are valued at the
cost of acquisition; work in process and finished goods are valued at the cost
of production. If the inventory values are lower at the closing date because of
a drop in market prices, for example, the lower amounts are shown. Of the E5,818
million (2000: E6,095 million) in inventories carried as of December 31, 2001,
E824 million (2000: E431 million) represents those included at their net
realizable value.

     Inventories are normally valued by the weighted-average method.

                                       F-31
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     The cost of production 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 for 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.

     Work in process and finished goods are grouped together in light of the
production sequences characteristic of the chemical industry. Inventories are
comprised as follows:

<Table>
<Caption>
                                                              DEC. 31, 2001    DEC. 31, 2000
                                                              -------------    -------------
                                                                       (E MILLION)
<S>                                                           <C>              <C>
Raw materials and supplies..................................      1,179            1,041
Work in process, finished goods and goods purchased for
  resale....................................................      4,626            5,046
Advance payments............................................         13                8
                                                                  -----            -----
                                                                  5,818            6,095
                                                                  =====            =====
</Table>

     The changes in inventory write-downs are as follows:

<Table>
<Caption>
                                                              DEC. 31, 2001    DEC. 31, 2000
                                                              -------------    -------------
                                                                       (E MILLION)
<S>                                                           <C>              <C>
Balance at the beginning of the year........................      (241)            (248)
Additions charged to expense................................      (362)            (218)
Exchange differences........................................        (2)              (9)
Changes in scope of consolidation...........................        17               --
Deductions due to utilization...............................       154              234
                                                                  ----             ----
BALANCE AT THE END OF YEAR..................................      (434)            (241)
                                                                  ====             ====
</Table>

[22] TRADE ACCOUNTS RECEIVABLE

     Trade accounts receivable are stated at nominal value, less write-downs of
E222 million (2000: E204 million) for amounts unlikely to be recovered.

     Trade accounts receivable as of December 31, 2001 include E5,413 million
(2000: E6,236 million) maturing within one year and E2 million (2000: E8
million) maturing after one year. Of the total, E18 million (2000: E11 million)
is receivable from subsidiaries, E66 million (2000: E87 million) from other
affiliated companies and E5,331 million (2000: E6,146 million) from other
customers.

[23] OTHER RECEIVABLES AND OTHER ASSETS

     Other receivables and other assets are stated at nominal value, less
write-downs of E4 million (2000: E4 million).

                                       F-32
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     They are comprised as follows:

<Table>
<Caption>
                                                              DEC. 31, 2001   DEC. 31, 2000
                                                              -------------   -------------
                                                                       (E MILLION)
<S>                                                           <C>             <C>
Claims for tax refunds......................................        448             662
Short-term loans............................................        102             153
Lease payments receivable...................................         94              96
Receivables from derivative financial instruments...........         72              --
Payroll-receivables.........................................         47              47
Short-term loans from clearing..............................         41              87
Interest receivable on loans................................         19              23
Other receivables...........................................      1,624           1,346
                                                                  -----           -----
                                                                  2,447           2,414
                                                                  =====           =====
</Table>

     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 E66 million (2000: E149
million) pertaining to subsidiaries and E124 million (2000: E44 million)
pertaining to other affiliated companies.

     Total other receivables and other assets in the amount of E444 million
(2000: E442 million) mature in more than one year. Of this amount, E30 million
(2000: E31 million) pertains to subsidiaries.

     Changes in write-downs of receivables are as follows:

<Table>
<Caption>
                                                              DEC. 31, 2001   DEC. 31, 2000
                                                              -------------   -------------
                                                                       (E MILLION)
<S>                                                           <C>             <C>
Balance at the beginning of year............................       (204)           (173)
Additions charged to expenses...............................        (94)            (42)
Exchange differences........................................         (5)             (5)
Changes in scope of consolidation...........................          5              --
Deductions due to utilization...............................         76              16
                                                                  -----           -----
BALANCE AT THE END OF YEAR..................................       (222)           (204)
                                                                  =====           =====
</Table>

     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 E94 million (2000: E96 million), while the interest
portion pertaining to future years amounts to E29 million (2000: E23 million).
The lease payments are due as follows:

<Table>
<Caption>
                                              LEASE      OF WHICH     ACCOUNT
                                             PAYMENTS    INTEREST    RECEIVABLE
                                             --------    --------    ----------
                                                        (E MILLION)
<S>                                          <C>         <C>         <C>
2002.....................................       41           8           33
2003.....................................       28           6           22
2004.....................................       23           6           17
2005.....................................       18           5           13
2006.....................................       11           4            7
After 2006...............................        2           0            2
                                               ---          --           --
                                               123          29           94
                                               ===          ==           ==
</Table>

                                       F-33
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

[24] LIQUID ASSETS

<Table>
<Caption>
                                                              DEC. 31, 2001    DEC. 31, 2000
                                                              -------------    -------------
                                                                       (E MILLION)
<S>                                                           <C>              <C>
Marketable securities and other instruments.................        52              213
Cash and cash equivalents...................................       719              491
                                                                   ---              ---
                                                                   771              704
                                                                   ===              ===
</Table>

     As of 2001, 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 E52 million (2000: E247 million) and exceeds the
lower of cost and market by E13 million (2000: E34 million). Financial
instruments with original maturities of up to three months are recognized as
cash equivalents in view of their high liquidity.

[25] DEFERRED CHARGES

     Deferred charges as of December 31, 2001 include unamortized debt discounts
of E9 million (2000: E17 million). The debt discounts are amortized annually
over the lives of the underlying liabilities.

     Total deferred charges include E183 million that is expected to be used up
in 2002.

[26] STOCKHOLDERS' EQUITY

     The capital stock of Bayer AG amounts to E1,870 million, as in the previous
year, and is divided into 730,341,920 no-par bearer shares of a single class.

     Authorized capital totaling E256 million was approved by the Annual
Stockholders' Meeting on April 30, 1997. It expires on April 30, 2002. The
authorized capital can be used to increase the capital stock by issuing new
shares against cash contributions. Subscription rights for existing stockholders
are excluded with respect to E102 million of this authorized capital.

     Further authorized capital in the amount of E374 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 E83 million existed at December 31, 2001. 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.

     The changes in the various components of stockholders' equity during 2001,
2000 and 1999 are shown in the statements of changes in stockholders' equity.

     The dividend per share amounts paid for the 2000 and 1999 fiscal years were
E1.40 and E1.30, respectively.

[27] MINORITY INTEREST

     Minority interest mainly comprises third parties' shares in the equity of
the consolidated subsidiaries Sumika Bayer Urethane Co. Ltd., Japan; the
Makroform GmbH group; Bayer (India) Ltd.; and Bayer ABS Ltd., India.

                                       F-34
<PAGE>
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 2001,
these expenses totaled E312 million (2000: E437 million; 1999: E491 million).

     All other retirement benefit systems are DEFINED BENEFIT PLANS, which may
be either unfunded, i.e. financed by provisions (accruals), or funded, i.e.
financed through pension funds. In 2001, expenses for defined benefit plans
amounted to E301 million (2000: E326 million; 1999: E359 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. For the most
important defined benefit plans they are comprised as follows:

<Table>
<Caption>
                                                              DEC. 31, 2001    DEC. 31, 2000
                                                              -------------    -------------
                                                                       (E MILLION)
<S>                                                           <C>              <C>
Service cost................................................       265              210
Past service cost...........................................        10                1
Interest cost...............................................       669              589
Return on plan assets.......................................      (640)            (526)
Amortization of actuarial amounts...........................       (34)             (14)
                                                                  ----             ----
                                                                   270              260
                                                                  ====             ====
</Table>

     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.

     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 IAS and U.S. GAAP purposes.

     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:

<Table>
<Caption>
                                                                           PARAMETERS
                                                                --------------------------------
                                                                DEC. 31, 2001     DEC. 31, 2000
                                                                --------------    --------------
<S>                                                             <C>               <C>
Discount rate...............................................      2.5%-7.0%         3.0%-7.3%
Projected future remuneration increases.....................      2.0%-4.8%         1.0%-7.0%
Projected future pension increases..........................      2.0%-3.3%         1.0%-4.5%
Projected employee turnover (according to age and gender)...    Empirical data    Empirical data
Projected return on plan assets.............................      2.0%-8.5%         3.0%-8.5%
</Table>

                                       F-35
<PAGE>
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:

<Table>
<Caption>
                                                               DEC. 31, 2001    DEC. 31, 2000
                                                               -------------    -------------
                                                                        (E MILLION)
<S>                                                            <C>              <C>
Defined benefit obligation..................................      (11,303)         (9,535)
Fair value of plan assets...................................        8,126           7,847
                                                                  -------          ------
FUNDED STATUS...............................................       (3,177)         (1,688)
Unrecognized transition liability (asset)...................            3             (11)
Unrecognized actuarial (gain) loss..........................        1,366            (203)
Asset limitation due to uncertainty of obtaining future
  benefits..................................................       (1,249)         (1,249)
                                                                  -------          ------
NET RECOGNIZED LIABILITY....................................       (3,057)         (3,151)
                                                                  =======          ======
</Table>

     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
actual return on plan assets was a loss of E606 million for defined benefit
plans providing pension and healthcare benefits. The net liability under these
defined benefit plans changed as follows:

<Table>
<Caption>
                                                               DEC. 31, 2001    DEC. 31, 2000
                                                               -------------    -------------
                                                                        (E MILLION)
<S>                                                            <C>              <C>
Net liability recognized at the beginning of the year.......      (3,151)          (3,191)
Pension benefit (cost) income...............................        (270)            (260)
Employer contributions......................................         313              255
Divestitures................................................          54               20
Change in asset limitation..................................          --               12
Change in scope of consolidation............................           *               11
Change in currency translation..............................          (3)               2
                                                                  ------           ------
NET LIABILITY RECOGNIZED AT END OF YEAR.....................      (3,057)          (3,151)
                                                                  ======           ======
</Table>

---------------

* less than E1 million

     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.

     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 2001,
provisions for early retirement and other post-retirement benefits amounted to
E635 million (2000: E637 million). The resulting expenses for 2001 amounted to
E63 million (2000: E214 million), comprising E23 million (2000: E192 million)
for service cost, E58 million (2000: E52 million) for interest cost, E31 million
(2000: E30 million) for expected return on plan assets and E13 million (2000: E0
million) for actuarial losses.

                                       F-36
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

[29] OTHER 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. The
Group sets up and maintains provisions for probable and on-going litigation
cases when a reasonable estimate can be made. These provisions include all
estimated legal fees and costs of settlement. The amounts are based upon written
notification and reasonable settlement cost estimates provided by the Group's
attorneys. Periodically, but at least quarterly, the provisions are reviewed
with the Group's attorneys and updated.

     The breakdown of provisions is as follows:

<Table>
<Caption>
                                                              DEC. 31, 2001      DEC. 31, 2000
                                                             ----------------   ----------------
                                                                     MATURING           MATURING
                                                             TOTAL   IN 2002    TOTAL   IN 2001
                                                             -----   --------   -----   --------
                                                                         (E MILLION)
<S>                                                          <C>     <C>        <C>     <C>
Provisions for taxes.......................................    524      151       537      370
Provisions for personnel commitments.......................    923      451     1,044      555
Provisions for environmental remediation...................    200       19       230       12
Provisions for restructuring...............................    145       79       131       69
Provisions for trade-related commitments...................    438      426       411      397
Miscellaneous provisions...................................    535      351       556      298
                                                             -----    -----     -----    -----
                                                             2,765    1,477     2,909    1,701
                                                             =====    =====     =====    =====
</Table>

     Personnel commitments mainly include annual bonus payments, service awards
and other personnel costs. Reimbursements to be received from the German
government under the pre-retirement part-time 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.

     Changes in provisions were as follows:

<Table>
<Caption>
                                                 CHANGES IN
                                      JAN. 1,     SCOPE OF      CURRENCY                                         DEC. 31,
                                       2001     CONSOLIDATION   EFFECTS    ALLOCATION   UTILIZATION   REVERSAL     2001
                                      -------   -------------   --------   ----------   -----------   --------   --------
                                                                          (E MILLION)
<S>                                   <C>       <C>             <C>        <C>          <C>           <C>        <C>
Provisions for taxes................     537           1           --          465          (402)        (77)       524
Provisions for personnel
  commitments.......................   1,044         (24)           9          493          (560)        (39)       923
Provisions for environmental
  remediation.......................     230         (15)           3           19           (34)         (3)       200
Provisions for restructuring........     131          --            7           98           (91)         --        145
Provisions for trade-related
  commitments.......................     411         (10)          10          583          (542)        (14)       438
Miscellaneous provisions............     556         (17)          13          454          (425)        (46)       535
                                       -----         ---           --        -----        ------        ----      -----
                                       2,909         (65)          42        2,112        (2,054)       (179)     2,765
                                       =====         ===           ==        =====        ======        ====      =====
</Table>

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 senior executives, a Stock Incentive Program for middle management and
equivalent employees, and a Stock Participation Program for junior management
and other employees. 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.
Participants do not pay an exercise price for the shares they receive under
these programs. Rather, they receive the

                                       F-37
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

shares as bonus shares or, in the case of Module 2 of the Stock Participation
Program, have the opportunity to purchase shares at a discounted price.

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 one
option right for each 20 shares deposited. These deposited shares are "locked
up"; the participant may not sell them during the following three years. After
the end of these three years, 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 number of shares received upon exercise,
we apply three performance criteria. Two of these measure the relative
performance of the Bayer AG share; the third measures the individual
contribution of the participant. If the participant fails to meet minimum
standards under these criteria, he or she receives no shares under the program.
At December 31, 2001, no options were exercisable. No options expired, nor were
any options cancelled, during fiscal 2001.

     If it is not possible to issue shares under the Stock Option Program to
participants at the time they are entitled to exercise their option rights, the
option rights would function as share appreciation rights. Instead of shares,
the participant would receive the cash value of the shares to which the option
rights would otherwise entitle him or her, based on the trading price of the
Bayer AG share at the time of exercise.

Stock Incentive Program

     Like the Stock Option Program, our Stock Incentive Program for middle
management 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 number of incentive shares the participant receives depends on
the number deposited at the launch of the program as well as on the overall
performance of Bayer stock. 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 program, but any deposited shares they
sell are no longer counted in calculating the number of incentive shares for
subsequent distribution dates. The Stock Incentive Program has a ten-year term.
There are three incentive share distribution dates during this period. On these
dates, the participant receives incentive shares as follows:

Issuance of incentive shares to employees in the Stock Incentive Program

<Table>
<Caption>
                                                       INCENTIVE SHARES RECEIVED
DISTRIBUTION DATE AT END OF                            (PER 10 DEPOSITED SHARES)
---------------------------                            -------------------------
<S>                                                    <C>
Second year..........................................               2
Sixth year...........................................               4
Tenth year...........................................               4
                                                                  ---
Total................................................              10
                                                                  ===
</Table>

     Participants receive incentive shares only if Bayer stock has outperformed
the Dow Jones EURO STOXX 50 index on the relevant distribution date, 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
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

                                       F-38
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

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
number of bonus shares on subsequent distribution dates.

     Module 1 has a term of ten years and entitles the participant to receive
incentive shares 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 incentive shares as
follows on the distribution dates:

Issuance of incentive shares to employees in the Stock Participation Program

<Table>
<Caption>
                                                       INCENTIVE SHARES RECEIVED
DISTRIBUTION DATE AT END OF                            (PER 10 DEPOSITED SHARES)
---------------------------                            -------------------------
<S>                                                    <C>
Second year..........................................               1
Sixth year...........................................               2
Tenth year...........................................               2
                                                                  ---
Total................................................               5
                                                                  ===
</Table>

     In addition, under Module 2 each participant may purchase 10 Bayer AG
shares per year at a tax-free discount of E15.34 (2000: E15.34) per share to the
market price. Participants may not include shares that they purchase 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 in the year he or she enters the program.

     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 shares of Bayer AG stock bought in the capital market,
subject to certain performance criteria, compensation expense for potential
share distributions is recorded when there is a reasonable basis on which to
estimate whether the performance criteria will ultimately be met. Compensation
expense is recorded at each balance sheet date by estimating the number of
rights outstanding multiplied by the current quoted market price of Bayer AG
shares. The related personnel provisions on December 31, 2001 amounted to E12
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, 2001, participants in Module 2 received 252,652 shares at a
total price of E7.8 million, resulting in personnel expenses of E3.9 million.
The discount to the price of Bayer AG stock was 33.2 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

                                       F-39
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

produced specifically for us by contract manufacturers or where waste from our
operations was treated, stored or disposed. 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, 2001 amounted
to E200 million (2000: E230 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
E265 million (2000: E304 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 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 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 heterogeneous business portfolio, Bayer is
exposed to numerous legal risks, particularly in the areas of product liability,
patent disputes, tax assessments, competition and antitrust law, and
environmental matters. We cannot predict with certainty the outcome of any
proceedings in which we are or may become involved. It is therefore possible
that legal judgments give rise to expenses that are not fully covered by
insurers' compensation payments and significantly affect our revenues and
earnings.

     In the opinion of the management, however, currently pending litigation is
unlikely to result in judgments that would materially affect the Group's
financial position or results of operations.

RESTRUCTURING CHARGES

     Charges incurred for restructuring programs during 2001 were E214 million,
including E98 million in provisions that are expected to be used as the related
actions under the plans are completed. The total charges comprise E57 million in
severance payments, E61 million in accelerated amortization/depreciation and
write-downs of intangible assets, property, plant and equipment, and E96 million
in other expenses.

                                       F-40
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     Of the restructuring charges in 2001, a total of E39 million is related to
the integration of the polyols business acquired from Lyondell, with severance
payments accounting for E13 million, other expenses for E19 million and asset
write-downs for E7 million. The greater part of the severance payments and other
expenses for 2001 will lead to disbursements in 2002.

     The restructuring of our styrenics business in North America and Europe led
to a further E43 million in charges, including E19 million for write-downs and
E24 million for other expenses.

     In the second half of 2001 we announced plans to restructure our styrenics
operations in Camacari, Brazil, resulting in charges of E22 million, comprising
E16 million in write-offs of assets no longer utilized and E6 million in other
expenses.

     In 2001, a further E15 million in restructuring charges was incurred in the
U.S. for the restructuring of the Consumer Care Business Group in Elkhart,
Indiana, including E9 million in write-downs and E6 million in other expenses.

     In the second half of 2001 we initiated restructuring measures to enhance
the efficiency of our U.S. production facilities in Baytown, Texas and New
Martinsville, West Virginia. The E35 million in charges comprises E21 million in
severance payments and E13 million in other expenses. We also announced plans to
close down a facility in West Virginia, resulting in E10 million in write-offs
of assets no longer utilized and E3 million in severance payments.

     The ongoing restructuring programs to improve profitability in the
Pharmaceuticals Business Group gave rise to E26 million in charges, comprising
E7 million in severance payments and E19 million in other expenses.

     Further charges relate to various small-scale restructuring programs.
Changes in provisions and expenses for restructuring were as follows:

<Table>
<Caption>
                                                   EMPLOYEE         TANGIBLE FIXED    OTHER THIRD
                                               TERMINATION COSTS   ASSET IMPAIRMENT   PARTY COSTS   TOTAL
                                               -----------------   ----------------   -----------   -----
<S>                                            <C>                 <C>                <C>           <C>
BALANCE AT JANUARY 1, 2000...................          50                  9               47        106
Additions....................................          59                 51               90        200
Cash payments................................         (26)                --             (108)      (134)
Reclassification to fixed assets.............          --                (47)              --        (47)
Translation gain (loss), net.................           3                 --                3          6
                                                      ---                ---             ----       ----
BALANCE AT DECEMBER 31, 2000.................          86                 13               32        131
Additions....................................          57                 61               96        214
Cash payments................................         (69)                --              (64)      (133)
Reclassification to fixed assets.............          --                (74)              --        (74)
Translation gain (loss), net.................           5                  0                2          7
                                                      ---                ---             ----       ----
BALANCE AT DECEMBER 31, 2001.................          79                  0               66        145
                                                      ===                ===             ====       ====
</Table>

     The other costs are mainly demolition expenses and other charges related to
the abandonment of production facilities.

                                       F-41
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

[30] FINANCIAL OBLIGATIONS

     Financial obligations that are not the hedged item in a permissible hedge
accounting relationship are carried at the higher of nominal and redemption
value. They comprise the following:

<Table>
<Caption>
                                                              DEC. 31, 2001      DEC. 31, 2000
                                                             ----------------   ----------------
                                                                     MATURING           MATURING
                                                             TOTAL   IN 2002    TOTAL   IN 2001
                                                             -----   --------   -----   --------
                                                                         (E MILLION)
<S>                                                          <C>     <C>        <C>     <C>
Debentures.................................................  2,592      781     2,168      283
Liabilities to banks.......................................  1,122      829     1,458      932
Liabilities under lease agreements.........................    881       99       199       34
Liabilities from the issuance of promissory notes..........     84       84         2        2
Commercial paper...........................................  1,365    1,365     1,812    1,812
Liabilities from derivative financial instruments..........    180      169        --       --
Other financial obligations................................  1,156      982     1,026      799
                                                             -----    -----     -----    -----
                                                             7,380    4,309     6,665    3,862
                                                             =====    =====     =====    =====
</Table>

     The maturities of financial obligations existing at December 31, 2001 were
as follows:

MATURING IN

<Table>
<Caption>
                                                               E MILLION
                                                               ---------
<S>                                                            <C>
2002........................................................     4,309
2003........................................................       291
2004........................................................     1,665
2005........................................................       355
2006........................................................        86
2007 or later...............................................       674
                                                                 -----
                                                                 7,380
                                                                 =====
</Table>

     The financial obligations are predominantly in U.S. dollars, which account
for E5.1 billion (2000: E4.0 billion). U.S. dollar borrowings represent 69
percent (2000: 61 percent) of total financial obligations.

     Short-term borrowings (excluding the short-term portion of debentures)
amounted to E3,528 million (2000: E3,579 million) with a weighted average
interest rate of 5.4 percent (2000: 6.6 percent) The Bayer Group's financial
obligations are primarily unsecured and of equal priority.

                                       F-42
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     Debentures include the following:

<Table>
<Caption>
EFFECTIVE   STATED
  RATE       RATE                                          VOLUME         DEC. 31, 2001   DEC. 31, 2000
---------   ------                                    -----------------   -------------   -------------
                                                                                   (E MILLION)
<S>         <C>      <C>                              <C>                 <C>             <C>
BAYER CAPITAL CORPORATION B.V.
2.820%..    2.500%   Bonds with Warrants Attached     CHF 250.0 million         169             164
                     1987/2002
BAYER CORPORATION
6.735%..    6.500%   Notes 1995/2002                  USD 400.0 million         454             430
7.323%..    7.125%   Notes 1995/2015                  USD 200.0 million         227             215
6.784%..    6.750%   Notes 1996/2001                  USD 250.0 million          --             269
2.166%..    2.250%   Bonds 1997/2002                  CHF 200.0 million         135             131
3.500%..    3.500%   Revenue Bonds 1997/2009           USD 20.6 million          23              22
4.000%..    4.000%   Revenue Bonds 1997/2027           USD 25.0 million          28              27
6.761%..    6.650%   Notes 1998/2028                  USD 350.0 million         397             376
6.391%..    6.200%   Bonds 1998/2028                  USD 250.0 million         284             269
4.750%..    4.750%   Money Market Puttable Reset      USD 500.0 million         568             269
                     Securities 2001/2011
BAYER LTD., JAPAN
3.869%..    3.750%   Bonds 2000/2005                  CHF 400.0 million         270             239
OTHER DEBENTURES...................................                              37              26
                                                                              -----           -----
                                                                              2,592           2,168
                                                                              =====           =====
</Table>

     The other debentures totaling E37 million are due between 2002 and 2011;
their average interest rate is 10.9 percent.

     In July 1987, Bayer Capital Corporation B.V. issued CHF 250 million of
2.50% Bonds with warrants in Switzerland. The Bonds have a term of 15 years and
mature in July 2002. The issue price of the Bonds was 100%, and interest is paid
annually in July. The warrants attached expired on August 28, 1997.

     In October 1995, Bayer Corporation issued USD 400 million of 6.50% Notes to
qualified institutional buyers. The Notes have a term of 7 years and mature in
October 2002. Interest is paid semi-annually in April and October. The Group
recorded a discount of USD 2.7 million, which includes commissions paid to
underwriters.

     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 April 1997, Bayer Corporation issued CHF 200 million of 2.25% Bonds in
Switzerland. The Bonds have a term of 5 years and mature in April 2002. Interest
is paid annually in April. The Group recorded a discount of USD 0.4 million,
which includes commissions paid to underwriters. This debt was swapped into U.S.
dollars at a floating interest rate. At December 31, 2001, the effective U.S.
dollar interest rate was 2.17%. 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 May 1997, Bayer Corporation issued USD 25 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 30 years and mature in May
2027.

     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

                                       F-43
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

underwriters. The Notes will be redeemable, in whole or in part, at the option
of Bayer Corporation at any time, upon 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.

     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, 2001, the Group had approximately E6.2 billion (2000: E5.6
billion) in total lines of credit, of which E1.1 billion (2000: E1.5 billion)
was used and E5.1 billion (2000: E4.1 billion) were 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 E1,174 million (2000: E285
million), including E293 million (2000: E86 million) in interest, are to be made
to the respective lessors in future years.

     The liabilities associated with finance leases mature as follows:

<Table>
<Caption>
                                                                LEASE      OF WHICH
                                                               PAYMENTS    INTEREST    LIABILITY
                                                               --------    --------    ---------
                                                                          (E MILLION)
<S>                                                            <C>         <C>         <C>
2002........................................................      130         26          104
2003........................................................      149         38          111
2004........................................................      126         34           92
2005........................................................      101         26           75
2006........................................................       79         22           57
2007 or later...............................................      589        147          442
                                                                -----        ---          ---
                                                                1,174        293          881
                                                                =====        ===          ===
</Table>

     Lease payments in 2001 in connection with operating leases amounted to E244
million (2000: E162 million; 1999:E 154 million).

     The other financial obligations include E85 million (2000: E42 million) to
nonconsolidated subsidiaries.

[31] TRADE ACCOUNTS PAYABLE

     Trade accounts are payable mainly to third parties; they are carried at the
higher of nominal and redemption value. As last year, the entire amount is due
within one year. Trade accounts payable as of December 31, 2001 include E1,991
million (2000: E2,013 million) maturing within one year and E2 million (2000: E3
million)

                                       F-44
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

maturing after one year. Of the total, E8 million (2000: E8 million) is payable
to subsidiaries, E7 million (2000: E16 million) to other affiliated companies
and E1,978 million (2000: E1,992 million) to other suppliers.

[32] MISCELLANEOUS LIABILITIES

     Miscellaneous liabilities are carried at the higher of nominal and
redemption value. They are comprised as follows:

<Table>
<Caption>
                                                            DEC. 31, 2001        DEC. 31, 2000
                                                          -----------------    -----------------
                                                                   MATURING             MATURING
                                                          TOTAL    IN 2002     TOTAL    IN 2001
                                                          -----    --------    -----    --------
                                                                       (E MILLION)
<S>                                                       <C>      <C>         <C>      <C>
Payroll liabilities....................................     443       320        537       422
Tax liabilities........................................     281       280        291       289
Liabilities for social expenses........................     144       144        114       114
Accrued interest on liabilities........................     125       125         73        46
Advance payments received..............................      25        25         24        24
Liabilities from the acceptance of drafts..............      17        17         14        14
License liabilities....................................      56        56         32        32
Other miscellaneous liabilities........................     881       865      1,385     1,333
                                                          -----     -----      -----     -----
                                                          1,972     1,832      2,470     2,274
                                                          =====     =====      =====     =====
</Table>

     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.

     The total of miscellaneous liabilities includes E42 million (2000: E76
million) to non-consolidated subsidiaries and E3 million (2000: E12 million) to
other affiliated companies.

[33] FURTHER INFORMATION ON OTHER LIABILITIES

     Other liabilities (financial obligations, trade accounts payable and
miscellaneous liabilities) include E1,779 million (2000: E1,636 million)
maturing in more than five years.

     Of the total, E334 million (2000: E283 million) was secured, mainly by
mortgages of E256 million (2000: E256 million).

     Included is E125 million (2000: E123 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

     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 during the useful lives of the respective assets and recognized in
income.

     The main component of deferred income as of December 31, 2001 comprises
E111 million (2000: E113 million) in such grants and subsidies received from
governments; the amount reversed and recognized in income was E17 million (2000:
E13 million).

                                       F-45
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

[35] DISCONTINUING OPERATIONS

     Assets and liabilities include the following amounts pertaining to the
discontinuing operations of Haarmann & Reimer, Erdolchemie, Fibers and DyStar:

<Table>
<Caption>
                                           FIBERS          HR         EC    DYSTAR       TOTAL
                                         -----------   -----------   ----   ------   -------------
                                         2001   2000   2001   2000   2000    2000    2001    2000
                                         ----   ----   ----   ----   ----   ------   -----   -----
                                                         (E MILLION AS OF DEC. 31)
<S>                                      <C>    <C>    <C>    <C>    <C>    <C>      <C>     <C>
Noncurrent assets......................  130    143    419    423    200      89       549     855
Current assets (excluding liquid
  assets)..............................   99    195    384    390    199     320       483   1,104
Liquid assets..........................   --     --     17     30     --      11        17      41
                                         ---    ---    ---    ---    ---     ---     -----   -----
ASSETS.................................  229    338    820    843    399     420     1,049   2,000
                                         ===    ===    ===    ===    ===     ===     =====   =====
Pension provisions.....................   28     53     74     69     59      16       102     197
Other provisions.......................   17     35     43     62     39      28        60     164
Financial obligations..................   --     --     12     15      5      76        12      96
Remaining liabilities..................   29     82    104    101     59     122       133     364
                                         ---    ---    ---    ---    ---     ---     -----   -----
LIABILITIES............................   74    170    233    247    162     242       307     821
                                         ===    ===    ===    ===    ===     ===     =====   =====
</Table>

[36] COMMITMENTS AND CONTINGENCIES

     Contingent liabilities as of December 31, 2001 -- almost all of which exist
toward third parties -- amount to E193 million. They result from:

<Table>
<Caption>
                                                                DEC. 31, 2001    DEC. 31, 2000
                                                                -------------    -------------
                                                                         (E MILLION)
<S>                                                             <C>              <C>
Issuance and endorsement of bills...........................          22               23
Guarantees..................................................          53               44
Warranties..................................................         118              148
                                                                     ---              ---
                                                                     193              215
                                                                     ===              ===
</Table>

     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. The warranties mainly relate to
contractual terms encountered in the ordinary course of business.

     In addition to provisions, other liabilities and contingent liabilities,
there are other financial commitments resulting primarily from long-term lease
and rental agreements. Minimum non-discounted future payments relating to
operating leases total E557 million (2000: E598 million). The respective payment
obligations mature as follows:

<Table>
<Caption>
                                                              E MILLION
                                                              ---------
<S>                                                           <C>
2002........................................................     188
2003........................................................      91
2004........................................................      69
2005........................................................      56
2006........................................................      86
2007 or later...............................................      67
                                                                 ---
                                                                 557
                                                                 ===
</Table>

                                       F-46
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     Financial commitments resulting from orders already placed under purchase
agreements related to planned or ongoing capital expenditure projects total E354
million (2000: E446 million). The respective payments are due almost entirely in
2002.

     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, 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 E732 million (2000: E683 million). At December 31, 2001, the
remaining payments expected to be made to these parties, assuming the milestones
or other conditions are met, were as follows:

<Table>
<Caption>
MATURING IN                                                   E MILLION
-----------                                                   ---------
<S>                                                           <C>
2002........................................................     218
2003........................................................     215
2004........................................................      88
2005........................................................      81
2006........................................................      84
2007 or later...............................................      46
                                                                 ---
                                                                 732
                                                                 ===
</Table>

[37] RELATED PARTIES

     Transactions with related persons and companies, which are invariably
performed on an arm's length basis, are mainly trade transactions. The related
receivables and payables have been included in the respective notes to the
financial statements as required by European Union directives. The revenue and
expenses related to these transactions are immaterial to the consolidated
financial statements as a whole.

[38] 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.

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 fair value are recognized in stockholders' equity. In the event
of impairment losses, the assets are written down and the write-downs are
recognized in income. Financial instruments constituting liabilities are carried
at the higher of nominal and redemption value.

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 on the basis of quoted prices, or in some cases by discounting future
cash flows. Their total fair value is E83 million less than their carrying
value. The remaining

                                       F-47
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

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.

     All 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 year end was as follows:

<Table>
<Caption>
                                                              DEC. 31, 2001    DEC. 31, 2000
                                                              -------------    -------------
                                                                       (E MILLION)
<S>                                                           <C>              <C>
Primary asset instruments exposed to currency risk..........      3,657            2,813
Primary liability instruments exposed to currency risk......      2,314            2,159
Amount naturally hedged.....................................     (3,011)          (1,102)
Amount hedged through derivative financial instruments......     (2,527)          (2,205)
                                                                 ------           ------
RESIDUAL UNHEDGED CURRENCY EXPOSURE.........................        433            1,665
                                                                 ======           ======
</Table>

     In some cases forecasted transactions are also hedged to further reduce the
related anticipated currency risk. At December 31, 2001 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, 2002 -- was E497 million, which is not included in the hedged amount of E2.5
billion. These hedging relationships amount to cash flow hedges as defined in
IAS 39. The contracts are concluded monthly so that they run for one year and
mature in the middle of each month. On these dates the results of the
transactions are recognized in income. In 2001, the differences resulting from
fair value measurement and initially recognized in equity amounted to E1.9
million.

     On the asset side, 62 percent of currency risks relate to the U.S. dollar
and 10 percent to the Japanese yen. On the liabilities side, 60 percent of
foreign currency risks relate to the U.S. dollar, while only 4 percent relate to
euro risk positions of subsidiaries domiciled outside the euro zone. The
remaining exposure involves liabilities in British pounds (3 percent), Japanese
yen (5 percent) and a number of other currencies outside the dollar and euro
zones. The U.S. dollar accounts for 77 percent of the asset volume hedged
through derivative financial instruments, while the pound accounts for 8 percent
and the yen for 6 percent. Of the hedged liabilities, 59 percent are in U.S.
dollars, 7 percent in yen, 5 percent in British pounds and 29 percent in other
currencies. The need for hedging within the euro zone ceased at the beginning of
1999 due to the permanent fixing of exchange rates. When economically hedging
exchange rate risk on recorded foreign currency operating items, we

                                       F-48
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

do not aim for hedge accounting treatment. Changes in the fair values of the
respective hedging instruments are therefore recognized immediately in income.

     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 exposed to currency
risk have no natural hedge, 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
commitments. 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 confined to
the hedging of the operating business and of the related investments and
financing transactions. "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-49
<PAGE>
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:

<Table>
<Caption>
                                                     NOTIONAL AMOUNT                   FAIR VALUE
                                              -----------------------------   -----------------------------
                                              DEC. 31, 2001   DEC. 31, 2000   DEC. 31, 2001   DEC. 31, 2000
                                              -------------   -------------   -------------   -------------
                                                                       (E MILLION)
<S>                                           <C>             <C>             <C>             <C>
Forward foreign exchange contracts..........      2,740           3,219             (28)            145
Currency options............................        279              87               *               1
Currency swaps..............................          9             196               *             (12)
Interest rate hedging contracts (including
  interest and principal currency swaps)....      4,485           3,495             (60)           (133)
                                                  -----           -----           -----           -----
                                                  7,513           6,997             (88)              1
                                                  =====           =====           =====           =====
</Table>

---------------

* less than E1 million

     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 E139 million (2000: E227 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 E2.7 billion (2000:
E3.3 billion) mature within one year, while instruments in the amount of E0.3
billion (2000: E0.2 billion) have longer remaining terms.

INTEREST RATE RISK

     Short-term interest rate hedging contracts (including interest and
principal currency swaps) total E2.0 billion (2000: E0.3 billion). Those
maturing after more than one year total E2.5 billion (2000: E3.2 billion).

HEDGE ACCOUNTING

     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.
All swap contracts amount to permissible hedge accounting relationships and
there is no ineffectiveness related to these hedges. Changes in the fair values
of derivatives that hedge interest rate risk are recorded as interest expense
for the respective periods, as are offsetting changes in the fair value of the
related hedged debt items. Fair value hedge accounting is not used in any other
circumstances. 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. However, most of the
cash flow hedges are entered into to protect future operating revenues against
currency fluctuations, as explained earlier.

                                       F-50
<PAGE>
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 2001 of E2.9 billion (2000: E4.2 billion; 1999: E3.2 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 pages F-20 to F-22. The net cash flow of E3.9 billion (2000: E3.1 billion;
1999: E3.2 billion) takes into account changes in working capital.

[40] NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     Additions to property, plant and equipment and intangible assets in 2001
resulted in a cash outflow of E2.6 billion (2000: E2.6 billion; 1999: E2.6
billion). Cash outflows for acquisitions amounted to E0.5 billion (2000: E4.1
billion; 1999: E0.3 billion). Sales of property, plant and equipment led to a
cash inflow of E0.5 billion (2000: E0.3 billion; 1999: E0.1 billion), while that
from interest and dividend receipts and from marketable securities amounted to
E0.4 billion (2000: E0.3 billion; 1999: E0.4 billion).

[41] NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     The net cash outflow of E1.5 billion in 2001 mainly comprises the E1.0
billion dividend payment for 2000 (2000: E1.0 billion dividend payment for 1999;
1999: E0.8 billion dividend payment for 1998) and E0.5 billion (2000: E0.3
billion; 1999: E0.3 billion) in interest payments.

[42] DISCONTINUING OPERATIONS

     Discontinuing operations affected the Group cash flow statements as
follows:
<Table>
<Caption>
                                             ERDOLCHEMIE             FIBERS                 HR             DYSTAR      AGFA    TOTAL
                                          ------------------   ------------------   ------------------   -----------   -----   ----
                                          2001   2000   1999   2001   2000   1999   2001   2000   1999   2000   1999   1999    2001
                                          ----   ----   ----   ----   ----   ----   ----   ----   ----   ----   ----   -----   ----
                                                                                 (E MILLION)
<S>                                       <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>     <C>
Net cash provided by operating
 activities.............................   13     38     39     28    114     35    118     84     42     66     35      167   159
Net cash provided by (used in) investing
 activities.............................  474    (87)   (62)   (16)   (30)   (62)   (163)  (116)  (308)  (65)   (16)   2,613   295
Net cash provided by (used in) financing
 activities.............................    0      0     (1)   (41)     *      *     77     (7)   227     18    (28)      --    36
                                          ---    ---    ---    ---    ---    ---    ----   ----   ----   ---    ---    -----   ---
CHANGE IN CASH AND CASH EQUIVALENTS.....  487    (49)   (24)   (29)    84    (27)    32    (39)   (39)    19     (9)   2,780   490
                                          ===    ===    ===    ===    ===    ===    ====   ====   ====   ===    ===    =====   ===

<Caption>
                                           TOTAL
                                          ------------
                                          2000   1999
                                          ----   -----
                                          (E MILLION)
<S>                                       <C>    <C>
Net cash provided by operating
 activities.............................  302      318
Net cash provided by (used in) investing
 activities.............................  (298)  2,165
Net cash provided by (used in) financing
 activities.............................   11      198
                                          ----   -----
CHANGE IN CASH AND CASH EQUIVALENTS.....   15    2,681
                                          ====   =====
</Table>

---------------

* less than E1 million

[43] CASH AND CASH EQUIVALENTS

     Cash and cash equivalents as of December 31, 2001 amounted to E0.7 billion
(2000: E0.5 billion; 1999: E2.8 billion). The liquid assets of E0.8 billion
(2000: E0.7 billion; 1999: E3.1 billion) shown in the balance sheet also include
marketable securities and other instruments.

                                       F-51
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

[44] U.S. GAAP INFORMATION

     The Group's consolidated financial statements have been prepared in
accordance with IAS, 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:

<Table>
<Caption>
                                              NOTES        2001           2001          2000          1999
                                              -----   --------------   -----------   -----------   -----------
                                                      ($ MILLION(1))   (E MILLION)   (E MILLION)   (E MILLION)
<S>                                           <C>     <C>              <C>           <C>           <C>
NET INCOME REPORTED UNDER IAS...............                859             965         1,816         2,002
Fair value of derivative financial
  instruments...............................    a           (85)            (95)           95            --
Available for sale securities...............    b           (27)            (30)           --            --
Business combinations.......................    c           (56)            (63)         (128)          (54)
Pensions....................................    d           (21)            (24)          (24)          (24)
Other.......................................    e            (5)             (5)           33            54
Deferred tax effect on U.S. GAAP
  adjustments...............................                 46              52            (9)          (11)
                                                          -----           -----         -----         -----
NET INCOME REPORTED UNDER U.S. GAAP.........                711             800         1,783         1,967
                                                          =====           =====         =====         =====
BASIC AND DILUTED EARNINGS PER SHARE UNDER
  U.S. GAAP.................................               0.97            1.10          2.44          2.69
                                                          =====           =====         =====         =====
</Table>

<Table>
<Caption>
                                                                              DECEMBER 31,
                                                               ------------------------------------------
                                                       NOTES        2001           2001          2000
                                                       -----   --------------   -----------   -----------
                                                               ($ MILLION(1))   (E MILLION)   (E MILLION)
<S>                                                    <C>     <C>              <C>           <C>
STOCKHOLDERS' EQUITY REPORTED UNDER IAS..............              15,062         16,922        16,140
Fair value of derivative financial instruments.......    a             --             --            95
Available for sale securities........................    b             --             --         1,366
Business combinations................................    c            700            786           822
Pensions.............................................    d            784            881         1,105
Other................................................    e             93            105           109
Deferred tax effect on U.S. GAAP adjustments.........                (351)          (394)         (527)
                                                                   ------         ------        ------
STOCKHOLDERS' EQUITY REPORTED UNDER U.S. GAAP........              16,288         18,300        19,110
                                                                   ======         ======        ======
</Table>

<Table>
<Caption>
                                                                             DECEMBER 31,
                                                              ------------------------------------------
                                                                   2001           2001          2000
                                                              --------------   -----------   -----------
                                                              ($ MILLION(1))   (E MILLION)   (E MILLION)
<S>                                                           <C>              <C>           <C>
COMPONENTS OF STOCKHOLDERS' EQUITY IN ACCORDANCE WITH U.S.
  GAAP:
Capital stock of Bayer AG...................................       1,664          1,870         1,870
Capital reserves of Bayer AG................................       2,619          2,942         2,942
Retained earnings...........................................      10,922         12,270        12,492
Accumulated other comprehensive income:
-- Unrealized market value adjustment on securities
   available for sale (net of taxes of $37 million, E42
   million, E14 million)....................................         499            561         1,352
-- Unrealized market value adjustment on cash flow hedges
   (net of taxes of $1 million, E1 million, and E nil)......           1              1             0
-- Additional minimum pension liability (net of taxes of
   $152 million, E171 million, and E90 million).............        (217)          (244)         (124)
-- Translation differences..................................         800            900           578
                                                                  ------         ------        ------
TOTAL.......................................................      16,288         18,300        19,110
                                                                  ======         ======        ======
</Table>

---------------

                                       F-52
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

(1)  The 2001 U.S. dollar figures have been translated at an exchange rate of
     $1.1235 = E1.00. 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 IAS and US GAAP. The Group uses
foreign currency forward contracts for hedging of anticipated transactions.
These forward contracts were recorded at the lower of cost or market value under
IAS and were marked to market through the income statement in accordance with
U.S. GAAP applicable at the time. The E95 million difference between IAS and
U.S. GAAP net income and equity for the year ended December 31, 2000 arose from
the recognition of a E95 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 E68 million. As the hedged
anticipated transactions were realized during 2001, this E68 million was
recorded as gain under IAS. Conversely, under U.S. GAAP, the E27 million decline
in value was recognized as an expense. Therefore, the reconciling item between
net income under IAS and U.S. GAAP for the year ended December 31, 2001 of E95
million results from the difference between the E68 million gain under IAS
compared to the E27 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 IAS and
U.S. GAAP.

b.  AVAILABLE FOR SALE SECURITIES

     Under IAS, 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. All declines in market value are
considered to be other-than-temporary if they have exceeded 20% over a continual
period of 6 months and there is no indication of a significant increase in fair
value in the short-term. 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 IAS. 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 equity.

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 IAS 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, 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 E22 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.

                                       F-53
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

d.  PENSION PROVISIONS

     Under IAS, 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 SEC accommodation 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 IAS and U.S.
GAAP comprises amortization of the unrecognized transition obligation over the
remaining average service lives of employees from 1994 of E238 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.

     Following is a reconciliation of the balance sheet and income statement
amounts recognized for IAS and U.S. GAAP for both pension and post-retirement
benefit plans:

<Table>
<Caption>
                                                               2001      2000      1999
                                                              ------    ------    ------
                                                                     (E MILLION)
<S>                                                           <C>       <C>       <C>
PENSION BENEFITS:
Liability recognized for IAS................................  (3,057)   (3,151)   (3,191)
Asset limitation under IAS 19...............................   1,249     1,249     1,261
Additional minimum liability under SFAS No. 87..............    (415)     (215)     (218)
Difference in unrecognized transition obligation............      47        71        95
                                                              ------    ------    ------
LIABILITY RECOGNIZED FOR U.S. GAAP..........................  (2,176)   (2,046)   (2,053)
                                                              ======    ======    ======
Net periodic benefit cost recognized for IAS................     270       260       291
Amortization of transition obligation.......................      24        24        24
                                                              ------    ------    ------
NET PERIODIC BENEFIT COST RECOGNIZED FOR U.S. GAAP..........     294       284       315
                                                              ======    ======    ======
</Table>

e.   OTHER

     There are also differences between IAS and U.S. GAAP in relation to (1)
asset impairments, (2) restructuring provisions, (3) equity compensation, (4)
other employee benefits and (5) in-process research and development. None of the
differences are individually significant and they are therefore shown as a
combined total.

ADDITIONAL U.S. GAAP DISCLOSURES

DISCONTINUED OPERATIONS

     Under IAS, the Group has classified DyStar, EC Erdolchemie, Haarmann &
Reimer and the Fibers business group as discontinuing operations. Under U.S.
GAAP, DyStar does not meet the requirements for classification as a discontinued
operation, as the formal plan for disposal of these operations will not be
completed within one year. The following U.S. GAAP income statement information
excludes DyStar as a discontinued operation.

<Table>
<Caption>
                                                      2001           2001           2000           1999
                                                   -----------    -----------    -----------    -----------
                                                   ($ MILLION)    (E MILLION)    (E MILLION)    (E MILLION)
<S>                                                <C>            <C>            <C>            <C>
INCOME FROM CONTINUING OPERATIONS................       427            481          1,603          1,898
Discontinued Operations -- net of tax............       284            319            180             69
                                                      -----          -----          -----          -----
NET INCOME REPORTED UNDER U.S. GAAP..............       711            800          1,783          1,967
                                                      =====          =====          =====          =====
</Table>

                                       F-54
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

<Table>
<Caption>
EARNINGS PER SHARE                                    2001           2001           2000           1999
------------------                                 -----------    -----------    -----------    -----------
                                                   ($ MILLION)    (E MILLION)    (E MILLION)    (E MILLION)
<S>                                                <C>            <C>            <C>            <C>
Basic and diluted:
  Income from continuing operations..............      0.58           0.66           2.19           2.60
  Income from discontinued operations............      0.39           0.44           0.25           0.09
                                                      -----          -----          -----          -----
BASIC AND DILUTED EARNINGS PER SHARE.............      0.97           1.10           2.44           2.69
                                                      =====          =====          =====          =====
</Table>

FINANCIAL ASSETS AND LIABILITIES

     The components of marketable securities under U.S. GAAP at December 31,
2001 and 2000 are the following:

<Table>
<Caption>
                                                             GROSS         GROSS       CARRYING VALUE
                                                           UNREALIZED    UNREALIZED    AND ESTIMATED
                                                  COST       GAINS         LOSSES        FAIR VALUE
                                                  -----    ----------    ----------    --------------
                                                                      (E MILLION)
<S>                                               <C>      <C>           <C>           <C>
AS OF DECEMBER 31, 2001
Available for sale securities:
  Equity securities.............................    944        625           (35)          1,534
  Debt securities...............................     39         20            (7)             52
                                                  -----      -----         -----           -----
TOTAL...........................................    983        645           (42)          1,586
                                                  =====      =====         =====           =====
AS OF DECEMBER 31, 2000
Available for sale securities:
  Equity securities.............................    426      1,370            (6)          1,790
  Debt securities...............................     51          2            --              53
                                                  -----      -----         -----           -----
TOTAL...........................................    447      1,372            (6)          1,843
                                                  =====      =====         =====           =====
</Table>

     Prior to the adoption of IAS 39, unrealized holding gains on available for
sale securities were not recorded under IAS, and gross unrealized holding losses
on available for sale securities were recorded in the other financial expense
component of financial income, net. Under U.S. GAAP, unrealized holding gains
and losses on available-for-sale-securities are recorded as a component of other
comprehensive income in all periods presented.

     Proceeds from sales of available for sale securities were E195 million,
E296 million, and E71 million in 2001, 2000 and 1999, respectively. Gross
realized gains were E25 million, E73 million, and E13 million on those sales in
2001, 2000 and 1999, respectively. Gross realized losses were E2 million in 1999
on those sales. There were no gross realized losses in 2001 or in 2000. The gain
or loss on these sales was determined using the weighted average cost method.

     The maturities of debt securities at December 31, 2001 are as follows:

<Table>
<Caption>
                                                              AVAILABLE FOR
                                                                  SALE
                                                              -------------
                                                               (E MILLION)
<S>                                                           <C>
Within one year.............................................        33
Over one year through five years............................        19
                                                                   ---
TOTAL.......................................................        52
                                                                   ===
</Table>

                                       F-55
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

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 confined to the hedging of the operating business and of the
related investments and financing transactions.

FAIR VALUE HEDGES

     Changes in the fair value of derivatives that hedge interest rate risk are
recorded in interest expense-net each 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-net for 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.

CASH FLOW HEDGES

     While each risk management program has a different time horizon, no program
currently extends beyond the next one-year period. The effects of hedges of
foreign currency-denominated cash receipts are reported in other non-operating
expense-net, and the effects of hedges of payments are reported in the same line
item of the underlying payment. There was no hedge ineffectiveness reported in
earnings in the twelve-months ended December 1, 2001, and no amounts were
reclassified to earnings for forecasted transactions that did not occur.

     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.

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, except for marketable
securities before 2001, as described above. 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.

                                       F-56
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

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 on 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:

<Table>
<Caption>
                                                                 2001          2000          1999
                                                              -----------   -----------   -----------
                                                              (E MILLION)   (E MILLION)   (E MILLION)
<S>                                                           <C>           <C>           <C>
Net income under U.S. GAAP..................................       800         1,783         1,967
Other comprehensive income:
  Unrealized market value adjustment on available-for-sale
     securities
     (net of taxes of E28 million, E3 and E7 million,
     respectively)..........................................      (816)          799           507
  Unrealized market value adjustment on cash flow hedges
     (net of taxes of E1 million, E nil, and E nil).........         1             0             0
  Reclassification adjustment:
     Net realized gains on sales of securities (net of taxes
       of E nil, E4 million and E5 million, respectively)...        25           (12)           (7)
  Additional minimum pension liability (net of taxes of E80
     million, E1 and E19 million, respectively).............      (120)            2            27
  Foreign currency translation adjustment...................       322           288         1,304
                                                                 -----         -----         -----
COMPREHENSIVE INCOME UNDER U.S. GAAP........................       212         2,860         3,798
                                                                 =====         =====         =====
</Table>

EMPLOYEE BENEFIT PLANS

     Presented below are the disclosures required by SFAS No. 132 "Employers'
Disclosures about Pensions and Other Post-Retirement Benefits"), which provide a
roll forward of benefit obligations, plan assets and funded status of the plan:

<Table>
<Caption>
                                                                                   OTHER POST-
                                                                                   EMPLOYMENT
                                                             PENSION BENEFITS       BENEFITS
                                                             -----------------   ---------------
                                                              2001      2000      2001     2000
                                                             -------   -------   ------   ------
                                                                         (E MILLION)
<S>                                                          <C>       <C>       <C>      <C>
BENEFIT OBLIGATION
At beginning of year.......................................  10,684    10,161       949      864
Service cost...............................................     265       323        23      192
Interest cost..............................................     669       642        58       52
Spin-offs of subsidiaries..................................    (184)      (91)       --       --
Acquisitions...............................................       2        --         2        7
Plan amendments............................................      --                 (94)      --
Plan settlements...........................................      (1)      (12)       --       --
Actuarial (gain) loss......................................     305        51        84      (13)
Foreign currency translation...............................      66       128        25       50
Benefit payments...........................................    (503)     (518)      (90)    (203)
                                                             ------    ------    ------   ------
BENEFIT OBLIGATION AT END OF YEAR..........................  11,303    10,684       957      949
                                                             ------    ------    ------   ------
</Table>

                                       F-57
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

<Table>
<Caption>
                                                                                   OTHER POST-
                                                                                   EMPLOYMENT
                                                             PENSION BENEFITS       BENEFITS
                                                             -----------------   ---------------
                                                              2001      2000      2001     2000
                                                             -------   -------   ------   ------
                                                                         (E MILLION)
<S>                                                          <C>       <C>       <C>      <C>
PLAN ASSETS AT FAIR VALUE
At beginning of year.......................................   8,790     8,407       389      337
Actual return on plan assets...............................    (563)      355       (43)      24
Spin-offs of subsidiaries..................................    (130)      (72)       --       --
Acquisitions...............................................       2        51        --       --
Foreign currency translation...............................     178       155         9       26
Employer contribution......................................     313       368        72      205
Employee contributions.....................................      39        44        --       --
Benefit payments...........................................    (503)     (518)      (90)    (203)
                                                             ------    ------    ------   ------
PLAN ASSETS AT FAIR VALUE AT END OF YEAR...................   8,126     8,790       337      389
                                                             ------    ------    ------   ------
FUNDED STATUS..............................................  (3,177)   (1,894)     (620)    (560)
Unrecognized transition obligation.........................      50        79        --       --
Unrecognized prior service cost............................      16         3       (85)       5
Unrecognized actuarial (gains) losses......................   1,350      (130)       70      (82)
ADDITIONAL MINIMUM LIABILITY...............................    (415)     (215)       --       --
                                                             ------    ------    ------   ------
PREPAID (ACCRUED) BENEFIT COST.............................  (2,176)   (2,157)     (635)    (637)
                                                             ======    ======    ======   ======
Amounts recognized in the balance sheet
Prepaid benefit cost.......................................   1,792     1,604        --       --
Accrued benefit liability..................................  (3,968)   (3,761)     (635)    (637)
                                                             ------    ------    ------   ------
NET AMOUNT RECOGNIZED......................................  (2,176)   (2,157)     (635)    (637)
                                                             ======    ======    ======   ======
BENEFIT COST
Service cost...............................................     265       323        23      192
Flat-rate tax on employer contributions....................       7         7        --       --
Interest cost..............................................     669       642        58       52
Expected return on plan assets.............................    (608)     (592)      (31)     (30)
Employee contributions.....................................     (39)      (42)       --       --
Amortisation of unrecognized prior service cost............      10         1        --       --
Amortisation of transition obligation......................     (22)       20        --       --
Amortisation of actuarial (gains) losses...................      12        (9)       13       (1)
                                                             ------    ------    ------   ------
NET PERIODIC BENEFIT COST..................................     294       350        63      213
                                                             ======    ======    ======   ======
</Table>

<Table>
<Caption>
OTHER POST-RETIREMENT BENEFIT PLANS WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,  2001     2000
-----------------------------------------------------------------------------------  -----    -----
<S>                                                                                  <C>      <C>
Discount rate..........................................................              7.00%    7.00%
Rate of compensation increase..........................................                N/A      N/A
Expected return on plan assets.........................................              8.50%    8.50%
</Table>

                                       F-58
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     The assumed health care cost trend rate at December 31, 2001 was 8.0%
gradually declining 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 2001 would
have the following effects:

<Table>
<Caption>
                                                              1% POINT INCREASE    1% POINT DECREASE
                                                              -----------------    -----------------
                                                                           (E MILLION)
<S>                                                           <C>                  <C>
Effects on total of service and interest cost components....          13                  (11)
Effect on post retirement benefit obligations...............          87                  (75)
</Table>

PRO FORMA NET INCOME

     The Group applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations in accounting for its
stock compensation program. Statement of Financial Accounting Standards No. 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 No. 25.
Hence the additional pro forma disclosures required under SFAS No. 123 do not
apply.

PROPORTIONAL CONSOLIDATION

     The Group accounts for its investment in 12 joint ventures 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 United States
Securities and Exchange Commission (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:

<Table>
<Caption>
BALANCE SHEET INFORMATION                                     DEC. 31, 2001    DEC. 31, 2000
-------------------------                                     -------------    -------------
                                                                      (IN MILLION E)
<S>                                                           <C>              <C>
Current assets..............................................        175              582
Noncurrent assets...........................................        236              791
Short-term liabilities......................................        128             (511)
Long-term liabilities.......................................         38             (189)
</Table>

<Table>
<Caption>
STATEMENT OF INCOME INFORMATION                               DEC. 31, 2001    DEC. 31, 2000
-------------------------------                               -------------    -------------
                                                                      (IN MILLION E)
<S>                                                           <C>              <C>
Net sales...................................................        492            1,799
Operating result............................................         63              132
Net income..................................................         55              118
</Table>

<Table>
<Caption>
STATEMENT OF CASH FLOW INFORMATION                            DEC. 31, 2001    DEC. 31, 2000
----------------------------------                            -------------    -------------
                                                                      (IN MILLION E)
<S>                                                           <C>              <C>
Net cash provided by operating activities...................         61              159
Net cash (used in) investing activities.....................        (16)            (142)
Net cash (used in) financing activities.....................        (44)             (29)
</Table>

     The reduction in joint venture amounts listed above relates to the
inclusion of DyStar by the equity method starting in 2001.

                                       F-59
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

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
approximately E10 million per occurrence, and product liability up to E14
million per occurrence. For claims against our US subsidiary, the product
liability self-insurance is limited to a maximum of E22 million per year. An
estimate of the cost of settling existing claims is included under accrued
liabilities.

LEGAL PROCEEDINGS

     As discussed in Note 29, 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 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. 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 section, we describe what we believe to be the
most significant of the proceedings in which Bayer AG or its subsidiaries are
currently involved.

PATENT VALIDITY CHALLENGES AND INFRINGEMENT PROCEEDINGS; PATENT-RELATED
ANTITRUST ACTIONS

     In the United States, Bayer AG and its U.S. subsidiary Bayer Corporation
are plaintiffs or co-plaintiffs 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 containing the active ingredients ciprofloxacin or
nifedipine 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 had 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 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

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

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(R). 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
expires 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. Shortly after settling this suit, we applied to the U.S. Patent and
Trademark Office for a reexamination of our patent. The Patent and Trademark
Office reissued the patent in February 1999.

     In April 1999, Danbury Pharmacal Inc., an affiliate of Schein
Pharmaceutical, Inc., filed an ANDA (IV) alleging that our ciprofloxacin patent
was invalid. Mylan Pharmaceuticals, Inc., an affiliate of Mylan Laboratories,
Inc., filed an ANDA (IV) challenging our ciprofloxacin patent in September 1999.
To protect and enforce our patent rights, Bayer AG together with Bayer
Corporation as licensee filed two lawsuits against Danbury Pharmacal and Schein
Pharmaceutical and one lawsuit against Mylan Pharmaceuticals and Mylan
Laboratories in 1999, and a second lawsuit against Mylan Pharmaceuticals and
Mylan Laboratories in 2000. Reddy Cheminor, Inc. intervened as an additional
defendant in the Danbury/Schein suits. All these suits were consolidated for
pre-trial proceedings and trial before the U.S. federal District Court for the
District of New Jersey.

     In their responses the defendants alleged the invalidity and
unenforceability of our reexamined patent on several grounds. They then moved
for summary judgment on the invalidity issue, and we filed a cross-motion for
partial summary judgment. In February 2001, the district court denied the
defendants' motion and granted our cross-motion. The court subsequently entered
a final judgment in our favor, confirming the validity and enforceability of the
patent. The defendants appealed this judgment to the Court of Appeals for the
Federal Circuit, which heard oral arguments on January 7, 2002.

     In addition, Bayer AG and Bayer Corporation filed a patent infringement
action in May 2001 against Carlsbad Technology, Inc., arising from Carlsbad's
ANDA (IV) filing seeking regulatory approval of its generic version of Cipro(R).
Carlsbad filed two motions for summary judgment. The first motion alleged as a
matter of patent procedure that Bayer's patent as it relates to ciprofloxacin
should expire in October 2002 and not, as determined by the Patent and Trademark
Office, in December 2003. Bayer filed a cross-motion for summary judgment that
the expiration date is in December 2003. In its second motion, Carlsbad alleged
that ciprofloxacin was obvious in light of the prior art. The federal District
Court for the Southern District of California denied both Carlsbad motions in
October, 2001 and granted summary judgment to Bayer on its cross-motion.
Carlsbad has appealed the decision denying the first motion to the Court of
Appeals for the Federal Circuit. A trial regarding the arguments of obviousness
raised in Carlsbad's second motion was held in April and May 2002. The Court has
not yet made a ruling. Carlsbad has withdrawn all other defenses it had
originally raised challenging the validity and enforceability of Bayer AG's
ciprofloxacin patent.

     If we lost our patent protection for ciprofloxacin, or if the expiration of
the patent were accelerated to October 2002, we believe that we would forego
significant revenue. We intend to continue taking vigorous action to maintain
our ciprofloxacin patent rights in the United States through their normal expiry
in December 2003.

                                       F-61
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     Antitrust actions.  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 defendant in twenty of these
cases, including the individual lawsuit and the consumer protection group
lawsuit; it has 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 defendant in one or more of these
lawsuits. The plaintiffs in these suits allege that they are direct or indirect
purchasers of Cipro(R) who were damaged because Bayer's settlement of the Barr
ANDA (IV) litigation prevented generic manufacturers from selling a generic
version of Cipro(R). The plaintiffs allege that the defendants violated various
federal antitrust and state business, antitrust, unfair trade practices and
consumer protection statutes, and seek treble damages and injunctive relief.

     These proceedings are at an early stage. None of the relevant courts have
certified a class. The Judicial Panel for Multidistrict Litigation, or MDL
Panel, transferred 35 of these cases to the U.S. federal District Court for the
Eastern District of New York for coordinated pre-trial proceedings. The federal
court ordered nine of those cases remanded to various state courts in October
2001. Nine cases are currently pending in a California state court. Bayer is
also involved in state court proceedings occurring in Florida, New York, Kansas,
Tennessee and Wisconsin.

     The Barr settlement is also the subject of ongoing antitrust investigations
by the U.S. Federal Trade Commission and a number of state attorneys general.

     Because these cases 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 material to our results of operations and
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.

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(R) CC and
Pfizer, Inc.'s brand-name product Procardia(R) 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(R) XL under
a license from Bayer, Bayer AG and Bayer Corporation became Pfizer's
co-plaintiffs in the infringement actions relating to that product.

     In August 1997, Bayer AG and Bayer Corporation filed a patent infringement
suit against Elan Pharmaceutical Research Corp. and Elan's parent company, Elan
Corp., plc, arising from Elan's ANDA (IV) for a drug product containing
nifedipine in a 30 mg dosage form. In March 1999, the U.S. federal District
Court for the Northern District of Georgia granted summary judgment against us,
holding that the particular generic product for which Elan sought marketing
approval as described in its ANDA would not violate our patent. In May 2000, the
U.S. Court of Appeals for the Federal Circuit affirmed this decision.

     In March 2001, the same district court granted summary judgment against
Bayer AG and Bayer Corporation in a second ANDA (IV) related suit (60 mg dosage
form) that we had filed against Elan and later in another action that we had
filed against Elan, Biovail Labs, Inc., Biovail Corp. International and Teva
Pharmaceuticals USA, Inc., arising from these parties' commercial sale of an
allegedly bio-equivalent nifedipine product. We appealed these decisions to the
Court of Appeals for the Federal Circuit. The Federal Circuit vacated these
decisions of the District Court and remanded the cases to the District Court for
further proceedings.

     Bayer AG and Bayer Corporation have also filed four ANDA (IV) related
lawsuits against Biovail and two lawsuits arising from the commercial sale of
nifedipine products by Biovail and Teva. These suits are currently stayed before
the U.S. federal District Court for the District of Puerto Rico.

                                       F-62
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     As defendants have prevailed in some of these lawsuits, it is possible that
they may also prevail in the trials and appeals that may take place in the
future. We believe, however, that we have meritorious claims in the pending
cases, and intend to prosecute these claims vigorously. Because some of our
nifedipine dosages have already begun to face generic competition, we do not
believe that an adverse result in the pending cases would result in a material
amount of additional foregone revenue.

     Antitrust actions.  Biovail has filed an antitrust lawsuit against Bayer
AG, Bayer Corporation and Pfizer in the U.S. federal District Court for the
District of Western Pennsylvania. Biovail is seeking a declaratory judgment that
Bayer's nifedipine patents are invalid. Biovail also seeks damages under federal
and state antitrust statutes alleging, among other things, that Bayer illegally
asserted its patent rights. The district court has stayed this litigation
pending resolution of the nifedepine-related patent infringement actions against
Biovail.

     This proceeding is at an early stage. However, we believe that we have
meritorious defenses to the antitrust allegations, and we intend to defend this
case vigorously.

Product liability proceedings

     HIV-related actions.  During the past decade, our U.S. subsidiary 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 also satisfactorily settled
nearly 400 lawsuits by plaintiffs who opted out of the class action. Seven 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.

     Although 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. These provisions are not material to the Bayer Group.

     Cerivastatin-related actions.  In August 2001, we voluntarily ceased
marketing our cerivastatin anticholesterol products in response to reports of
serious side effects in some patients. See Item 4, Information about the Company
-- Health Care -- Pharmaceuticals -- Products. Since this withdrawal, about
1,700 lawsuits, many of them putative class actions, have been initiated in the
United States against Bayer Corporation and Bayer AG. The actions in the United
States have been 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 are being transferred to the U.S. federal District Court for the
District of Minnesota for coordinated discovery and other pre-trial proceedings.
In addition, several actions have been initiated against other companies of the
Bayer Group in other countries. We expect additional lawsuits to be filed in the
United States and elsewhere. If the plaintiffs in these actions were to be
successful, it is possible that the ultimate liability could be material to our
results of operations and cash flows. We believe that we have meritorious
defenses in these actions and are defending them vigorously. Without
acknowledging any liability, we have settled a small 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 any litigation.
                                       F-63
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

     Phenylpropanolamine (PPA) actions.  In late 2000, Bayer Corporation
discontinued marketing Alka-Seltzer Plus effervescent medicines containing PPA
in the United States, Canada and various Latin American countries in response to
a recommendation from the U.S. Food and Drug Administration to all manufacturers
of drugs and medicines containing PPA. 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. More
than 540 class and individual lawsuits have been initiated in the United States
against Bayer Corporation. The MDL Panel has assigned management of the federal
court cases to the U.S. federal District Court for the Western District of
Washington. It is probable that additional actions will be initiated there or in
other jurisdictions where products containing PPA were marketed. Bayer
Corporation believes it has meritorious defenses to these actions and intends to
defend them vigorously.

Medicaid Rebate Program allegations

     Our U.S. subsidiary, Bayer Corporation, is currently under investigation by
the U.S. Attorney's Office for the District of Massachusetts. The investigation,
which is assisted by the Department of Health & Human Services, focuses
primarily on allegations that Bayer Corporation improperly underpaid rebates
under the Medicaid Rebate Program during a period from 1995 to 2000.

     These investigations could lead the government to bring criminal or civil
actions, or both, against Bayer Corporation. If the government brought such
actions and obtained a conviction or verdict against Bayer Corporation, we would
likely be required to reimburse the government the amount of the alleged
underpayment. We would also become liable to pay civil and/or criminal fines or
penalties, which could be substantial. Although we believe this outcome to be
unlikely, in the worst case a conviction or adverse verdict could result in the
exclusion of Bayer Corporation from participation in federal health programs.
Bayer Corporation is providing information to the government and otherwise
cooperating with the investigation. Bayer Corporation believes that its
practices complied in all material respects with all applicable laws and is
therefore seeking to persuade the government to discontinue its investigation.
If the government does bring civil or criminal charges against Bayer
Corporation, Bayer Corporation intends to defend itself vigorously.

Average wholesale price manipulation proceedings

     Seven pending lawsuits allege that a number of pharmaceutical companies,
including Bayer Corporation, manipulated the average wholesale 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. We expect that six of
these actions will be consolidated before the U.S. federal court for the
District of Massachusetts. The remaining case, in which the State of Nevada is
plaintiff, has been removed to federal court in Nevada but may be subject to
remand to a state court. Bayer Corporation has not yet responded to the
complaints in these actions, but intends to defend itself vigorously.

EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

U.S. GAAP

     Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137
and No. 138, requires all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income. The adoption of
SFAS No. 133 as of January 1, 2001 did not have a material effect on the Group's
financial position, results of operations or cash flows.

     In June 2001, the Financial Accounting Standards Board approved SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets".
SFAS 141 requires the purchase method of accounting to be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill, and requires
unallocated negative goodwill to be written off
                                       F-64
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

immediately as an extraordinary gain. Bayer will apply SFAS 141 to all business
combinations for which purchase agreements are signed after June 30, 2001. SFAS
142 addresses the accounting for goodwill and identifiable intangible assets
subsequent to their acquisition. Amortization of goodwill will discontinue upon
adoption of SFAS 142. In addition, goodwill recorded as a result of business
combinations completed during the six-month period ended December 31, 2001 will
not be amortized. All goodwill and intangible assets will be tested for
impairment in accordance with the provision of this statement. The Group will
apply the provisions of SFAS 142 beginning January 1, 2002. Bayer has not
completed its analysis of these standards and, accordingly, has not determined
what affect the adoption of SFAS 141 and 142 will have on the Group's financial
position, results of operations or cash flows.

     In June 2001, the Financial Accounting Standards Board approved SFAS 143
"Accounting for Asset Retirement Obligations". SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS 143 is effective for fiscal
periods beginning after June 15, 2002. Early adoption is encouraged and initial
application of this Statement shall be as of the beginning of an entity's fiscal
year. The Group will apply SFAS 143 beginning January 1, 2003. Bayer has not
completed its analysis of this standard and, accordingly, has not determined
what effect the adoption of SFAS 143 will have on the Group's financial
position, results of operations or cash flows.

     In August 2001, the Financial Accounting Standards Board approved SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
retains the requirements of SFAS 121 to recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and measure an impairment loss as the difference between the carrying
amount and fair value of the asset. SFAS 144 requires a probability-weighted
cash flow estimation approach and establishes a "primary-asset" approach to
determine the cash flow estimation period for groups of assets and liabilities.
SFAS 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The Group will apply SFAS 144 beginning January 1, 2002. Bayer has not completed
its analysis of this standard and, accordingly, has not determined what effect
the adoption of SFAS 144 will have on the Group's financial position, results of
operations or cash flows.

     In 2001, the Emerging Issues Task Force (EITF) reached consensus on EITF
00-14 "Accounting for Certain Sales Incentives" and EITF 00-25 "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products", which address the recognition, measurement and income statement
presentation classification of certain sales incentives, and the statement of
earnings of consideration from a vendor to an entity that purchases the vendor's
products for resale, respectively. We have not yet completed our analysis of the
impact of these statements on our financial information presented in accordance
with U.S. GAAP.

[45] SUBSEQUENT EVENTS (UNAUDITED)

     In October 2001, we entered into an agreement to acquire Aventis
CropScience from Aventis and Schering for E7.25 billion. The European Commission
approved the transaction in April 2002, and the United States Federal Trade
Commission gave its preliminary approval of the transaction under the terms of a
consent order on May 30, 2002. Both approvals are subject to the condition that
we divest or out-license some of the combined enterprise's products. These
conditions require us, among other things, to: divest Aventis CropScience's
Fipronil business worldwide, with a right to obtain a co-exclusive license for
non-agricultural uses worldwide, except for Europe; divest five Aventis
fungicides in Europe and grant a world-wide, non-exclusive license for the
Aventis seed treatment products; divest the sugar beet herbicide Metamitron in
Europe; divest the broad-spectrum pyrethroid insecticides Cyfluthrin
(Baythroid(R)) and beta-cyfluthrin (Bulldock(R)); divest the sugar beet
herbicide (Goltix(R)); divest the insecticide Acetamiprid in Europe and North
America; divest the wheat herbicide Everest worldwide; and divest Aventis
CropScience's cotton defoliant business Folex in the U.S. The total sales value
of all divestments is about E650 to 700 million of which about 25 percent comes
from the former Bayer Crop protection business and 75 percent from the former
Aventis CropScience. The acquisition of Aventis CropScience

                                       F-65
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE BAYER GROUP -- (CONTINUED)

was closed on June 3, 2002, and we do not expect to make additional major
acquisitions in our Crop Protection segment in the near term.

     In April 2002, Bayer AG placed benchmark bonds in the European capital
market. The total volume of the issue was E5 billion, split into two tranches of
a five-year E3 billion bond and a ten-year E2 billion bond.

     The tranches carry a 5.375% and a 6% coupon, respectively. The bond
proceeds served to finance part of the costs of Bayer's acquisition of Aventis
CropScience. The remaining price will be covered through the ongoing issuance of
commercial paper.

     In May 2002, we decided to retain our Fiber business as part of polymers,
because presently the market is not prepared to pay an appropriate price for
this business. We will include the Fiber business in our continuing operations
for all periods beginning with the second quarter of 2002. Continuing the
business offers better prospects for success than a divestment. As a result of
the present review process of the fibers' activities, an impairment write-down
affecting the operating results of polymers substantially may arise.

     On June 4, 2001 we sold the remaining 30 percent stake in Agfa for a gain
of approximately E200 million.

TOTAL REMUNERATION OF THE BOARD OF MANAGEMENT AND THE SUPERVISORY BOARD,
ADVANCES AND LOANS

     The remuneration of the Board of Management for 2001 amounted to
E8,153,562. Emoluments to retired members of the Board of Management and their
surviving dependants amounted to E8,355,270.

     Pension provisions for these individuals amounting to E69,341,493 are
reflected in the balance sheet of Bayer AG.

     The remuneration of the Supervisory Board amounted to E1,293,750.

     There were no loans to members of the Board of Management or the
Supervisory Board outstanding as of December 31, 2001, nor any repayments of
such loans during the year.

Leverkusen, February 26, 2002
Bayer Aktiengesellschaft
The Board of Management

                                       F-66