##### Table of Contents



As filed with the Securities and Exchange
Commission on June 27, 2003




---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




---

FORM 20-F

|           |  |                                                                                                                                       |  | 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | 
|(Mark One) |  |                                                                                                                                       |  | 
|o          |  | REGISTRATION STATEMENT PURSUANT TO
    SECTION 12(b) OR 12(g) OF
    THE SECURITIES EXCHANGE ACT OF 1934
    OR                       |  | 
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF
    THE SECURITIES EXCHANGE ACT OF 1934
    OR                                   |  | 
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF
    THE SECURITIES EXCHANGE ACT OF 1934
    Commission file number 001-16829 |  | 

BAYER AKTIENGESELLSCHAFT


(Exact name of Registrant as specified in its
charter)


BAYER CORPORATION*


(Translation of Registrants name into
English)


Federal Republic of Germany


(Jurisdiction of incorporation or
organization)


Bayerwerk, Gebäude W11

Kaiser-Wilhelm-Allee


51368 Leverkusen, GERMANY


(Address of principal executive
offices)




---

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

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



---

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

None

(Title of class)


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

None

(Title of class)


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

As
of December 31, 2002, 730,341,920 ordinary shares, of no
par value, of Bayer AG were outstanding.

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

Yes
x          No
o          Not
applicable.

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

Item 17
o          Item 18
x



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



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TABLE OF CONTENTS



|                                        |                                                                                       |  |  |  |  |  |  | 
|--------------------------------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                 
|                                        | Item 1. Identity of Directors, Senior Management and Advisors                        
|                                        | Item 2. Offer Statistics and Expected Timetable                                      
|                                        | Item 3. Key Information                                                              
|                                        | Item 4. Information on the Company                                                   
|                                        | Item 5. Operating and Financial Review and Prospects                                 
|                                        | Item 6. Directors, Senior Management and Employees                                   
|                                        | Item 7. Major Shareholders and Related Party Transactions                            
|                                        | Item 8. Financial Information                                                        
|                                        | Item 9. The Listing                                                                  
|                                        | Item 10. Additional Information                                                      
|                                        | Item 11. Quantitative and Qualitative Disclosures about Market Risk                  
|                                        | Item 12. Description of Securities Other Than Equity Securities                      
|PART II                                
|                                        | Item 13. Defaults, Dividend Arrearages and Delinquencies                             
|                                        | Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
|                                        | Item 15. Controls and Procedures                                                     
|                                        | Item 16. [Reserved]                                                                  
|PART III                               
|                                        | Item 17. Financial Statements                                                        
|                                        | Item 18. Financial Statements                                                        
|                                        | Item 19. Exhibits                                                                    
|SIGNATURES                             
|Summary of Employment Agreement Wenning
|Summary of Employment Agreement Oels   
|Summary of Employment Agreement Kuehn  
|Summary of Employment Agreement Pott   
|906 Certification                      



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##### Table of Contents



TABLE OF CONTENTS

|         |                                                                                           |      |     |     | 
|-------- | ----------------------------------------------------------------------------------------- | ---- | --- | --- | 
|         |                                                                                           | Page
|         |                                                                                           |     
|PART I   |                                                                                           |      | 5   |    
|         | Item 1. Identity of Directors, Senior
    Management and Advisors                         |      |     | 5   | 
|         | Item 2. Offer Statistics and Expected
    Timetable                                       |      |     | 5   | 
|         | Item 3. Key Information                                                                   |      |     | 5   | 
|         | Item 4. Information on the Company                                                        |      |     | 12  | 
|         | Item 5. Operating and Financial Review and
    Prospects                                  |      |     | 64  | 
|         | Item 6. Directors, Senior Management and
    Employees                                    |      |     | 84  | 
|         | Item 7. Major Shareholders and Related Party
    Transactions                             |      |     | 94  | 
|         | Item 8. Financial Information                                                             |      |     | 95  | 
|         | Item 9. The Listing                                                                       |      |     | 104 | 
|         | Item 10. Additional Information                                                           |      |     | 105 | 
|         | Item 11. Quantitative and Qualitative
    Disclosures about Market Risk                   |      |     | 110 | 
|         | Item 12. Description of Securities Other
    Than Equity Securities                       |      |     | 113 | 
|PART II  |                                                                                           |      | 114 |    
|         | Item 13. Defaults, Dividend Arrearages and
    Delinquencies                              |      |     | 114 | 
|         | Item 14. Material Modifications to the
    Rights of Security Holders and Use of Proceeds |      |     | 114 | 
|         | Item 15. Controls and Procedures                                                          |      |     | 114 | 
|         | Item 16. [Reserved]                                                                       |      |     | 114 | 
|PART III |                                                                                           |      | 114 |    
|         | Item 17. Financial Statements                                                             |      |     | 114 | 
|         | Item 18. Financial Statements                                                             |      |     | 114 | 
|         | Item 19. Exhibits                                                                         |      |     | 114 | 

2



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##### Table of Contents



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



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

3



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##### Table of Contents





| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | there is a lack of reciprocity between Germany
    and the jurisdiction whose court rendered the original judgment.

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

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

4



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##### Table of Contents






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

Since January 1, 1999, we have prepared our
financial statements in European Union
euros ().
In this annual report we have translated certain euro amounts
into U.S. dollar amounts at the rate of $1.0485 =
1.00, the noon
buying rate of the Federal Reserve Bank of New York on
December 31, 2002. We have translated these amounts solely
for your convenience, and you should not assume that, on that or
any other date, one could have converted these amounts of euros
into dollars at that or any other exchange rate.

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

5



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Consolidated Income Statement
Data

|                                       |  |                         |        |                                     |  |      |        |      |  |      |        |         |  |  |        |   |  |  |        |   |  |  |        |  
|-------------------------------------- |  | ----------------------- | ------ | ----------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ------- |  |  | ------ | - |  |  | ------ | - |  |  | ------ | -
|                                       |  |                        
|                                       |  | Year ended December 31,
|                                       |  |                        
|                                       |  | 2002                    |        | 2002                                |  | 2001 |        | 2000 |  | 1999 |        | 1998(1)
|                                       |  |                         |        |                                     |  |      |        |      |  |      |        |        
|                                       |  |                         |        |                                    |  |     |        |     |  |     |        |       
|                                       |  | $                       |        |                                    
|                                       |  | (                       |        | in millions, except per share data)
|IFRS:                                  |  |                         |        |                                     |  |      |        |      |  |      |        |         |  |  |        |   |  |  |        |   |  |  |        |  
|Net sales                              |  |                         | 31,061 |                                     |  |      | 29,624 |      |  |      | 30,275 |         |  |  | 30,971 |   |  |  | 27,320 |   |  |  | 28,062 |  
|Of which discontinuing operations      |  |                         | 698    |                                     |  |      | 666    |      |  |      | 1,105  |         |  |  | 1,850  |   |  |  | 3,357  |   |  |  | 5,981  |  
|Operating result                       |  |                         | 1,650  |                                     |  |      | 1,574  |      |  |      | 1,611  |         |  |  | 3,287  |   |  |  | 3,357  |   |  |  | 3,155  |  
|Of which discontinuing operations      |  |                         | 1,028  |                                     |  |      | 980    |      |  |      | 406    |         |  |  | 172    |   |  |  | 1,195  |   |  |  | 359    |  
|Non-operating result                   |  |                         | 648    |                                     |  |      | (618   | )    |  |      | (496   | )       |  |  | (297   | ) |  |  | (521   | ) |  |  | (427   | )
|Income before income taxes             |  |                         | 1,002  |                                     |  |      | 956    |      |  |      | 1,115  |         |  |  | 2,990  |   |  |  | 2,836  |   |  |  | 2,728  |  
|Income taxes                           |  |                         | 112    |                                     |  |      | 107    |      |  |      | (154   | )       |  |  | (1,148 | ) |  |  | (818   | ) |  |  | (1,113 | )
|Income after taxes                     |  |                         | 1,115  |                                     |  |      | 1,063  |      |  |      | 961    |         |  |  | 1,842  |   |  |  | 2,018  |   |  |  | 1,615  |  
|Minority stockholders interest        |  |                         | (3     | )                                   |  |      | (3     | )    |  |      | 4      |         |  |  | (26    | ) |  |  | (16    | ) |  |  | (1     | )
|Net income                             |  |                         | 1,111  |                                     |  |      | 1,060  |      |  |      | 965    |         |  |  | 1,816  |   |  |  | 2,002  |   |  |  | 1,614  |  
|Average number of shares in issue      |  |                         | 730    |                                     |  |      | 730    |      |  |      | 730    |         |  |  | 730    |   |  |  | 730    |   |  |  | 730    |  
|Basic net income per share             |  |                         | 1.52   |                                     |  |      | 1.45   |      |  |      | 1.32   |         |  |  | 2.49   |   |  |  | 2.74   |   |  |  | 2.21   |  
|Diluted net income per share           |  |                         | 1.52   |                                     |  |      | 1.45   |      |  |      | 1.32   |         |  |  | 2.49   |   |  |  | 2.74   |   |  |  | 2.21   |  
|Dividends per share                    |  |                         | 0.94   |                                     |  |      | 0.90   |      |  |      | 0.90   |         |  |  | 1.40   |   |  |  | 1.30   |   |  |  | 1.02   |  
|U.S. GAAP:                             |  |                         |        |                                     |  |      |        |      |  |      |        |         |  |  |        |   |  |  |        |   |  |  |        |  
|Net income                             |  |                         | 1,339  |                                     |  |      | 1,277  |      |  |      | 800    |         |  |  | 1,783  |   |  |  | 1,967  |   |  |  |       |  
|Basic and diluted net income per share |  |                         | 1.83   |                                     |  |      | 1.75   |      |  |      | 1.10   |         |  |  | 2.44   |   |  |  | 2.69   |   |  |  |       |  






|    |                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 1998 figures have been restated from German
    marks into euros at the irrevocably fixed conversion rate of
    DM 1.95583 =
    1.00.

Consolidated Balance Sheet
Data

|                                         |  |                                      |        |      |  |      |        |      |  |      |        |         |  |  |        |  |  |  |        |  |  |  |        | 
|---------------------------------------- |  | ------------------------------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ------- |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                                         |  |                                     
|                                         |  | December 31,                        
|                                         |  |                                     
|                                         |  | 2002                                 |        | 2002 |  | 2001 |        | 2000 |  | 1999 |        | 1998(1)
|                                         |  | $                                    |        |     |  |     |        |     |  |     |        |       
|                                         |  |                                      |        |      |  |      |        |      |  |      |        |        
|                                         |  |                                     
|                                         |  | (in millions, except per share data)
|IFRS:                                    |  |                                      |        |      |  |      |        |      |  |      |        |         |  |  |        |  |  |  |        |  |  |  |        | 
|Total Assets                             |  |                                      | 43,714 |      |  |      | 41,692 |      |  |      | 37,039 |         |  |  | 36,451 |  |  |  | 31,279 |  |  |  | 29,377 | 
|Of which discontinuing operations        |  |                                      | 0      |      |  |      | 0      |      |  |      | 820    |         |  |  | 1,662  |  |  |  | 1,440  |  |  |  | 5,238  | 
|Stockholders equity                     |  |                                      | 16,079 |      |  |      | 15,335 |      |  |      | 16,922 |         |  |  | 16,140 |  |  |  | 15,006 |  |  |  | 12,568 | 
|Liabilities                              |  |                                      | 27,509 |      |  |      | 26,237 |      |  |      | 20,019 |         |  |  | 20,074 |  |  |  | 16,097 |  |  |  | 16,598 | 
|Of which long-term financial obligations |  |                                      | 7,673  |      |  |      | 7,318  |      |  |      | 3,071  |         |  |  | 2,803  |  |  |  | 2,359  |  |  |  | 2,404  | 
|Of which discontinuing operations        |  |                                      | 0      |      |  |      | 0      |      |  |      | 233    |         |  |  | 651    |  |  |  | 574    |  |  |  | 2,354  | 
|U.S. GAAP:                               |  |                                      |        |      |  |      |        |      |  |      |        |         |  |  |        |  |  |  |        |  |  |  |        | 
|Stockholders equity                     |  |                                      | 17,545 |      |  |      | 16,734 |      |  |      | 18,300 |         |  |  | 19,110 |  |  |  | 17,177 |  |  |  |       | 
|Total assets                             |  |                                      | 44,737 |      |  |      | 42,668 |      |  |      | 37,831 |         |  |  | 38,740 |  |  |  | 32,769 |  |  |  |       | 






|    |                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 1998 figures have been restated from German
    marks into euros at the irrevocably fixed conversion rate of
    DM 1.95583 =
    1.00.

6



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##### Table of Contents



Dividends

The following table indicates the dividends per
share paid from 1998 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.

|                                   |  |      |      |      |  |      |      |      |  |      |       |  |  |  |      |  |  |  |      | 
|---------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ----- |  |  |  | ---- |  |  |  | ---- | 
|                                   |  | 2002 |      | 2001 |  | 2000 |      | 1999 |  | 1998
|                                   |  |      |      |      |  |      |      |      |  |     
|Total dividend
    ( in millions) |  |      | 657  |      |  |      | 657  |      |  |      | 1,022 |  |  |  | 949  |  |  |  | 747  | 
|Dividend per share
    ()         |  |      | 0.90 |      |  |      | 0.90 |      |  |      | 1.40  |  |  |  | 1.30 |  |  |  | 1.02 | 

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
1.00 =
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.

|     |  |            |        |         |  |      |        |     |  |  |        |  |  |  |        | 
|---- |  | ---------- | ------ | ------- |  | ---- | ------ | --- |  |  | ------ |  |  |  | ------ | 
|Year |  | Period End |        | Average |  | High |        | Low
|     |  |            |        |         |  |      |        |    
|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 | 
|2002 |  |            | 1.0485 |         |  |      | 0.9454 |     |  |  | 1.0485 |  |  |  | 0.8594 | 

|                    |  |      |        |     |  |  |        | 
|------------------- |  | ---- | ------ | --- |  |  | ------ | 
|Previous six months |  | High |        | Low
|                    |  |      |        |    
|December 2002       |  |      | 1.0485 |     |  |  | 0.9927 | 
|January 2003        |  |      | 1.0861 |     |  |  | 1.0361 | 
|February 2003       |  |      | 1.0875 |     |  |  | 1.0708 | 
|March 2003          |  |      | 1.1062 |     |  |  | 1.0545 | 
|April 2003          |  |      | 1.1180 |     |  |  | 1.0621 | 
|May 2003            |  |      | 1.1853 |     |  |  | 1.1200 | 

7



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##### Table of Contents



Risk Factors

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

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, Biological Products segment
and our Consumer Care, Diagnostics segment are subject to
particularly strict regulatory regimes. Failure to achieve
regulatory approval of new products can mean that we do not
recoup our research and development investment through sales of
that product. Withdrawal by regulators of an approval previously
granted can mean that the affected product ceases to generate
revenue. This can occur even if regulators take action falling
short of actual withdrawal. 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

8



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##### Table of Contents



substance. In addition, in some cases we may
voluntarily cease marketing a product even in the absence of
regulatory action.


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.

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

In cases where we believe it appropriate, we have
established provisions to cover potential litigation-related
costs. Increased risks currently result from litigation
commenced in the United States after we voluntarily withdrew
Lipobay/ Baycol and products containing PPA from the market. If
plaintiffs in these actions substantially prevail despite our
defense arguments, we could incur charges that exceed our
insurance coverage. This event could materially affect our
business and financial condition. There is considerable
uncertainty associated with these proceedings; currently,
therefore, we cannot accurately estimate our potential liability
in connection with these actions. Depending on the progress of
the litigation, we will continue to reconsider the need to
establish provisions, which may have a negative effect on our
financial results.

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##### Table of Contents



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

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

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

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;

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| |   |                                                             
| | - | ------------------------------------------------------------
| |  | 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.

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, 2002, we had entered into
forward foreign exchange contracts and currency swaps with a
total notional value of
3.0 billion.
See Item 11, Quantitative and Qualitative Disclosures
About Market Risk.

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##### Table of Contents






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. Farbenindustrie AG, or I.G. Farben. After the
second World War, the Allied High Commission, formed by the
United States, the United Kingdom, France and the former Soviet
Union to administer occupied Germany, seized the assets of I.G.
Farben. Pursuant to Law No. 35 of the Allied High
Commission, some of these assets were later distributed among 12
newly formed companies, including the present Bayer AG.

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

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

Since 2000 we have incurred capital expenditures
as follows:

|                                     |       |                     |     |       |  |      |     |       |  |  |     |       | 
|------------------------------------ | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                                     |       | 2002                |     | 2001  |  | 2000
|                                     |       |                     |     |       |  |     
|                                     |       |                    
|                                     |       | (euros in millions)
|Pharmaceuticals, Biological Products |       |                     | 178 |       |  |      | 375 |       |  |  | 482 |      
|Consumer Care, Diagnostics           |       |                     | 272 |       |  |      | 238 |       |  |  | 167 |      
|Animal Health                        |       |                     | 26  |       |  |      | 45  |       |  |  | 42  |      
|CropScience                          |       |                     | 297 |       |  |      | 199 |       |  |  | 194 |      
|Plastics, Rubber                     |       |                     | 504 |       |  |      | 536 |       |  |  | 556 |      
|Polyurethanes, Coatings, Fibers      |       |                     | 506 |       |  |      | 468 |       |  |  | 338 |      
|Chemicals                            |       |                     | 285 |       |  |      | 444 |       |  |  | 358 |      
|                                     |       |                     |     |       |  |      |     |       |  |  |     |      
|                                     | Total |                     |     | 2,068 |  |      |     | 2,305 |  |  |     | 2,137 | 
|                                     |       |                     |     |       |  |      |     |       |  |  |     |      

In 2000 we spent a total of
4.2 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 our crop protection business by acquiring the
Flint® strobilurin product line. In 2001 we spent
0.5 billion
on acquisitions, including rights to manufacture and market
products that detect hepatitis C and HIV antibodies, as well as
the corn herbicide Mikado®. We also made a
93 million
equity

12



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##### Table of Contents



investment in CuraGen. In 2002 we spent a total
of
7.9 billion
on acquisitions, mainly for the acquisition of Aventis
CropScience effective June 1, 2002 from Aventis and
Schering. Approval of this acquisition by the relevant antitrust
authorities, particularly in Europe and the United States, was
conditional upon our divesting or outlicensing a number of
products. We also acquired Visible Genetics Inc. in Canada and
Tectrade A/S in Denmark.


In 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. We continued to streamline our portfolio
through 2000, divesting our animal health biologicals 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 Erdölchemie joint venture, which we had
previously classified under Discontinuing
Operations. As part of the streamlining of our portfolio,
we sold Haarmann & Reimer effective September 30, 2002.
We also sold the remaining 30 percent of our Agfa business
segment, of which we had already divested 70 percent in
1999. Effective March 1, 2002 we sold our 94.9 percent
interest in Bayer Wohnungen. In addition, we sold a large part
of the global household insecticides business of our Consumer
Care business group. As a further part of our drive to
streamline our portfolio, we divested our French and Spanish
generic pharmaceutical operations. We also sold our
50 percent interest in PolymerLatex. This transaction was
closed on May 9, 2003.

13



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##### Table of Contents



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 330 consolidated subsidiaries. We
are organized into seven business segments 
Pharmaceuticals, Biological Products; Consumer Care,
Diagnostics; Animal Health; CropScience; Plastics, Rubber;
Polyurethanes, Coatings, Fibers; 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 are:



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Bayer HealthCare AG(consisting of our three health care segments: Pharmaceuticals,
    Biological Products; Consumer Care, Diagnostics; and Animal
    Health);
|
| |  | Bayer CropScience AG(consisting of our CropScience segment);                                                                                                   
|
| |  | Bayer Polymers AG(consisting of our Plastics, Rubber segment and our
    Polyurethanes, Coatings, Fibers segment); and                                         
|
| |  | Bayer Chemicals AG(consisting of our Chemicals segment).                                                                                                       

Under the plan, we have also created three
additional subsidiaries (Bayer Technology Services GmbH, Bayer
Business Services GmbH and Bayer Industry Services GmbH &
Co. oHG). 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
annual shareholders meeting, the shareholders approved the
transfer of assets to Bayer CropScience AG, with economic effect
from January 1, 2002. At the annual shareholders
meeting in April 2003, Bayer AGs shareholders approved the
transfer of assets to the other three operating companies, as
well as to the three service companies. Our transformation to
the new holding company structure will be complete when these
asset transfers have been recorded in the commercial register.
However, at the April 2003 annual meeting, Bayer AGs
shareholders resolved that, for tax and accounting purposes, the
transformation shall have retroactive economic effect as from
January 1, 2003 for Bayer HealthCare and Bayer Technology
Services, as from July 1, 2003 for Bayer Chemicals and as
from October 1, 2003 for Bayer Polymers, Bayer Business
Services and Bayer Industry Services.

A shareholder of Bayer AG has filed a lawsuit in
the regional court of Cologne, Germany (Landgericht
Köln), challenging the planned new structure. The
transfers of assets to our new subsidiaries cannot be recorded
in the commercial register while this case is pending. See
Item 8, Financial Information  Legal
Proceedings.

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. In our Pharmaceuticals business, we may
consider entering into collaborations without being bound by a
strict minimum ownership percentage, if we believe that such
collaborations are in the best interest of our shareholders. We
may also consider entering into collaborations in the Polymers
sector, particularly in the area of production.

For the year ended December 31, 2002, Bayer
reported total sales of
29.6 billion,
an operating result of
1.6 billion,
and net income of
1.1 billion.
Sales from continuing operations amounted to
29.0 billion.
As of December 31, 2002, we employed 122,600 people
worldwide.

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##### Table of Contents



The following table shows a breakdown by region
of our sales in 2002:

|                                  |  |                     |        |                       |  |  |      | 
|--------------------------------- |  | ------------------- | ------ | --------------------- |  |  | ---- | 
|                                  |  |                    
|                                  |  | Sales              
|                                  |  |                    
|Region                            |  | (euros in millions) |        | (percentage of total)
|                                  |  |                     |        |                      
|Europe                            |  |                     | 13,537 |                       |  |  | 46.7 | 
|North America                     |  |                     | 8,992  |                       |  |  | 31.1 | 
|Asia/Pacific                      |  |                     | 3,927  |                       |  |  | 13.6 | 
|Latin America/ Africa/Middle East |  |                     | 2,502  |                       |  |  | 8.6  | 

Portfolio optimization has for many years been
the focus of our strategy. In the past year, we completed the
largest acquisition in the history of the company with the
purchase of Aventis CropScience, while completing a series of
divestitures with an aggregate value of approximately
5.5 billion
under generally difficult market conditions. In the CropScience
business, we continue to focus on integration measures and on
further increasing our market share. In Plastics we believe
opportunities exist to expand our market position, particularly
in the area of high value plastics. Substantial development
potential exists in Asia, especially in China. We also believe
that there is a significant potential for improving earnings in
our Polymers business. In our Chemicals business, we have
significantly restructured our activities over the past years.
We will continue to focus these efforts particularly on
Specialty Chemicals, and we may consider entering into strategic
partnerships in business areas where we have identified
strategically meaningful opportunities.

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

PHARMACEUTICALS, BIOLOGICAL PRODUCTS

Overview

Our Pharmaceuticals, Biological Products segment
(formerly Pharmaceuticals) 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) and recombinant protein therapies. This segment
formerly consisted of a single business group responsible for
both pharmaceutical and biological products. Beginning in 2002,
we have organized the segment internally into separate
Pharmaceuticals and Biological Products business groups. The
following table shows the segments performance for the
last three years.

|                                             |                                                                  |                     |       |      |  |      |       |      |  |  |       |      | 
|-------------------------------------------- | ---------------------------------------------------------------- | ------------------- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- | ---- | 
|                                             |                                                                  | 2002                |       | 2001 |  | 2000
|                                             |                                                                  |                     |       |      |  |     
|                                             |                                                                  |                    
|                                             |                                                                  | (euros in millions)
|External net sales                           |                                                                  |                     | 4,767 |      |  |      | 5,729 |      |  |  | 6,140 |     
|                                             | Percentage of total sales (continuing operations)                |                     |       | 16.5 |  |      |       | 19.6 |  |  |       | 21.1 | 
|Intersegment sales                           |                                                                  |                     | 33    |      |  |      | 38    |      |  |  | 39    |     
|Operating result before exceptional items(1) |                                                                  |                     | 151   |      |  |      | 383   |      |  |  | 1,165 |     
|                                             | Percentage of total operating result (continuing
    operations) |                     |       | 15.3 |  |      |       | 20.8 |  |  |       | 35.6 | 
|Exceptional items(1)                         |                                                                  |                     | (339  | )    |  |      | (332  | )    |  |  | (5    | )   
|Operating result                             |                                                                  |                     | (188  | )    |  |      | 51    |      |  |  | 1,160 |     






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In this table and the similar tables presented
    for our other segments, we use the term exceptional
    items to identify and segregate certain items reported in
    our operating results for the segment. These items relate
    primarily to restructuring activities, impairment charges and
    gains and losses from sales of operations. This use of
    exceptional items is consistent with our
    managements internal reporting process. Our management
    believes that this presentation provides the reader with
    additional information about our core activities at the Bayer
    Group and segment levels. See also Note 7 to our
    consolidated financial statements.

15



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##### Table of Contents



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

|           |  |           |       |            |  |           |      |            |  |           |       |            |  |  |      |  |  |  |       |  |  |  |      | 
|---------- |  | --------- | ----- | ---------- |  | --------- | ---- | ---------- |  | --------- | ----- | ---------- |  |  | ---- |  |  |  | ----- |  |  |  | ---- | 
|           |  |           |       |            |  |          
|           |  | 2002      |       | 2001       |  | 2000     
|           |  |           |       |            |  |          
|           |  | Sales     |       | Percentage |  | Sales     |      | Percentage |  | Sales     |       | Percentage
|           |  | (euros in |       | of segment |  | (euros in |      | of segment |  | (euros in |       | of segment
|Product    |  | millions) |       | sales      |  | millions) |      | sales      |  | millions) |       | sales     
|           |  |           |       |            |  |           |      |            |  |           |       |           
|Cipro      |  |           | 1,411 |            |  |           | 29.6 |            |  |           | 1,964 |            |  |  | 34.3 |  |  |  | 1,785 |  |  |  | 29.1 | 
|Adalat     |  |           | 800   |            |  |           | 16.8 |            |  |           | 975   |            |  |  | 17.0 |  |  |  | 1,155 |  |  |  | 18.8 | 
|Kogenate   |  |           | 400   |            |  |           | 8.4  |            |  |           | 250   |            |  |  | 4.4  |  |  |  | 491   |  |  |  | 8.0  | 
|Gamimune-N |  |           | 333   |            |  |           | 7.0  |            |  |           | 343   |            |  |  | 6.0  |  |  |  | 350   |  |  |  | 5.7  | 

Segment Strategy

We are in the process of bundling our health care
businesses (including Pharmaceuticals, Biological Products) into
a single new, wholly-owned subsidiary of Bayer AG.
See  Business.

Our strategic priorities for the Pharmaceuticals,
Biological Products segment include:



| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | restructuring our business to adjust the cost
    base, especially for research and development, without stifling
    our potential for long-term growth, and to evaluate potential
    strategic partnerships in order to fully exploit the value of
    the business;
|
| |  | together with our co-promotion partner
    GlaxoSmithKline, continuing the launch in major European markets
    of Levitra, our vardenafil erectile dysfunction product, and
    preparing for Levitras expected launch in the United
    States;                     
|
| |  | focusing on the development of key projects in
    the pipeline;                                                                                                                                                                                                       
|
| |  | expanding into the oncology area; and                                                                                                                                                                                                                                  
|
| |  | increasing the market share and profitability of
    our Kogenate recombinant Factor VIII clotting factor.                                                                                                                                                             

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. See 
Research and Development  Life Cycle
Management.

Major Products

Ciprofloxacin, marketed under the trademark
Cipro® in the United States and
Ciproxin®, Ciproxine®,
Ciprobay® and Ciflox® in other
countries, is a broad-spectrum antimicrobial agent of the
fluoroquinolone class. We launched Cipro in 1986 and have since
marketed it in more than 100 countries. Cipros main
uses are in the treatment of urinary tract infections and in
severe hospital infections, where it competes with other
fluoroquinolones as well as with antibiotics of other classes.
It is also approved for the treatment of anthrax. In addition,
in the United States in January 2003, we launched Cipro XR
in a 500 mg extended release tablet for once daily
administration in the treatment of uncomplicated urinary tract
infections. In October 2002 we submitted to the FDA an
application for approval of a 1,000 mg tablet of Cipro XR
for once daily therapy of complicated urinary tract infections.
Cipro is our leading pharmaceutical product.

Moxifloxacin, marketed under the tradename
Avalox® in the United States and
Avelox®, Izilox® and Actira®
in other countries, is an antibiotic used to treat common
bacterial respiratory tract infections. We currently market
Avelox in more than 60 countries. It is indicated for the
treatment of community-acquired pneumonia, acute exacerbations
of chronic bronchitis and acute sinusitis. In late 2001 we
launched Avelox i.v.®, a new intravenous form of
this product, in the United States, our most important market
for this product in terms of sales, and subsequently in other
markets.

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

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Kogenate®
FS (Kogenate® 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 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. The production issues highlighted by the FDA
inspections in late 2000 have been resolved.

We supply recombinant fVIII to Aventis Behring,
which markets it under the brand name Helixate FS®.
We produce recombinant fVIII under licenses from Genentech and
another licensor, which together give us worldwide production
rights.

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

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

Prolastin®
(α1-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
α1-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® (nimodipine)
globally in the mid-1980s. A member of the dihydropyridine 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® and
Plasmanate® 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® 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.

Microbial resistance to antibiotics

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

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

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Markets and Distribution

The Pharmaceuticals, Biological Products
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:

|                                  |       |                     |       |       |  |      |       |       |  |  |       |       | 
|--------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                  |       | 2002                |       | 2001  |  | 2000
|                                  |       |                     |       |       |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 1,411 |       |  |      | 1,629 |       |  |  | 1,698 |      
|North America                     |       |                     | 2,084 |       |  |      | 2,637 |       |  |  | 2,812 |      
|Asia/Pacific                      |       |                     | 884   |       |  |      | 1,022 |       |  |  | 1,159 |      
|Latin America/ Africa/Middle East |       |                     | 388   |       |  |      | 441   |       |  |  | 471   |      
|                                  |       |                     |       |       |  |      |       |       |  |  |       |      
|                                  | Total |                     |       | 4,767 |  |      |       | 5,729 |  |  |       | 6,140 | 
|                                  |       |                     |       |       |  |      |       |       |  |  |       |      

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

|                    |                         |                     |       |       |  |      |       |       |  |  |       |       | 
|------------------- | ----------------------- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                    |                         | 2002                |       | 2001  |  | 2000
|                    |                         |                     |       |       |  |     
|                    |                         |                    
|                    |                         | (euros in millions)
|Cipro/ Ciprobay     |                         |                     | 1,411 |       |  |      | 1,964 |       |  |  | 1,785 |      
|Adalat              |                         |                     | 800   |       |  |      | 975   |       |  |  | 1,155 |      
|Kogenate            |                         |                     | 400   |       |  |      | 250   |       |  |  | 491   |      
|Gamimune N          |                         |                     | 333   |       |  |      | 343   |       |  |  | 350   |      
|Glucobay            |                         |                     | 287   |       |  |      | 312   |       |  |  | 311   |      
|Avelox              |                         |                     | 280   |       |  |      | 181   |       |  |  | 132   |      
|Trasylol            |                         |                     | 154   |       |  |      | 136   |       |  |  | 104   |      
|Prolastin           |                         |                     | 151   |       |  |      | 131   |       |  |  | 140   |      
|Nimotop             |                         |                     | 111   |       |  |      | 120   |       |  |  | 129   |      
|Fraction V products |                         |                     | 85    |       |  |      | 101   |       |  |  | 118   |      
|                    |                         |                     |       |       |  |      |       |       |  |  |       |      
|                    | Sum of top ten products |                     |       | 4,012 |  |      |       | 4,513 |  |  |       | 4,715 | 
|                    | All other products      |                     |       | 755   |  |      |       | 1,216 |  |  |       | 1,425 | 
|                    |                         |                     |       |       |  |      |       |       |  |  |       |      
|                    | Total                   |                     |       | 4,767 |  |      |       | 5,729 |  |  |       | 6,140 | 
|                    |                         |                     |       |       |  |      |       |       |  |  |       |      

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



| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | in Europe and North America, increasingly
    competitive price pressures, as managed care groups, health care
    institutions, government agencies and other purchaser groups
    seek price discounts and rebates for pharmaceutical products;
|
| |  | the impact of competing generic products entering
    the European and North American markets;                                                                                                                                                   
|
| |  | currency effects resulting from transactions in
    countries outside the euro zone;                                                                                                                                                             
|
| |  | competition from large pharmaceutical companies
    in the market with substantial resources for research, product
    development and promotion;                                                                                                
|
| |  | in Japan, regulation of pharmaceutical prices and
    mandatory price reductions stipulated by the Japanese Ministry
    of Health, Labor 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 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 help us ensure an unbroken
supply chain. We obtain additional ingredients and packaging
materials from diverse suppliers on a worldwide basis. We
endeavor to approve several suppliers for each required
material. At the same time, we are

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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 at our
facilities in Clayton, North Carolina and, under license from
Genentech, recombinant fVIII in Berkeley, California. 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
Levitra (vardenafil), our erectile dysfunction medication,
currently approved in the EU and being launched in Germany and
other major European markets. We expect approval in the United
States and Japan. See  New Products. In
January 2003 Bayer and Aventis terminated negotiations regarding
the establishment of a joint venture for biological products.

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., Novartis, and AstraZeneca are market
leaders in the area of hypertension and coronary heart disease
therapy. The market leaders for oral antidiabetics are Takeda,
GlaxoSmithKline and Bristol-Myers Squibb. The erectile
dysfunction market currently is dominated by Pfizer. Lilly has
also recently entered the erectile dysfunction market. In
cytostatics, Roche and Bristol-Myers Squibb have the largest
market shares. 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, Biological
Products 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 investment to yield
high productivity. Our established areas of core competency are
bacterial infections as well as cardiovascular diseases and
related disorders such as diabetes. Furthermore, we plan to
steadily expand our activities in our recently established
therapeutic area, oncology. Our current research and development
portfolio also includes the following therapeutic areas:
obesity, 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, 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.
See  Research and Development.

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 apply life cycle management measures to our
marketed products to expand the scope of possible treatment
opportunities by identifying new indications and improved
formulations. 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: seventeen years
after the patent protection for nifedipine, its key component,
expired, the drug generated
800 million
in sales in 2002. Similarly, as our original patent for
Ciprofloxacin expires in various jurisdictions, we are
implementing life

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cycle management measures, such as improved
formulations and dosage forms, for that drug. See 
Major Products.


New products

We received marketing approval from the European
Commission in March 2003 for Levitra®, our erectile
dysfunction medication. Levitra has already been launched in
Germany and other major European markets. We expect to receive
final marketing approval in the United States in the second half
of 2003. The application that we filed with the Japanese
authorities in December 2001 is currently under review. See
Item 8, Financial Information  Legal
Proceedings for a discussion of the intellectual property
status in the United States of Levitra and other erectile
dysfunction medications.

Gamunex

Gamunex is a
plasma-derived concentrate of human antibodies (IVIG). We
manufacture Gamunex using a new purification process, which aims
to assure product quality and supply reliability by eliminating
viruses and other potential disease-causing agents. Biological
Products has built a manufacturing facility exclusively
dedicated to producing IVIG. Gamunex has been the subject of a
large-scale clinical trial program for patients with certain
forms of primary immune deficiency (PIP), congenital conditions
in which the bodys immune system is impaired, as well as
idiopathic thrombocytopenic purpura (ITP), a condition in which
the patients own antibodies damage the cells that
facilitate blood clotting. On the basis of these trials, we
believe that Gamunex shows significantly improved effectiveness
compared with earlier products used to treat these conditions.

Additional drug candidates in Phase II of
clinical development are Repinotan, a Factor Xa inhibitor, a Raf
Kinase inhibitor, and a novel Taxane. The respective indications
are:

|                     |  |                       |  |            
|-------------------- |  | --------------------- |  | -----------
|Product/ Brand name  |  | Principal application |  | Status     
|                     |  |                       |  |            
|Repinotan            |  | Acute ischemic stroke |  | In Phase II
|Faxtor Xa inhibitor  |  | Thrombosis            |  | In Phase II
|Raf Kinase inhibitor |  | Cancer                |  | In Phase II
|Novel Taxane         |  | Cancer                |  | In Phase II

We plan to outlicense two projects in
Phase II in the indications of chronic obstructive
pulmonary disease and severe asthma. We have discontinued the
development of Faropenem since the results of clinical trials
indicated that it was unlikely that the product could be
marketed successfully. Although Repinotan was ready for
Phase III development, we revisited our clinical
development strategy based on recent experiences in the stroke
field and advice from key clinical experts, resulting in a
revised study program for Phase II.

In May 2002 we entered into an agreement with
Medicines for Malaria Venture (MMV), a World Health Organization
(WHO) initiative, concerning the development of a new malaria
drug based on the active substance artemisone. Under the
agreement we will assume responsibility for the development of
the drug, and after approval, WHO/MMV will oversee the
distribution of the product in the public health systems of
developing countries.

CONSUMER CARE, DIAGNOSTICS

Overview

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

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

|                                          |                                                                  |                     |       |      |  |      |       |      |  |  |       |      | 
|----------------------------------------- | ---------------------------------------------------------------- | ------------------- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- | ---- | 
|                                          |                                                                  | 2002                |       | 2001 |  | 2000
|                                          |                                                                  |                     |       |      |  |     
|                                          |                                                                  |                    
|                                          |                                                                  | (euros in millions)
|External net sales                        |                                                                  |                     | 3,755 |      |  |      | 4,104 |      |  |  | 3,888 |     
|                                          | Percentage of total sales (continuing operations)                |                     |       | 13.0 |  |      |       | 14.1 |  |  |       | 13.4 | 
|Intersegment sales                        |                                                                  |                     | 2     |      |  |      | 2     |      |  |  |      |     
|Operating result before exceptional items |                                                                  |                     | 408   |      |  |      | 388   |      |  |  | 311   |     
|                                          | Percentage of total operating result (continuing
    operations) |                     |       | 41.3 |  |      |       | 21.1 |  |  |       | 9.5  | 
|Exceptional items                         |                                                                  |                     | 193   |      |  |      | (47   | )    |  |  | (134  | )   
|Operating result                          |                                                                  |                     | 601   |      |  |      | 341   |      |  |  | 177   |     

Segment Strategy

We are in the process of bundling our health care
businesses (including Consumer Care, Diagnostics) into a single
new, wholly-owned subsidiary of Bayer AG. See 
Business.

Our strategic priorities for the Consumer Care,
Diagnostics segment are improving profitability, especially in
the Diagnostics business, and gaining market share with selected
core brands.

Consumer Care

Overview

Our Consumer Care business group develops and
markets over-the-counter (OTC) medications (analgesics, cough
and cold, dermatological and gastrointestinal remedies), as well
as vitamin and nutritional supplements. It is our goal to
achieve cost savings in the medium term by consolidating
production. We have divested the household insecticide product
lines in accordance with our strategy to focus on
over-the-counter (OTC) medications, vitamins and nutritional
supplements.

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, ointments and salves). We
concentrate primarily on the oral products segment. Our OTC
products also face competition from prescription drugs, for
example cyclooxygenase (COX-II) inhibitor pain relievers.

Aspirin®
(Bayer® brand aspirin in the United States) is a
nonsteroidal anti-inflammatory drug (NSAID). It is used for pain
relief and 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® is a
nonprescription strength of the analgesic naproxen sodium. Aleve
is a long-lasting pain reliever and can be used for fever
reduction.

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

Cough/Cold

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

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Alka-Seltzer
Plus® is an effervescent product
to relieve symptoms accompanying the common cold. We market
Alka-Seltzer Plus in the United States and Canada.
Tabcin® is a line of products similar to
Alka-Seltzer Plus; we market it primarily in Latin America. 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 outside the United
States in 2002.

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

Dermatologicals

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

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

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

Rid® 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 (for example, anti-diarrheal brands extending
or re-positioning to cover the antacid segment) and possible
future preventative or curative therapies (for example, products
that eradicate or manage the ulcer-causing bacterium H.
pylori).

Alka-Seltzer®
was developed in the late 1920s by Miles Laboratories and 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® is a saline laxative
used as an overnight remedy for constipation and acid
indigestion, heartburn or sour stomach that may accompany it.
The original Phillips formulation entered the
U.S. market in 1873.

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

Nutritionals

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

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One-A-Day®
multivitamins entered the marketplace in 1940. Since 1994 we
have offered a variety of special formulations, such as
Mens, Womens, 55 Plus, Maximum and Essential
formulas. In 1998 One-A-Day introduced a line of multivitamin/
herbals blends to target specific health concerns (for example,
Energy, Memory and Prostate).

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

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
totals for the past three years are as follows:

|                                  |       |                     |     |       |  |      |     |       |  |  |     |       | 
|--------------------------------- | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                                  |       | 2002                |     | 2001  |  | 2000
|                                  |       |                     |     |       |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 452 |       |  |      | 467 |       |  |  | 465 |      
|North America                     |       |                     | 680 |       |  |      | 894 |       |  |  | 749 |      
|Asia/Pacific                      |       |                     | 188 |       |  |      | 222 |       |  |  | 207 |      
|Latin America/ Africa/Middle East |       |                     | 396 |       |  |      | 512 |       |  |  | 502 |      
|                                  |       |                     |     |       |  |      |     |       |  |  |     |      
|                                  | Total |                     |     | 1,716 |  |      |     | 2,095 |  |  |     | 1,923 | 
|                                  |       |                     |     |       |  |      |     |       |  |  |     |      

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

|                  |       |                     |     |       |  |      |     |       |  |  |     |       | 
|----------------- | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                  |       | 2002                |     | 2001  |  | 2000
|                  |       |                     |     |       |  |     
|                  |       |                    
|                  |       | (euros in millions)
|Analgesics        |       |                     | 621 |       |  |      | 775 |       |  |  | 731 |      
|Cough/Cold        |       |                     | 120 |       |  |      | 177 |       |  |  | 110 |      
|Dermatologicals   |       |                     | 218 |       |  |      | 246 |       |  |  | 225 |      
|Gastrointestinals |       |                     | 209 |       |  |      | 266 |       |  |  | 239 |      
|Nutritionals      |       |                     | 174 |       |  |      | 197 |       |  |  | 179 |      
|Other             |       |                     | 374 |       |  |      | 434 |       |  |  | 439 |      
|                  |       |                     |     |       |  |      |     |       |  |  |     |      
|                  | Total |                     |     | 1,716 |  |      |     | 2,095 |  |  |     | 1,923 | 
|                  |       |                     |     |       |  |      |     |       |  |  |     |      

The business group is not generally subject to
seasonality. Although consumer purchases of OTC cough/cold
medications may vary at different times of the year, these
variations do not have a material impact on the results of the
segment as a whole.

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 and are usually
not subject to significant price fluctuations. Changes in oil
and energy prices can affect a few key items, such as
acetylsalicylic acid, phenol and aluminum foil. We diversify our
raw materials sources internationally to help balance currency
exchange rate risk.

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.

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

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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                                                           
|
| |  | 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, Germany. The Leverkusen-based activities are
currently being relocated to Morristown.

We currently have six 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 2003. These products are:

|                     |  |                         |  |                                                
|-------------------- |  | ----------------------- |  | -----------------------------------------------
|Product/ Brand name  |  | Principal application   |  | Status                                         
|                     |  |                         |  |                                                
|ASA & Pseudoephedrin |  | Congestion, pain relief |  | Registration approved, launch
    expected 2003
|Fluconazol           |  | Vaginal Mycosis         |  | Registration approved, launch
    expected 2003
|ASP Fast Dissolve    |  | Cough & Cold            |  | Launch expected 2003                           
|Bayer Muscle & Joint |  | Topical pain            |  | Launch expected 2003                           
|PhillipsChews        |  | GI                      |  | Launch expected 2003                           
|RID Pure             |  | Lice treatment          |  | Launch expected 2003                           

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

Diagnostics

Overview

With approximately 8,000 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.

Diagnostics acquired Visible Genetics (VGI) in
the fourth quarter of 2002, which expands Bayers position
in the Nucleic Acid Diagnostics segment of the Central
Laboratory Market. VGI introduced the first FDA-approved product
for HIV resistance testing and provides additional expertise in
HIV and HCV testing. The VGI acquisition serves the strategic
goal to serve the market with an expanded infectious disease
portfolio. We also signed a joint venture agreement with
Matsushita Electric Industial Co. to establish Viterion
TeleHealthcare LLC, a company intended to market products and
services for the telemedicine sector. The company was
established in January 2003.

Major Products

Central Laboratory Testing

The ADVIA® 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. The main systems include ADVIA
Centaur®, ADVIA 1650® and ADVIA
120®.

24



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In addition to our ADVIA products, we also offer
the ACS:180® and Bayer Immuno 1®
immunodiagnostic analyzers, as well as the Clinitek
Atlas® 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® brand for the testing of HIV and Hepatitis
B and C. NAD techniques detect nucleic acids such as DNA and RNA
to allow for effective treatment of infectious and other
diseases.

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® family of
instruments and reagents for the measurement of blood gases,
electrolytes and coagulation.

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

Self-Testing

In the self-testing segment we launched the
Ascensia® brand for our diabetes testing products.
Our key products include the Ascensia Dex/Esprit®
blood glucose meter, which incorporates a 10-test cartridge to
provide greater convenience to patients who test their blood
sugar levels several times per day, and our best-selling
diagnostics product, the Ascensia Elite®, 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:

|                                  |       |                     |     |       |  |      |     |       |  |  |     |       | 
|--------------------------------- | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                                  |       | 2002                |     | 2001  |  | 2000
|                                  |       |                     |     |       |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 742 |       |  |      | 697 |       |  |  | 700 |      
|North America                     |       |                     | 901 |       |  |      | 880 |       |  |  | 868 |      
|Asia/Pacific                      |       |                     | 268 |       |  |      | 276 |       |  |  | 307 |      
|Latin America/ Africa/Middle East |       |                     | 128 |       |  |      | 156 |       |  |  | 90  |      
|                                  |       |                     |     |       |  |      |     |       |  |  |     |      
|                                  | Total |                     |     | 2,039 |  |      |     | 2,009 |  |  |     | 1,965 | 
|                                  |       |                     |     |       |  |      |     |       |  |  |     |      

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

|                               |       |                     |     |       |  |      |     |       |  |  |     |       | 
|------------------------------ | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                               |       | 2002                |     | 2001  |  | 2000
|                               |       |                     |     |       |  |     
|                               |       |                    
|                               |       | (euros in millions)
|Laboratory testing (excl. NAD) |       |                     | 813 |       |  |      | 791 |       |  |  | 776 |      
|NAD testing                    |       |                     | 99  |       |  |      | 86  |       |  |  | 65  |      
|Near patient testing           |       |                     | 398 |       |  |      | 407 |       |  |  | 419 |      
|Self-testing                   |       |                     | 729 |       |  |      | 722 |       |  |  | 705 |      
|Other                          |       |                     |    |       |  |      | 3   |       |  |  |    |      
|                               |       |                     |     |       |  |      |     |       |  |  |     |      
|                               | Total |                     |     | 2,039 |  |      |     | 2,009 |  |  |     | 1,965 | 
|                               |       |                     |     |       |  |      |     |       |  |  |     |      

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

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

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

We market our laboratory testing and NAD
products, as well as most of our near patient testing products,
directly to customers, who are primarily reference or private
laboratories and hospitals. 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.

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 on 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 oncology,
    cardiovascular and infectious disease testing.
|
| |  | In NAD testing, through menu expansion of assays
    for infectious disease and oncology 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
    monitoring systems and by focusing research in minimally- and
    non-invasive technologies.

The divisions primary research and
development facilities are located in the United States: in
Medfield and Cambridge, Massachusetts; Tarrytown, New York;
Elkhart, Indiana; and Berkeley, California.

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

|                                     |  |                                                                                                                            |  |                                       
|------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------
|Product/Brand name                   |  | Principal application                                                                                                      |  | Status                                
|                                     |  |                                                                                                                            |  |                                       
|ADVIA IMS® Integrated Modular System |  | Modular platform, combining immunodiagnostic and
    clinical chemistry on a single instrument with a broad
    assay menu |  | Launch planned for 2003               
|ADVIA Centaur® menu extension        |  | Extension of immunoassay menu, including full ID
    panel                                                                 |  | Launches planned for 2003 through 2004
|VERSANT HIV 3.0                      |  | Quantitative detection of HIV                                                                                              |  | Launched in November 2002             
|VERSANT HCV 3.0                      |  | Quantitative detection of hepatitis C                                                                                      |  | Launched in May 2003                  
|RapidLab 1200                        |  | Blood gas/electrolyte analyzer                                                                                             |  | Launch planned for 2004               
|Multistix PRO                        |  | Addition of proprietary microalbumin and creatine
    reagent pads for improved screening for kidney dysfunction           |  | Launched in January 2002              
|Ascensia® Contour®                   |  | Next generation whole blood glucose monitoring
    single strip system                                                     |  | Launched in April 2003                

ANIMAL HEALTH

Overview

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

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

|                                          |                                                                  |                     |     |      |  |      |     |     |  |  |     |     | 
|----------------------------------------- | ---------------------------------------------------------------- | ------------------- | --- | ---- |  | ---- | --- | --- |  |  | --- | --- | 
|                                          |                                                                  | 2002                |     | 2001 |  | 2000
|                                          |                                                                  |                     |     |      |  |     
|                                          |                                                                  |                    
|                                          |                                                                  | (euros in millions)
|External net sales                        |                                                                  |                     | 850 |      |  |      | 858 |     |  |  | 873 |    
|                                          | Percentage of total sales (continuing operations)                |                     |     | 2.9  |  |      |     | 2.9 |  |  |     | 3.0 | 
|Intersegment sales                        |                                                                  |                     | 1   |      |  |      | 4   |     |  |  | 6   |    
|Operating result before exceptional items |                                                                  |                     | 180 |      |  |      | 161 |     |  |  | 148 |    
|                                          | Percentage of total operating result (continuing
    operations) |                     |     | 18.2 |  |      |     | 8.8 |  |  |     | 4.5 | 
|Exceptional items                         |                                                                  |                     | (11 | )    |  |      | 0   |     |  |  | 25  |    
|Operating result                          |                                                                  |                     | 169 |      |  |      | 161 |     |  |  | 173 |    

Segment Strategy

We are in the process of bundling our health care
businesses (including Animal Health) into a single new,
wholly-owned subsidiary of Bayer AG. See  Business.

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Animal Health collaborates closely with our
Pharmaceuticals business group and CropScience segment as well
as other life science companies in research and development in
order to bring to the market new active ingredients and products
that combat diseases in animals.

Major Products

The imidacloprid combinations
Advantage® and Advantix® as well as
Baytril® are the two most important product types in
our Animal Health business.

Parasiticides

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

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

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

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

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

Antimicrobials

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

Biologicals

The Bayovac® 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.

Farm Hygiene

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

Nutritionals

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

Markets and Distribution

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

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

|                                  |       |                     |     |      |  |      |     |     |  |  |     |     | 
|--------------------------------- | ----- | ------------------- | --- | ---- |  | ---- | --- | --- |  |  | --- | --- | 
|                                  |       | 2002                |     | 2001 |  | 2000
|                                  |       |                     |     |      |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 243 |      |  |      | 237 |     |  |  | 228 |    
|North America                     |       |                     | 337 |      |  |      | 340 |     |  |  | 339 |    
|Asia/Pacific                      |       |                     | 136 |      |  |      | 134 |     |  |  | 150 |    
|Latin America/ Africa/Middle East |       |                     | 134 |      |  |      | 147 |     |  |  | 156 |    
|                                  |       |                     |     |      |  |      |     |     |  |  |     |    
|                                  | Total |                     |     | 850  |  |      |     | 858 |  |  |     | 873 | 
|                                  |       |                     |     |      |  |      |     |     |  |  |     |    

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

|               |       |                     |     |      |  |      |     |     |  |  |     |     | 
|-------------- | ----- | ------------------- | --- | ---- |  | ---- | --- | --- |  |  | --- | --- | 
|               |       | 2002                |     | 2001 |  | 2000
|               |       |                     |     |      |  |     
|               |       |                    
|               |       | (euros in millions)
|Parasiticides  |       |                     | 448 |      |  |      | 455 |     |  |  | 443 |    
|Antimicrobials |       |                     | 205 |      |  |      | 208 |     |  |  | 191 |    
|Biologicals    |       |                     | 39  |      |  |      | 45  |     |  |  | 81  |    
|Nutritionals   |       |                     | 63  |      |  |      | 69  |     |  |  | 78  |    
|Others         |       |                     | 95  |      |  |      | 81  |     |  |  | 80  |    
|               |       |                     |     |      |  |      |     |     |  |  |     |    
|               | Total |                     |     | 850  |  |      |     | 858 |  |  |     | 873 | 
|               |       |                     |     |      |  |      |     |     |  |  |     |    

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

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
pharmacologicals. A particular goal of our research and
development efforts is to provide the segment with innovative
and patent-protected products (new active ingredients,
formulations and application technologies).

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

We currently have several products or product
families in late stages of development. Subject to regulatory
approval, we expect to launch these products between 2003 and
2006. These products are:

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

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CROPSCIENCE

Overview

Our CropScience segment develops and markets
chemical crop protection products, seeds and integrated
biotechnology solutions for agricultural and non-agricultural
uses. CropScience operates through three business groups: Crop
Protection, Environmental Science and BioScience. Crop
Protection develops and markets chemical crop protection
products for the control of insects, weeds and fungi. It
develops active ingredients for new modes of action for enhanced
effectiveness against these target pests. Environmental Science
markets pest-control products for non-agricultural uses. The
business groups portfolio includes products for lawn and
garden care, termite and vector control, and rural hygiene and
household care. BioScience focuses on the research, development
and commercialization of conventional seeds and biotechnology
products. The following table shows CropSciences
performance for the last three years.

|                                          |                                                                  |                     |       |      |  |      |       |      |  |  |       |      | 
|----------------------------------------- | ---------------------------------------------------------------- | ------------------- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- | ---- | 
|                                          |                                                                  | 2002                |       | 2001 |  | 2000
|                                          |                                                                  |                     |       |      |  |     
|                                          |                                                                  |                    
|                                          |                                                                  | (euros in millions)
|External net sales                        |                                                                  |                     | 4,697 |      |  |      | 2,838 |      |  |  | 2,582 |     
|                                          | Percentage of total sales (continuing operations)                |                     |       | 16.2 |  |      |       | 9.7  |  |  |       | 8.9  | 
|Intersegment sales                        |                                                                  |                     | 90    |      |  |      | 102   |      |  |  | 97    |     
|Operating result before exceptional items |                                                                  |                     | (15   | )    |  |      | 464   |      |  |  | 410   |     
|                                          | Percentage of total operating result (continuing
    operations) |                     |       |     |  |      |       | 25.2 |  |  |       | 12.5 | 
|Exceptional items                         |                                                                  |                     | (107  | )    |  |      | 0     |      |  |  | 1     |     
|Operating result                          |                                                                  |                     | (122  | )    |  |      | 464   |      |  |  | 411   |     

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

|                                                  |  |           |     |            |  |           |      |            |  |           |     |            |  |  |      |  |  |  |     |  |  |  |      | 
|------------------------------------------------- |  | --------- | --- | ---------- |  | --------- | ---- | ---------- |  | --------- | --- | ---------- |  |  | ---- |  |  |  | --- |  |  |  | ---- | 
|                                                  |  |           |     |            |  |          
|                                                  |  | 2002      |     | 2001       |  | 2000     
|                                                  |  |           |     |            |  |          
|                                                  |  | Sales     |     | Percentage |  | Sales     |      | Percentage |  | Sales     |     | Percentage
|                                                  |  | (euros in |     | of segment |  | (euros in |      | of segment |  | (euros in |     | of segment
|Product                                           |  | millions) |     | sales      |  | millions) |      | sales      |  | millions) |     | sales     
|                                                  |  |           |     |            |  |           |      |            |  |           |     |           
|Imidacloprid (Confidor, Gaucho, Admire, Provado)* |  |           | 561 |            |  |           | 11.9 |            |  |           | 608 |            |  |  | 21.4 |  |  |  | 560 |  |  |  | 21.7 | 






|  |                                                                
|- | ---------------------------------------------------------------
|* | Also used in our Animal Health segments
    Advantage product.

Segment Strategy

In 2002 we reorganized our former Crop Protection
segment in connection with the acquisition of Aventis
CropScience. In the short term, the completion of the
integration and divestiture processes is a high priority. In
nearly all countries, we have merged the activities of the two
companies, and we have initiated important integration projects
to achieve our synergy targets. In addition, we have
substantially completed the divestitures required in connection
with antitrust approvals for the acquisition. See 
Notes to the Consolidated Financial Statements of the Bayer
Group  Acquisitions/ Divestitures.

CropScience aims to increase profitability by
introducing new products, realizing our synergy targets,
controlling costs and streamlining its portfolio. From time to
time, CropScience may seek to optimize its portfolio through
strategic joint ventures and acquisitions.

In Crop Protection, the strategic focus is to
capitalize on our strong product portfolio and introduce the new
products in the pipeline.

Environmental Science is among the leading
suppliers for non-agricultural pest control products worldwide,
based on total sales. The groups objective is to maintain
this leading market position. Strategic cornerstones will be
selective partnerships for the lawn and garden business in the
United States and the continuous optimization of our portfolio.

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With the acquisition of Aventis CropScience,
CropScience has gained access to the field of biotechnology.
CropScience continues to analyze its opportunities in the market
for agronomic trait technologies, which are traits that a crop
exhibits while it is still on the farm, such as insect
resistance or herbicide resistance. CropScience is also further
exploring the opportunities in the emerging field of quality
traits, which are post-farm traits, such as fiber
quality or nutritional value. Additionally, Nunza, a leading
international developer and supplier of high quality
conventional vegetable seed varieties, is an important pillar of
our BioScience business.

Major Products

Crop Protection

Insecticides

Imidacloprid is an active ingredient in the
chemical class of 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.
Key brands containing Imidacloprid are Confidor®,
Admire® and Provado®. Imidacloprid is
now marketed in more than 120 countries for use on numerous
important crops.

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

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

Fungicides

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

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

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

Herbicides

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

Metribuzin (Sencor®) is used against
broadleaf weeds and grasses. The product is applied on potatoes,
soybeans, sugar cane, tomatoes and other crops. Despite
Metribuzins maturity, its lifecycle has been extended by
using the product as a mix partner with other key herbicides.

Flufenacet®,
introduced in 1998, is effective in low dosages to protect
numerous crops, including corn, soybeans, potatoes, cereals and
rice, against grass weeds. Axiom®, Define,
Domain®, Epic® and Terano® are
key Flufenacet brands.

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

The active ingredients Phenmedipham, Desmedipham
and Ethofumesate make up the Betanal® product
family, the basis of weed control systems in various beet
varieties. Constant product innovation improving efficacy and
product use have extended the life cycle of the product family,
resulting in its strong position in the sugar beet market.

Seed Treatment

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

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

Environmental Science

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

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

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

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

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

BioScience

Nunza is a leading international developer and
supplier of high quality vegetable seed varieties that are
marketed to professional outdoor and greenhouse growers, plant
raisers and the food processing and service industries. The main
crop seeds are carrots, onions, melons, leeks and tomatoes. The
commercial name in Asia/Pacific and Europe is
Nunhems® and Sunseeds® in the Americas.

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

FiberMax®
cottonseed brand was launched in the U.S. market in 1998.
Additionally it was introduced in Greece, Spain, Turkey and some
Latin American countries.

InVigor® hybrid
canola (oilseed rape) varieties are suitable in several climate
and soil conditions for a variety of agricultural practices.
InVigor hybrid canola is a high yielding variety and affords
agricultural management options that require less cultivation
techniques. These hybrid varieties also have tolerance to
Glufosinate-Ammonium.

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Markets and Distribution

Europe has traditionally been CropSciences
strongest crop protection market, accounting for 39 percent
of our sales in 2002.

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

|                                  |       |                     |       |       |  |      |       |       |  |  |     |       | 
|--------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | --- | ----- | 
|                                  |       | 2002                |       | 2001  |  | 2000
|                                  |       |                     |       |       |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 1,851 |       |  |      | 1,063 |       |  |  | 925 |      
|North America                     |       |                     | 1,024 |       |  |      | 636   |       |  |  | 574 |      
|Asia/Pacific                      |       |                     | 797   |       |  |      | 558   |       |  |  | 555 |      
|Latin America/ Africa/Middle East |       |                     | 1,025 |       |  |      | 581   |       |  |  | 528 |      
|                                  |       |                     |       |       |  |      |       |       |  |  |     |      
|                                  | Total |                     |       | 4,697 |  |      |       | 2,838 |  |  |     | 2,582 | 
|                                  |       |                     |       |       |  |      |       |       |  |  |     |      

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

|                      |       |                     |       |       |  |      |       |       |  |  |       |       | 
|--------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                      |       | 2002                |       | 2001  |  | 2000
|                      |       |                     |       |       |  |     
|                      |       |                    
|                      |       | (euros in millions)
|Insecticides          |       |                     | 1,250 |       |  |      | 1,059 |       |  |  | 1,026 |      
|Fungicides            |       |                     | 1,030 |       |  |      | 821   |       |  |  | 722   |      
|Herbicides            |       |                     | 1,452 |       |  |      | 538   |       |  |  | 451   |      
|Seed Treatment        |       |                     | 270   |       |  |      |      |       |  |  |      |      
|                      |       |                     |       |       |  |      |       |       |  |  |       |      
|Total Crop Protection |       |                     | 4,002 |       |  |      | 2,418 |       |  |  | 2,199 |      
|Environmental Science |       |                     | 605   |       |  |      | 420   |       |  |  | 383   |      
|BioScience            |       |                     | 90    |       |  |      |      |       |  |  |      |      
|                      |       |                     |       |       |  |      |       |       |  |  |       |      
|                      | Total |                     |       | 4,697 |  |      |       | 2,838 |  |  |       | 2,582 | 
|                      |       |                     |       |       |  |      |       |       |  |  |       |      

Because nearly 80 percent of
CropSciences business is realized in the northern
hemisphere, the business is affected by the seasonality of the
various crop cycles.

CropScience obtains a significant part of its raw
materials from within the Bayer group but also enters into
contractual agreements with non-Bayer companies.

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

Environmental Science products are marketed
either through specialized distribution channels or agricultural
distribution channels depending on the target segments.

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

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

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Research and Development

Crop Protection

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

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

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

Collaborations with research companies supplement
our internal research activities (for example target
identification carried out by GenOptera LLC, a joint venture
between Bayer and Exelixis, Inc.).

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

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

Environmental Science

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

BioScience

The BioScience research and discovery facilities
are located in Lyon, France; Haelen, Netherlands; Ghent, Belgium
and Potsdam, Germany.

Agricultural biotechnological research and
development is predominantly directed toward crop protection and
yield enhancement, reproductive biology (hybrids), stress
tolerance and carbohydrate modification. The technologies
include all relevant tools to improve key crops (for example
corn, cotton, rice) for growers and industrial partners, from
identifying the gene of interest to development. We pursue
cooperative arrangements to leverage our portfolio and plant
transformation technologies over a larger genetic pool (germ
plasm). Research activities range from the discovery of
additional agronomic traits to the discovery of new quality
traits to enhance crops for the food, feed and industrial
applications markets.

The following new active ingredients were
launched in 2002 or are expected to be launched in 2003:

|                       |  |                |  |                        
|---------------------- |  | -------------- |  | -----------------------
|New active ingredients |  | Product Family |  | Status                 
|                       |  |                |  |                        
|Methoxyfenozide(1)     |  | Insecticides   |  | Launched in 2002       
|Mesosulfuron           |  | Herbicides     |  | Launched in 2002       
|Foramsulfuron          |  | Herbicides     |  | Launched in 2002       
|Spirodiclofen          |  | Insecticides   |  | Launch expected in 2003
|Clothianidin(2)        |  | Insecticides   |  | Launch expected in 2003






|    |                                                           
|--- | ----------------------------------------------------------
|(1) | Co-development with Dow AgroScience                       
|   
|(2) | Co-development with Sumitomo Chemical Takeda Agro
    Ltd.

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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.

|                                          |                                                                  |                     |       |      |  |      |       |      |  |  |       |      | 
|----------------------------------------- | ---------------------------------------------------------------- | ------------------- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- | ---- | 
|                                          |                                                                  | 2002                |       | 2001 |  | 2000
|                                          |                                                                  |                     |       |      |  |     
|                                          |                                                                  |                    
|                                          |                                                                  | (euros in millions)
|External net sales                        |                                                                  |                     | 5,378 |      |  |      | 5,581 |      |  |  | 5,816 |     
|                                          | Percentage of total sales (continuing operations)                |                     |       | 18.6 |  |      |       | 19.1 |  |  |       | 20.0 | 
|Intersegment sales                        |                                                                  |                     | 115   |      |  |      | 116   |      |  |  | 122   |     
|Operating result before exceptional items |                                                                  |                     | 175   |      |  |      | 288   |      |  |  | 560   |     
|                                          | Percentage of total operating result (continuing
    operations) |                     |       | 17.7 |  |      |       | 15.7 |  |  |       | 17.1 | 
|Exceptional items                         |                                                                  |                     | (102  | )    |  |      | (50   | )    |  |  | (45   | )   
|Operating result                          |                                                                  |                     | 73    |      |  |      | 238   |      |  |  | 515   |     

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

Segment Strategy

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

Our goal is to continue our leading market
position in high-value added plastic and rubber products. We
intend to continue developing new applications for our products.
We aim to improve profit margins by continually streamlining our
existing product portfolio, implementing efficient cost
structures, eliminating capacity constraints and further
exploiting our regional growth potential. We intend to boost our
returns through stringent cost and efficiency programs. As part
of these programs, we have announced that we plan to reduce the
headcount in the Plastics, Rubber segment and the Polyurethanes,
Coatings, Fibers segment.

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 transparent
and 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® 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® 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®, and Lustran®, acrylonitrile/

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butadiene/styrene (ABS) copolymers, are our
leading stryrenics. Other styrenics include Lustran
SAN®, Bayblend® (Polycarbonate/ABS
blend), Triax® and Centrex®.


Fabricated Products

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

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 anti-lock braking systems. Durethan®
is our range of engineering thermoplastics based an PA 6, PA 66
and their copolyamides.

Polyesters

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

Thermoplastic polyurethanes

Thermoplastic polyurethanes, or TPUs, belong to
the high-performance thermoplastic elastomers family. A key TPU
property is high abrasion- and wear-resistance. 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® in Germany and other EU countries and
Texin® in the United States.

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 sales, by region and
total, for the past three years are as follows:

|                                  |       |                     |       |       |  |      |       |       |  |  |       |       | 
|--------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                  |       | 2002                |       | 2001  |  | 2000
|                                  |       |                     |       |       |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 1,502 |       |  |      | 1,572 |       |  |  | 1,574 |      
|North America                     |       |                     | 824   |       |  |      | 846   |       |  |  | 994   |      
|Asia/Pacific                      |       |                     | 736   |       |  |      | 735   |       |  |  | 730   |      
|Latin America/ Africa/Middle East |       |                     | 175   |       |  |      | 221   |       |  |  | 222   |      
|                                  |       |                     |       |       |  |      |       |       |  |  |       |      
|                                  | Total |                     |       | 3,237 |  |      |       | 3,374 |  |  |       | 3,520 | 
|                                  |       |                     |       |       |  |      |       |       |  |  |       |      

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

|                                                                                       |       |                     |       |       |  |      |       |       |  |  |       |       | 
|-------------------------------------------------------------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                                                                       |       | 2002                |       | 2001  |  | 2000
|                                                                                       |       |                     |       |       |  |     
|                                                                                       |       |                    
|                                                                                       |       | (euros in millions)
|Amorphic polymers (polycarbonates, styrenics and
    structural fabricates)            |       |                     | 2,709 |       |  |      | 2,767 |       |  |  | 2,918 |      
|Semi-crystalline polymers (polyamides, polyesters
    and thermoplastic polyurethanes) |       |                     | 528   |       |  |      | 607   |       |  |  | 602   |      
|                                                                                       |       |                     |       |       |  |      |       |       |  |  |       |      
|                                                                                       | Total |                     |       | 3,237 |  |      |       | 3,374 |  |  |       | 3,520 | 
|                                                                                       |       |                     |       |       |  |      |       |       |  |  |       |      

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. 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 global problem. 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 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, limiting raw material price fluctuation to the
effects of fluctuation in the price of crude oil and energy.

We market substantially all our plastics products
through regional distribution channels, supported by regional
competence centers and by our head office. In addition, we also
use e-commerce as a platform for marketing and distribution and
other business functions.

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

Research and Development

The Plastics business group focuses its research
and development activities on process development in
polycarbonates, styrenics and semi-crystalline thermoplastics.
We are introducing a new polycarbonate melt manufacturing
process, 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.

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

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We currently have six products in late stages of
development. We expect to launch these products during 2003.
These products are:

|                                  |  |                                           |  |                        
|--------------------------------- |  | ----------------------------------------- |  | -----------------------
|Product/ Brand name               |  | Application                               |  | Status                 
|                                  |  |                                           |  |                        
|Makrolon sheet grade              |  | Sheets with transparent IR protection     |  | Start commercialization
|Extension of Bayblend FR series   |  | Business machines/ information technology |  | Start commercialization
|Triax for online painting         |  | Automotive exterior parts                 |  | Start commercialization
|Structural hybrid components      |  | Automotive                                |  | Start commercialization
|Halogenfree flame retardant Pocan |  | Electric/ Electronic                      |  | Start commercialization
|Light-stable Desmopan             |  | Instrument panels                         |  | Start commercialization

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. On May 9,
2003, we sold our interest in PolymerLatex, a joint venture with
Degussa AG, after receiving approval from the relevant antitrust
authorities.

Major Products

Solid Rubber

We produce a wide range of synthetic rubber
products. Our customers may process our rubber materials into
end products, often blending them with other synthetic rubbers
or natural rubber to form a wide range of compounds. Our
products offer customers an array of varying characteristics,
including processability, hardness, flexibility and wear, heat
and chemical resistance, to suit their specific needs. The tire
industry is a major user of our rubber products. Our rubber
products are also the basis for a wide variety of other articles
such as hoses, cable and wire sheathing, footwear and golf
balls. In addition, some of our polymers are formulated as
adhesives.

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.

Rhein Chemie

Our subsidiary Rhein Chemie produces a wide
variety of substances used in rubber manufacture and processing.

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.

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

|                                  |       |                     |       |       |  |      |       |       |  |  |       |       | 
|--------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                  |       | 2002                |       | 2001  |  | 2000
|                                  |       |                     |       |       |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 1,008 |       |  |      | 1,060 |       |  |  | 1,033 |      
|North America                     |       |                     | 658   |       |  |      | 720   |       |  |  | 762   |      
|Asia/Pacific                      |       |                     | 347   |       |  |      | 307   |       |  |  | 367   |      
|Latin America/ Africa/Middle East |       |                     | 128   |       |  |      | 120   |       |  |  | 134   |      
|                                  |       |                     |       |       |  |      |       |       |  |  |       |      
|                                  | Total |                     |       | 2,141 |  |      |       | 2,207 |  |  |       | 2,296 | 
|                                  |       |                     |       |       |  |      |       |       |  |  |       |      

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

|                 |       |                     |       |       |  |      |       |       |  |  |       |       | 
|---------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                 |       | 2002                |       | 2001  |  | 2000
|                 |       |                     |       |       |  |     
|                 |       |                    
|                 |       | (euros in millions)
|Solid Rubber     |       |                     | 1,373 |       |  |      | 1,420 |       |  |  | 1,468 |      
|Rubber Chemicals |       |                     | 292   |       |  |      | 288   |       |  |  | 314   |      
|PolymerLatex     |       |                     | 179   |       |  |      | 190   |       |  |  | 184   |      
|Rhein Chemie     |       |                     | 280   |       |  |      | 293   |       |  |  | 318   |      
|Other            |       |                     | 17    |       |  |      | 16    |       |  |  | 12    |      
|                 |       |                     |       |       |  |      |       |       |  |  |       |      
|                 | Total |                     |       | 2,141 |  |      |       | 2,207 |  |  |       | 2,296 | 
|                 |       |                     |       |       |  |      |       |       |  |  |       |      

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 Chemical
    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, Canada.

Because a substantial portion of our business
comes from the automotive sector, anticipating and meeting that
sectors needs is a key priority of our research and
development effort. In the 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 in more demanding
environments.

We currently have five products in late stages of
development. We expect to launch these products during 2003.
These products are:

|                                          |  |                                                               |  |                                     
|----------------------------------------- |  | ------------------------------------------------------------- |  | ------------------------------------
|Product/ Brand name                       |  | Application                                                   |  | Status                              
|                                          |  |                                                               |  |                                     
|Therban PT                                |  | Injection moulding                                            |  | Production trials                   
|Therban XT                                |  | Improved hot abrasion and adhesion                            |  | Market development                  
|Polymer Gel
    (Tradename to be decided) |  | Low density, polymer filler for tires and
    technical goods |  | Sampling to customers               
|Levapren 900                              |  | PVC substitute in NBR blends                                  |  | Sampling to customers               
|Vulcuren                                  |  | Natural rubber/ truck tire                                    |  | Trial product, sampling to customers

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POLYURETHANES, COATINGS, FIBERS

Overview

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

|                                          |                                                                  |                     |       |      |  |      |       |      |  |  |       |      | 
|----------------------------------------- | ---------------------------------------------------------------- | ------------------- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- | ---- | 
|                                          |                                                                  | 2002                |       | 2001 |  | 2000
|                                          |                                                                  |                     |       |      |  |     
|                                          |                                                                  |                    
|                                          |                                                                  | (euros in millions)
|External net sales                        |                                                                  |                     | 5,397 |      |  |      | 5,439 |      |  |  | 5,582 |     
|                                          | Percentage of total sales (continuing operations)                |                     |       | 18.6 |  |      |       | 18.6 |  |  |       | 19.2 | 
|Intersegment sales                        |                                                                  |                     | 78    |      |  |      | 138   |      |  |  | 462   |     
|Operating result before exceptional items |                                                                  |                     | 243   |      |  |      | 129   |      |  |  | 577   |     
|                                          | Percentage of total operating result (continuing
    operations) |                     |       | 24.6 |  |      |       | 7.0  |  |  |       | 17.7 | 
|Exceptional items                         |                                                                  |                     | (448  | )    |  |      | (120  | )    |  |  | (53   | )   
|Operating result                          |                                                                  |                     | (205  | )    |  |      | 9     |      |  |  | 524   |     

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

Segment Strategy

We plan to hold our Polyurethanes, Coatings,
Fibers segment and our 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 polymers. In 2000 we supplemented 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. We intend to boost our
returns through stringent cost and efficiency programs. As part
of these programs we have announced that we plan to reduce the
headcount in the Polyurethanes, Coatings, Fibers segment and in
the Plastics, Rubber segment.

Polyurethanes

Overview

Our Polyurethanes business group focuses on the
development, production and marketing of isocyanates and Polyol
materials for PUR formulations and systems used in producing a
wide variety of polyurethane polymers for a broad range of
industrial and consumer applications.

Products

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

Our customers use our isocyanates or polyether
polyols, or both, to create their own specific polyurethane
formulations. In addition, upon request we design and evaluate
custom blends to meet specific customer requirements. When we
have perfected a formulation for a specific end product, we
deliver the components to the customer, who then combines them
at his 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, appliances, sport and leisure equipment
and construction.

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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:

|                                  |       |                     |       |       |  |      |       |       |  |  |       |       | 
|--------------------------------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                  |       | 2002                |       | 2001  |  | 2000
|                                  |       |                     |       |       |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 1,287 |       |  |      | 1,340 |       |  |  | 1,218 |      
|North America                     |       |                     | 1,143 |       |  |      | 1,237 |       |  |  | 1,175 |      
|Asia/Pacific                      |       |                     | 439   |       |  |      | 416   |       |  |  | 394   |      
|Latin America/ Africa/Middle East |       |                     | 387   |       |  |      | 200   |       |  |  | 343   |      
|                                  |       |                     |       |       |  |      |       |       |  |  |       |      
|                                  | Total |                     |       | 3,256 |  |      |       | 3,193 |  |  |       | 3,130 | 
|                                  |       |                     |       |       |  |      |       |       |  |  |       |      

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

|           |       |                     |       |       |  |      |       |       |  |  |       |       | 
|---------- | ----- | ------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|           |       | 2002                |       | 2001  |  | 2000
|           |       |                     |       |       |  |     
|           |       |                    
|           |       | (euros in millions)
|TDI        |       |                     | 593   |       |  |      | 575   |       |  |  | 583   |      
|MDI        |       |                     | 1,099 |       |  |      | 1,177 |       |  |  | 980   |      
|Polyethers |       |                     | 1,347 |       |  |      | 953   |       |  |  | 1,226 |      
|Others     |       |                     | 217   |       |  |      | 488   |       |  |  | 341   |      
|           |       |                     |       |       |  |      |       |       |  |  |       |      
|           | Total |                     |       | 3,256 |  |      |       | 3,193 |  |  |       | 3,130 | 
|           |       |                     |       |       |  |      |       |       |  |  |       |      

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

The 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.

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 BASF, Dow Chemical and
Huntsman.

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

Coatings 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. Colorants has
been transferred to Bayer Chemicals as of January 2003.

Major Products

Resins and Hardeners

Polyurethane lacquers are formed through the
combination of an isocyanates component with a polyol or
polyester component. We offer a variety of components (for
example Desmophen®, Rucote® and
Bayhydrol®) and isocyanates (for example Desmodur
L®, Desmodur N®, Desmodur BL®,
Bayhydur®, and Crelan®). 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®/Baybond®, our
polyurethane coating systems for textiles.

Adhesive raw materials

Dispercoll® and
Desmocoll® 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® 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.

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Markets and Distribution

Our Coatings and Colorants business group is a
major producer of raw materials for coatings 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:

|                                  |       |                     |     |       |  |      |     |       |  |  |     |       | 
|--------------------------------- | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                                  |       | 2002                |     | 2001  |  | 2000
|                                  |       |                     |     |       |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 891 |       |  |      | 961 |       |  |  | 934 |      
|North America                     |       |                     | 538 |       |  |      | 555 |       |  |  | 523 |      
|Asia/Pacific                      |       |                     | 345 |       |  |      | 336 |       |  |  | 311 |      
|Latin America/ Africa/Middle East |       |                     | 167 |       |  |      | 162 |       |  |  | 178 |      
|                                  |       |                     |     |       |  |      |     |       |  |  |     |      
|                                  | Total |                     |     | 1,941 |  |      |     | 2,014 |  |  |     | 1,946 | 
|                                  |       |                     |     |       |  |      |     |       |  |  |     |      

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

|                       |       |                     |     |       |  |      |     |       |  |  |     |       | 
|---------------------- | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                       |       | 2002                |     | 2001  |  | 2000
|                       |       |                     |     |       |  |     
|                       |       |                    
|                       |       | (euros in millions)
|Resins                 |       |                     | 282 |       |  |      | 253 |       |  |  | 211 |      
|Aliphatic isocyanates  |       |                     | 578 |       |  |      | 553 |       |  |  | 543 |      
|Aromatic isocyanates   |       |                     | 212 |       |  |      | 230 |       |  |  | 223 |      
|Special raw materials  |       |                     | 161 |       |  |      | 186 |       |  |  | 161 |      
|Adhesive raw materials |       |                     | 218 |       |  |      | 242 |       |  |  | 240 |      
|Colorants              |       |                     | 490 |       |  |      | 550 |       |  |  | 568 |      
|                       |       |                     |     |       |  |      |     |       |  |  |     |      
|                       | Total |                     |     | 1,941 |  |      |     | 2,014 |  |  |     | 1,946 | 
|                       |       |                     |     |       |  |      |     |       |  |  |     |      

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:



| |   |                                                        
| | - | -------------------------------------------------------
| |  | Resin components: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 high
performance resin components and aliphatic and aromatic
polyisocyanates, which we formulate into environmentally
friendly coatings, reducing their use of natural resources. We
are also exploring ways of reducing the amount of solvent needed
for the use of our raw materials within coating applications.

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

Fibers

Overview

Our Fibers business has been reclassified from
discontinuing operations to continuing operations under the
segment Polyurethanes, Colorants, Fibers. Our Fibers business
focuses on the development, production and marketing of fibers
for the textile industry under the tradename
Dorlastan®, and for general applications under the
tradenames Atlas®, Perlon® and
Bayco®. We will evaluate the strategic direction of
the reclassified operations of the business group, including the
production facilities for Dorlastan spandex fibers and Perlon
monofil at three sites  Dormagen and Goch, Germany,
and Bushy Park, South Carolina.

Markets and Distribution

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

|                                  |       |                     |    |      |  |      |     |     |  |  |     |     | 
|--------------------------------- | ----- | ------------------- | -- | ---- |  | ---- | --- | --- |  |  | --- | --- | 
|                                  |       | 2002                |    | 2001 |  | 2000
|                                  |       |                     |    |      |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 99 |      |  |      | 134 |     |  |  | 257 |    
|North America                     |       |                     | 52 |      |  |      | 54  |     |  |  | 67  |    
|Asia/Pacific                      |       |                     | 24 |      |  |      | 15  |     |  |  | 55  |    
|Latin America/ Africa/Middle East |       |                     | 25 |      |  |      | 29  |     |  |  | 127 |    
|                                  |       |                     |    |      |  |      |     |     |  |  |     |    
|                                  | Total |                     |    | 200  |  |      |     | 232 |  |  |     | 506 | 
|                                  |       |                     |    |      |  |      |     |     |  |  |     |    

CHEMICALS

Overview

The Chemicals segment is comprised of 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.

|                                          |                                                                  |                     |       |      |  |      |       |      |  |  |       |      | 
|----------------------------------------- | ---------------------------------------------------------------- | ------------------- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- | ---- | 
|                                          |                                                                  | 2002                |       | 2001 |  | 2000
|                                          |                                                                  |                     |       |      |  |     
|                                          |                                                                  |                    
|                                          |                                                                  | (euros in millions)
|External net sales                        |                                                                  |                     | 3,304 |      |  |      | 3,749 |      |  |  | 3,410 |     
|                                          | Percentage of total sales (continuing operations)                |                     |       | 11.4 |  |      |       | 12.9 |  |  |       | 11.7 | 
|Intersegment sales                        |                                                                  |                     | 409   |      |  |      | 456   |      |  |  | 466   |     
|Operating result before exceptional items |                                                                  |                     | 160   |      |  |      | 271   |      |  |  | 370   |     
|                                          | Percentage of total operating result (continuing
    operations) |                     |       | 16.2 |  |      |       | 14.7 |  |  |       | 11.3 | 
|Exceptional items                         |                                                                  |                     | (26   | )    |  |      | (68   | )    |  |  | 24    |     
|Operating result                          |                                                                  |                     | 134   |      |  |      | 203   |      |  |  | 394   |     

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

Segment Strategy

The focus of our activities in the Chemicals
segment is improving our margins. We aim to achieve this goal by
streamlining our portfolio and focusing on selected activities
in the chemical industry. A recent example is the divestment of
the non-core Haarmann & Reimer subsidiary effective
September 30, 2002.

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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 (for example benzene or
chlorine). 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.

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
industries using organic or anorganic 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:

|                                  |       |                     |     |      |  |      |     |       |  |  |     |       | 
|--------------------------------- | ----- | ------------------- | --- | ---- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                                  |       | 2002                |     | 2001 |  | 2000
|                                  |       |                     |     |      |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 611 |      |  |      | 666 |       |  |  | 622 |      
|North America                     |       |                     | 124 |      |  |      | 167 |       |  |  | 194 |      
|Asia/Pacific                      |       |                     | 127 |      |  |      | 122 |       |  |  | 129 |      
|Latin America/ Africa/Middle East |       |                     | 69  |      |  |      | 70  |       |  |  | 61  |      
|                                  |       |                     |     |      |  |      |     |       |  |  |     |      
|                                  | Total |                     |     | 931  |  |      |     | 1,025 |  |  |     | 1,006 | 
|                                  |       |                     |     |      |  |      |     |       |  |  |     |      

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

|                          |       |                     |     |      |  |      |     |       |  |  |     |       | 
|------------------------- | ----- | ------------------- | --- | ---- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                          |       | 2002                |     | 2001 |  | 2000
|                          |       |                     |     |      |  |     
|                          |       |                    
|                          |       | (euros in millions)
|Fine chemicals            |       |                     | 215 |      |  |      | 276 |       |  |  | 272 |      
|Basic chemicals           |       |                     | 515 |      |  |      | 506 |       |  |  | 487 |      
|Inorganic basic chemicals |       |                     | 170 |      |  |      | 220 |       |  |  | 197 |      
|Others                    |       |                     | 31  |      |  |      | 23  |       |  |  | 50  |      
|                          |       |                     |     |      |  |      |     |       |  |  |     |      
|                          | Total |                     |     | 931  |  |      |     | 1,025 |  |  |     | 1,006 | 
|                          |       |                     |     |      |  |      |     |       |  |  |     |      

Our Basic and Fine Chemicals business group is
not seasonal. Basic chemicals are more influenced by
fluctuations in raw material prices (for example 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.

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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

Research and development for Fine Chemicals
concentrates on the development of innovative, cost efficient
and reliable processes for the custom manufacturing of
industrial intermediates and products.

For Basic Chemicals, our efforts focus on
technological and chemical improvements of manufacturing
processes of industrial intermediates.

The business groups primary research and
development facilities are located in Leverkusen, Germany.

Specialty Products

Overview

In contrast to other chemicals business lines,
our Specialty Products business group displays a high degree of
custom tailoring for the specific needs of its
customers. The business group serves a broad range of
industries, including textile, paper and leather manufacture;
material protection products; polymer producing and processing
industries; and water treatment.

The Specialty Products business group offers its
customers thousands of compounds. 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 to a 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:

|                                  |       |                     |     |       |  |      |     |       |  |  |     |       | 
|--------------------------------- | ----- | ------------------- | --- | ----- |  | ---- | --- | ----- |  |  | --- | ----- | 
|                                  |       | 2002                |     | 2001  |  | 2000
|                                  |       |                     |     |       |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 631 |       |  |      | 644 |       |  |  | 607 |      
|North America                     |       |                     | 294 |       |  |      | 379 |       |  |  | 239 |      
|Asia/Pacific                      |       |                     | 264 |       |  |      | 244 |       |  |  | 257 |      
|Latin America/ Africa/Middle East |       |                     | 214 |       |  |      | 202 |       |  |  | 209 |      
|                                  |       |                     |     |       |  |      |     |       |  |  |     |      
|                                  | Total |                     |     | 1,403 |  |      |     | 1,469 |  |  |     | 1,312 | 
|                                  |       |                     |     |       |  |      |     |       |  |  |     |      

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

|                                                                               |       |                     |     |       |  |      |       |       |  |  |     |       | 
|------------------------------------------------------------------------------ | ----- | ------------------- | --- | ----- |  | ---- | ----- | ----- |  |  | --- | ----- | 
|                                                                               |       | 2002                |     | 2001  |  | 2000
|                                                                               |       |                     |     |       |  |     
|                                                                               |       |                    
|                                                                               |       | (euros in millions)
|Textile, paper and leather chemicals                                           |       |                     | 890 |       |  |      | 1,038 |       |  |  | 873 |      
|Performance chemicals, material protection, ion
    exchange resins and others |       |                     | 513 |       |  |      | 431   |       |  |  | 439 |      
|                                                                               |       |                     |     |       |  |      |       |       |  |  |     |      
|                                                                               | Total |                     |     | 1,403 |  |      |       | 1,469 |  |  |     | 1,312 | 
|                                                                               |       |                     |     |       |  |      |       |       |  |  |     |      

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. Specialty Products
has historically not been affected by shortages; however, rising
oil prices have 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 water
    treatment and metal recovery;
|
| |  | new fungicides for material protection; and                                   
|
| |  | improved optical brighteners and sizing agents
    for the paper industry.    

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

We currently have over 100 products in late
stages of development. We expect to launch these products during
2003 and 2004. In 2002 we launched more than 80 products of
our 2002/2003 pipeline.

H.C. Starck

Overview

Our subsidiary H.C. Starck develops,
produces and markets metallic and ceramic powders and mill
products for various markets and applications. H.C. Starck
constantly pursues its policy of forward integration. With the
integration of CSM Industries, we have made full use of the
synergies of the two companies. As a result of this acquisition,
we are able to manufacture higher-value-added products made from
tungsten and molybdenum for the medical, aerospace, electronics,
explosive detection and other demanding markets. In the first
quarter of 2003, H.C. Starck acquired a majority interest
in InDec B.V. InDec produces ceramic cells for use in fuel
cell systems. We expect these ceramic cells to enable
H.C. Starck to advance into the Solid Oxide Fuel Cell
(SOFC) market and to develop higher-value added products in the
field of functional ceramics. There are many future large-scale
applications of SOFC systems, such as residential and commercial
co-generation, auxiliary power units for trucks, buses and
passenger cars and numerous other applications where reliable,
high quality power is needed.

Major Products

We produce a broad portfolio of products ranging
from ceramic materials to such metals as tungsten, molybdenum,
tantalum and niobium and their various alloys and compounds for
industrial customers. We manufacture these materials not only in
the form of ceramic or metallic powders but also as solid
intermediates or

47



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finished parts. This gives us the ability to
partner with our customers and provide engineering and design
services for a wide variety of markets and end uses. We bring
this ability to customers in the aerospace, medical, chemical,
electronic, lighting, sophisticated tooling and optical
components industries.


Heavy metal and Tungsten alloy

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

Battery intermediates

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

Metallic chemical products

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

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

Thermal spray powders

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

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 has stagnated since the
middle of 2002 after a long period of growth, while the hard
metals markets in the United States, Europe and Japan are
declining. The market for battery intermediates has recovered
slightly, and the battery industry is expecting moderate growth.
Prices are still under extreme pressure because of the
competitive situation resulting from overcapacity.

The weakness of the electronic market intensified
in 2002. Combined with inventory reduction at all levels of the
supply chain, it caused a significant decrease in both sales and
profits for our electronic business.

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

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

In 2002 the main factor influencing the
H.C. Starck Group was the downturn of the electronics
industry.

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

|                                  |       |                     |     |      |  |      |     |     |  |  |     |     | 
|--------------------------------- | ----- | ------------------- | --- | ---- |  | ---- | --- | --- |  |  | --- | --- | 
|                                  |       | 2002                |     | 2001 |  | 2000
|                                  |       |                     |     |      |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 248 |      |  |      | 325 |     |  |  | 280 |    
|North America                     |       |                     | 148 |      |  |      | 234 |     |  |  | 143 |    
|Asia/Pacific                      |       |                     | 196 |      |  |      | 208 |     |  |  | 196 |    
|Latin America/ Africa/Middle East |       |                     | 15  |      |  |      | 44  |     |  |  | 46  |    
|                                  |       |                     |     |      |  |      |     |     |  |  |     |    
|                                  | Total |                     |     | 607  |  |      |     | 811 |  |  |     | 665 | 
|                                  |       |                     |     |      |  |      |     |     |  |  |     |    

China is the primary source for the raw materials
for tungsten products. In the past, China had limited
production, thereby causing shortages. We have our own tungsten
production and recycling facilities, however, and are therefore
only partly dependent on Chinese imports and do not bear the
full brunt of raw material price increases. Tantalum
raw-material prices have normalized during 2002, and we believe
that our supply of raw material is secure due to long term
contracts.

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

We regard the following companies as our chief
competitors:



| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Metallic products and
    compounds:Bergla, Cabot Group
    (including its associated joint ventures), Mitsui, MolymetOMG,
    Osram Sylvania, Umicore, Plansee AG,
    Philips Elmet, Phelps Dodge;
|
| |  | Battery
    intermediates:OMG, Tanaka, Umicore;                                                                                                                                                     
|
| |  | Chemical catalysts:Activated Metals, Degussa, Grace-Davison, Engelhard;                                                                                                                             
|
| |  | Ceramic products:Denki Kagaku, SB Boron; GE Ceramics,
    Tokuyama Soda; and                                                                                                                        
|
| |  | Thermal spray
    powders:Praxair, Sulzer Metco,
    Woka.                                                                                                                                          

Research and Development

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

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

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We currently have seven products in late stages
of development, and expect to start and continue their launch
during 2003. These products are:

|                                              |  |                              
|--------------------------------------------- |  | -----------------------------
|Product/Brand name                            |  | Application                  
|                                              |  |                              
|Niobium and Niobium Oxide powder              |  | Capacitors                   
|Ta/Nb mill products                           |  | Capacitors                   
|High-capacity tantalum powder                 |  | Capacitors                   
|Sophisticated electronic heat sinks           |  | Electronics                  
|High temperature furnace Materials            |  | Furnace construction         
|Refractory metals products                    |  | Refractory metals products   
|Alternative (ferrous, nickel, cobalt) binders |  | Diamond tools and hard metals

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.
Additionally, we created a service company that supplies the
enterprises at Bomlitz with predominantly technical services.
These subsidiaries are owned by Wolff Walsrode AG, which now
serves as a holding company. In 2001, we sold the Covexx
business, which had been responsible for our former Combithen
and Combitherm food packaging film lines. In January 2002,
Wolffs former thermoplastic polyurethane films business
was integrated into Bayers Plastics business group.

Major Products

Cellulose Derivatives

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

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

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

Plastic films

Walothen®is a
class of films based on Polypropylen for food and cigarette
packaging and paper lamination.

Walsroder®is a
casing used in the production of a wide range of sausages.

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.

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

|                                  |       |                     |     |      |  |      |     |     |  |  |     |     | 
|--------------------------------- | ----- | ------------------- | --- | ---- |  | ---- | --- | --- |  |  | --- | --- | 
|                                  |       | 2002                |     | 2001 |  | 2000
|                                  |       |                     |     |      |  |     
|                                  |       |                    
|                                  |       | (euros in millions)
|Europe                            |       |                     | 251 |      |  |      | 301 |     |  |  | 295 |    
|North America                     |       |                     | 41  |      |  |      | 79  |     |  |  | 76  |    
|Asia/Pacific                      |       |                     | 20  |      |  |      | 20  |     |  |  | 19  |    
|Latin America/ Africa/Middle East |       |                     | 51  |      |  |      | 44  |     |  |  | 37  |    
|                                  |       |                     |     |      |  |      |     |     |  |  |     |    
|                                  | Total |                     |     | 363  |  |      |     | 444 |  |  |     | 427 | 
|                                  |       |                     |     |      |  |      |     |     |  |  |     |    

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

|                      |       |                     |     |      |  |      |     |     |  |  |     |     | 
|--------------------- | ----- | ------------------- | --- | ---- |  | ---- | --- | --- |  |  | --- | --- | 
|                      |       | 2002                |     | 2001 |  | 2000
|                      |       |                     |     |      |  |     
|                      |       |                    
|                      |       | (euros in millions)
|Cellulose derivatives |       |                     | 231 |      |  |      | 210 |     |  |  | 195 |    
|Plastic films         |       |                     | 114 |      |  |      | 221 |     |  |  | 229 |    
|Other                 |       |                     | 18  |      |  |      | 13  |     |  |  | 3   |    
|                      |       |                     |     |      |  |      |     |     |  |  |     |    
|                      | Total |                     |     | 363  |  |      |     | 444 |  |  |     | 427 | 
|                      |       |                     |     |      |  |      |     |     |  |  |     |    

The decrease in plastic films sales in 2002
resulted primarily from the divestments discussed above. The
increase in the segment Other in 2001 and 2002 is based on
external sales of our service companies at the Bomlitz location.

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
and cotton. 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 competitor is
Exxon Mobil (BOPP films).

Research and Development

Wolff Cellulosics is the Bayer Groups
competence center for cellulose chemistry. Our research on
cellulose and other polysaccharides takes advantage of the
unique structural and chemical properties of these important
renewable materials. By converting them into Wolffs
derivative specialty products and optimizing their application
properties, high customer value is created. This work is focused
on products such as additives for building materials, binders
for printing inks and coatings, as well as formulation aids for
food, cosmetics and pharmaceuticals. Besides product
development, we are constantly improving our production
processes.

Wolffs primary research and development
facilities, including a new pilot plant, are in Bomlitz, near
Walsrode, Germany.

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The following new products were developed in
close cooperation with our customers and introduced to the
market by Wolff in 2002:



| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | New Walocel M additives (based on methyl
    cellulose): A product line for high performance tile adhesives
    and a special grade for cement extrusion applications;
|
| |  | a highly viscous Walocel C additive (based on
    carboxy methyl cellulose) used for example, in pet food
    formulations;                                           
|
| |  | phthalate-free plastified nitrocellulose that
    complies with the new European regulations; and                                                                     
|
| |  | a new supply form of nitrocellulose (free-flowing
    product packed in cartons).                                                                                     

We currently have two additional product lines in
late stages of development:

|                                                                            |  |                                                                            |  |              
|--------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | -------------
|Product/ Brand name                                                         |  | Application                                                                |  | Status       
|                                                                            |  |                                                                            |  |              
|New Walocel M additive (based on hydroxy propyl
    methyl cellulose, HPMC) |  | Formulation of pharmaceuticals and food                                    |  | Pre-marketing
|New Walocel M additive (based on methyl cellulose)                          |  | Ready to use Joint compounds (filling compounds
    for wall board joints) |  | Pre-marketing

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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 a continuous
flow of innovative active ingredients for human and animal
health and crop protection products. See also 
CropScience  Research and Development.

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.

|                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                    
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|Research Cycle                                                                                                               |  | Discipline/Technique                                                                                                                                                                                                                                                                                                          |  | Partners                                                                                                                           
|                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                    
|Understanding the disease mechanism and
    identifying new targets                                                          |  | Genomics (mapping the expression of a gene in
    an organism or tissue); Functional genomics (functional
    analysis of genetic data); Proteomics (mapping protein
    expression and function in an organism or tissue);
    Bioinformatics (applying the tools of information technology
    to biological data analysis) |  | Millennium; Incyte; Affymetrix; CuraGen; Oxford
    Glycoscience; Exelixis; Paradigm
    LION Bioscience; Incyte Exelixis; Paradigm
|Screening the candidate substances                                                                                           |  | High throughput screening, or HTS (rapid,
    automated testing of compounds for potential effectiveness
    against a given target) Toxico- and Pharmacogenomics
    (increasing the quality and probability of success of drug
    candidates)                                                                              |  | Axxam; Greiner
    CuraGen                                                                                                         
|Increasing the pool of potential drug candidates
    by small-chemical molecules and macromolecules (proteins,
    peptides) |  | Combinatorial chemistry/Substance synthesis
    (techniques for increasing the number and diversity of test
    compounds); Pool of Bayer biomolecules (for example,
    monoclonal antibodies)                                                                                                                               |  | ArQule; ComGenex
    Morphosys                                                                                                     

In addition to the collaborations focusing on
disease mechanisms and screening, we have established
collaborations in the field of medicinal chemistry. These
collaborations together with our internal research efforts have
given us access to approximately 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 research 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.

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Millennium

Together with Millennium, we have created a
substantial collaborative effort to use the tools of genomics to
identify new drug targets. Through this collaboration, we expect
Millennium to provide us with more than 100 assays on
disease-relevant proprietary target genes for high-throughput
screening.

We expect to invest up to $465 million in
our collaboration with Millennium. The current collaboration
program is scheduled to expire on October 31, 2003. An
additional goal of our collaboration is to obtain technology and
know-how to enable us to 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 provides our life sciences
effort with a strong IT platform and software development
program and allows us to review drug-relevant target gene data
for further use in our laboratories. LBRI delivered more than
400 disease-related targets, which we have developed into a
large number of new patent applications.

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

We expect to invest a total of $82.5 million
in our collaborations with LION, including a $30 million
equity investment that we have already made. We have an option
to acquire LBRI when both collaboration projects are complete.

CuraGen

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

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

Product Development
Collaborations

We have two major collaborations for
co-development of drug candidates, one with Onyx and one with
GlaxoSmithKline.

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

GlaxoSmithKline.Vardenafil, the active ingredient of Levitra, researched by
Bayer, will be marketed by Bayer and GlaxoSmithKline through a
worldwide co-promotion and co-development agreement signed in
November 2001.

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INTELLECTUAL PROPERTY PROTECTION

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

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

Patents

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



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

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

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

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

Term and Expiration of
Patents

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

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

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



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | 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,
Avelox, Ciprofloxacin, Imidacloprid and Vardenafil:

|                    |                                |         |      |        |  |      |      |       |  |       |      |       |  |        |      |        |  |  |      |      |  |  |      |      |  |  |      |      |  |  |      |      |  
|------------------- | ------------------------------ | ------- | ---- | ------ |  | ---- | ---- | ----- |  | ----- | ---- | ----- |  | ------ | ---- | ------ |  |  | ---- | ---- |  |  | ---- | ---- |  |  | ---- | ---- |  |  | ---- | ---- | -
|                    |                                |        
|                    |                                | Market 
|                    |                                |        
|Product             |                                | Germany |      | France |  | U.K. |      | Italy |  | Spain |      | Japan |  | U.S.A. |      | Canada
|                    |                                |         |      |        |  |      |      |       |  |       |      |       |  |        |      |       
|Adalat              |                                |         |      |        |  |      |      |       |  |       |      |       |  |        |      |        |  |  |      |      |  |  |      |      |  |  |      |      |  |  |      |     
|                    | Crystal patent (Retard)        |         |      |       |  |      |      |      |  |       |      |      |  |        |      | 2003   |  |  |      |     |  |  |      |     |  |  |      | 2010 |  |  |      |     |  
|                    | Adalat CC (Coat Core)          |         |      | 2008   |  |      |      | 2008  |  |       |      | 2008  |  |        |      | 2008   |  |  |      | 2008 |  |  |      | 2008 |  |  |      | 2008 |  |  |      | 2009 |  
|                    | Gits/Oros excl. license (Alza) |         |      | 2004   |  |      |      | 2004  |  |       |      | 2003  |  |        |      | 2004   |  |  |      | 2004 |  |  |      | 2004 |  |  |      |     |  |  |      | 2004 |  
|Avelox              |                                |         |      |        |  |      |      |       |  |       |      |       |  |        |      |        |  |  |      |      |  |  |      |      |  |  |      |      |  |  |      |     
|                    | Compound                       |         |      | 2009   |  |      |      | 2009  |  |       |      | 2009  |  |        |      | 2014   |  |  |      | 2009 |  |  |      | 2009 |  |  |      | 2014 |  |  |      | 2016 |  
|                    | Hydrochloride-Monohydrate      |         |      | 2016   |  |      |      | 2016  |  |       |      | 2016  |  |        |      | 2016   |  |  |      | 2016 |  |  |      | 2016 |  |  |      | 2016 |  |  |      | 2016 |  
|                    | Tablet formulation             |         |      | 2019   |  |      |      | 2019  |  |       |      | 2019  |  |        |      | 2019   |  |  |      | 2019 |  |  |      | 2019 |  |  |      | 2019 |  |  |      | 2019 |  
|Ciprofloxacin       |                                |         |      |        |  |      |      |       |  |       |      |       |  |        |      |        |  |  |      |      |  |  |      |      |  |  |      |      |  |  |      |     
|                    | Active ingredient              |         |      |       |  |      |      | 2004  |  |       |      | 2002  |  |        |      | 2009   |  |  |      |     |  |  |      |     |  |  |      | 2003 |  |  |      | 2004 | *
|                    | Process                        |         |      | 2002   |  |      |      | 2002  |  |       |      | 2002  |  |        |      | 2002   |  |  |      | 2003 |  |  |      | 2002 |  |  |      |     |  |  |      | 2004 |  
|                    | IV formulation                 |         |      | 2006   |  |      |      | 2006  |  |       |      | 2006  |  |        |      | 2006   |  |  |      | 2006 |  |  |      | 2006 |  |  |      | 2007 |  |  |      | 2008 |  
|                    | Tablet formulation             |         |      | 2007   |  |      |      | 2007  |  |       |      | 2007  |  |        |      | 2007   |  |  |      | 2007 |  |  |      | 2007 |  |  |      | 2011 |  |  |      | 2009 |  
|Imidacloprid        |                                |         | 2006 |        |  |      | 2006 |       |  |       | 2006 |       |  |        | 2006 |        |  |  | 2007 |      |  |  | 2005 |      |  |  | 2006 |      |  |  | 2007 |     
|Vardenafil compound |                                |         | 2028 |        |  |      | 2028 |       |  |       | 2018 |       |  |        | 2018 |        |  |  | 2028 |      |  |  | 2018 |      |  |  | 2018 |      |  |  | 2018 |     






|  |            
|- | -----------
|* | Composition

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

Trademarks

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

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GOVERNMENTAL REGULATION

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

Product Regulation

The primary emphasis of product regulation is to
assure the safety and effectiveness of our products. Regulation
in the United States is of particular importance because of the
United States large share of the worldwide market. In the
United States, the Food and Drug Administration (FDA) regulates
many of our products, primarily in our Health Care business. In
addition, our pharmaceutical facilities typically require
regulatory approval and are subject to periodic re-inspection.

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

Pharmaceutical Products

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

The various regulatory authorities administer and
execute requirements covering the testing, safety, efficacy,
labeling, approval, manufacturing and marketing of prescription
pharmaceuticals. Pharmaceutical products must receive regulatory
approval before they can be marketed. The regulatory
requirements follow stringent standards that vary by country.
Before a drug can qualify for marketing approval, a registration
dossier must be submitted to a regulatory authority for review
and evaluation. The registration dossier principally contains
detailed information about the safety, efficacy and quality of a
new medication. It also provides details about the manufacturing
process, the production facilities and information to be
provided to patients. The registration process can last from a
few months to a few years and depends on the nature of the
medication under review, the quality of the submitted data and
the efficiency of the relevant agency. If a drug meets the
approval requirements, the regulatory authority will grant a
product license for marketing. In some countries, negotiation on
pricing and reimbursement follow the grant of the product
license. The process of developing a pharmaceutical product from
discovery through testing, registration and initial product
launch could take approximately 10 years. The manufacturer
is required to monitor adverse reactions and report them to the
appropriate authorities.

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

In the European Union, there are two different
approval procedures available: a centralized procedure and one
based on the Mutual Recognition Procedure. The London-based
European Agency for the Evaluation of Medicinal Products governs
the centralized drug registration and approval process and
consists of two committees, one for proprietary medicinal
products (CPMP) and one for veterinary medicinal products
(CVMP). The other method is the Mutual Recognition Procedure, in
which one country makes the principal evaluation. The other
member states then have 90 days to decide if they accept or
reject the decision made by the reference member state.

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

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. This 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, that is those that do not come in direct
contact with the human body. In Japan a special section of the
Pharmaceutical Affairs Law regulates diagnostic products. In
Australia and Canada, the applicable laws and regulations are
similar to the European model. Many countries in South America
and Asia have regulatory requirements similar to those
promulgated either by the FDA or the European Commission. All of
these requirements involve product registration and approval and
the reporting of adverse incidents and corrective actions.

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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).

Crop Protection Products

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

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

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

Environmental Science Products

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

In Europe the products sold in the professional
pest control area fall under the Biocidal Products Directive
(BPD), and basic manufacturers must develop complete regulatory
dossiers in order to support their active ingredients and
products under the BPD. Green industry products and consumer
lawn and garden products are governed by the Plant Protection
Directive.

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

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

BioScience Products

Biotechnology products, in particular those based
on genetic modification, are subject to specific regulatory
oversight covering environmental impact as well as use and trade
of products and derivatives in food and feed. In the United
States, the main regulatory authorities are the USDA, the FDA
and the EPA.

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Proposed new EU Regulations

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

Within the European Union a new chemicals policy
has been proposed and may become effective in 2005/2006. It will
mandate a significant increase in the testing and assessment of
basic chemicals and chemical intermediates, leading to increased
costs and reduced operating margins for these products. Although
we have adopted measures to address the stricter regulations,
such as increasing the efficiency of our internal research and
development process in order to reduce the impact of extended
testing on time-to-market, we cannot assure that stricter
regulatory regimes will not delay product development or
restrict marketing and sales.

In addition, an EU directive on emissions
trading, expected to become effective in 2005, could affect
Bayers business opportunities especially in Europe. The
directive requires carbon dioxide emissions to be reduced by
21 percent in Germany and 7.5 percent in Belgium, in
each case based on 1990 carbon dioxide emission levels.
Compliance with this directive could require relevant capital
expenditures by Bayer.

Health, Safety and 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 as to whether it knew of or caused the presence of the
contaminants, and regardless of whether the practices that
resulted in the contamination were legal at the time they
occurred. As many of our industrial sites have long histories,
we cannot predict the effect these regulations will have on us.
We cannot assure you that soil or groundwater contamination will
not occur or be discovered.

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

It is difficult to estimate the future costs of
environmental protection and remediation because of
uncertainties about the status of regulations and information
related to individual sites. Taking into consideration our
experience and currently known facts, we believe that capital
expenditures and remedial actions to comply

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with environmental regulations will not have a
material adverse effect on our financial position, results of
operations or cash flows. As of December 31, 2002, we had
reserved
202 million
for environmental matters.


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

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ORGANIZATIONAL STRUCTURE

Bayer AG is the ultimate parent company of the
Bayer Group. Until December 31, 2002, the Bayer Group
operated in seven segments comprised of 17 business groups.

The Bayer Groups new holding structure is
based on the four operating units HealthCare, CropScience,
Polymers and Chemicals, and three service areas that provide key
support and administrative services. See 
Business. Bayer AG will be the strategic holding company
of the Bayer Group. Bayer AG will consist of the following
corporate center functions: the Corporate Office;
Communications; Investor Relations; Corporate Auditing;
International Human Resources & Organization; Human
Resources Germany; Corporate Development; Law &
Patents, Insurance; Finance; Group Accounting and Controlling;
Governmental & Product Affairs; and Regional
Coordination. See Item 8, Financial
Information  Legal Proceedings  German
shareholder litigation.

Subsidiaries

The following table lists Bayer AGs
principal consolidated subsidiaries as of December 31, 2002
and its beneficial ownership interest in each.

|                                                      |  |                      |      | 
|----------------------------------------------------- |  | -------------------- | ---- | 
|Company Name and Place of Business                    |  | Bayers interest (%)
|                                                      |  |                     
|Germany                                               |  |                      |      | 
|Bayer Buna GmbH, Marl                                 |  |                      | 100  | 
|Bayer CropScience AG, Monheim                         |  |                      | 100  | 
|Bayer Distribution Service GmbH, Leverkusen           |  |                      | 100  | 
|Bayer Industrieprodukte GmbH & Co. KG,
    Leverkusen |  |                      | 100  | 
|Bayer Vital GmbH, Leverkusen                          |  |                      | 100  | 
|H.C. Starck GmbH, Goslar                              |  |                      | 100  | 
|Wolff Walsrode AG, Walsrode                           |  |                      | 100  | 
|Other European Countries                              |  |                      |      | 
|Bayer A/S, Denmark                                    |  |                      | 100  | 
|Bayer Antwerpen N.V., Belgium                         |  |                      | 100  | 
|Bayer B.V., Netherlands                               |  |                      | 100  | 
|Bayer CropScience France S.A., France                 |  |                      | 100  | 
|Bayer CropScience Holding S.A., France                |  |                      | 100  | 
|Bayer CropScience S.A., France                        |  |                      | 100  | 
|Bayer Hispania, S.A., Spain                           |  |                      | 100  | 
|Bayer International S.A., Switzerland                 |  |                      | 99.7 | 
|Bayer Pharma S.A., France                             |  |                      | 99.9 | 
|Bayer plc, U..K                                       |  |                      | 100  | 
|Bayer Rubber N.V., Belgium                            |  |                      | 100  | 
|Bayer S.A.S., France                                  |  |                      | 99.9 | 
|Bayer S.p.A., Italy                                   |  |                      | 100  | 
|Quimica Farmaceutica Bayer, S.A., Spain               |  |                      | 100  | 
|North America                                         |  |                      |      | 
|Bayer Corporation, United States                      |  |                      | 100  | 
|Bayer CropScience LP, United States                   |  |                      | 100  | 
|Bayer CropScience Inc., Canada                        |  |                      | 100  | 
|Bayer Inc., Canada                                    |  |                      | 100  | 
|Asia/Pacific                                          |  |                      |      | 
|Bayer (India) Ltd., India                             |  |                      | 55.3 | 
|Bayer (South East Asia) Pte Ltd., Singapore           |  |                      | 100  | 

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|                                       |  |                      |      | 
|-------------------------------------- |  | -------------------- | ---- | 
|Company Name and Place of Business     |  | Bayers interest (%)
|                                       |  |                     
|Bayer Australia Ltd., Australia        |  |                      | 99.9 | 
|Bayer China Co. Ltd., Hong Kong        |  |                      | 99.3 | 
|Bayer CropScience K.K., Japan          |  |                      | 100  | 
|Bayer Ltd., Japan                      |  |                      | 100  | 
|Bayer Polymers Co. Ltd., Hong Kong     |  |                      | 100  | 
|Bayer Yakuhin Ltd., Japan              |  |                      | 100  | 
|Sumika Bayer Urethane Co., Ltd., Japan |  |                      | 60   | 
|Latin America/ Africa/Middle East      |  |                      |      | 
|Bayer (Proprietary) Ltd., South Africa |  |                      | 100  | 
|Bayer CropScience Brasil S.A., Brazil  |  |                      | 100  | 
|Bayer de México, S.A.de C.V., Mexico.  |  |                      | 100  | 
|Bayer S.A., Argentina                  |  |                      | 99.9 | 
|Bayer S.A., Brazil                     |  |                      | 99.9 | 

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 (for example, German-law hereditary building
rights or Erbbaurechte and granted land-use rights in
Asian countries).

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Item 5. Operating and Financial Review
and Prospects

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

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

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
 Basis of Presentation  Critical
Accounting Policies, below.

OVERVIEW

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

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

Although Bayer AG was first incorporated in 1951,
we trace our historical roots to Friedr. Bayer & Co.,
founded in 1863. Since our formation in 1951, we have pursued a
program of growing both organically and through selective
acquisitions. In 2000 we spent a total of
4.2 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
514 million
on acquisitions. The largest acquisition in that year was the
purchase by Bayer Corporation, our U.S. subsidiary, of the
development, manufacturing and distribution rights for products
that detect antibodies to the hepatitis C (HCV) and human
immunodeficiency (HIV) viruses. Nearly equal in magnitude
was our acquisition of the Mikado® corn
herbicide, which included patents, other product rights and
know-how.

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

We selectively divest businesses and assets that
no longer fit in our strategic plan. 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. 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 Erdölchemie 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 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. As part of the
streamlining of our portfolio, we sold Haarmann &
Reimer effective September 30, 2002. We also sold the
remaining 30 percent of our Agfa business segment, of which
we had already divested 70 percent in 1999. Effective
March 1, 2002 we sold our 94.9 percent interest in
Bayer Wohnungen. In addition, we sold a large part of the global
household insecticides business of our Consumer Care

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business group. As a further part of our drive to
streamline the portfolio, we divested our French and Spanish
generic pharmaceutical operations. We also sold our
50 percent interest in PolymerLatex. This transaction was
closed on May 9, 2003.


OPERATING RESULTS 2002, 2001 and
2000

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 2002 was affected by widespread economic weakness in the
world markets as well as, more specifically, strong downward
pressure on prices. See  2002 compared with
2001  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 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 Erdölchemie joint venture, which had been our one
significant venture into this area, to Deutsche BP, our former
joint venture partner. We had classified
EC Erdölchemie 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 2002 and
2001 had a positive effect on net sales of
1.9 billion.
This activity affected the comparison between the two
years sales figures as follows:

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

We spent
427 million
on restructuring in 2002,
214 million
in 2001 and
200 million
in 2000. The total charges in 2002 include
193 million
in severance payments, a total of
166 million
in accelerated amortization/

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depreciation and write-downs of intangible
assets, property plant and equipment, and
68 million
in other expenses. Our largest single restructuring expense in
2001,
43 million,
related to the restructuring of our styrenics business in North
America and Europe.
39 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
26 million.
In 2000,
61 million
of our restructuring expenses related to the continuing
integration of Chiron Diagnostics, which we acquired in 1998,
and
48 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
32 million
in 2000.


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.

|                           |                           |                     |        |               |  |      |       |               |  |      |        |      |  |  |       |   |  |  |        |      | 
|-------------------------- | ------------------------- | ------------------- | ------ | ------------- |  | ---- | ----- | ------------- |  | ---- | ------ | ---- |  |  | ----- | - |  |  | ------ | ---- | 
|                           |                           |                     |        | Change from   |  |      |       | Change from   |  |     
|                           |                           |                     |        | Previous Year |  |      |       | Previous Year |  |     
|                           |                           | 2002                |        | (%)           |  | 2001 |       | (%)           |  | 2000
|                           |                           |                     |        |               |  |      |       |               |  |     
|                           |                           |                    
|                           |                           | (euros in millions)
|Net sales                  |                           |                     | 29,624 |               |  |      | (2.2  | )             |  |      | 30,275 |      |  |  | (2.2  | ) |  |  | 30,971 |     
|Gross profit               |                           |                     | 11,739 |               |  |      | (8.7  | )             |  |      | 12,851 |      |  |  | (10.2 | ) |  |  | 14,318 |     
|                           | as percentage of sales(%) |                     |        | 39.6          |  |      |       |              |  |      |        | 42.4 |  |  |       |  |  |  |        | 46.2 | 
|Operating result           |                           |                     | 1,574  |               |  |      | (2.3  | )             |  |      | 1,611  |      |  |  | (51.0 | ) |  |  | 3,287  |     
|                           | as percentage of sales(%) |                     |        | 5.3           |  |      |       |              |  |      |        | 5.3  |  |  |       |  |  |  |        | 10.6 | 
|Income before income taxes |                           |                     | 956    |               |  |      | (14.3 | )             |  |      | 1,115  |      |  |  | (62.7 | ) |  |  | 2,990  |     
|Net income                 |                           |                     | 1,060  |               |  |      | 9.8   |               |  |      | 965    |      |  |  | (46.9 | ) |  |  | 1,816  |     
|                           | as percentage of sales(%) |                     |        | 3.6           |  |      |       |              |  |      |        | 3.2  |  |  |       |  |  |  |        | 5.9  | 

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

|                                  |  |                     |        |               |  |      |      |               |  |      |        |  |  |  |      |   |  |  |        | 
|--------------------------------- |  | ------------------- | ------ | ------------- |  | ---- | ---- | ------------- |  | ---- | ------ |  |  |  | ---- | - |  |  | ------ | 
|                                  |  |                     |        | Change from   |  |      |      | Change from   |  |     
|                                  |  |                     |        | Previous Year |  |      |      | Previous Year |  |     
|                                  |  | 2002                |        | (%)           |  | 2001 |      | (%)           |  | 2000
|                                  |  |                     |        |               |  |      |      |               |  |     
|                                  |  |                    
|                                  |  | (euros in millions)
|Europe                            |  |                     | 11,970 |               |  |      | 1.5  |               |  |      | 11,794 |  |  |  | 2.1  |   |  |  | 11,557 | 
|North America                     |  |                     | 8,863  |               |  |      | (7.0 | )             |  |      | 9,527  |  |  |  | 1.1  |   |  |  | 9,419  | 
|Asia/Pacific                      |  |                     | 4,794  |               |  |      | 2.5  |               |  |      | 4,675  |  |  |  | (4.1 | ) |  |  | 4,873  | 
|Latin America/ Africa/Middle East |  |                     | 3,331  |               |  |      | 4.9  |               |  |      | 3,174  |  |  |  | (3.0 | ) |  |  | 3,272  | 

2002 compared with 2001

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. Our 2002 net
sales of
29.6 billion
(2001:
30.3 billion)
included
0.7 billion
of our discontinuing operations (2001:
1.1 billion).

Our net sales from continuing operations were
down by
0.2 billion
in 2002, a decrease of 0.7 percent. Currency movements and
price declines reduced sales by 5 percent and
2 percent, respectively, while portfolio
changes  particularly the acquisition of Aventis
CropScience  added 6 percent. Including
discontinuing operations, our net sales decreased
2.2 percent from 2001.

Sales in our Pharmaceuticals, Biological Products
segment decreased 16.8 percent in 2002 to
4.8 billion.
Sales in our Consumer Care, Diagnostics segment decreased
8.5 percent to
3.8 billion.
Sales in our Animal Health segment declined 0.9 percent to
850 million,
while Sales in our CropScience segment increased

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65.5 percent, to
4.7 billion.
Sales in our Plastics, Rubber segment decreased 3.6 percent
to
5.4 billion.
Sales in the Polyurethanes, Coatings, Fibers segment decreased
0.8 percent to
5.4 billion.
Sales in our Chemicals segment decreased 11.9 percent to
3.3 billion.
See  Segment Data, below, 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.

Our gross profit from continuing operations
decreased 7.8 percent in 2002. The total reported gross
profit decreased 8.7 percent.

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.

The operating result from continuing operations
before exceptional items decreased by 46.2 percent to
989 million.
We attribute this development primarily to additional
depreciation and amortization of goodwill determined and
inventories remeasured in purchase accounting following the
Aventis CropScience acquisition.

After exceptionals, the operating result amounted
to
594 million.
We incurred exceptional charges of
1.2 billion
relating mainly to asset write-downs, restructuring measures and
site consolidations. Also included here are provisions
established in connection with an agreement reached with the
U.S. federal authorities relating to an investigation into
pharmaceutical product prices. These charges were partially
offset by exceptional income of
817 million,
generated mainly by the sale of Bayer Wohnungen GmbH and the
household insecticides business.

The operating result from discontinuing
operations consists of
47 million
in operating profit from the Haarmann & Reimer group and the
933 million
gain from its divestiture on September 30, 2002. The
previous years figure contained
333 million
pertaining to EC Erdölchemie.

The total reported operating result decreased by
2.3 percent from 2001 to
1.6 billion.

In 2002 our selling expenses decreased
3.1 percent, while research and development expenses
increased 1.4 percent. General administration expenses
increased 22.9 percent mainly due to the reorganization of
the Bayer Group.

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 2002 increased
24.6 percent over the previous year, mainly because of the
additional interest expense associated with the financing of the
Aventis CropScience acquisition and also as a consequence of
securities write-downs. Income from investments in affiliated
companies was sharply higher due to the sale of our interest in
Agfa-Gevaert N.V.

Income Before Income Taxes

Our income before taxes decreased by
14.3 percent from 2001 to
1.0 billion.

Income Taxes

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

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Net Income

Group net income rose by 9.8 percent to
1.1 billion.

2001 compared with 2000

Net Sales

Our net sales from continuing operations
increased by
49 million
in 2001, a growth of 0.2 percent. The primary internal
factors that contributed to sales growth were portfolio changes
and price increases. In 2001, portfolio changes accounted for
0.9 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
0.3 billion
of the increase in net sales. These positive developments were
reduced by lower volumes of
1.2 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
0.7 billion.
Including discontinuing operations, our net sales decreased
2.2 percent from 2000.

Sales in our Pharmaceuticals, Biological Products
segment decreased 6.7 percent in 2001 to
5.7 billion.
Sales in our Consumer Care, Diagnostics segment increased
5.6 percent to
4.1 billion.
Sales in our Animal Health segment declined 1.7 percent to
858 million.
Sales in our CropScience segment increased 9.9 percent, to
2.8 billion.
Sales in our Plastics, Rubber segment decreased 4.0 percent
to
5.6 billion.
Sales in the Polyurethanes, Coatings, Fibers segment decreased
2.6 percent to
5.4 billion.
Our Chemicals segment achieved sales of
3.7 billion,
an increase of 9.9 percent. See  Segment
Data, below, for a more detailed discussion of the results
of each of our business segments.

Gross Profit

Despite a sales increase of 0.2 percent, our
gross profit from continuing operations decreased
9.1 percent in 2001. Cost of goods sold, which increased
8.3 percent, cut into our margins.

Operating Result

Our result from continuing operations in 2001
before exceptional items decreased by
1.4 billion,
or 43.8 percent, from the previous year, to
1.8 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
0.3 billion.
After net exceptional charges of
0.6 billion,
the decrease in operating result was 61.3 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
0.4 billion
from discontinuing operations comprised
73.0 million
from Haarmann & Reimer and
333 million
from EC Erdölchemie. The sale of our interest in EC
Erdölchemie in April 2001 added
0.3 billion
to our
17 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 to
1.6 billion.

In 2001 our selling expenses increased
4.8 percent, while research and development expenses
increased 7.2 percent and general administration expenses
increased 11.9 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 other net operating expenses increased
12.4 percent, largely because of higher restructuring
expenses and additional write-downs of receivables.

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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
311 million
to
349 million.
This increase reflected reduced interest income, rather than an
increase in interest expense. Our net exchange gain of
49.0 million
in 2001, compared with a net exchange loss of
21 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 74.4 percent from the previous
year to
0.7 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
26 million
in 2000, we reported a net loss of
4 million
in 2001, reflecting lower earnings. After minority interests,
our net income from continuing operations decreased
1.0 billion,
or 63.6 percent, to
0.6 billion
(0.82 per share)
from
1.7 billion
(2.26 per share)
in 2000. Including discontinuing operations, our net income in
2001 decreased 46.9 percent.

Segment Data

Pharmaceuticals, Biological
Products

|                                          |  |                     |       |               |  |      |       |               |  |      |       |  |  |  |       |   |  |  |       | 
|----------------------------------------- |  | ------------------- | ----- | ------------- |  | ---- | ----- | ------------- |  | ---- | ----- |  |  |  | ----- | - |  |  | ----- | 
|                                          |  |                     |       | Change from   |  |      |       | Change from   |  |     
|                                          |  |                     |       | Previous Year |  |      |       | Previous Year |  |     
|                                          |  | 2002                |       | (%)           |  | 2001 |       | (%)           |  | 2000
|                                          |  |                     |       |               |  |      |       |               |  |     
|                                          |  |                    
|                                          |  | (euros in millions)
|Net sales (external)                      |  |                     | 4,767 |               |  |      | (16.8 | )             |  |      | 5,729 |  |  |  | (6.7  | ) |  |  | 6,140 | 
|Intersegment sales                        |  |                     | 33    |               |  |      | (13.2 | )             |  |      | 38    |  |  |  | (2.6  | ) |  |  | 39    | 
|                                          |  |                     |       |               |  |      |       |               |  |      |       |  |  |  |       |   |  |  |       | 
|Operating result before exceptional items |  |                     | 151   |               |  |      | (60.6 | )             |  |      | 383   |  |  |  | (67.1 | ) |  |  | 1,165 | 
|Operating result                          |  |                     | (188  | )             |  |      |      |               |  |      | 51    |  |  |  | (95.6 | ) |  |  | 1,160 | 

2002 compared with 2001

Sales in our Pharmaceuticals, Biological Products
segment declined by 16.8 percent in 2002. Sales in the
Pharmaceuticals business group decreased 22.9 percent, or
1.1 billion,
to
3.7 billion.
We attribute this development primarily to the withdrawal of the
cholesterol-lowering drug Lipobay/ Baycol and to lower sales of
the antibiotic Ciprobay/ Cipro, for which demand had been
particularly high in the previous year due to its indication for
anthrax. Also, sales of the antihypertensive Adalat were down,
due to increased competition from generic products. The drivers
behind the growth in Pharmaceuticals were the respiratory
antibiotic Avalox/ Avelox and the cardiovascular drug Aspirin
Cardio. Sales in the Biological Products business group expanded
by 14.2 percent, or
134 million,
to
1.1 billion.
This was due primarily to significant growth in volumes for
Kogenate, our recombinant Factor VIII clotting factor. Now that
the production problems have been rectified and the FDA has
approved an increase in Kogenate production, the foundation is
laid for further growth.

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

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In 2002 we incurred exceptional charges of
414 million.
More than half this amount represented provisions for expected
payments under an agreement being negotiated with
U.S. federal authorities. This agreement, which concerned
an investigation into pharmaceutical product prices, has since
been finalized. Our total payments under the agreement will not
materially exceed the amount of these provisions. These
exceptional charges were partially offset by exceptional income
of
75 million
from the divestiture of our holdings in several generic
pharmaceutical companies.

2001 compared with 2000

Sales in our Pharmaceuticals, Biological Products
segment decreased 6.7 percent in 2001. Sales in our
Pharmaceuticals business group, which makes up the bulk of the
segment, decreased 3.0 percent to
4.8 billion.
Our withdrawal of Lipobay/ Baycol was the most significant
factor in this decline. Sales in the smaller Biological Products
business group declined 21.9 percent to
0.95 billion,
reflecting a
24 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
975 million
due to generic competition.

The segments operating result before
exceptional items decreased to
383 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
332 million.

Consumer Care, Diagnostics

|                                          |  |                     |       |               |  |      |      |               |  |      |       |  |  |  |      |  |  |  |       | 
|----------------------------------------- |  | ------------------- | ----- | ------------- |  | ---- | ---- | ------------- |  | ---- | ----- |  |  |  | ---- |  |  |  | ----- | 
|                                          |  |                     |       | Change from   |  |      |      | Change from   |  |     
|                                          |  |                     |       | Previous Year |  |      |      | Previous Year |  |     
|                                          |  | 2002                |       | (%)           |  | 2001 |      | (%)           |  | 2000
|                                          |  |                     |       |               |  |      |      |               |  |     
|                                          |  |                    
|                                          |  | (euros in millions)
|Net sales (external)                      |  |                     | 3,755 |               |  |      | (8.5 | )             |  |      | 4,104 |  |  |  | 5.6  |  |  |  | 3,888 | 
|Intersegment sales                        |  |                     | 2     |               |  |      | 0    |               |  |      | 2     |  |  |  |     |  |  |  | 0     | 
|                                          |  |                     |       |               |  |      |      |               |  |      |       |  |  |  |      |  |  |  |       | 
|Operating result before exceptional items |  |                     | 408   |               |  |      | 5.2  |               |  |      | 388   |  |  |  | 24.8 |  |  |  | 311   | 
|Operating result                          |  |                     | 601   |               |  |      | 76.2 |               |  |      | 341   |  |  |  | 92.7 |  |  |  | 177   | 

2002 compared with 2001

Sales in our Consumer Care, Diagnostics segment
decreased by 8.5 percent. Currency depreciation in Latin
America and inventory reductions by North American drug
suppliers caused sales of the Consumer Care business group to
recede by 18.1 percent, or
379 million,
to
1.7 billion.
Sales of the Diagnostics business group rose by
1.5 percent, or
30 million,
to
2.0 billion,
driven mainly by growth in laboratory diagnostic systems and
nucleic acid diagnostics.

The segments operating result before
exceptional items increased to
408 million
in 2002, a change of 5.2 percent from 2001. This increase
is a result of improved business performance of Diagnostics in
North America, as well costs saved through CURE, our internal
restructuring program.

The net exceptional income of
193 million
was primarily related to the sale of Consumer Cares
Household business.

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##### Table of Contents



2001 compared with 2000

Sales in our Consumer Care, Diagnostics segment
increased 5.6 percent. Of this amount,
2.1 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
2.0 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
388 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 we discontinued marketing
Alka-Seltzer-Plus in 2000 and after its subsequent re-launch in
the United States during 2001. We completed the 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.

Animal Health

|                                          |  |                     |     |               |  |      |       |               |  |      |     |  |  |  |       |   |  |  |     | 
|----------------------------------------- |  | ------------------- | --- | ------------- |  | ---- | ----- | ------------- |  | ---- | --- |  |  |  | ----- | - |  |  | --- | 
|                                          |  |                     |     | Change from   |  |      |       | Change from   |  |     
|                                          |  |                     |     | Previous Year |  |      |       | Previous Year |  |     
|                                          |  | 2002                |     | (%)           |  | 2001 |       | (%)           |  | 2000
|                                          |  |                     |     |               |  |      |       |               |  |     
|                                          |  |                    
|                                          |  | (euros in millions)
|Net sales (external)                      |  |                     | 850 |               |  |      | (0.9  | )             |  |      | 858 |  |  |  | (1.7  | ) |  |  | 873 | 
|Intersegment sales                        |  |                     | 1   |               |  |      | (75.0 | )             |  |      | 4   |  |  |  | (33.3 | ) |  |  | 6   | 
|                                          |  |                     |     |               |  |      |       |               |  |      |     |  |  |  |       |   |  |  |     | 
|Operating result before exceptional items |  |                     | 180 |               |  |      | 11.8  |               |  |      | 161 |  |  |  | 8.8   |   |  |  | 148 | 
|Operating result                          |  |                     | 169 |               |  |      | 5.0   |               |  |      | 161 |  |  |  | (6.9  | ) |  |  | 173 | 

2002 compared with 2001

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

The operating result before exceptional items
increased to
180 million
in 2002, a change of 11.8 percent from 2001. The primary
factors driving this positive development were a change in
product mix and strict cost savings.

2001 compared with 2000

Animal Healths sales declined
1.7 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
161 million
in 2001, a change of 8.8 percent from 2000. We attribute
this development primarily to higher sales for Advantage.

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CropScience

|                                          |  |                     |       |               |  |      |      |               |  |      |       |  |  |  |      |  |  |  |       | 
|----------------------------------------- |  | ------------------- | ----- | ------------- |  | ---- | ---- | ------------- |  | ---- | ----- |  |  |  | ---- |  |  |  | ----- | 
|                                          |  |                     |       | Change from   |  |      |      | Change from   |  |     
|                                          |  |                     |       | Previous Year |  |      |      | Previous Year |  |     
|                                          |  | 2002                |       | (%)           |  | 2001 |      | (%)           |  | 2000
|                                          |  |                     |       |               |  |      |      |               |  |     
|                                          |  |                    
|                                          |  | (euros in millions)
|Net sales (external)                      |  |                     | 4,697 |               |  |      | 65.5 |               |  |      | 2,838 |  |  |  | 9.9  |  |  |  | 2,582 | 
|Intersegment sales                        |  |                     | 90    |               |  |      | 11.8 |               |  |      | 102   |  |  |  | 5.2  |  |  |  | 97    | 
|                                          |  |                     |       |               |  |      |      |               |  |      |       |  |  |  |      |  |  |  |       | 
|Operating result before exceptional items |  |                     | (15   | )             |  |      |     |               |  |      | 464   |  |  |  | 13.2 |  |  |  | 410   | 
|Operating result                          |  |                     | (122  | )             |  |      |     |               |  |      | 464   |  |  |  | 12.9 |  |  |  | 411   | 

2002 compared with 2001

The acquisition of Aventis CropScience (ACS)
allowed CropScience to increase sales by 65.5 percent to
4.7 billion.
Disregarding the ACS business, sales decreased by
4 percent, mainly because of the weak economy in Latin
America and a weather-related demand reduction in North America,
Australia and Asia.

The segments operating result before
exceptional items decreased to a loss of
15 million
in 2002. This is attributable to additional depreciation and
amortization of determined goodwill and revalued assets in
purchase accounting following the ACS acquisition. Operating
Result was also reduced by integration costs. The incurred net
exceptional charges were
107 million.
These charges were primarily for restructuring programs.

2001 compared with 2000

In 2001 CropSciences sales increased
9.9 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
464 million
in 2001, a change of 13.2 percent from 2000. We attribute
this development primarily to higher sales and an additional
income stemming from a patent dispute with Syngenta.

Plastics, Rubber

|                                          |  |                     |       |               |  |      |       |               |  |      |       |  |  |  |       |   |  |  |       | 
|----------------------------------------- |  | ------------------- | ----- | ------------- |  | ---- | ----- | ------------- |  | ---- | ----- |  |  |  | ----- | - |  |  | ----- | 
|                                          |  |                     |       | Change from   |  |      |       | Change from   |  |     
|                                          |  |                     |       | Previous Year |  |      |       | Previous Year |  |     
|                                          |  | 2002                |       | (%)           |  | 2001 |       | (%)           |  | 2000
|                                          |  |                     |       |               |  |      |       |               |  |     
|                                          |  |                    
|                                          |  | (euros in millions)
|Net sales (external)                      |  |                     | 5,378 |               |  |      | (3.6  | )             |  |      | 5,581 |  |  |  | (4.0  | ) |  |  | 5,816 | 
|Intersegment sales                        |  |                     | 115   |               |  |      | (0.9  | )             |  |      | 116   |  |  |  | (4.9  | ) |  |  | 122   | 
|                                          |  |                     |       |               |  |      |       |               |  |      |       |  |  |  |       |   |  |  |       | 
|Operating result before exceptional items |  |                     | 175   |               |  |      | (39.2 | )             |  |      | 288   |  |  |  | (48.6 | ) |  |  | 560   | 
|Operating result                          |  |                     | 73    |               |  |      | (69.3 | )             |  |      | 238   |  |  |  | (53.8 | ) |  |  | 515   | 

2002 compared with 2001

In 2002 sales of our Plastics, Rubber segment
decreased by 3.6 percent. Plastics with 2002 sales of
3.2 billion,
and Rubber with sales of
2.1 billion.
The decline in Plastics sales is mainly a result of price
pressure in Asia and the change in exchange rates. Rubber
declined due to business conditions in North America.

The segments operating result before
exceptional items decreased to
175 million
in 2002, a change of 39.2 percent from 2001. We attribute
this development primarily to a fall in prices, a decrease in
volume in the Rubber business and idle plant expenses. We
incurred exceptional charges of
102 million.
These charges were primarily due to restructuring of our Butyl
and Polybutadiene businesses.

2001 compared with 2000

Sales of our Plastics, Rubber segment declined
4.0 percent. Plastics, with 2001 sales of
3.4 billion,
and Rubber, with sales of
2.2 billion,
accounted for approximately equal proportions of this decrease.
Plastics sales

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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
288 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
50 million.
These charges were primarily for the restructuring of our
Styrenics business.

Polyurethanes, Coatings,
Fibers

|                                          |  |                     |       |               |  |      |       |               |  |      |       |  |  |  |       |   |  |  |       | 
|----------------------------------------- |  | ------------------- | ----- | ------------- |  | ---- | ----- | ------------- |  | ---- | ----- |  |  |  | ----- | - |  |  | ----- | 
|                                          |  |                     |       | Change from   |  |      |       | Change from   |  |     
|                                          |  |                     |       | Previous Year |  |      |       | Previous Year |  |     
|                                          |  | 2002                |       | (%)           |  | 2001 |       | (%)           |  | 2000
|                                          |  |                     |       |               |  |      |       |               |  |     
|                                          |  |                    
|                                          |  | (euros in millions)
|Net sales (external)                      |  |                     | 5,397 |               |  |      | (0.8  | )             |  |      | 5,439 |  |  |  | (2.6  | ) |  |  | 5,582 | 
|Intersegment sales                        |  |                     | 78    |               |  |      | (43.5 | )             |  |      | 138   |  |  |  | (70.1 | ) |  |  | 462   | 
|                                          |  |                     |       |               |  |      |       |               |  |      |       |  |  |  |       |   |  |  |       | 
|Operating result before exceptional items |  |                     | 243   |               |  |      | 88.4  |               |  |      | 129   |  |  |  | (77.6 | ) |  |  | 577   | 
|Operating result                          |  |                     | (205  | )             |  |      |      |               |  |      | 9     |  |  |  | (98.3 | ) |  |  | 524   | 

2002 compared with 2001

In 2002 sales of the segment decreased by
0.8 percent. The Polyurethanes business group contributed
3.3 billion,
an increase of 2.0 percent from the previous year, while
Coatings and Colorants contributed
1.9 billion,
down 3.6 percent from 2001 and the Fibers business
0.2 billion,
down 13.8 percent.

The segments operating result before
exceptional items increased to
243 million
in 2002, a change of 88.4 percent from 2001. We attribute
this development primarily to increased volumes and the success
of our restructuring programs. We incurred net exceptional
charges of
448 million.
These charges were primarily for restructuring programs in
Polyether and Powder Coatings, as well as adjustments to
carrying values of our Polyether and Fibers businesses.

2001 compared with 2000

Sales of our Polyurethanes, Coatings, Fibers
segment decreased by 2.6 percent. The Polyurethanes
business group contributed
3.2 billion,
an increase of 2.0 percent from 2000, while Coatings and
Colorants contributed
2.0 billion,
up 3.5 percent, and the Fibers business
0.2 billion
down 54.2 percent from the previous year. The decrease in
Fibers is due to the sale of the Dralon business. 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
129 million
in 2001, a change of 77.6 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
120 million.
These charges were primarily for restructuring programs in the
United States.

Chemicals

|                                          |  |                     |       |               |  |      |       |               |  |      |       |  |  |  |       |   |  |  |       | 
|----------------------------------------- |  | ------------------- | ----- | ------------- |  | ---- | ----- | ------------- |  | ---- | ----- |  |  |  | ----- | - |  |  | ----- | 
|                                          |  |                     |       | Change from   |  |      |       | Change from   |  |     
|                                          |  |                     |       | Previous Year |  |      |       | Previous Year |  |     
|                                          |  | 2002                |       | (%)           |  | 2001 |       | (%)           |  | 2000
|                                          |  |                     |       |               |  |      |       |               |  |     
|                                          |  |                    
|                                          |  | (euros in millions)
|Net sales (external)                      |  |                     | 3,304 |               |  |      | (11.9 | )             |  |      | 3,749 |  |  |  | 9.9   |   |  |  | 3,410 | 
|Intersegment sales                        |  |                     | 409   |               |  |      | (10.3 | )             |  |      | 456   |  |  |  | (2.1  | ) |  |  | 466   | 
|                                          |  |                     |       |               |  |      |       |               |  |      |       |  |  |  |       |   |  |  |       | 
|Operating result before exceptional items |  |                     | 160   |               |  |      | (41.0 | )             |  |      | 271   |  |  |  | (26.8 | ) |  |  | 370   | 
|Operating result                          |  |                     | 134   |               |  |      | (34.0 | )             |  |      | 203   |  |  |  | (48.5 | ) |  |  | 394   | 

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2002 compared with 2001

The chemicals segment is comprised of four
business groups: Basic and Fine Chemicals, Specialty Products,
H.C. Starck, and Wolff Walsrode.

The sales of the Basic and Fine Chemicals
business group decreased 9.2 percent to
931 million.
The falling prices for sodium hydroxide and lower sales in the
life-science intermediates markets were the main reasons for
that decline. The basic chemicals business unit took advantage
of further consolidation in the market. The Specialty Products
business group sustained a decline in sales to
1.4 billion,
down 4.5 percent. This decline is attributable to
unfavorable changes in the exchange rates and to the weak global
economic situation. For the H.C. Starck business group the
continuing weakness in demand in the electronics industry as
well as significantly reduced prices led to a decline in sales
of 25.2 percent to
607 million.
Sales of the Wolff Walsrode business group decreased due to
changes in the portfolio from
444 million
to
363 million.

The operating result before exceptional items
decreased 41 percent to
160 million.
The most important factor affecting the operating result of the
Chemicals segment was the weak profitability of H.C. Starck.

2001 compared with 2000

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
1.0 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
1.5 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
811 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
444 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
271 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
68 million.
These charges were primarily in connection with the sale of our
interest in ChemDesign Corporation.

LIQUIDITY AND CAPITAL RESOURCES 2002, 2001 and
2000

Cash Flows

In recent years, our primary source of liquidity
has been cash from operations. We use cash in investing
activities primarily for acquisitions as well as for additions
to property, plant, equipment and investments; these activities
represented our primary liquidity requirements during the years
discussed below. We use cash in financing activities primarily
to retire debt and pay dividends. At December 31, 2002, we
had cash, cash equivalents and net working capital totaling
5.5 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.

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The following table summarizes our cash flows in
each of the last three years:

|                                                        |                                  |                     |        |               |  |      |       |               |   |      |        |     |  |  |       |       |   |  |        |      |  
|------------------------------------------------------- | -------------------------------- | ------------------- | ------ | ------------- |  | ---- | ----- | ------------- | - | ---- | ------ | --- |  |  | ----- | ----- | - |  | ------ | ---- | -
|                                                        |                                  |                     |        | Change from   |  |      |       | Change from   |   |     
|                                                        |                                  |                     |        | Previous Year |  |      |       | Previous Year |   |     
|                                                        |                                  | 2002                |        | (%)           |  | 2001 |       | (%)           |   | 2000
|                                                        |                                  |                     |        |               |  |      |       |               |   |     
|                                                        |                                  |                    
|                                                        |                                  | (euros in millions)
|Gross operating cash flow                               |                                  |                     | 3,012  |               |  |      | 3.0   |               |   |      | 2,923  |     |  |  | (29.8 | )     |   |  | 4,164  |     
|                                                        | Thereof discontinuing operations |                     |        | 77            |  |      |       | (27.4         | ) |      |        | 106 |  |  |       | (56.6 | ) |  |        | 244  |  
|Changes in working capital                              |                                  |                     | 1,408  |               |  |      | 50.4  |               |   |      | 936    |     |  |  |      |       |   |  | (1,073 | )   
|Net cash provided by operating activities               |                                  |                     | 4,420  |               |  |      | 14.5  |               |   |      | 3,859  |     |  |  | 24.8  |       |   |  | 3,091  |     
|                                                        | Thereof discontinuing operations |                     |        | 87            |  |      |       | (33.6         | ) |      |        | 131 |  |  |       | (30.3 | ) |  |        | 188  |  
|Net cash provided by (used in)
    investing activities |                                  |                     | (6,570 | )             |  |      | 208.2 |               |   |      | (2,132 | )   |  |  | (65.6 | )     |   |  | (6,189 | )   
|                                                        | Thereof discontinuing operations |                     |        | 1,286         |  |      |       | 314.8         |   |      |        | 310 |  |  |       |      |   |  |        | (268 | )
|Net cash provided by (used in)
    financing activities |                                  |                     | 2,209  |               |  |      |      |               |   |      | (1,549 | )   |  |  |      |       |   |  | 772    |     
|                                                        | Thereof discontinuing operations |                     |        | 1             |  |      |       | (98.7         | ) |      |        | 77  |  |  |       |      |   |  |        | 11   |  
|Change in cash and cash equivalents                     |                                  |                     | 59     |               |  |      | (66.9 | )             |   |      | 178    |     |  |  |      |       |   |  | (2,326 | )   
|Cash and cash equivalents at beginning of period        |                                  |                     | 719    |               |  |      | 46.4  |               |   |      | 491    |     |  |  | (82.5 | )     |   |  | 2,812  |     
|Change in scope of consolidation                        |                                  |                     | 4      |               |  |      | (90.5 | )             |   |      | 42     |     |  |  |      |       |   |  | (3     | )   
|Exchange rate movements                                 |                                  |                     | (15    | )             |  |      |      |               |   |      | 8      |     |  |  |      |       |   |  | 8      |     
|Cash and cash equivalents at end of year                |                                  |                     | 767    |               |  |      | 6.7   |               |   |      | 719    |     |  |  | 46.4  |       |   |  | 491    |     
|Marketable securities and other instruments             |                                  |                     | 29     |               |  |      | (44.2 | )             |   |      | 52     |     |  |  | (75.6 | )     |   |  | 213    |     
|Liquid assets as per balance sheets                     |                                  |                     | 796    |               |  |      | 3.2   |               |   |      | 771    |     |  |  | 9.5   |       |   |  | 704    |     

Cash from Operating
Activities

Cash from operating activities was
3.0 billion
in 2002,
2.9 billion
in 2001 and
4.2 billion
in 2000. Gross cash decreased 3.0 percent. In 2000 the
gross cash provided by operating activities decreased
29.8 percent from 2000, mainly due to lower operating
results.

Due to a
1.4 billion
reduction in working capital, net operating cash flow in 2002
increased to
4.4 billion
or 14.5 percent. We achieved this improvement primarily
through our project, begun in 2001, to reduce inventories and
improve the collection of receivables.

Investing activities

Net cash used in investing activities amounted to
6.6 billion.
Additions to property, plant and equipment and intangible assets
in 2002 resulted in a cash outflow of
2.2 billion.
Cash outflows for acquisitions, primarily that of Aventis
CropScience, amounted to
7.8 billion.
Sales of property, plant and equipment led to cash inflow of
2.2 billion,
while the cash inflow from the sale of investments and from
interest and dividend receipts, including marketable securities,
amounted to
1.3 billion.
The net cash outflow for investing activities amounted to
2.1 billion
in 2001. Additions to property, plant and equipment and
intangible assets resulted in a cash outflow of
2.6 billion.
Cash outflow for acquisitions amounted to
0.5 billion.
Sales of property, plant and equipment led to a cash inflow of
0.5 billion,
while that from interest and dividend receipts and from
marketable securities amounted to
0.5 billion.
In 2000, we had a net cash outflow for investing activities of
6.2 billion.
We had cash receipts of
0.6 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
4.1 billion
for acquisitions and
2.6 billion
for additions to property, plant, equipment and investments
during 2000.

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##### Table of Contents



Financing Activities

Net cash provided by financing activities came to
2.2 billion,
with net borrowings amounting to
3.5 billion.
Dividend and interest payments totaled
1.4 billion.

Financing activities led to a net cash outflow of
1.5 billion
in 2001, which comprises mainly the
1.0 billion
dividend payment for 2000 and
0.5 billion
in interest payments. Financing activities in 2000 provided us
with a net cash inflow of
0.8 billion,
with net borrowings of
2.1 billion
and dividend and interest payments of
1.3 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
2 billion
European Medium-Term Note program in 2000, which we increased to
8 billion
in 2001. At December 31, 2002, we had approximately
6.2 billion
of total lines of credit, of which
1.0 billion
was used and
5.2 billion
was unused and available for borrowing on an unsecured basis.

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
2.4 billion
in 2002 and to
2.6 billion
in each of 2001 and 2000.

Our major capital expenditures since 2000
included:

|     |  |                                      |  |                                                                                                                               
|---- |  | ------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------
|Year |  | Segment                              |  | Description                                                                                                                   
|     |  |                                      |  |                                                                                                                               
|2002 |  | Pharmaceuticals, Biological Products |  | Construction of a sterile filling facility for
    Factor VIII, Berkeley, California                                          
|     |  | Consumer Care, Diagnostics           |  | Construction of a small volume facility with
    pilot plant for Aspirin production, Greppin, Germany                         
|     |  | CropScience                          |  | Completion of a multi-purpose facility for crop
    protection products, Dormagen, Germany                                    
|     |  | Plastics, Rubber                     |  | Modification of butyl rubber production,
    Zwijndrecht, Belgium and Sarnia, Canada                                          
|     |  |                                      |  | Expansion of capacity for ABS plastics,
    Tarragona, Spain and Map Ta Phut, Thailand                                        
|     |  |                                      |  | Expansion of polycarbonate capacity including
    precursors, Uerdingen, Germany                                              
|     |  | Polyurethanes, Coatings, Fibers      |  | Expansion of isocyanate capacity including
    precursors, Brunsbüttel, Dormagen and Uerdingen, Germany
    and Niihama, Japan
|     |  | Chemicals                            |  | Expansion/ modification of electrolysis plants,
    Leverkusen, Germany                                                       
|     |  |                                      |  | Efficiency improvement in the integrated
    aromatics production network, Leverkusen, Germany                                
|     |  |                                      |  | Expansion of nitrocellulose production, Bomlitz,
    Germany                                                                  
|2001 |  | Pharmaceuticals, Biological Products |  | Construction of a facility for packaging and
    storage of biological products, Berkeley, California                         
|     |  |                                      |  | Construction of research facility in West Haven,
    Connecticut, and Kyoto, Japan (completed 2001)                           
|     |  | Consumer Care, Diagnostics           |  | Expansion of solids plants, Bitterfeld, Germany
    and Lerma, Mexico                                                         

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##### Table of Contents



|     |  |                                      |  |                                                                                                                                     
|---- |  | ------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------
|Year |  | Segment                              |  | Description                                                                                                                         
|     |  |                                      |  |                                                                                                                                     
|     |  | CropScience                          |  | Construction of a multi-purpose facility for crop
    protection products, Dormagen, Germany                                        
|     |  |                                      |  | Protection products, Dormagen, Germany                                                                                              
|     |  |                                      |  | Insecticides production facility, Dormagen,
    Germany                                                                             
|     |  | Plastics, Rubber                     |  | Expansion of polycarbonate capacities (production
    of bisphenol A and Makrolon), Map Ta Phut, Thailand and
    Uerdingen, Germany
|     |  |                                      |  | Expansion of films capacity, Dormagen, Germany                                                                                      
|     |  |                                      |  | Construction of a melt polycarbonate facility,
    Antwerp, Belgium (completed 2001)                                                
|     |  |                                      |  | Construction of a rubber chemicals facility,
    Brunsbüttel, Germany (completed 2001)                                              
|     |  | Polyurethanes, Coatings, Fibers      |  | Expansion of isocyanate capacities including
    precursors, Uerdingen and Brunsbüttel, Germany                                     
|     |  |                                      |  | Expansion of coating raw materials production,
    Leverkusen, Germany                                                              
|     |  |                                      |  | Expansion of capacity for aqueous dispersions,
    Dormagen/ Germany (brought on stream 2001)                                       
|     |  |                                      |  | Expansion of dyestuff production for transparent
    Plastics, Leverkusen, Germany                                                  
|     |  |                                      |  | Construction of a coating raw materials facility,
    Caojing, China                                                                
|     |  | Chemicals                            |  | Construction of a sulfuric acid facility,
    Leverkusen, Germany                                                                   
|     |  |                                      |  | Expansion/ modification of the electrolysis
    plant, Leverkusen, Germany                                                          
|     |  |                                      |  | Construction of a polyaspartic acid facility,
    Leverkusen, Germany                                                               
|     |  |                                      |  | Expansion of tantalum production, Goslar, Germany
    and Mito, Japan                                                               
|     |  |                                      |  | Process technology center, Goslar, Germany
    (completed 2001)                                                                     
|     |  |                                      |  | Modernization and expansion of the nitrocellulose
    facility, Bomlitz, Germany                                                    
|     |  |                                      |  | Expansion of the molybdenum facility, Laufenburg,
    Germany                                                                       
|2000 |  | Pharmaceuticals, Biological Products |  | Construction of process development pilot plant,
    Wuppertal, Germany (completed 2000)                                            
|     |  | Consumer Care, Diagnostics           |  | Expansion of solids plant, Bitterfeld, Germany                                                                                      
|     |  | CropScience                          |  | 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)
    and Bisphenol A), Map Ta Phut, Thailand                                        
|     |  |                                      |  | Construction of Therban facility, Leverkusen,
    Germany (completed 2000)                                                          
|     |  | Polyurethanes, Coatings, Fibers      |  | Facility for continuous production of long chain
    polyethers by our pro- prietary 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                                                              

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Commitments

Off Balance Sheet
Arrangements

Our unconsolidated entities are not considered
special-purpose entities and do not constitute other off-balance
sheet arrangements. However, under current US GAAP, we are
evaluating unconsolidated entities in which we may have a
variable interest. If consolidation should turn out to be
necessary, it will take place in 2003.

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.

|                                         |  |       |        |        |  |         |       |         |  |         |     |         |  |         |     |  |  |  |     |  |  |  |       |  |  |  |       | 
|---------------------------------------- |  | ----- | ------ | ------ |  | ------- | ----- | ------- |  | ------- | --- | ------- |  | ------- | --- |  |  |  | --- |  |  |  | ----- |  |  |  | ----- | 
|                                         |  |       |        |        |  |         |       |         |  |         |     |         |  | After  
|Contractual Obligations                  |  | Total |        | 1 year |  | 2 years |       | 3 years |  | 4 years |     | 5 years |  | 5 years
|                                         |  |       |        |        |  |         |       |         |  |         |     |         |  |        
|Long-term Debt, including Capital Leases |  |       | 10,159 |        |  |         | 2,841 |         |  |         | 186 |         |  |         | 427 |  |  |  | 82  |  |  |  | 3,231 |  |  |  | 3,392 | 
|Operating Leases                         |  |       | 619    |        |  |         | 191   |         |  |         | 140 |         |  |         | 85  |  |  |  | 61  |  |  |  | 49    |  |  |  | 93    | 
|Capital Expenditures                     |  |       | 286    |        |  |         | 286   |         |  |         |     |         |  |         |     |  |  |  |    |  |  |  |      |  |  |  |      | 
|                                         |  |       |        |        |  |         |       |         |  |         |     |         |  |         |     |  |  |  |     |  |  |  |       |  |  |  |       | 
|Total Contractual Obligations            |  |       | 11,064 |        |  |         | 3,318 |         |  |         | 326 |         |  |         | 512 |  |  |  | 143 |  |  |  | 3,280 |  |  |  | 3,485 | 
|                                         |  |       |        |        |  |         |       |         |  |         |     |         |  |         |     |  |  |  |     |  |  |  |       |  |  |  |       | 

|                             |  |       |     |        |  |         |     |         |  |         |     |         |  |         |    |  |  |  |    |  |  |  |    |  |  |  |    | 
|---------------------------- |  | ----- | --- | ------ |  | ------- | --- | ------- |  | ------- | --- | ------- |  | ------- | -- |  |  |  | -- |  |  |  | -- |  |  |  | -- | 
|                             |  |       |     |        |  |         |     |         |  |         |     |         |  | After  
|Other Commercial Commitments |  | Total |     | 1 year |  | 2 years |     | 3 years |  | 4 years |     | 5 years |  | 5 years
|                             |  |       |     |        |  |         |     |         |  |         |     |         |  |        
|Collaborative Agreements     |  |       | 570 |        |  |         | 208 |         |  |         | 153 |         |  |         | 89 |  |  |  | 74 |  |  |  | 36 |  |  |  | 10 | 

Payments for guarantees and endorsements of bills
and of warranties of
245 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 spent a total of
2.4 billion
for intangible assets, property, plant and equipment in 2002. As
in recent years, the main focus of our capital spending was in
our Polymers business.

Other Commitments

In 2002 our minimum non-discounted future lease
payments relating to long-term lease and rental arrangements
totaled
1.5 billion,
compared with
1.7 billion
in the previous year. Of this amount,
899 million
represented future payments under financial leases
(1.2 billion
in 2001).

Our financial commitment for orders placed under
purchase agreements relating to planned or ongoing capital
expenditure projects totaled
286 million
in 2002. We expect to pay the majority of this amount in 2003.
In 2001 this figure was
354 million,
and in
2001 446 million.

Under collective agreements on part-time work
arrangements for certain older employees, we have to accept
applications for such arrangements from a certain quota of the
work force. Other financial obligations that may arise from such
work arrangements in the future cannot be quantified, since the
quota has already been exceeded.

In addition, we have entered into research
agreements with a number of third parties. Under these
agreements, we have agreed to fund various research projects or
to assume other commitments. Our payments under these agreements
are typically based on the achievement of certain milestones or
the fulfillment of other specific conditions by our research
partners. In 2002 the total amount of these commitments was
570 million.
For 2001 the figure had been
732 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,

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commercial paper and other financial obligations.
See the tables under  Contractual Obligations and
Commercial Commitments, above, for a summary of our current
financial obligations. See also Note 30 to our consolidated
financial statements.


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 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 primarily use interest rate swaps to convert a
portion of our fixed rate borrowings into, in effect, floating
rate borrowings. Short-term interest rate hedging contracts
(including interest and principal currency swaps) totaled a
nominal amount of
0.5 billion
in 2002,
2.0 billion
in 2001 and
0.3 billion
in 2000. In 2002 hedges maturing in more than one year
represented a nominal amount
5.3 billion,
in
2001 2.5 billion
and in
2000 3.2 billion.

Because a substantial portion of Bayers
assets, liabilities, sales and earnings are denominated in
currencies other than the euro-zone currencies, we have
translation exposure to fluctuations in the values of these
currencies relative to the euro. These currency fluctuations,
especially the fluctuation of the value of the U.S. dollar
relative to the euro, can have a material impact on our results
of operations. For example, an increase in the value of the
U.S. dollar relative to the euro will increase the euro
value of Bayers sales and earnings made in the dollar zone
and increase the competitiveness of its products produced in
Europe against products exported from the United States. The
effects of currency fluctuations have been negative in 2002,
decreasing our sales by
1.4 billion
compared to the positive effects of
0.1 billion
in 2001 and
2.2 billion
in 2000. This effect was mainly due to a decrease of the value
of the U.S. dollar compared to the euro (the average
relative value of one euro in 2002 was $0.95, compared with
average values of $0.90 in 2001 and $0.93 in 2000).

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, 2002, we had entered into forward foreign
exchange contracts and currency swaps with a nominal value of
2.98 billion,
compared to
2.75 billion
in 2001 and
3.42 billion
in 2000.

Our aggregate direct transaction risk from sales
and purchases in foreign currencies before hedging was
approximately
2.7 billion
at December 31, 2002, consisting primarily of dollars
($1.7 billion), Japanese yen (¥53 billion) and
Brazilian real (R1.3 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.

Inflation, Seasonality and
Cyclicality

Inflation has not had a material effect on our
operating results in recent years. Seasonality does not
materially affect our business as a whole. However, several of
our individual business lines are subject to seasonal effects.
In addition, a number of our business groups are subject to
cyclicality, either directly or because of the effect of
cyclicality on their customers businesses. See the
descriptions of our various business segments in Item 4,
Information on the Company for a discussion of those
businesses subject to seasonal or cyclical effects.

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RESEARCH AND DEVELOPMENT

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

|                                      |                               |      |  |             |  |      |  |             |  |      |  |       |  |  |  |     |  |  |  |       | 
|------------------------------------- | ----------------------------- | ---- |  | ----------- |  | ---- |  | ----------- |  | ---- |  | ----- |  |  |  | --- |  |  |  | ----- | 
|                                      |                               |      |  | Change from |  |      |  | Change from |  |     
|                                      |                               |      |  | Previous    |  |      |  | Previous    |  |     
|                                      |                               | 2002 |  | Year (%)    |  | 2001 |  | Year (%)    |  | 2000
|                                      |                               |      |  |             |  |      |  |             |  |     
|Research and development expenditure: |                               |      |  |             |  |      |  |             |  |      |  |       |  |  |  |     |  |  |  |      
|                                      | Amount (in millions of euros) |      |  | 2,577       |  |      |  | 0.7         |  |      |  | 2,559 |  |  |  | 6.9 |  |  |  | 2,393 | 
|                                      | As a percentage of sales      |      |  | 8.7         |  |      |  |            |  |      |  | 8.5   |  |  |  |    |  |  |  | 7.7   | 

We typically allocate the largest portion of our
research and development expenses to our Health Care businesses,
primarily in the Pharmaceuticals, Biological Products segment.
In 2002, Pharmaceuticals, Biological Products accounted for
41.6 percent of our total research and development spending
(2001: 48.5 percent; 2000: 45.8 percent).

For a more detailed discussion of our research
and development activities and policies, see Item 4,
Information on the Company  Research and
Development as 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
IFRS. See Note 44 to our consolidated financial statements
for a reconciliation of the significant differences between IFRS
and U.S. GAAP.

New Accounting Standards

IFRS

The following new or revised accounting standards
and interpretations were implemented in 2002:

|       |  |                                                                                                    
|------ |  | ---------------------------------------------------------------------------------------------------
|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
    Agreements                                                     
|SIC-30 |  | Reporting Currency  Translation from
    Measurement Currency to Presentation Currency            
|SIC-31 |  | Revenue  Barter Transactions Involving
    Advertising Services                                   
|SIC-32 |  | Intangible Assets  Web Site Costs                                                                 
|SIC-33 |  | Consolidation and Equity Method 
    Potential Voting Rights and Allocation of Ownership Interests

The adoption of these new interpretations did not
have a material impact on our financial position or results of
operation in 2002 or on the comparability of our 2002, 2001 and
2000 consolidated financial statements.

In 2003 a new International Accounting Standard,
IAS 41 Agriculture, will be implemented. IAS 41 Agriculture
prescribes the accounting treatment, financial statement
presentation and disclosures related to agricultural activity.
This standard stipulates, among other things, the accounting
treatment for biological assets during the period of growth,
degeneration, production and procreation, and for the initial
measurement of agricultural produce at the point of harvest. It
prescribes that biological assets be included at fair value less
estimated point-of-sale costs, provided that fair value can be
measured reliably. Agricultural produce harvested from such
biological assets is also recognized at fair value at the point
of harvest less estimated point-of-sale costs.

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U.S. GAAP

In June 2001 the Financial Accounting Standards
Board (FASB) approved Statement of Financial Accounting
Standards (SFAS) 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets
(SFAS 143), which requires that the fair values of an
obligation associated with the retirement of long-lived assets
be recognized in the period in which such obligation is incurred
if a reasonable estimate of fair value can be made. When the
liability is recorded, we must capitalize the costs of the
liability by increasing the carrying amount of the long-lived
asset. Over the estimated life of the asset, the liability is
accreted to its present value and the related capitalized charge
is depreciated over the useful life of the asset. We are
required to implement SFAS 143 with effect from January 1,
2003. We do not believe the adoption of this standard will have
a material impact on our financial position, results of
operations or cash flows.

SFAS 145, Rescission of FASB
Statements no. 4, 44 and 64, Amendment of FASB
Statement no. 13 and Technical Corrections was issued
in April 2002. The statement updates, clarifies and simplifies
existing accounting standards related to the presentation of
gains and losses from certain extinguishments of debt, the
accounting for certain intangible assets and the accounting for
certain sale-leaseback transactions. Significant provisions of
this statement applicable to Bayer are effective for our 2003
fiscal year. We do not believe the adoption of this standard
will have a material impact on our financial position, results
of operations or cash flows.

SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities was issued in June 2002.
SFAS  146, which rescinds Emerging Issues Task Force
(EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring), requires a liability for costs associated
with exit or disposal activities to be recognized and measured
initially at fair value only when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS
146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. We will adopt
this standard effective January 1, 2003. We do not believe
the adoption of this standard will have a material impact on our
financial position, results of operations or cash flows.

In November 2002 the FASB published FASB
Interpretation no. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45).
FIN 45 expands on the accounting guidance of other SFASs by
extending the disclosures to be made by a guarantor in its
financial statements about its obligations under certain
guarantees, and it requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a
guarantee. The disclosure requirements are effective for
financial years ending after December 15, 2002, and require
disclosure of the nature of the guarantee, the maximum potential
amount of future payments that the guarantor could be required
to make under the guarantee, and the current amount of the
liability, if any, for the guarantors obligations under
the guarantee. FIN 45s provisions for initial recognition
and measurement should be applied prospectively to guarantees
issued or modified after December 31, 2002. We will apply
this standard beginning on January 1, 2003. We do not
believe the adoption of this standard will have a material
impact on our financial position, results of operations or cash
flows.

In January 2003 the FASB published FASB
Interpretation no. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46 addresses the
consolidation of entities for which control is achieved through
means other than through voting rights (such entities are
designated variable interest entities or
VIE) by clarifying the application of ARB
No. 51, Consolidated Financial Statements to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. The primary objective of this interpretation
is to provide guidance on how to identify a VIE and to determine
when a VIEs assets, liabilities, noncontrolling interests
and result of operations need to be included in a companys
consolidated financial statements. The measurement principles
will apply to our 2003 financial statements, while the
disclosure principles are effective immediately. While we are
currently in the process of assessing the impact of the adoption
of FIN 46, we do not believe it will have a material impact
on our financial position, results of operations or cash flows.

In May 2003 the FASB published SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS 150 establishes standards for how an issuer classifies
and

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measures certain financial instruments with
characteristics of both liabilities and equity. This statement
is effective for our 2003 fiscal year reporting. We do not
believe the adoption of this standard will have a material
impact on our financial position, results of operations or cash
flows.


In May 2003 the FASB Emerging Issues Task Force
published Issue 00-21, Revenue Arrangements with
Multiple Deliverables (EITF 00-21). EITF 00-21
addresses certain aspects of the accounting by a vendor for
revenue arrangements entered into for fiscal periods beginning
after June 15, 2002. We do not believe the adoption of
EITF 00-21 will have a material impact on our financial
position, results of operations or cash flows.

In April 2003 the FASB issued SFAS No. 149
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives) and
for hedging activities under SFAS no. 133, Accounting
for Derivative Instruments and Hedging Activities. The
Group is currently evaluating the impact of this change.

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

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

Intangible Assets and Property, Plant and
Equipment

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

Intangible assets and property, plant and
equipment are tested for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairment testing requires management
to compare the carrying value of the assets to the expected
discounted future cash flows from the related assets.
Determining the expected discounted future cash flows involves
significant estimations, including future sales prices and sales
volumes, costs, and risk-adjusted discount rates.

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

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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.

Income Taxes

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

Use of Estimates

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

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Item 6. Directors, Senior Management and
Employees

Directors and Senior Management

In accordance with the German Stock Corporation
Act (Aktiengesetz ), Bayer AG has both a Board of
Management (Vorstand ) and a Supervisory Board
(Aufsichtsrat ). The Board of Management is
responsible for the management of our business; the Supervisory
Board 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 for a maximum term of five
years and are eligible for reappointment after the completion of
their term in office.

Bayer AG is legally represented by two members of
the Board of Management acting together, or by one member of the
Board of Management together with a person possessing a special
power of attorney (Prokura ).

The Board of Management must report regularly to
the Supervisory Board, particularly on proposed business policy
and strategy, on profitability and on the current business of
Bayer AG, as well as on any exceptional matters that may arise
from time to time. If not otherwise required by law, the Board
of Management decides with a simple majority of the votes cast.
In case of deadlock, the vote of the chairman is the relevant
vote.

Under certain circumstances, such as a serious
breach of duty or a vote of no confidence by the shareholders in
an annual meeting, a member of the Board of Management may be
removed by the Supervisory Board prior to the expiration of his
term. A member of the Board of Management may not deal with, or
vote on, matters relating to proposals, arrangements or
contracts between him/herself and Bayer.

Individual Board members serve as representatives
with primary responsibility for our various corporate segments
and as representatives for the various geographic regions in
which we operate.

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

|                      |  |          |  |                      |      | 
|--------------------- |  | -------- |  | -------------------- | ---- | 
|Name and Age(1)       |  | Position |  | Current term expires
|                      |  |          |  |                     
|Werner Wenning (56)   |  | Chairman |  |                      | 2007 | 
|Dr. Udo Oels (59)     |  | Member   |  |                      | 2006 | 
|Klaus Kühn (51)       |  | Member   |  |                      | 2007 | 
|Dr. Richard Pott (49) |  | Member   |  |                      | 2007 | 






|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Attila Molnar and Frank Morich left the Board of
    Management on June 30, 2002. Werner Spinner resigned from
    the Board of Management effective February 28, 2003.

Werner Wenningbecame chairman of our Board of Management in April 2002. He has
served on the Board since 1997. Prior to becoming chairman, he
served as chief financial officer and was a member of the
Corporate Coordination and Human Resources Committees. From 1996
until he joined the Board in 1997, Mr. Wenning was head of
Corporate Planning and Controlling. In addition to his
responsibilities on the Board, he is a member of the supervisory
boards of Gerling-Konzern Versicherungs-Beteiligungs AG and
Henkel KGaA.

Dr. Udo Oelsjoined the Board of Management in 1996 and currently is
responsible for the corporate functions innovation, technology
and environment. He is the representative for the Asia region.

Klaus Kühnis
Bayers chief financial officer. Prior to joining the Board
in May 2002, Mr. Kühn was head of Bayers Finance
Division. Prior to that appointment, he oversaw the spin-off of
Bayers former Agfa division. Before joining Bayer in 1998,
Mr. Kühn worked with Schering AG, most recently as
head of finance. He is also the vice president of the Deutsches
Aktieninstitut e.V.

Dr. Richard
Pottjoined the Board in May 2002. He
had previously served as General Manager of our Specialty
Products business group. Before assuming responsibility for
Specialty Products, he served Bayer in a number of positions,
most recently as head of the Strategic Planning Department and
then as head of Corporate Planning and Controlling.
Dr. Pott oversees strategy and human resources and serves
as Arbeitsdirektor.

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 oversees our business policy,
corporate planning and strategy. It also approves the annual
budget and the financial statements of Bayer AG and of the Bayer
Group. The Supervisory Board may not make management decisions,
but the Board of Managements standard operating procedures
(Geschäftsordnung ) may require the prior
consent of the Supervisory Board for specified transactions
above a specified threshold, including:



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the acquisition or disposition of investments;                                                                                                                
|
| |  | 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
    (Bürgschaften ) and loans, except to
    subsidiaries; and
|
| |  | the establishment of branch offices
    (Zweigniederlassungen ).                                                                                              

Our shareholders elect ten members of the
Supervisory Board at the annual meeting of shareholders.
Pursuant to the Co-Determination Act of 1976, our employees
elect the remaining ten members. The term of a Supervisory Board
member expires at the end of the annual meeting of shareholders
in which the shareholders discharge Supervisory Board members
for the fourth fiscal year following the year in which the
member was elected. There is no compulsory retirement age for
members of the Supervisory Board. However, in accordance

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with the German Corporate Governance Codex, Board
members are encouraged to retire at the Annual Shareholders
Meeting during the year in which they reach the age of 72.


Any member elected by the shareholders at the
annual meeting of shareholders may be removed by a majority of
three quarters of the votes cast by the shareholders in such
meeting. Any member elected by the employees may be removed by a
majority of three quarters of the votes cast by the employees.
Unless otherwise required by law or by the Articles of
Association of Bayer AG, resolutions of the Supervisory Board
are passed by simple majority of the votes cast. According to
the Articles of Association, in the case of a deadlock, a second
vote is held in which the chairman of the Supervisory Board is
entitled to one additional vote. In order to constitute a
quorum, at least half of the total members of the Supervisory
Board must be present in the meeting or participate in the
voting.

All of the current shareholder representatives on
the Supervisory Board were elected by the shareholders at the
annual meeting of shareholders held on April 26, 2002, with
the exception of Dr. Jürgen Weber, who was elected on
April 25, 2003.

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

|                             |  |               |  |                                                                                      |  |               |      | 
|---------------------------- |  | ------------- |  | ------------------------------------------------------------------------------------ |  | ------------- | ---- | 
|Name(1)                      |  | Position      |  | Principal occupation                                                                 |  | First elected
|                             |  |               |  |                                                                                      |  |              
|Dr. Manfred Schneider        |  | Chairman      |  | Former chairman of the management board, Bayer AG                                    |  |               | 2002 | 
|*Erhard Gipperich            |  | Vice Chairman |  | Lathe operator                                                                       |  |               | 1998 | 
|Dr. Paul Achleitner          |  | Member        |  | Member of the management board, Allianz AG                                           |  |               | 2002 | 
|Dr. Josef Ackermann          |  | Member        |  | Chairman of the management board, Deutsche Bank AG                                   |  |               | 2002 | 
|*Karl-Josef Ellrich          |  | Member        |  | Chairman of the Works Council, Dormagen Site                                         |  |               | 2000 | 
|Prof. Dr. Hans-Olaf Henkel   |  | Member        |  | President of the Leibniz Association                                                 |  |               | 2002 | 
|*Thomas Hellmuth             |  | Member        |  | Agricultural Engineer                                                                |  |               | 2002 | 
|Dr. h.c. Martin Kohlhaussen  |  | Member        |  | Chairman of the supervisory board, Commerzbank AG                                    |  |               | 1992 | 
|John Christian Kornblum      |  | Member        |  | Chairman of Lazard & Co.                                                             |  |               | 2002 | 
|*Petra Kronen                |  | Member        |  | Chairman of the Works Council                                                        |  |               | 2000 | 
|Dr. Heinrich von Pierer      |  | Member        |  | President and Chief Executive Officer of Siemens
    AG                              |  |               | 1993 | 
|*Wolfgang Schenk             |  | Member        |  | Engineer                                                                             |  |               | 2002 | 
|*Hubertus Schmoldt           |  | Member        |  | Chairman of German Mine, Chemical and Power
    Workers Union                       |  |               | 1995 | 
|*Dieter Schulte              |  | Member        |  | Former Chairman of German Unions Federation                                          |  |               | 1997 | 
|*Dr. h.c. Jürgen Weber       |  | Member        |  | Chairman of the Supervisory Board Deutsche
    Lufthansa AG                          |  |               | 2003 | 
|*Siegfried Wendlandt         |  | Member        |  | North Rhine District Secretary of German Mine,
    Chemical and Power Workers Union |  |               | 2001 | 
|*Reinhard Wendt              |  | Member        |  | Printer                                                                              |  |               | 2002 | 
|*Thomas de Win               |  | Member        |  | Commercial Clerk                                                                     |  |               | 2002 | 
|Prof. Dr. Ernst-L. Winnacker |  | Member        |  | University Professor, Bonn                                                           |  |               | 1997 | 
|Dr. Hermann Wunderlich       |  | Member        |  | Former Vice Chairman of management board                                             |  |               | 1996 | 






|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Petra Brayer, Hilmar Kopper, Dr. Ing, Manfred
    Lennings, Dr. h.c. Andre Leysen, Dr. h.c. Helmul
    Oswald Maucher, Rolf Nietzard, Waltrud Schlaelke, Hermann Josef
    Strenger and Dr. Eugen Velker left the

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| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Supervisory Board on April 26, 2002.
    Karl-Heinz Huchthausen left the Supervisory Board on
    October 1, 2002. Dr. Wolfgang Reitzle resigned from the
    Supervisory Board effective April 25, 2003.

Supervisory Board Committees

Currently, the Supervisory Board has the
following committees:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Presidium was established pursuant to
    § 27 (3) of the Co-Determination Act and
    consists of the chairman and vice chairman of the Supervisory
    Board, as well as of one shareholder representative and one
    employee representative. It serves as our nomination committee
    (Vermittlungsausschuss ). The purpose of this
    committee is to nominate members of the Board of Management for
    election by a simple majority of the votes of the Supervisory
    Board in the event that the Supervisory Board is unable to
    appoint members of the Board of Management with the votes of at
    least a two thirds majority of the Supervisory Board. Pursuant
    to § 9 (2) of the Standard Operating Procedures
    (Geschäftsordnung ) of the Supervisory Board,
    the Presidium also prepares the general meetings of the full
    Supervisory Board. The current members of the nomination
    committee are Mr. Schneider (chairman), Mr. Gipperich,
    Mr. von Pierer and Mr. Schmoldt.                                                                                  
|
| |  | The personnel committee
    (Personalausschuss ) was established pursuant to
    § 10 of the Standard Operating Procedures of the
    Supervisory Board. The personnel committee consists of four
    members of the Supervisory Board. The chairman of the
    Supervisory Board acts as chairman of the personnel committee.
    The main responsibility of the personnel committee is the
    determination of the salary and further conditions of the
    employment of Board of Management members, the legal
    representation of the Company in affairs with Board of
    Management members pursuant to § 112 of the German
    Stock Corporation Act, the approval of agreements with
    Supervisory Board members pursuant to § 114 of the
    German Stock Corporation Act and the approval of loans granted
    to Supervisory Board and Board of Management members and other
    persons pursuant to § 89 and § 115 of the
    German Stock Corporation Act. The current members of the
    personnel committee are Mr. Schneider (chairman),
    Mr. Kohlhaussen, Mr. Ellrich and Ms. Kronen.
|
| |  | The audit committee
    (Prüfungsausschuss ) was established pursuant
    to § 11 of the Standard Operating Procedures of the
    Supervisory Board. The audit committee consists of six members
    of the Supervisory Board. The chairman of the Supervisory Board
    acts as chairman of the audit committee. The main
    responsibilities of the audit committee are oversight of
    financial accounting, risk management, the preparation of the
    resolutions of the Supervisory Board with respect to the annual
    financial statements, the review of all non-audit services to be
    performed by the independent auditor, oversight over the
    independent auditors including scope of services, fees and
    schedules, the direct receipt of the audit reports, and the
    direct receipt of reports of accounting irregularities. The
    current members of the audit committee are Mr. Schneider
    (chairman), Mr. Henkel, Mr. Kohlhaussen,
    Mr. Schenk, Mr. Wendlandt and Mr. de Win.                                                                                         

Share Ownership

Because the shares of Bayer AG are in bearer
form, we cannot obtain precise information as to their holders.
To the best of our knowledge, however, no member of the
Supervisory Board or the Board of Management beneficially owns
shares of Bayer AG totaling one percent or more of all
outstanding shares.

Compensation

The members of our Board of Management receive a
fixed salary and a variable bonus. The variable bonus for a
given year is tied to the amount of Bayer AGs dividend for
that year. In addition, the members of our Board of Management
may participate in a cash-settlement-based stock option program,
provided that they place shares of their own into a special
deposit account. In 2002 we paid salary and bonus compensation
totaling
5,700,737 (2001:
8,153,562) to
the members of our Board of Management. Of this amount,
4,426,757 was
paid to members who were active on the Board as of
December 31, 2002. With respect to their periods of active
membership an additional
1,273,980 was
paid to members of the Board who resigned or whose terms expired

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during 2002. Of the amount paid to members who
were active on the Board as of December 31, 2002,
1,988,291
represented base salary and fixed bonus and
2,324,111
represented variable bonus. The Board members who were active as
of December 31, 2002 also received remuneration in kind
totaling 114,355
and consisting mainly of amounts such as the value assigned to
the use of a company car for taxation purposes.


Emoluments to retired members of the Board of
Management and their surviving dependents amounted to
14,383,353
(2001:
8,355,270). We
pay former and retired members of the Board of Management a
monthly pension equal to 80 percent of the last monthly
base salary received while in service. These amounts are in
addition to any amounts they receive as a result of their
participation in the Bayer pension plan described below.
See  Employee Pension Plan. If we increase the
base salary of current members of the Board of Management, we
adjust the pension payments to retired members accordingly.

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. From the 2002 tranche of the Stock
Option Program, the members of the Board of Management received
a total of 476 option rights on the basis of their own
investments. These rights are initially blocked for three years.
During the subsequent two-year exercise period, the option
rights entitle the participants to receive a maximum of 47,600
shares in total. See below,  Employee Option
Plans  Stock Option Program.

The following table shows the remuneration paid
to those individual members of our Board of Management who were
active on the Board as of December 31, 2002.

Remuneration of the Members of the Board of
Management

|                 |  |                |  |        |         |          |  |       |         |                |  |  |           |  |  |  |     | 
|---------------- |  | -------------- |  | ------ | ------- | -------- |  | ----- | ------- | -------------- |  |  | --------- |  |  |  | --- | 
|                 |  |                |  |        |         |          |  |       |         | Stock         
|                 |  |                |  | Fixed  |         | Variable |  |       |         | option rights 
|                 |  | Period         |  | Salary |         | bonus    |  | Total |         | (2002 tranche)
|                 |  |                |  |        |         |          |  |       |         |               
|                 |  |                |  |       |         |         |  |      |         |               
|Klaus Kühn       |  | May-Dec. 2002  |  |        | 271,550 |          |  |       | 320,332 |                |  |  | 591,882   |  |  |  | 119 | 
|Dr. Udo Oels     |  | Jan.-Dec. 2002 |  |        | 414,079 |          |  |       | 480,498 |                |  |  | 894,577   |  |  |  | 119 | 
|Dr. Richard Pott |  | May-Dec. 2002  |  |        | 271,832 |          |  |       | 320,332 |                |  |  | 592,164   |  |  |  | 0   | 
|Werner Spinner   |  | Jan.-Dec. 2002 |  |        | 408,513 |          |  |       | 480,498 |                |  |  | 889,011   |  |  |  | 119 | 
|Werner Wenning   |  | Jan.-Dec. 2002 |  |        | 622,317 |          |  |       | 722,451 |                |  |  | 1,344,768 |  |  |  | 119 | 

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The following table shows the remuneration paid
to individual members of the Supervisory Board who were active
on the Board as of December 31, 2002.

Remuneration of the Members of the
Supervisory Board

|                                     |  |              |        |              |  |        |         |  |  |  |         | 
|------------------------------------ |  | ------------ | ------ | ------------ |  | ------ | ------- |  |  |  | ------- | 
|                                     |  | Basic        |        | Variable     |  |       
|                                     |  | remuneration |        | remuneration |  | Totals
|                                     |  |              |        |              |  |       
|                                     |  |             |        |             |  |      
|Dr. Paul Achleitner                  |  |              | 3,389  |              |  |        | 35,583  |  |  |  | 38,972  | 
|Dr. Josef Ackermann                  |  |              | 3,389  |              |  |        | 35,583  |  |  |  | 38,972  | 
|Karl-Josef Ellrich                   |  |              | 5,000  |              |  |        | 52,500  |  |  |  | 57,500  | 
|Erhard Gipperich                     |  |              | 7,500  |              |  |        | 78,750  |  |  |  | 86,250  | 
|Thomas Hellmuth                      |  |              | 1,236  |              |  |        | 12,979  |  |  |  | 14,215  | 
|Prof. Dr.-Ing. e.h. Hans-Olaf Henkel |  |              | 3,389  |              |  |        | 35,583  |  |  |  | 38,972  | 
|Dr. h.c. Martin Kohlhaussen          |  |              | 5,000  |              |  |        | 52,500  |  |  |  | 57,500  | 
|John Christian Kornblum              |  |              | 3,389  |              |  |        | 35,583  |  |  |  | 38,972  | 
|Petra Kronen                         |  |              | 5,000  |              |  |        | 52,500  |  |  |  | 57,500  | 
|Dr. Heinrich von Pierer              |  |              | 5,000  |              |  |        | 52,500  |  |  |  | 57,500  | 
|Dr. Wolfgang Reitzle                 |  |              | 3,389  |              |  |        | 35,583  |  |  |  | 38,972  | 
|Wolfgang Schenk                      |  |              | 3,389  |              |  |        | 35,583  |  |  |  | 38,972  | 
|Hubertus Schmoldt                    |  |              | 5,000  |              |  |        | 52,500  |  |  |  | 57,500  | 
|Dr. Manfred Schneider                |  |              | 10,167 |              |  |        | 106,750 |  |  |  | 116,917 | 
|Dieter Schulte                       |  |              | 5,000  |              |  |        | 52,500  |  |  |  | 57,500  | 
|Siegfried Wendlandt                  |  |              | 5,000  |              |  |        | 52,500  |  |  |  | 57,500  | 
|Reinhard Wendt                       |  |              | 3,389  |              |  |        | 35,583  |  |  |  | 38,972  | 
|Thomas de Win                        |  |              | 3,389  |              |  |        | 35,583  |  |  |  | 38,972  | 
|Prof. Dr. Enrst-Ludwig Winnacker     |  |              | 5,000  |              |  |        | 52,500  |  |  |  | 57,500  | 
|Dr. Hermann Wunderlich               |  |              | 5,000  |              |  |        | 52,500  |  |  |  | 57,500  | 

There were no loans to members of the Board of
Management or to members of the Supervisory Board outstanding as
of December 31, 2002.

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 present value of the compensation they would have
received through the normal expiration date of their employment
contracts, discounted by 25 percent for a duration of more
than three years. In addition, they would receive a severance
payment equal to the sum of two to four years annual
compensation. The basic amount of these severance payments is
equal to two years compensation. If the former Board
member is 50 or older at the time of termination, the payment
increases by one years compensation or by two years
compensation if, in addition, the former Board members
length of service with the company was at least 30 years or
his or her tenure on the Board was at least ten years. Total
payments under the plan are, however, capped at an amount equal
to five times the former Board members annual
compensation. In addition, the former Board member retains full
pension rights.

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Employee option plans

In May 2000 we implemented a three-tier program
to provide employees and management with an opportunity to earn
Bayer AG shares. We offer the stock option program for
members of the Board of Management and senior executives, the
stock incentive program for middle management and
equivalent employees and the stock participation program
for junior management and other employees.

To 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 absolute and
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 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
    zero and two. This factor was set to one for the tranche of the
    program issued in 2002 because of the implementation and impact
    of the new holding structure.

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 2002 participants in our stock option program
received a total of 1,211 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 the three
performance criteria described above, a maximum of
121,100 shares.

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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 of 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. In the 2002 fiscal year, participants were
allowed to deposit shares in a maximum aggregate value equal to
their performance-related bonus for the 2000 fiscal year, if the
bonus for 2000 was higher than that for 2001.

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:

|                            |  |                           |   | 
|--------------------------- |  | ------------------------- | - | 
|                            |  | Incentive shares received
|Distribution date at end of |  | (per 10 deposited shares)
|                            |  |                          
|Second year                 |  |                           | 2 | 
|Sixth year                  |  |                           | 4 | 
|Tenth year                  |  |                           | 4 | 

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 2002, participants are eligible to receive a total
of 71,310 shares on the tranches future distribution
dates, assuming satisfaction of the performance criterion on
each such date and assuming that these participants do not
remove any shares from deposit during the term of the tranche.

Stock Participation Program

Our stock participation program has two
components, Module 1 and Module 2. Employees not
covered by the stock option program or stock incentive program
may generally participate in both Module 1 and
Module 2.

The Module 1 program, like the stock
incentive program, requires participants to deposit Bayer AG
shares in a special account. As with the stock incentive
program, participants in the stock participation program may
sell their deposited Bayer AG shares during the term of the
tranche; any shares they sell are no longer counted in
calculating the 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. In the 2002 fiscal year, junior
management participants were allowed to deposit shares in a
maximum aggregate value equal to their performance-related bonus
for the 2000 fiscal year, if the bonus for 2000 was higher than
that for 2001.

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

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program, Module 1 does not impose a share
performance criterion. The participant receives incentive shares
as follows on the distribution dates:


|                            |  |                           |   | 
|--------------------------- |  | ------------------------- | - | 
|                            |  | Incentive shares received
|Distribution date at end of |  | (per 10 deposited shares)
|                            |  |                          
|Second year                 |  |                           | 1 | 
|Sixth year                  |  |                           | 2 | 
|Tenth year                  |  |                           | 2 | 

Based on the number of Bayer AG shares that
participants in Module 1 of the stock participation program have
deposited in the tranche for 2002, participants are eligible to
receive a total of 258,760 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 15.40 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 2002, 2001 and 2000
by area of primary activity and an approximate breakdown of
employees as of December 31, 2002, 2001 and 2000 by
geographical region:

|                      |  |                     |         |      |  |                    |         |  |  |      |         |      |  |                    |  |  |        |  |  |  |        |  |  |  |        | 
|--------------------- |  | ------------------- | ------- | ---- |  | ------------------ | ------- |  |  | ---- | ------- | ---- |  | ------------------ |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                      |  |                    
|Employees by Activity |  | Breakdown by Region
|                      |  |                    
|                      |  |                    
|                      |  |                     |         |      |  |                   
|                      |  | Average for         |         |      |  | As of December 31,
|                      |  |                     |         |      |  |                   
|                      |  | 2002                |         | 2001 |  | 2000               |         |  |  | 2002 |         | 2001 |  | 2000              
|                      |  |                     |         |      |  |                    |         |  |  |      |         |      |  |                   
|Technology            |  |                     | 66,051  |      |  |                    | 61,055  |  |  |      | 59,356  |      |  | Europe             |  |  | 70,100 |  |  |  | 65,400 |  |  |  | 65,800 | 
|Marketing             |  |                     | 35,985  |      |  |                    | 33,875  |  |  |      | 33,186  |      |  | North America      |  |  | 24,600 |  |  |  | 23,400 |  |  |  | 23,100 | 
|Administration        |  |                     | 10,035  |      |  |                    | 9,091   |  |  |      | 9,567   |      |  | Asia/Pacific       |  |  | 15,400 |  |  |  | 12,600 |  |  |  | 11,100 | 
|                      |  |                     |         |      |  |                    |         |  |  |      |         |      |  | Latin America/     |  |  |        |  |  |  |        |  |  |  |        | 
|Research              |  |                     | 12,521  |      |  |                    | 11,206  |  |  |      | 11,520  |      |  | Africa/Middle East |  |  | 12,000 |  |  |  | 11,000 |  |  |  | 11,500 | 
|                      |  |                     |         |      |  |                    |         |  |  |      |         |      |  |                    |  |  |        |  |  |  |        |  |  |  |        | 
|Total                 |  |                     | 124,592 |      |  |                    | 115,227 |  |  |      | 113,629 |      |  | Corporate          |  |  | 500    |  |  |  | 600    |  |  |  | 600    | 
|                      |  |                     |         |      |  |                    |         |  |  |      |         |      |  |                    |  |  |        |  |  |  |        |  |  |  |        | 

Labor Relations

The union-organized employees at our German
facilities belong to several unions, the most important of which
is IG BCE, the German Mining, Chemical and Energy Industrial
Union. We do not negotiate collective bargaining agreements with
these unions to cover our employees. Instead, in accordance with
German practice, unions negotiate agreements with industry-wide
employers associations, in our case the German Chemical
Industry Association.

In Germany employers and unions generally
negotiate collective bargaining agreements annually. The current
agreement that covers our employees has a term of
13 months, beginning April 2003. It grants employees a
lump-sum payment of
40 in the first
month of the agreement and a subsequent 2.6 percent pay
increase over the life of the agreement. A German collective
bargaining agreement governs the employment of all employees of
the categories organized in the relevant union. At Bayer, we do
not differentiate between individual employees who are union
members and those who are not.

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
contract levels.

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

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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 (namely, beginning and end of daily
    working hours);
|
| |  | vacation guidelines;                                                 
|
| |  | social services (e.g., subsidized cafeterias); and                   
|
| |  | distribution guidelines for performance-related
    bonuses.         

A works council has 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.

With effect from January 1, 2001 we entered
into an agreement (Standortsicherungsvereinbarung) with
our joint works council to further job stability at several of
our most important German sites. 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 Brunsbüttel
sites for operational reasons before December 31, 2004. If
exceptional circumstances arise that are beyond our control and
lead to employee over-capacity, 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 (up to the threshold for the statutory pension
insurance, which for 2002 is
4,500 per month
or 54,000 per
year) to the pension fund. These contributions are withheld from
the members salary. Bayer AG also contributes to the
Pensionskasse. Upon retirement, the employee is entitled
to receive a monthly basic pension payment (Grundrente)
from the Pensionskasse if the employee was employed by
Bayer AG, or was a member of the Pensionskasse, for at
least five years. Employees whose annual salary exceeds the
annual salary threshold for statutory pension insurance
(gesetzliche Rentenversicherung) by up to
44,500 are
entitled to receive an additional monthly pension payment from
an additional pension plan (Zusatzrente), which is
financed by book reserves in the balance sheet. Employees whose
annual earnings exceed the total of
54,000 plus
44,500 may
become eligible for an individual pension promise. Bayer AG
finances these individual pension entitlements also through book
reserves.

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Item 7. Major Shareholders and Related
Party Transactions

Major Shareholders

Under our Articles of Association, each of our
ordinary shares represents one vote. Major shareholders do not
have different voting rights.

Under the German Securities Trading Act
(Wertpapierhandelsgesetz), holders of voting securities
of a listed German company must notify that company of the level
of their holding whenever it reaches, exceeds or falls below
specified thresholds. These thresholds are 5, 10, 25, 50 and
75 percent of the companys outstanding voting
securities. One shareholder, Allianz AG, has informed the SEC
that it holds 6.18 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
    (except at arms length conditions in the ordinary course
    of business);
|
| |  | enterprises in which we have significant
    influence or which have significant influence over us (except at
    arms length conditions in the ordinary course of business);                 
|
| |  | shareholders beneficially owning a
    10 percent or greater interest in our voting power;                                                                                                     
|
| |  | key management personnel; or                                                                                                                                                                   
|
| |  | enterprises in which persons described above own,
    directly or indirectly, a substantial interest in the voting
    power.                                                                  

Interests of Experts and Counsel

Not applicable.

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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 and have been
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 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.

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Ciprofloxacin-related actions

Patent-related actions.In January 1997 Bayer AG and
Bayer Corporation settled a patent infringement suit against
Barr Laboratories, Inc. This suit arose when Barr filed an ANDA
(IV) seeking regulatory approval of a generic form of
Bayers ciprofloxacin anti-infective product, which we sell
in the United States under the trademark Cipro. Under the
settlement agreement, Barr and Rugby Laboratories Inc., another
generic manufacturer that supported Barr during the infringement
suit, agreed to dismiss the litigation, acknowledging the
validity and enforceability of Bayers patent rights, and
we agreed to pay each company $24.5 million. The agreement
gave us the option, until our patent 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. In addition, as of
June 9, 2003, Barr began selling ciprofloxacin
hydrochloride tablets in the United States using licensed
product purchased from Bayer. These purchases are being made
pursuant to a separate obligation of Bayer under the settlement
agreement to supply such product to Barr during the
six month period immediately proceeding the
December 2003 expiration of the patent protecting the sale
of Cipro in the United States. Bayer further intends to seek
pediatric exclusivity for Cipro, which, if granted by the FDA,
could delay the introduction of generic versions of
ciprofloxacin for six months beyond expiration of the
patent. If Bayer is successful, we expect that the agreement
term will be extended to include the additional six-month
pediatric exclusivity period. Shortly after settling this suit,
we applied to the U.S. Patent and Trademark Office for a
re-examination of our patent. The Patent and Trademark Office
reissued the patent in February 1999. See below, 
Antitrust actions.

After the settlement with Barr, a series of
generics manufacturers filed ANDA (IV)s seeking regulatory
approval of generic versions of ciprofloxacin. We filed patent
infringement suits against these manufacturers, all of whom
challenged the validity of our patent covering the sales of
Cipro. During 2002 all patent infringement actions then still
pending were concluded by final judgments in our favor.

Antitrust actions.Since July 2000 Bayer Corporation has been named as a defendant
in 39 putative class action lawsuits, one individual
lawsuit and one consumer protection group lawsuit filed in a
number of state and federal courts in the United States. Bayer
AG has also been named as a defendant in 20 of those cases,
including the individual lawsuit and the consumer protection
group lawsuit; however, to date it has only been served with
process in the individual lawsuit and twelve of the putative
class action lawsuits. In addition, Barr Laboratories,
Aventis S.A., Hoechst Marion Roussel, Inc., Rugby
Laboratories, Inc., and Watson Pharmaceuticals, Inc. have
each been named as a defendant in one or more of these lawsuits.
The plaintiffs in these suits allege that they are direct or
indirect purchasers of Cipro who were damaged because
Bayers settlement of the Barr ANDA (IV) litigation
prevented generic manufacturers from selling a generic version
of Cipro. The plaintiffs allege that the settlement violates
various federal antitrust and state business, antitrust, unfair
trade practices, and consumer protection statutes, and seek
treble damages and injunctive relief.

None of the relevant courts in any of the
putative class action lawsuits have certified a class. The
Judicial Panel for Multidistrict Litigation (or MDL Panel)
transferred 35 of these cases to the U.S. District Court
for the Eastern District of New York for coordinated pre-trial
proceedings. The district court later remanded nine of those
cases to various state courts.

On January 25, 2002, Bayer filed a motion to
dismiss all of the cases pending in the District Court for the
Eastern District of New York, and the plaintiffs filed motions
for partial summary judgment that the conduct alleged in the
complaints constitutes an agreement that is unlawful on its
face. On May 20, 2003, the district court denied the
plaintiffs motions for partial summary judgment,
concluding that the alleged conduct was not per se
anticompetitive under U.S. antitrust laws. The district
court also denied Bayers motion to dismiss, except as to
the consumer protection group lawsuit, which the court held to
be time-barred under the applicable statute of limitations.

Nine cases have been consolidated and are
currently pending in a California state court. The California
state court denied Bayers demurrer, and Bayer answered
plaintiffs claims on December 23, 2002. Bayer is also
involved in state court proceedings in Florida, New York,
Kansas, Tennessee and Wisconsin. Bayer has answered
plaintiffs claims in the Florida case and filed motions to
dismiss in the other four jurisdictions.

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

Because these cases, which may involve joint and
several liability among the defendants, in the aggregate allege
substantial unquantified damages and also seek treble and
punitive damages and penalties, it is possible that the ultimate
liability could be materially adverse 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. Additionally, due to the considerable
uncertainty associated with these proceedings, it is currently
not possible to accurately estimate potential liability.
Depending on the progress of the litigation, we will continue to
reconsider the need to establish provisions, which may have a
negative effect on our financial results.

Nifedipine-related actions

Patent-related actions.Since 1997 Bayer AG and Bayer
Corporation have been involved in a number of patent
infringement actions arising from ANDA (IV)s filed by generic
manufacturers seeking regulatory marketing approval for
allegedly bio-equivalent versions of our brand-name product
Adalat CC and Pfizer, Inc.s brand-name product
Procardia XL. The active ingredient of these products is
nifedipine. We own patent rights related to nifedipine drug
product formulations. In addition, because Pfizer markets
Procardia XL under a license from Bayer, Bayer AG and
Bayer Corporation became Pfizers co-plaintiffs in the
infringement actions relating to that product. We have concluded
these cases related to nifedipine with all of the defendants,
with the exception of the Biovail and Teva cases described in
the following two paragraphs.

Bayer AG and Bayer Corporation filed four ANDA
(IV) patent infringement suits against Biovail Laboratories
and Biovail Corporation in the U.S. District Court for the
District of Puerto Rico. Two of these suits relate to Biovail
ANDAs directed to 30mg and 60mg dosage strengths of nifedipine
extended release tablets assertedly bioequivalent to
Pfizers 30mg and 60mg Procardia XL. The other two
ANDA lawsuits relate to Biovails 30mg and 60mg dosage
strength tablets assertedly bioequivalent to Bayers 30mg
and 60mg Adalat CC drug products.

In addition, Bayer and Pfizer filed a suit
against Biovail and Teva Pharmaceuticals U.S.A., Inc. asserting
that Tevas commercial sales of Biovails 60mg tablet
asserted to be bioequivalent to Pfizers 60mg
Procardia XL drug product infringed Bayers related
U.S. patent. Bayer also filed suit against Biovail and Teva
asserting that Tevas commercial sales of Biovails
60mg tablet asserted to be bioequivalent to Bayers 60mg
Adalat CC drug product infringed Bayers patent. All
of these lawsuits are currently proceeding on the limited
question of claim construction.

Antitrust actions.Biovail filed an antitrust lawsuit
against Bayer AG, Bayer Corporation and Pfizer in the
U.S. District Court for the District of Western
Pennsylvania in April 1998. Biovail was seeking a declaratory
judgment that Bayers nifedipine patents are invalid.
Biovail was also seeking damages under federal and state
antitrust statutes alleging, among other things, that Bayer
illegally asserted its patent rights. The district court stayed
this litigation pending resolution of the nifedepine-related
patent infringement actions against Biovail.

Vardenafil-related actions

In October 2002 Pfizer, Inc. filed a declaratory
judgment action against Bayer AG and Bayer Corporation in the U.
S. District Court for the District of Delaware claiming that the
expected sale of Levitra, Bayers product for the treatment
of erectile dysfunction, will infringe upon Pfizers
U.S. patent relating to products for the treatment of
erectile dysfunction. Levitra has not yet been approved in the
United States by the Food and Drug Administration. The action
seeks a permanent injunction to prevent Bayer AG and Bayer
Corporation from selling Levitra in the United States. If
Levitra is approved and launched in the United States, Pfizer
may make a motion for a preliminary injunction to prevent sales
of Levitra. Bayer AG and Bayer Corporation are coordinating
their defense with SmithKline Beecham Corporation (a
GlaxoSmithKline company), Bayers co-promotion partner in
the United States and other countries and a co-defendant in this
suit. In some other countries, the local Pfizer affiliate has
initiated similar proceedings to prevent the marketing of
Levitra. We believe that we have meritorious defenses in these
actions and intend to defend them vigorously.

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Aventis Behring action

Nattermann & Cie GmbH and Aventis Behring LLC
filed a suit on April 11, 2003 against Bayer Corporation
and Bayer Healthcare LLC in the U. S. District Court for
the Eastern District of Pennsylvania alleging that Bayers
Kogenate FS composition containing recombinant
Factor VIII, which is used to treat hemophilia, infringes
upon the U.S. patent owned by either Nattermann &
Cie or Aventis Behring. Bayer counterclaimed, seeking inter
alia a declaration of patent invalidity and
non-infringement, and asserting that Bayers use of the
patented process is pursuant to an implied license. The
proceedings are at an early stage. We believe that we have
meritorious defenses in these actions and intend to defend them
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. Bayer Corporation intends to defend
aggressively the remaining HIV-related lawsuits in various
countries. We have made what we believe to be appropriate
provisions should these suits result in judgments in favor of
the plaintiffs.

In June 2003 a U.S. law firm filed a
putative class action against Bayer Corporation and other
manufacturers on behalf of non-U.S. residents claiming
compensation for HIV/HCV infections allegedly acquired through
blood plasma products manufactured in the U.S. This case is
at an early stage. Although we have not yet responded to the
complaint in this action, we believe that we have meritorious
defenses to this action and intend to defend it vigorously.

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. In the
United States, we co-promoted this product with SmithKline
Beecham Corporation pursuant to an agreement dated July 21,
1997. As of June 26, 2003, approximately 9,400 lawsuits are
pending in both federal and state courts, including 158 putative
class actions. The actions in the United States have been based
primarily on theories of product liability, consumer fraud,
medical monitoring, predatory pricing and unjust enrichment.
These lawsuits seek remedies including compensatory and punitive
damages, disgorgement of funds received from the marketing and
sale of cerivastatin and the establishment of a trust fund to
finance the medical monitoring of former cerivastatin users. The
federal cases are being transferred to the U.S. District
Court for the District of Minnesota for coordinated discovery
and other pre-trial proceedings. A motion for certification of
nationwide personal injury, medical monitoring and economic
refund classes is awaiting decision by this court. On
June 16, 2002, the Oklahoma District Court of Pottawatomie
County certified a class of all Oklahoma residents who took
cerivastatin and sustained muscular/skeletal injuries as a
result. Bayer appealed this ruling to the Oklahoma Court of
Appeals, which affirmed the lower courts class
certification ruling on June 20, 2003. We believe that we
have meritorious defenses against class certification and intend
to seek further appellate review of this ruling. The
certification of a class, if such a decision is upheld, is
unrelated to a determination of our liability. In addition,
several actions have been initiated against other companies of
the Bayer Group in other countries, including class actions in
Canada. We expect additional lawsuits to be filed in the United
States and elsewhere. On March 18, 2003, a jury in an
action brought

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against us in state court in Corpus Christi,
Texas delivered a verdict in our favor. On April 3, 2003, a
jury in an action brought against us in a state court in Hinds
County, Mississippi also delivered a verdict in our favor.


In the event that plaintiffs substantially
prevail, despite existing defense arguments, it is possible that
Bayer could incur charges in excess of our insurance coverage.
Due to the considerable uncertainty associated with these
proceedings, it is currently not possible to more accurately
estimate potential liability. Depending on the progress of the
litigation, we will continue to reconsider the need to establish
provisions, which may have a negative effect on our financial
results. Without acknowledging any liability, we have settled
over 1,000 cases as of June 26, 2003, resulting in
settlement payments of approximately $343 million. Bayer
will continue to offer fair compensation to people who
experienced serious side effects while taking cerivastatin on a
voluntary basis and without concession of liability. In cases
where an examination of the facts indicates that Baycol played
no part in the patients medical situation, or where a
settlement is not achieved, Bayer will continue to defend itself
vigorously. We believe we have meritorious defenses in these
actions. In some countries, criminal proceedings have been
initiated by the relevant authorities. SmithKline Beecham
Corporation and Bayer Corporation have signed an allocation
agreement under which SmithKline Beecham has agreed to pay
5 percent of all settlements and compensatory damages
judgments arising out of actions based on the sale or
distribution of cerivastatin in the United States, with each
party responsible for paying its own attorneys fees.

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. As of May 30,
2003, approximately 1,100 lawsuits have been initiated in the
United States against Bayer Corporation, including 14 putative
class actions of which 11 have been denied. Three putative class
actions are pending, and appeals are possible. Bayer AG has also
been recently named as a defendant. The MDL Panel has assigned
management of the federal court cases to the U.S. District
Court for the Western District of Washington. The claims
primarily relate to compensation for alleged damage to health,
entitlement to subsequent monitoring and reimbursement of the
purchase price. Claims for punitive damages have also been
filed. It is probable that additional actions will be initiated
in the United States or in other jurisdictions where products
containing PPA were marketed. Bayer Corporation believes it has
meritorious defenses to these actions and intends to defend them
vigorously. We may, on a case-by-case basis, settle cases for
reasonable amounts when, in our judgment, settlement is
economically feasible given the risks and costs inherent in the
litigation. In the event that plaintiffs in these PPA actions
substantially prevail, Bayer could be subject to monetary
judgments in excess of our insurance coverage, which could
materially affect our business, results of operations, cash
flows and financial position. Depending on the progress of the
litigation, we will continue to reconsider the need to establish
provisions, which may have a negative effect on our financial
results.

Medicaid Rebate Program
allegations

Our U.S. subsidiary Bayer Corporation was
under investigation by the U.S. Attorneys Office for
the District of Massachusetts. The investigation, which was
assisted by the Department of Health & Human Services,
focused primarily on allegations that Bayer Corporation
improperly underpaid rebates under the Medicaid Rebate Program
during a period from 1995 to 2000. The investigation and the
directly related civil and criminal claims were settled in April
2003. Under the settlement agreement, we will make payments of
approximately $260 million to cover the claims. We
established a reserve for these payments in 2002. In addition,
Bayer Corporation pleaded guilty to a single felony count for
failing to list private label Cipro® with the
U.S. Food and Drug Administration during the second half of
1995.

Average wholesale price manipulation
proceedings

Fourteen 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

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attorneys fees. All of the state court
actions have been removed to federal court, subject to potential
remand. Nine cases filed in federal court were transferred to
the U.S. District Court for the District of Massachusetts
for coordinated pretrial proceedings. All but two actions are
private class actions alleging injury to patients or payors. Two
cases are brought by governmental entities, one by the State of
Nevada and one by Suffolk County, New York, claiming recovery of
their portion of Medicaid cost sharing. On May 13, 2003,
the District Court of Massachusetts granted Bayers motion
to dismiss the master consolidated complaint governing some, but
not all of the private party class actions pending against
Bayer. Plaintiffs are expected to seek leave to file an amended
complaint. Still pending before the court are motions to remand
to state court the Nevada action and several of the private
party class actions that were not included in the master
consolidated complaint. Plaintiff in the Suffolk County action
has advised Bayer that it intends to file an amended complaint.


Due to the considerable uncertainty associated
with these proceedings, it is currently not possible to
accurately estimate potential liability. Depending on the
progress of the litigation, we will continue to reconsider the
need to establish provisions, which may have a negative effect
on our financial results.

Rubber-related actions

Bayer AG and certain of its U.S. and
Canadian subsidiaries are the subjects of criminal and civil
investigations being conducted by the Antitrust Division of the
U.S. Department of Justice (DOJ), the
Directorate General for Competition of the European Commission
(EC), and the Canadian Competition Bureau
(CCB). The investigations are based on allegations
of cartel-related activities involving certain of Bayers
rubber-related lines of business in violation of antitrust or
competition laws.

Since September 2002, the DOJ has undertaken
criminal grand jury investigations of alleged cartel activities
involving Bayers rubber chemicals, ethylene propylene
diene monomer (EPDM), and acrylonitrile butadiene
rubber (NBR) lines of business. The EC is conducting
civil investigations of similar allegations involving
Bayers rubber chemicals, EPDM and NBR lines of business.
The CCB is conducting criminal investigations of allegations of
cartel activities involving Bayers rubber chemicals, EPDM
and NBR lines of business.

Bayer AG and certain of its direct and indirect
subsidiaries have been named as defendants in more than 20
putative class action lawsuits that have been filed in state and
federal courts in the United States based on allegations related
to these governmental investigations. Twenty cases have been
filed in the state courts of 18 states on behalf of putative
classes of plaintiffs who allegedly purchased rubber chemicals
indirectly from one or more of the named defendants by
purchasing a product containing or manufactured using such
chemicals. Bayer AG and certain of its direct and indirect
subsidiaries have also been named as defendants in private civil
lawsuits that have been filed in U.S. federal courts on
behalf of putative classes of plaintiffs who allegedly purchased
rubber chemicals in the United States directly from one or more
of the named defendants. Crompton Corporation, Uniroyal Chemical
Company, Inc., Uniroyal Chemical Company Ltd., Flexsys NV,
Flexsys America LP, Akzo Nobel NV, Akzo Nobel, Inc., and
Solutia, Inc. have also been named as defendants in one or more
of these state and federal lawsuits. The plaintiffs in these
lawsuits are seeking from Bayer and each of the other defendants
damages equal to three times any proven negative effect on
commerce caused by their alleged conspiracy to fix prices for
rubber chemicals sold in the United States, as well as
injunctive relief against each defendant to prevent its future
participation in such a conspiracy.

All of these lawsuits are in preliminary stages.
Bayer Corporation and Rhein Chemie Corporation have been served
and have filed responsive pleadings in each of the state court
cases. The complaint filed in state court in North Dakota was
dismissed as to Rhein Chemie Corporation for lack of
jurisdiction, and the plaintiffs voluntarily dismissed without
prejudice the complaint filed in Nebraska. Bayer AG and Rhein
Chemie Rheinau GmbH have been served in three of the state court
cases. Bayer AG has not yet filed responsive pleadings in any of
these three cases, but Rhein Chemie Rheinau GmbH has filed
responsive pleadings in each of them. As of June 12, 2003,
Bayer Corporation has been served in two and Rhein Chemie
Corporation in one of the federal cases, but neither has yet
filed responsive pleadings. As of June 16, 2003 neither
Bayer AG nor any of its direct or indirect subsidiaries except
Bayer Corporation and Rhein Chemie Corporation had been served
in the federal cases.

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Bayer is also aware that a number of private
civil lawsuits have been filed in state and federal courts in
the United States asserting claims based on alleged
cartel-related activities involving EPDM. Bayer AG has been
named as a defendant in two cases, and Bayer Corporation has
been named and served in one case, all of which were filed in
the U.S. District Court for the Northern District of
California on behalf of a putative class of plaintiffs who
allegedly purchased EPDM in the United States directly from one
or more of the named defendants. Crompton Corporation, DuPont
Dow Elastomers LLC, DSM N.V., and Exxon Mobil Chemical Co. are
also named in one or more of these complaints. The plaintiffs
are seeking from Bayer and each of the other defendants damages
equal to three times any proven negative effect on commerce
caused by their alleged conspiracy to fix prices for EPDM sold
in the United States, as well as injunctive relief against each
defendant to prevent its future participation in such a
conspiracy. Neither Bayer AG nor any of its direct or indirect
subsidiaries except Bayer Corporation has been served with
complaints in any of these actions.

We are aware that our competitors are subject to
investigations by governmental authorities based on their
alleged participation in cartel-related activities involving
additional rubber-related products in violation of relevant
antitrust or competition laws. It is possible that additional
governmental investigations may be commenced in the United
States or other jurisdictions and that private civil lawsuits
may arise out of these investigations, which may involve both
Bayer and our competitors.

Because these cases, which may involve joint and
several liability among the defendants, in the aggregate allege
substantial, unquantified damages and also seek treble and
punitive damages and penalties, it is possible that the ultimate
liability could be materially adverse to our results of
operations and cash flows in one or more periods. Additionally,
due to the considerable uncertainty associated with these
proceedings, it is currently not possible to accurately estimate
potential liability. Depending on the progress of the
litigation, we will continue to reconsider the need to establish
provisions, which may have a negative effect on our financial
results.

Securities litigation

Since March 6, 2003 Bayer AG, along with
certain of its current and former officers and members of the
Bayer AG Board of Management, has been named as a defendant in
seven purported class action lawsuits filed in the
U.S. District Court for the Southern District of New York.
Each class action alleges violations of the U.S. securities
laws and asserts that the defendants made false and misleading
statements and omissions with respect to the commercial
prospects, safety and efficacy of our cerivastatin
anticholesterol products and with respect to the extent of the
potential product liability exposure following our voluntary
decision to cease marketing and withdraw these products in
August 2001. Each case seeks damages on behalf of class members
who allegedly purchased Bayer securities at inflated prices.
There are differences between the seven complaints, both with
respect to the length of the purported class period, with the
longest alleging claims on behalf of persons who purchased
securities from June 27, 1997 to February 21, 2003, as
well as with respect to the purported class definition, with
several seeking certification of a class consisting of persons
who purchased American Depository Shares and others seeking
certification of a class consisting of persons who purchased
Bayer AGs publicly traded securities.

The cases are at an early stage. We expect that
all seven cases will be consolidated before a single judge, and
that a single consolidated amended class action complaint will
be filed. Although Bayer AG has not yet responded to the
complaints in these actions, we believe that we have meritorious
defenses to these actions and intend to defend them vigorously.

German shareholder lawsuit

In June 2003 a shareholder of Bayer AG filed a
lawsuit in the regional court of Cologne, Germany
(Landgericht Köln). This plaintiff is challenging
certain resolutions approved by the Shareholders Meeting
of April 25, 2003, including the financial statements of
Bayer AG (not the consolidated financial statements) and
consequently the distribution of profits. In effect, the
plaintiff seeks to prevent the implementation of our planned new
corporate structure. See Item 4, Information on the
Company  Business. While this case is pending,
the asset transfers within the Bayer Group to our new operating
and support subsidiaries cannot be recorded in the commercial
register.

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We believe that the plaintiffs lawsuit is
without merit and intend to defend ourselves vigorously.
Furthermore, in cases of this type German law permits the
defendant to seek dismissal in an accelerated proceeding
(Eilverfahren). We intend to make use of this accelerated
proceeding.

We do not believe that this lawsuit will affect
our day-to-day business. On an operational level, we began to
put our new structure into place in July 2002 and expect to
continue to be able to do so. If we cannot resolve this matter
satisfactorily within a reasonable period of time, however, or
if the plaintiff prevails, it could be more difficult for us to
implement some elements of our long-term strategic plans.

Asbestos litigation

We are currently involved in asbestos litigation
in the United States, primarily as a premises defendant,
predominantly in the states in which Bayer has industrial sites.
The overwhelming majority of cases involving Bayer have been
filed in West Virginia and Texas and involve allegations of
exposure at Bayers sites. Texas law and West Virginia law
permit consolidated asbestos actions in which multiple
plaintiffs can sue multiple defendants for asbestos-related
conditions without specifying which plaintiff has a claim
against which defendant. While Bayer may be named as a
defendant, each plaintiff does not have to assert a claim
against Bayer. In West Virginia, Bayer is a defendant in
approximately 26 cases involving 2,424 plaintiffs. Bayer has
been identified by less than 10 percent of the named
plaintiffs in these actions, i.e. of the 2,424 plaintiffs,
approximately 240 have claimed to work at a Bayer site. In
addition, after past settlements in principle are finalized, we
will be involved in only seven West Virginia cases involving 353
plaintiffs, as well as one medical monitoring class action that
is currently inactive. Bayer is involved in 56 cases in Texas
involving 6,329 plaintiffs, and, as in West Virginia, is
typically identified by a small percentage of plaintiffs (less
than 5 percent). Bayer also has cases pending in Indiana
and California.

The allegations as to Bayer and numerous other
premises defendants are that Bayer employed many contractors on
our industrial sites, yet failed to warn them or protect them
from the known hazards of asbestos exposures throughout the
1960s, 1970s and 1980s. Since premises owners
now form a new group of targeted corporate defendants in these
litigations, these types of actions may become material to our
business in the future.

One of our U.S. subsidiaries, Bayer
CropScience, Inc., is the legal successor to entities that sold
asbestos-containing products from the 1940s until 1976 and
is named as a defendant in asbestos-related litigation. Bayer
CropScience is and has been fully indemnified for its costs and
exposure in relation to this litigation by Union Carbide. Union
Carbide continues to accept Bayer CropSciences tender of
these cases, and it defends and settles them in Bayer
CropSciences name, in its own name and in the name of the
several predecessor companies to Bayer CropScience.

We believe that we have meritorious defenses in
these actions and are defending them vigorously. Without
acknowledging any liability, we have settled a number of these
cases in the past. We may, on a case-by-case basis, settle
additional cases for reasonable amounts when, in our judgment,
settlement is economically feasible given the risks and costs
inherent in the litigation. We have made what we believe to be
appropriate provisions should these suits result in judgments in
favor of the plaintiffs.

Plant Genetic Systems
litigation

Former shareholders of Plant Genetic Systems NV
(PGS) have initiated arbitration proceedings in the
Netherlands against AgrEvo, now Bayer CropScience GmbH.
Claimants seeks damages of up to $400 million based on
alleged violations of a confidentiality agreement in connection
with the acquisition of PGS by AgrEvo in 1996, which allegedly
prevented claimants from obtaining a higher purchase price.
Bayer CropScience believes that claimants allegations are
without merit and will continue to contest these allegations
vigorously. The stock purchase agreement between Aventis and
Bayer for Aventis CropScience provides that, in case of a
decision against Bayer CropScience, Bayer CropScience will be
fully indemnified by Hoechst AG and/or Aventis Nutrition S.A.

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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 (Gewinnrücklagen) 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. More
than 10 percent of the net income may be allocated to
retained earnings only if such retained earnings would then not
exceed 50 percent of our capital stock. The Board of
Management may also increase balance sheet profits when
preparing the financial statements with funds withdrawn from
retained earnings.

Our shareholders, in their resolution on the
appropriation of balance sheet profits, may carry forward
balance sheet profits in part or in full and may allocate
additional amounts to retained earnings. Profits carried forward
will be automatically incorporated in the balance sheet profits
of the next fiscal year and may be used in their entirety to pay
dividends in the next fiscal year. Amounts allocated to the
retained earnings are available for dividends only if and to the
extent the retained earnings have been dissolved by the Board of
Management when preparing the financial statements, thereby
increasing the balance sheet profits.

Dividends approved at an ordinary general
shareholders meeting are payable promptly after the
meeting, unless otherwise decided at the meeting. Because all of
Bayer AGs shares are in book-entry form represented by a
global certificate deposited with Clearstream Banking AG in
Frankfurt am Main, Germany, shareholders receive dividends
through Clearstream for credit to their deposit accounts.
Additionally, the ordinary general stockholders meeting may
decide to distribute the balance sheet profit partly or in total
to the stockholders by way of distribution in kind.

We expect to continue to pay dividends, although
we can give no assurance as to the payment of a dividend for any
particular year or as to the particular amounts that we may pay
from year to year.

Apart from liquidation as a result of insolvency
proceedings, Bayer AG may be liquidated only with a combined
majority of the votes cast and three-quarters of the share
capital present or represented at a shareholders meeting
at which the vote is taken. In accordance with the German Stock
Corporation Act, upon a liquidation of Bayer AG, any liquidation
proceeds remaining after paying off all of Bayer AGs
liabilities would be distributed among the shareholders in
proportion to the total number of shares held by each
shareholder.

See also Item 3, Key
Information  Dividends.

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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
is 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.

|                     |                  |                 |       |                |  |      |       |       |  |  |  |       |  |  |  |       | 
|-------------------- | ---------------- | --------------- | ----- | -------------- |  | ---- | ----- | ----- |  |  |  | ----- |  |  |  | ----- | 
|                     |                  |                 |       |               
|                     |                  | Frankfurt Stock |       | New York Stock
|                     |                  | Exchange        |       | Exchange      
|                     |                  |                 |       |               
|                     |                  | High            |       | Low            |  | High |       | Low  
|                     |                  |                 |       |                |  |      |       |      
|                     |                  |                 |       |               
|                     |                  | (in euros)      |       | (in dollars)  
|1998                 |                  |                 | 49.80 |                |  |      | 29.40 |       |  |  |  |       |  |  |  |      
|1999                 |                  |                 | 47.65 |                |  |      | 29.74 |       |  |  |  |       |  |  |  |      
|2000                 |                  |                 | 56.50 |                |  |      | 38.52 |       |  |  |  |       |  |  |  |      
|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          |  |      |       | 33.30 |  |  |  | 36.00 |  |  |  | 28.91 | 
|                     | Second quarter   |                 |       | 40.10          |  |      |       | 30.90 |  |  |  | 33.45 |  |  |  | 30.20 | 
|                     | Third quarter    |                 |       | 33.27          |  |      |       | 17.45 |  |  |  | 32.25 |  |  |  | 17.60 | 
|                     | Fourth quarter   |                 |       | 23.66          |  |      |       | 17.59 |  |  |  | 23.74 |  |  |  | 17.30 | 
|2003:                |                  |                 |       |                |  |      |       |       |  |  |  |       |  |  |  |      
|                     | First quarter    |                 |       | 22.42          |  |      |       | 10.28 |  |  |  | 23.38 |  |  |  | 11.24 | 
|Previous six months: |                  |                 |       |                |  |      |       |       |  |  |  |       |  |  |  |      
|                     | December 2002    |                 |       | 23.55          |  |      |       | 19.55 |  |  |  | 23.74 |  |  |  | 20.57 | 
|                     | January 2003     |                 |       | 22.42          |  |      |       | 16.28 |  |  |  | 23.38 |  |  |  | 17.29 | 
|                     | February 2003    |                 |       | 16.66          |  |      |       | 11.65 |  |  |  | 17.74 |  |  |  | 12.58 | 
|                     | March 2003       |                 |       | 14.20          |  |      |       | 10.28 |  |  |  | 15.40 |  |  |  | 11.24 | 
|                     | April 2003       |                 |       | 16.95          |  |      |       | 12.35 |  |  |  | 18.36 |  |  |  | 13.60 | 
|                     | May 2003         |                 |       | 18.34          |  |      |       | 16.31 |  |  |  | 21.30 |  |  |  | 18.30 | 






|    |                                                       
|--- | ------------------------------------------------------
|(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 2002, 2001 and
2000 was 3,807,568, 3,495,113 and 2,549,929, respectively. The
average daily trading volume in 2002 was 64,907 on the
New York Stock Exchange (from January 24).

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Item 10. Additional Information

Description of Share Capital

For a description of material provisions of Bayer
AGs articles of association (Satzung), including a
discussion of the voting, dividend and other rights of
shareholders, see Exhibit 1.1.

The Board of Management is authorized to
repurchase shares for such purposes as distribution to members
of the management who are not Board members and to employees of
Bayer Group companies in connection with share option programs.
This authorization has been extended to October 24, 2004.
See Employee option plans in Item 6, Directors,
Senior Management and Employees  Compensation.

Material contracts

In connection with our acquisition of Aventis
CropScience, we entered into two Stock Purchase Agreements, each
dated October 2, 2001, with the former 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. 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.

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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

We are required to withhold tax on dividends in
respect of the 2002 fiscal year in an amount equal to
20 percent of the gross amount paid to resident and
non-resident shareholders. As a Qualified Holder, you are
eligible to receive a partial refund of this withholding tax
under the Income Tax Treaty (subject to certain limitations),
effectively reducing the withholding tax to 15 percent of
the gross amount of the dividend. Thus, for each $100 of gross
dividend paid by Bayer AG to you, the dividend will be subject
to a German withholding tax of $15 under the Income Tax Treaty.
The cash received per $100 of gross dividend will thus be $85.
For U.S. federal income tax purposes, the gross amount of
the dividend, including German withholding tax, will be
includible in your gross income. You will not be entitled to the
dividends received deduction with respect to any dividends we
pay.

A surtax on the German withholding tax is
currently levied on dividend distributions paid by a German
resident company. The rate of this surtax is 5.5 percent on
the withholding tax due. The surtax will equal 1.1 percent
(5.5 percent x 20 percent) of the gross dividend.
Under the Income Tax Treaty, you will be entitled to a full
refund of this surtax.

Dividends paid to you in euros will be included
in income in a U.S. dollar amount, calculated by reference
to the exchange rate in effect on the date the dividends are
received or treated as received by you. 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.

Refund Procedures

To claim the refund reflecting the reduction of
the German withholding tax from 20 percent to
15 percent and the refund of the 5.5 percent German
surtax, when applicable, you must submit (either directly, or,
as described below, through our U.S. transfer agent or the
Depository Trust Company) a claim for refund to the German tax
authorities, with the original bank voucher (or a certified copy
thereof) issued by the paying entity documenting the tax
withheld within four years from the end of the calendar year in
which the dividend is received. Claims for refunds are made on a
special form, which must be filed with the German tax
authorities at the following address: Bundesamt für
Finanzen, 53221 Bonn-Beuel, Germany. A refund claim form may be
obtained from the German tax authorities at the same address as
where applications are filed, from the Embassy of the Federal
Republic of Germany, 4645 Reservoir Road, N.W.,
Washington, D.C. 20007-1998 or from the Office of
International Operations, Internal Revenue Service,
1325 K Street, N.W., Washington, D.C. 20225,
Attention: Taxpayer Service Division, Room 900. It can also
be downloaded from the following web site:
http://www.bff-online.de/SteuerVordrucke/KStKapSt/
ClaimRefundWithholdingTaxesDividendsInterests.pdf.

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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, upon request,
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 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.

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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
(Vermögensteuer)

The Income Tax Treaty provides that you will not
be subject to German capital tax (Vermögensteuer)
with respect to the Bayer AG shares. As a result of a judicial
decision, the German capital tax (Vermögensteuer)
presently is not imposed.

Other German Taxes

There are no German transfer, stamp or other
similar taxes that would apply to you upon receipt, purchase,
holding or sale of Bayer AG shares.

U.S. Information Reporting and Backup
Withholding

Dividends on Bayer AG shares and payments of the
proceeds of a sale of Bayer AG shares paid within the United
States or through certain U.S.-related financial intermediaries
are subject to information reporting and may be subject to
backup withholding at a current rate of up to 28 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 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.

Recent U.S. Tax Law Changes Applicable
to Individuals

Recent U.S. tax legislation generally has
reduced the rates of tax payable by individuals (as well as
certain trusts and estates) on many items of income. Under the
Jobs and Growth Tax Relief Reconciliation Act of 2003 (the
2003 Act), the marginal tax rates applicable to
ordinary income generally have been lowered effective
January 1, 2003. Furthermore, for capital assets held for
over one year and sold or exchanged on or after May 6,

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2003 but in taxable years beginning before
January 1, 2009, the maximum rate of tax generally will be
15% (rather than the higher rates of tax generally applicable to
items of ordinary income). Finally, qualified dividend
income received in taxable years beginning after
December 31, 2002 and beginning before January 1,
2009, generally will be taxed at the rates applicable to these
capital gains (i.e., a maximum rate of 15%) rather than
the rates applicable to other items of ordinary income. For this
purpose, qualified dividend income generally
includes dividends received from U.S. corporations as well
as from certain non-U.S. corporations. The exact extent to
which dividends paid by non-U.S. corporations will
constitute qualified dividend income and the effect
of such status on the ability of a taxpayer to utilize
associated foreign tax credits is not entirely clear at present,
but it is anticipated that a number of uncertainties will be
clarified through administrative pronouncements throughout the
remainder of 2003. In the meantime, you are urged to consult
your own tax advisor regarding the impact on your particular
situation of the provisions of the 2003 Act.


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.

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Item 11. Quantitative and Qualitative
Disclosures about Market Risk

Market Risk

The global nature of our business exposes our
operations, financial results and cash flows to a number of
risks, including those listed below.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Currency exchange rate fluctuations.We are exposed to fluctuations between
    major world currencies. The majority of our currency fluctuation
    risk is between the euro and the U.S. dollar. In addition,
    we are exposed to fluctuations between the euro and the Japanese
    Yen and fluctuations between the U.S. dollar and the
    Brazilian real.                                                                                      
|
| |  | Interest rate fluctuations.We are exposed to changes in interest
    rates. Our primary interest rate exposure is to fluctuations in
    short-and long-term European and U.S. interest rates. Our
    exposure to European interest-rate fluctuation decreased in 2002
    compared with the previous year, primarily as a result of our
    issuance of
    5 billion
    in fixed-rate debt to finance our acquisition of Aventis
    CropScience.
|
| |  | 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 cash flows of
the financial instruments and derivative financial instruments
that we held as of December 31, 2002 and 2001. These
instruments were subject to changes in foreign exchange rates
and interest rates. The range of sensitivities that we chose for
these analyses reflects our view of changes reasonably possible
over a one-year period.

Interest Rate Risk

Interest rate risk is the possibility that the
total return (all changes in fair value and interest rate
performance) of a financial instrument will change due to
movements in market rates of interest. This risk primarily
affects debt with maturities of more than one year. Items with
these long maturities are not of material significance to our
operations, but are relevant to our financial obligations.

We sometimes make loans to employees. Although a
small proportion of these loans are interest-free, they
generally bear interest at market-oriented, fixed rates. More
than three quarters of our loans to employees have terms of over
five years. 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.

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Derivative financial instruments

Derivative financial instruments are our main
method of interest rate hedging. We use interest rate swaps to
convert a portion of our fixed rate borrowings into, in effect,
floating rate debt. 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, 2002 and 2001; the
fair values quoted disregard any opposite movements in the
values of the underlying transactions.

|                                |  |                     |       |            |  |      |       |      |  |  |     |  |  |  |     |  
|------------------------------- |  | ------------------- | ----- | ---------- |  | ---- | ----- | ---- |  |  | --- |  |  |  | --- | -
|                                |  |                     |       |           
|                                |  | Notional amount     |       | Fair value
|                                |  |                     |       |           
|                                |  |                    
|                                |  | December 31,       
|                                |  |                    
|                                |  | 2002                |       | 2001       |  | 2002 |       | 2001
|                                |  |                     |       |            |  |      |       |     
|                                |  |                    
|                                |  | (euros in millions)
|Interest rate hedging contracts |  |                     | 5,799 |            |  |      | 4,485 |      |  |  | 365 |  |  |  | (60 | )

At December 31, 2002, the notional amount of
our short-term interest rate hedging contracts (including
interest and principal currency swaps) totaled
0.5 billion
(2001:
2.0 billion);
those maturing after more than one year totaled
5.3 billion
(2001:
2.5 billion).

Sensitivity Analysis

Based on our variable interest rate debt position
at year-end 2002, a hypothetical increase of 100 basis points,
or one percent per year, of interest rates in all currencies
would result in a growth of interest expense as at
December 31, 2002 of
39 million
(2001:
45 million).

Currency Risk

Because we conduct our operations in many
currencies, we face a variety of risks associated with
fluctuations in the relative values of these currencies. 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, and 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.

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

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of exchange rate translation exposure does not
affect our local currency cash flows. See Note 38 to the
consolidated financial statements.


Outside the euro zone, we hold significant
assets, liabilities and operations denominated in local
currencies, most importantly the U.S. dollar, the Japanese
yen and the Brazilian real. Although we regularly assess and
evaluate the long-term currency risk inherent in these
investments, we generally undertake foreign exchange
transactions addressing this type of risk only when we are
considering withdrawal from a specific venture and repatriating
the funds that our withdrawal generates. However, we reflect
effects from currency fluctuations on the translation of net
asset amounts into euro in our equity position.

Derivative financial instruments

To mitigate the impact of currency exchange
fluctuations, we regularly assess our transaction exposure to
currency risks and hedge a portion of those risks with
derivative financial instruments. Our Corporate Treasury
department has central responsibility for managing our currency
exposures and using currency derivatives.

We relate the maturity dates of hedging contracts
to the anticipated cash flows of the Bayer Group. Our policy is
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, 2002 and 2001:

|                                              |  |                     |       |            |  |      |       |      |  |  |     |  |  |  |     |  
|--------------------------------------------- |  | ------------------- | ----- | ---------- |  | ---- | ----- | ---- |  |  | --- |  |  |  | --- | -
|                                              |  |                     |       |           
|                                              |  | Notional amount     |       | Fair value
|                                              |  |                     |       |           
|                                              |  |                    
|                                              |  | December 31,       
|                                              |  |                    
|                                              |  | 2002                |       | 2001       |  | 2002 |       | 2001
|                                              |  |                     |       |            |  |      |       |     
|                                              |  |                    
|                                              |  | (euros in millions)
|Forward exchange contracts and currency swaps |  |                     | 2,979 |            |  |      | 2,749 |      |  |  | 105 |  |  |  | (28 | )
|Currency options                              |  |                     | 239   |            |  |      | 279   |      |  |  | 9   |  |  |  | *   |  






|  |                         
|- | ------------------------
|* | Less than
    1 million

At December 31, 2002, we estimated that our
aggregate annual direct net transaction risk from sales and
purchases in foreign currencies was approximately
2.7 billion,
which consisted primarily of U.S. dollars
($1.7 billion), Japanese yen (¥53 billion) and
Brazilian real (R1.3 billion). We do not anticipate a
significant change in these levels of risk with respect to our
current business operations during 2003.

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 2002 and 2001:

|                       |  |           |        |          |  |         |     |          |  |           |        |         |  |  |     |  |  |  |        |  |  |  |        | 
|---------------------- |  | --------- | ------ | -------- |  | ------- | --- | -------- |  | --------- | ------ | ------- |  |  | --- |  |  |  | ------ |  |  |  | ------ | 
|                       |  |           |        |         
|                       |  | 2002      |        | 2001    
|                       |  |           |        |         
|                       |  |           |        | % Change |  | Market  |     | % Change |  |           |        | Market 
|Currency vs. euro      |  | Effective |        | vs. 2001 |  | Average |     | vs. 2001 |  | Effective |        | Average
|                       |  |           |        |          |  |         |     |          |  |           |        |        
|U.S. dollar            |  |           | 0.9433 |          |  |         | 4.6 |          |  |           | 0.9452 |         |  |  | 5.5 |  |  |  | 0.9014 |  |  |  | 0.8956 | 
|Japanese yen           |  |           | 117.39 |          |  |         | 8.4 |          |  |           | 118.06 |         |  |  | 8.6 |  |  |  | 108.34 |  |  |  | 108.68 | 
|British pound sterling |  |           | 0.6301 |          |  |         | 2.0 |          |  |           | 0.6287 |         |  |  | 1.1 |  |  |  | 0.6177 |  |  |  | 0.6219 | 

|               |  |  |        |  |  |  |   |  |  |  |        |  |  |  |      |  |  |  |   |  |  |  |        | 
|-------------- |  |  | ------ |  |  |  | - |  |  |  | ------ |  |  |  | ---- |  |  |  | - |  |  |  | ------ | 
|Currency vs. $ |  |  |        |  |  |  |   |  |  |  |        | 
|               |  |  |        |  |  |  |   |  |  |  |        | 
|Brazilian real |  |  | 3.1807 |  |  |  | * |  |  |  | 2.7848 |  |  |  | 32.4 |  |  |  | * |  |  |  | 2.1031 | 






|  |                                                                     
|- | --------------------------------------------------------------------
|* | Insufficient trades in 2001 to calculate
    effective market rates.

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Sensitivity Analysis

We applied a hypothetical adverse change of
10 percent in foreign currency exchange rates where all
foreign exchange rates simultaneously weakened against the euro.
The estimated hypothetical loss in cash flows of derivative and
non-derivative financial instruments as at December 31,
2002 is
43 million
(2001:
50 million).

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. From time
to time, we also enter into swap agreements to manage supply and
demand. The most important of our raw materials affected by
price fluctuations are:



| |   |                
| | - | ---------------
| |  | 1.3-butadiene  
|
| |  | ACN            
|
| |  | Benzene        
|
| |  | Cyclohexane    
|
| |  | Phenol         
|
| |  | Propylene oxide
|
| |  | Styrene        
|
| |  | Toluene        

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, 2002.




Item 12. Description of Securities Other
Than Equity Securities

Not applicable

113



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##### Table of Contents






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. Controls and
Procedures

As required by Rule 13a-15 under the
Securities Exchange Act of 1934, the chairman of our Board of
Management and our chief financial officer, assisted by other
members of our management, have evaluated our disclosure
controls and procedures within 90 days prior to the date of
this annual report. Based on this evaluation, they have
concluded that our disclosure controls and procedures are
effective to ensure that the information we are required to
disclose in this annual report is recorded, processed,
summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. There
were no significant changes in our internal controls or in other
factors that could significantly affect these controls
subsequent to the date of the evaluation. We identified no
significant deficiencies or material weaknesses that required
corrective action.




Item 16. [Reserved]




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-77, incorporated
herein by reference.




Item 19. Exhibits

Documents filed as exhibits to this Annual Report:

|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  1.1 |  | Articles of Association (Satzung) of Bayer
    AG, as amended to 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  4.3 |  | Summary of Employment Arrangements between Bayer
    AG and Werner Wenning.                                                                                                                                                                                                                                                                                                                                                                                      
|Exhibit  4.4 |  | Summary of Employment Arrangements between Bayer
    AG and Dr. Udo Oels.                                                                                                                                                                                                                                                                                                                                                                                        
|Exhibit  4.5 |  | Summary of Employment Arrangements between Bayer
    AG and Klaus Kühn.                                                                                                                                                                                                                                                                                                                                                                                          
|Exhibit  4.6 |  | Summary of Employment Arrangements between Bayer
    AG and Dr. Richard Pott.                                                                                                                                                                                                                                                                                                                                                                                    

114



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##### Table of Contents



|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.
|Exhibit 11.1 |  | Certification in accordance with 18 U.S.C.
    § 1350 as adopted by § 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                         






|    |                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | 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.     

115



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##### Table of Contents






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/ DR. ROLAND HARTWIG  
| |                         
| | Name: Dr. Roland Hartwig
| | Title: General Counsel  

Date: June 27, 2003

116



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##### Table of Contents



CERTIFICATION OF THE PRINCIPAL EXECUTIVE
OFFICER OF THE REGISTRANT

IN ACCORDANCE WITH RULE 13a-14


UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED


I, Werner Wenning, certify that:



|   |                                                                                                                                                                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | I have reviewed this annual report on
    Form 20-F of Bayer AG;                                                                                                                                                                                                                                                          
|  
|2. | Based on my knowledge, this report does not
    contain any untrue statement of a material fact or omit to state
    a material fact necessary to make the statements made, in light
    of the circumstances under which such statements were made, not
    misleading with respect to the period covered by this report;
|  
|3. | Based on my knowledge, the financial statements,
    and other financial information included in this report, fairly
    present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this report;                   
|  
|4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-15 and 15d-15) for the registrant and have:                                                                                         



| |     |                                                                                                                                                                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this report is being prepared;
|
| | (b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this report
    (the Evaluation Date); and                                                                                                      
|
| | (c) | presented in this report our conclusions about
    the effectiveness of the disclosure controls and procedures
    based on our evaluation as of the Evaluation Date;                                                                                                                                



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



| |     |                                                                                                                                                                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



|   |                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. | The registrants other certifying officer
    and I have indicated in this report whether there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of our most recent evaluation, including any corrective
    actions with regard to significant deficiencies and material
    weaknesses.



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

Date: June 27, 2003

117



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##### Table of Contents



CERTIFICATION OF THE PRINCIPAL FINANCIAL
OFFICER OF THE REGISTRANT

IN ACCORDANCE WITH RULE 13a-14


UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED


I, Klaus Kühn, certify that:



|   |                                                                                                                                                                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | I have reviewed this annual report on
    Form 20-F of Bayer AG;                                                                                                                                                                                                                                                          
|  
|2. | Based on my knowledge, this report does not
    contain any untrue statement of a material fact or omit to state
    a material fact necessary to make the statements made, in light
    of the circumstances under which such statements were made, not
    misleading with respect to the period covered by this report;
|  
|3. | Based on my knowledge, the financial statements,
    and other financial information included in this report, fairly
    present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this report;                   
|  
|4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-15 and 15d-15) for the registrant and have:                                                                                         



| |     |                                                                                                                                                                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this report is being prepared;
|
| | (b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this report
    (the Evaluation Date); and                                                                                                      
|
| | (c) | presented in this report our conclusions about
    the effectiveness of the disclosure controls and procedures
    based on our evaluation as of the Evaluation Date;                                                                                                                                



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



| |     |                                                                                                                                                                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



|   |                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. | The registrants other certifying officer
    and I have indicated in this report whether there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of our most recent evaluation, including any corrective
    actions with regard to significant deficiencies and material
    weaknesses.



| |                 
| | ----------------
| | /s/ KLAUS KÜHN  
| |                 
| | Name: Klaus Kühn

| |        |                            
| | ------ | ---------------------------
| | Title: | Chief Financial Officer and

| |                                  
| | ---------------------------------
| | Member of the Board of Management

Date: June 27, 2003

118



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##### Table of Contents



BAYER GROUP

Index to Consolidated Financial
Statements

|                                   |                                                                                                                         |  |     |     | 
|---------------------------------- | ----------------------------------------------------------------------------------------------------------------------- |  | --- | --- | 
|Independent Auditors Report       |                                                                                                                         |  | F-2 |    
|Consolidated Financial Statements: |                                                                                                                         |  |     |    
|                                   | Consolidated Statements of Income for the years
    ended December 31, 2002, 2001 and 2000                              |  |     | F-3 | 
|                                   | Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                        |  |     | F-4 | 
|                                   | Consolidated Statements of Changes in
    Stockholders Equity for the years ended December 31,
    2002, 2001 and 2000 |  |     | F-5 | 
|                                   | Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000                          |  |     | F-6 | 
|                                   | Notes to the Consolidated Financial Statements                                                                          |  |     | F-7 | 

F-1



---



##### Table of Contents



Report of Independent Accountants

To the Board of Directors

and Stockholders of Bayer AG


We have audited the accompanying consolidated
balance sheets of Bayer AG and its subsidiaries (the
Group) as of December 31, 2002 and 2001, and
the related consolidated statements of income,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2002. These
financial statements are the responsibility of the Groups
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with
International Standards on Auditing and auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatements. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of the Group at
December 31, 2002, and 2001, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2002 in conformity with
International Accounting Standards.

International Accounting Standards vary in
certain significant respects from accounting principles
generally accepted in the United States of America. The
application of the latter would have affected the determination
of consolidated net income for the years ended December 31,
2002, 2001 and 2000, and the determination of consolidated
stockholders equity as of December 31, 2002 and 2001,
to the extent summarized in Note 44 to the consolidated
financial statements.

Essen, Germany

February 26, 2003


PwC Deutsche Revision

Aktiengesellschaft


Wirtschaftsprüfungsgesellschaft


|                                                          |  |                                                                                                          
|--------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------
|/s/ ALBRECHTP. Albrecht
    (Certified Public Accountant) |  | /s/ LINKE
    --------------------------------------------
    V. Linke
    (Certified Public Accountant)

F-2



---



##### Table of Contents



Bayer Group Consolidated Statements of
Income

|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|-------------------------------------------------------------------- |  | ---- | ---- | ----------- |  | ---- | ------- | ---- |  |  | ------- | - |  |  | ------- | -
|                                                                     |  | Note |      | 2002        |  | 2001 |         | 2000
|                                                                     |  |      |      |             |  |      |         |     
|                                                                     |  |      |      |            
|                                                                     |  |      |      | ( million)
|Net sales                                                            |  |      | [1]  |             |  |      | 29,624  |      |  |  | 30,275  |   |  |  | 30,971  |  
|Net sales from discontinuing
    operations                          |  |      | [6]  |             |  |      | (666    | )    |  |  | (1,105  | ) |  |  | (1,850  | )
|Net sales from continuing operations                                 |  |      |      |             |  |      | 28,958  |      |  |  | 29,170  |   |  |  | 29,121  |  
|Cost of goods sold                                                   |  |      |      |             |  |      | (17,509 | )    |  |  | (16,747 | ) |  |  | (15,460 | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Gross profit                                                         |  |      |      |             |  |      | 11,449  |      |  |  | 12,423  |   |  |  | 13,661  |  
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Selling expenses                                                     |  |      | [2]  |             |  |      | (6,786  | )    |  |  | (7,006  | ) |  |  | (6,687  | )
|Research and development expenses                                    |  |      | [3]  |             |  |      | (2,532  | )    |  |  | (2,496  | ) |  |  | (2,328  | )
|General administration expenses                                      |  |      |      |             |  |      | (1,228  | )    |  |  | (999    | ) |  |  | (893    | )
|Other operating income                                               |  |      | [4]  |             |  |      | 1,732   |      |  |  | 481     |   |  |  | 435     |  
|Other operating expenses                                             |  |      | [5]  |             |  |      | (2,041  | )    |  |  | (1,198  | ) |  |  | (1,073  | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Operating result from continuing
    operations                      |  |      |      |             |  |      | 594     |      |  |  | 1,205   |   |  |  | 3,115   |  
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Operating result from discontinuing
    operations                   |  |      | [6]  |             |  |      | 980     |      |  |  | 406     |   |  |  | 172     |  
|Operating result                                                     |  |      | [7]  |             |  |      | 1,574   |      |  |  | 1,611   |   |  |  | 3,287   |  
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Income (Expenses) from investments in affiliated
    companies  net |  |      | [8]  |             |  |      | 223     |      |  |  | 54      |   |  |  | 283     |  
|Interest expense  net                                               |  |      | [9]  |             |  |      | (449    | )    |  |  | (349    | ) |  |  | (311    | )
|Other non-operating expenses  net                                   |  |      | [10] |             |  |      | (392    | )    |  |  | (201    | ) |  |  | (269    | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Non-operating results                                                |  |      |      |             |  |      | (618    | )    |  |  | (496    | ) |  |  | (297    | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Income before income taxes                                           |  |      |      |             |  |      | 956     |      |  |  | 1,115   |   |  |  | 2,990   |  
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Income taxes                                                         |  |      | [11] |             |  |      | 107     |      |  |  | (154    | ) |  |  | (1,148  | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Income after taxes                                                   |  |      |      |             |  |      | 1,063   |      |  |  | 961     |   |  |  | 1,842   |  
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Minority Stockholders interest                                      |  |      | [13] |             |  |      | (3      | )    |  |  | 4       |   |  |  | (26     | )
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Net income                                                           |  |      |      |             |  |      | 1,060   |      |  |  | 965     |   |  |  | 1,816   |  
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  
|Basic and diluted earnings per share
    ()                         |  |      | [14] |             |  |      | 1.45    |      |  |  | 1.32    |   |  |  | 2.49    |  
|                                                                     |  |      |      |             |  |      |         |      |  |  |         |   |  |  |         |  

F-3



---



##### Table of Contents



Bayer Group Consolidated Balance
Sheets

|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |       |     | 
|------------------------------------------- | -------------------------------------------------------------- | ------------------------------- | ---- | ------------- |  | ------------- | ------ | ----- | ---- | - | ------ | ----- | --- | 
|                                            |                                                                | Note                            |      | Dec. 31, 2002 |  | Dec. 31, 2001
|                                            |                                                                |                                 |      |               |  |              
|                                            |                                                                |                                
|                                            |                                                                | ( million)                    
|ASSETS                                      |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Noncurrent assets                           |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Intangible assets                           |                                                                |                                 | [18] |               |  |               | 8,879  |       |      |   | 5,014  |      
|Property, plant and equipment               |                                                                |                                 | [19] |               |  |               | 12,436 |       |      |   | 13,543 |      
|Investments                                 |                                                                |                                 | [20] |               |  |               | 2,198  |       |      |   | 3,145  |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            |                                                                |                                 |      |               |  |               | 23,513 |       |      |   | 21,702 |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Current assets                              |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Inventories                                 |                                                                |                                 | [21] |               |  |               | 6,342  |       |      |   | 5,818  |      
|Receivables and other assets                |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            | Trade accounts receivable                                      |                                 |      | [22]          |  |               |        | 5,542 |      |   |        | 5,415 |    
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            | Other receivables and other assets                             |                                 |      | [23]          |  |               |        | 4,210 |      |   |        | 2,447 |    
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            |                                                                |                                 |      |               |  |               | 9,752  |       |      |   | 7,862  |      
|Liquid assets                               |                                                                |                                 | [24] |               |  |               |        |       |      |   |        |      
|Marketable securities and other instruments |                                                                |                                 |      |               |  |               | 29     |       |      |   | 52     |      
|Cash and cash equivalents                   |                                                                |                                 |      |               |  |               | 767    |       |      |   | 719    |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            |                                                                |                                 |      |               |  |               | 796    |       |      |   | 771    |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            |                                                                |                                 |      |               |  |               | 16,890 |       |      |   | 14,451 |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Deferred taxes                              |                                                                |                                 | [11] |               |  |               | 967    |       |      |   | 608    |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Deferred charges                            |                                                                |                                 | [25] |               |  |               | 322    |       |      |   | 278    |      
|                                            |                                                                |                                 |      |               |  |               | 41,692 |       |      |   | 37,039 |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|of which discontinuing operations           |                                                                |                                 | [35] |               |  |               | 0      |       |      |   | 820    |      
|STOCKHOLDERS EQUITY AND
    LIABILITIES    |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Stockholders equity                        |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Capital stock of Bayer AG                   |                                                                |                                 |      |               |  |               | 1,870  |       |      |   | 1,870  |      
|Capital reserves of Bayer AG                |                                                                |                                 |      |               |  |               | 2,942  |       |      |   | 2,942  |      
|Retained earnings                           |                                                                |                                 |      |               |  |               | 10,076 |       |      |   | 9,841  |      
|Net income                                  |                                                                |                                 |      |               |  |               | 1,060  |       |      |   | 965    |      
|Other Comprehensive Income                  |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            |                                                                | Currency translation adjustment |      |               |  |               |        |       | (593 | ) |        |       | 759 | 
|                                            |                                                                | Miscellaneous items             |      |               |  |               |        |       | (20  | ) |        |       | 545 | 
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            |                                                                |                                 | [26] |               |  |               | 15,335 |       |      |   | 16,922 |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Minority Stockholders interest             |                                                                |                                 | [27] |               |  |               | 120    |       |      |   | 98     |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Liabilities                                 |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Long-term liabilities                       |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            | Long-term financial obligations                                |                                 |      | [30]          |  |               |        | 7,318 |      |   |        | 3,071 |    
|                                            | Miscellaneous long-term liabilities                            |                                 |      | [32]          |  |               |        | 92    |      |   |        | 140   |    
|                                            | Provisions for pensions and other post-employment
    benefits |                                 |      | [28]          |  |               |        | 4,925 |      |   |        | 4,407 |    
|                                            | Other long-term provisions                                     |                                 |      | [29]          |  |               |        | 1,215 |      |   |        | 1,288 |    
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            |                                                                |                                 |      |               |  |               | 13,550 |       |      |   | 8,906  |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Short-term liabilities                      |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            | Short-term financial obligations                               |                                 |      | [30]          |  |               |        | 2,841 |      |   |        | 4,309 |    
|                                            | Trade accounts payable                                         |                                 |      | [31]          |  |               |        | 2,534 |      |   |        | 1,993 |    
|                                            | Miscellaneous short-term liabilities                           |                                 |      | [32]          |  |               |        | 2,138 |      |   |        | 1,832 |    
|                                            | Short-term provisions                                          |                                 |      | [29]          |  |               |        | 2,257 |      |   |        | 1,477 |    
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            |                                                                |                                 |      |               |  |               | 9,770  |       |      |   | 9,611  |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            |                                                                |                                 |      |               |  |               | 23,320 |       |      |   | 18,517 |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|of which discontinuing operations           |                                                                |                                 | [35] |               |  |               | 0      |       |      |   | 233    |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Deferred taxes                              |                                                                |                                 | [11] |               |  |               | 2,453  |       |      |   | 1,238  |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|Deferred income                             |                                                                |                                 | [34] |               |  |               | 464    |       |      |   | 264    |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      
|                                            |                                                                |                                 |      |               |  |               | 41,692 |       |      |   | 37,039 |      
|                                            |                                                                |                                 |      |               |  |               |        |       |      |   |        |      

F-4



---



##### Table of Contents



Bayer Group Consolidated Statements of Changes
in Stockholders Equity

|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |        |  
|---------------------------------------------------------------------------------------------- | -------------------------------- | ------------------------------ | ----------- | -------- |  | ----------- | ----- | -------- |  | ------ | ----- | ----------- |  | ------------------- | ------ | ------ |  | ------------- | ------ | ------ | - |  | ------ | ------ | - |  | ----- | ---- | - |  | ---- | ---- | - |  | ------ | ------ | -
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  | Miscellaneous items |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |       
|                                                                                               |                                  |                                |             | Capital  |  | Capital     |       |          |  |        |       | Currency    |  | Fair-value          |        | Cash   |  | Total        
|                                                                                               |                                  | Number of                      |             | stock of |  | reserves of |       | Retained |  | Net    |       | translation |  | remeasurement       |        | flow   |  | Stockholders
|                                                                                               |                                  | shares                         |             | Bayer AG |  | Bayer AG    |       | earnings |  | Income |       | adjustment  |  | of securities       |        | hedges |  | equity       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |              
|                                                                                               |                                  |                               
|                                                                                               |                                  | ( million, except share data)
|Dec. 31, 1999                                                                                  |                                  |                                | 730,341,920 |          |  |             | 1,870 |          |  |        | 2,942 |             |  |                     | 7,965  |        |  |               | 2,002  |        |   |  | 227    |        |   |  | 0     |      |   |  | 0    |      |   |  | 15,006 |       
|Changes in stockholders equity resulting
    from capital contributions and dividend payments |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Capital contributions            |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |        |  
|                                                                                               | Dividend payments                |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        | (949   | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | (949   | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               | (949   | )      |   |  |        |        |   |  |       |      |   |  |      |      |   |  | (949   | )     
|Other changes in stockholders equity not
    recognized in income                             |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Exchange differences             |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        | 238    |   |  |       |      |   |  |      |      |   |  |        | 238    |  
|                                                                                               | Other differences                |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        | 29     |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        | 29     |  
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     | 29     |        |  |               |        |        |   |  | 238    |        |   |  |       |      |   |  |      |      |   |  | 267    |       
|Changes in stockholders equity
    recognized in income                                       |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Allocation to retained earnings  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        | 1,053  |  |               |        | (1,053 | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | 0      |  
|                                                                                               | Income after taxes for 2000      |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        | 1,816  |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        | 1,816  |  
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     | 1,053  |        |  |               | 763    |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  | 1,816  |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|Dec. 31, 2000                                                                                  |                                  |                                | 730,341,920 |          |  |             | 1,870 |          |  |        | 2,942 |             |  |                     | 9,047  |        |  |               | 1,816  |        |   |  | 465    |        |   |  | 0     |      |   |  | 0    |      |   |  | 16,140 |       
|Jan. 1, 2001                                                                                   |                                  |                                | 730,341,920 |          |  |             | 1,870 |          |  |        | 2,942 |             |  |                     | 9,047  |        |  |               | 1,816  |        |   |  | 465    |        |   |  | 1,339 |      |   |  | 95   |      |   |  | 17,574 |       
|Changes in stockholders equity resulting
    from capital contributions and dividend payments |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Capital contributions            |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |        |  
|                                                                                               | Dividend payments                |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        | (1,022 | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | (1,022 | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               | (1,022 | )      |   |  |        |        |   |  |       |      |   |  |      |      |   |  | (1,022 | )     
|Other changes in stockholders equity not
    recognized in income                             |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Exchange differences             |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        | 294    |   |  |       |      |   |  |      |      |   |  |        | 294    |  
|                                                                                               | Other differences                |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       | (785 | ) |  |      | (104 | ) |  |        | (889   | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|of which realized (gains) losses                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  | (25   | )    |   |  | (68  | )    |   |  | (93    | )     
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  | 294    |        |   |  | (785  | )    |   |  | (104 | )    |   |  | (595   | )     
|Changes in stockholders equity
    recognized in income                                       |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Allocation to retained earnings  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        | 794    |  |               |        | (794   | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | 0      |  
|                                                                                               | Income after taxes for 2001      |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        | 965    |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        | 965    |  
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     | 794    |        |  |               | 171    |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  | 965    |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|Dec. 31, 2001                                                                                  |                                  |                                | 730,341,920 |          |  |             | 1,870 |          |  |        | 2,942 |             |  |                     | 9,841  |        |  |               | 965    |        |   |  | 759    |        |   |  | 554   |      |   |  | (9   | )    |   |  | 16,922 |       
|Changes in stockholders equity resulting
    from capital contributions and dividend payments |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Capital contributions            |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |        |  
|                                                                                               | Dividend payments                |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        | (657   | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | (657   | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               | (657   | )      |   |  |        |        |   |  |       |      |   |  |      |      |   |  | (657   | )     
|Other changes in stockholders equity not
    recognized in income                             |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Exchange differences             |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        | (1,352 | ) |  |       |      |   |  |      |      |   |  |        | (1,352 | )
|                                                                                               | Other differences                |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       | (561 | ) |  |      | (4   | ) |  |        | (565   | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | of which realized (gains) losses |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       | (154 | ) |  |      | 9    |   |  |        | (145   | )
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  | (1,352 | )      |   |  | (561  | )    |   |  | (4   | )    |   |  | (1,917 | )     
|Changes in stockholders equity
    recognized in income                                       |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               | Allocation to retained earnings  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        | 235    |  |               |        | (308   | ) |  |        |        |   |  |       |      |   |  |      |      |   |  |        | (73    | )
|                                                                                               | Income after taxes for 2002      |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        | 1,060  |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        | 1,060  |  
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     | 235    |        |  |               | 752    |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  | 987    |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       
|Dec. 31, 2002                                                                                  |                                  |                                | 730,341,920 |          |  |             | 1,870 |          |  |        | 2,942 |             |  |                     | 10,076 |        |  |               | 1,060  |        |   |  | (593   | )      |   |  | (7    | )    |   |  | (13  | )    |   |  | 15,335 |       
|                                                                                               |                                  |                                |             |          |  |             |       |          |  |        |       |             |  |                     |        |        |  |               |        |        |   |  |        |        |   |  |       |      |   |  |      |      |   |  |        |       

F-5



---



##### Table of Contents



Bayer Group Consolidated Statements of Cash
Flows

|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|-------------------------------------------------------------------------------- |  | ---- | ---- | ----------- |  | ---- | ------ | ---- |  |  | ------ | - |  |  | ------ | -
|                                                                                 |  | Note |      | 2002        |  | 2001 |        | 2000
|                                                                                 |  |      |      |             |  |      |        |     
|                                                                                 |  |      |      |            
|                                                                                 |  |      |      | ( million)
|Operating result                                                                 |  |      |      |             |  |      | 1,574  |      |  |  | 1,611  |   |  |  | 3,287  |  
|Income taxes                                                                     |  |      |      |             |  |      | (339   | )    |  |  | (637   | ) |  |  | (873   | )
|Depreciation and amortization                                                    |  |      |      |             |  |      | 3,313  |      |  |  | 2,516  |   |  |  | 2,139  |  
|Change in long-term provisions                                                   |  |      |      |             |  |      | (135   | )    |  |  | (193   | ) |  |  | (316   | )
|Gains on retirements of noncurrent assets                                        |  |      |      |             |  |      | (1,401 | )    |  |  | (374   | ) |  |  | (73    | )
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Gross cash provided by operating
    activities                                  |  |      |      |             |  |      | 3,012  |      |  |  | 2,923  |   |  |  | 4,164  |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|(Increase) Decrease in inventories                                               |  |      |      |             |  |      | (55    | )    |  |  | 146    |   |  |  | (750   | )
|(Increase) Decrease in trade accounts receivable                                 |  |      |      |             |  |      | 546    |      |  |  | 638    |   |  |  | (548   | )
|Increase (Decrease) in trade accounts payable                                    |  |      |      |             |  |      | 419    |      |  |  | 73     |   |  |  | 351    |  
|Changes in other working capital                                                 |  |      |      |             |  |      | 498    |      |  |  | 79     |   |  |  | (126   | )
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Net cash provided by operating
    activities                                    |  |      | [39] |             |  |      | 4,420  |      |  |  | 3,859  |   |  |  | 3,091  |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|of which discontinuing operations                                                |  |      | [42] |             |  |      | 87     |      |  |  | 131    |   |  |  | 188    |  
|Cash outflows for additions to property, plant
    and equipment                 |  |      |      |             |  |      | (2,239 | )    |  |  | (2,617 | ) |  |  | (2,647 | )
|Cash inflows from sales of property, plant and
    equipment                     |  |      |      |             |  |      | 2,114  |      |  |  | 521    |   |  |  | 322    |  
|Cash inflows and outflows related to investments                                 |  |      |      |             |  |      | 903    |      |  |  | 109    |   |  |  | (45    | )
|Cash outflows for acquisitions less acquired cash                                |  |      |      |             |  |      | (7,776 | )    |  |  | (502   | ) |  |  | (4,125 | )
|Interest and dividends received                                                  |  |      |      |             |  |      | 402    |      |  |  | 138    |   |  |  | 191    |  
|Cash inflows from marketable securities                                          |  |      |      |             |  |      | 26     |      |  |  | 219    |   |  |  | 115    |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Net Cash provided by (used in) investing
    activities                          |  |      | [40] |             |  |      | (6,570 | )    |  |  | (2,132 | ) |  |  | (6,189 | )
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|of which discontinuing operations                                                |  |      | [42] |             |  |      | 1,286  |      |  |  | 310    |   |  |  | (268   | )
|Capital contributions                                                            |  |      |      |             |  |      | 0      |      |  |  | 0      |   |  |  | 2      |  
|Bayer AG dividend and dividend payments to
    minority stockholders             |  |      |      |             |  |      | (662   | )    |  |  | (1,028 | ) |  |  | (953   | )
|Issuances of debt                                                                |  |      |      |             |  |      | 7,427  |      |  |  | 2,514  |   |  |  | 3,952  |  
|Retirements of debt                                                              |  |      |      |             |  |      | (3,890 | )    |  |  | (2,551 | ) |  |  | (1,893 | )
|Interest paid                                                                    |  |      |      |             |  |      | (704   | )    |  |  | (505   | ) |  |  | (440   | )
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Taxes on the non-operating result                                                |  |      |      |             |  |      | 38     |      |  |  | 21     |   |  |  | 104    |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Net cash provided by (used in) financing
    activities                          |  |      | [41] |             |  |      | 2,209  |      |  |  | (1,549 | ) |  |  | 772    |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|of which discontinuing operations                                                |  |      | [42] |             |  |      | 1      |      |  |  | 77     |   |  |  | 11     |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Change in cash and cash equivalents due to
    business activities               |  |      |      |             |  |      | 59     |      |  |  | 178    |   |  |  | (2,326 | )
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Cash and cash equivalents at beginning of
    year                               |  |      |      |             |  |      | 719    |      |  |  | 491    |   |  |  | 2,812  |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Change in cash and cash equivalents due to
    changes in scope of consolidation |  |      |      |             |  |      | 4      |      |  |  | 42     |   |  |  | (3     | )
|Change in cash and cash equivalents due to
    exchange rate movements           |  |      |      |             |  |      | (15    | )    |  |  | 8      |   |  |  | 8      |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Cash and cash equivalents at end of
    year                                     |  |      |      |             |  |      | 767    |      |  |  | 719    |   |  |  | 491    |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Marketable securities and other instruments                                      |  |      |      |             |  |      | 29     |      |  |  | 52     |   |  |  | 213    |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  
|Liquid assets as per balance sheets                                              |  |      |      |             |  |      | 796    |      |  |  | 771    |   |  |  | 704    |  
|                                                                                 |  |      |      |             |  |      |        |      |  |  |        |   |  |  |        |  

F-6



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##### Table of Contents



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).

A Declaration of Conformity with the German
Corporate Governance Code has been issued in compliance with
§161 of the German Stock Corporation Act and made available
to stockholders.

The financial statements of the consolidated
companies are prepared according to uniform recognition and
valuation principles. Valuation adjustments made for tax reasons
are not reflected in the Group statements. The individual
companies statements are prepared as of the closing date
for the Group statements.

In compliance with IAS 37 (Provisions, Contingent
Liabilities and Contingent Assets), 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.

Effect of new accounting
pronouncements

The consolidated financial statements of the
Bayer Group for the 2002 fiscal year comply with the following
new or revised interpretations of the Standing Interpretations
Committee (SIC), which the Group implemented for the first time
in 2002:



|       |  |                                                                                                    
|------ |  | ---------------------------------------------------------------------------------------------------
|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
    Agreements                                                     
|      
|SIC-30 |  | Reporting Currency  Translation from
    Measurement Currency to Presentation Currency            
|      
|SIC-31 |  | Revenue  Barter Transactions Involving
    Advertising Services                                   
|      
|SIC-32 |  | Intangible Assets  Web Site Costs                                                                 
|      
|SIC-33 |  | Consolidation and Equity Method 
    Potential Voting Rights and Allocation of Ownership Interests

The adoption of these new interpretations did not
have any significant impact on Bayers financial position
or its results of operations during 2002 or on the comparability
of its 2002 and 2001 consolidated financial statements.

F-7



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The following new International Accounting
Standard (IAS) will be implemented in 2003:

IAS 41 Agriculture

IAS 41 Agriculture prescribes the accounting
treatment, financial statement presentation and disclosures
related to agricultural activity. This standard stipulates,
among other things, the accounting treatment for biological
assets during the period of growth, degeneration, production and
procreation, and for the initial measurement of agricultural
produce at the point of harvest. It prescribes that biological
assets be included at fair value less estimated point-of-sale
costs, provided that fair value can be measured reliably.
Agricultural produce harvested from such biological assets is
also recognized at fair value at the point of harvest less
estimated point-of-sale costs.

Scope of consolidation

The financial statements of the Bayer Group as of
December 31, 2002 include Bayer AG and 59 German and
268 foreign consolidated subsidiaries in which Bayer AG,
directly or indirectly, has a majority of the voting rights,
over which it exercises uniform control, or from which it is
able to derive benefit by virtue of its power to govern
corporate financial and operating policies. The total number of
consolidated companies has risen by 89 from the previous year.
Excluded from consolidation are 154 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. The rise in the number of
subsidiaries is principally due to the acquisition of Aventis
CropScience Holding S.A., France, effective June 1, 2002.

We have included 11 joint ventures 
one fewer than in the previous year  by proportionate
consolidation in compliance with IAS 31 (Financial Reporting of
Interests in Joint Ventures). The effect of joint ventures on
the Group balance sheet and income statement is as follows:

|                      |  |           |     |  
|--------------------- |  | --------- | --- | -
|                      |  |  million
|                      |  |          
|Noncurrent assets     |  |           | 217 |  
|Current assets        |  |           | 151 |  
|Pension provisions    |  |           | (7  | )
|Other provisions      |  |           | (11 | )
|Financial obligations |  |           | (61 | )
|Remaining liabilities |  |           | (53 | )
|                      |  |           |     |  
|Net assets            |  |           | 236 |  
|                      |  |           |     |  
|Income                |  |           | 428 |  
|Expenses              |  |           | 383 |  
|                      |  |           |     |  
|Income after taxes    |  |           | 45  |  
|                      |  |           |     |  

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

Consolidated for the first time are 145
companies, while 56 companies have been deconsolidated. The
increase is largely due to the acquisition of Aventis
CropScience (108 companies) and the Visible Genetics group
(10 companies). The companies no longer consolidated are
those of the divested Haarmann & Reimer group
(22 companies), those merged with former Aventis
CropScience companies, and 12 other companies.

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 from the respective dates of

F-8



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


acquisition. The purchase prices of acquisitions
outside the euro zone are translated at the exchange rates in
effect at the respective dates of acquisition.

In 2002 a total of
7.9 billion
was spent on acquisitions, calculated at exchange rates at the
time of acquisition. They were paid for in cash, not with shares
in Bayer AG. These acquisitions led to goodwill of
2.3 billion.
The goodwill amounts are being amortized by the straight-line
method over periods not exceeding 15 years.

Bayer CropScience AG, Monheim, acquired Aventis
CropScience Holding S.A., France, effective June 1, 2002
from its previous owners Aventis S.A., France, and Schering AG,
Berlin, Germany, for
7.8 billion,
including the assumption of debt. Aventis CropScience is one of
the leading companies in the areas of crop protection,
biotechnology and agrochemical specialties. The
2.2 billion
in acquired goodwill is being amortized over a useful life of
15 years.

Approval of this acquisition by the relevant
antitrust authorities, particularly in Europe and the United
States, was conditional upon Bayers divesting or
outlicensing a number of products with total sales of
650-700 million.

On October 11, 2002 Bayer Corporation,
United States, acquired Visible Genetics Inc., Canada. The
purchase price was
62 million.
This acquisition gives the Diagnostics Business Group two
automated DNA sequencing systems marketed under the tradename
OpenGene and the TRUGENE HIV genotyping kits, which
permit testing for resistance to HIV drugs. The acquired
goodwill of
12 million
is being amortized over an estimated useful life of
15 years.

Bayer acquired Tectrade A/S, Denmark, at the
start of April 2002 for
19 million.
Tectrade develops customized polyurethane formulations. The
acquisition comprises further subsidiaries, a technical service
center and a formulating plant. The acquired goodwill of
16 million
is being amortized over 10 years.

Effective December 6, 2002 our
U.S. subsidiary Bayer Corporation acquired two
biocides  thiabendazole and
dibromodicyanobutane  and certain patented
formulations of these biocides from Ondeo Nalco Inc., United
States for
14 million.
The acquisition also includes the Tektamer®, Biochek®
and Metasol® tradenames. The active substances acquired
provide protection against microorganisms such as yeasts, fungi,
bacteria and algae, which can impair the quality of products and
functional fluids. The rights are being amortized over an
estimated useful life of 10 years.

The following significant divestitures
were made in 2002:

As part of the streamlining of the Bayer
Groups portfolio, Bayer AG sold its wholly owned
subsidiary Haarmann & Reimer GmbH, a manufacturer of
flavors and fragrances based in Holzminden, Germany, including
its subsidiaries, to the financial investor EQT Northern Europe
Private Equity Funds, for
1.7 billion
effective September 30, 2002. The divestiture of this
business group, which is reflected in discontinuing operations,
included not only the Haarmann & Reimer companies but also
the Haarmann & Reimer business operations of several of
Bayers foreign subsidiaries.

The 30 percent interest in the Belgian
imaging company Agfa-Gevaert N.V., which Bayer continued to hold
after the stock market placement of the other 70 percent of
the shares in 1999, was sold to the investment bank Goldman
Sachs for
714 million
at the start of June 2002.

Effective March 1, 2002 Bayer AG sold
its 94.9 percent interest in Bayer Wohnungen GmbH to
TreuHandStelle für Bergmannswohnstätten im
rheinisch-westfälischen Steinkohlenbezirk GmbH for
528 million.
In addition to this interest, the transaction included further
land and buildings owned by Bayer Wohnungen GmbH.

As part of the continued streamlining of its
portfolio, Bayer sold to SC Johnson & Son Inc., United
States, a large part of the global household insecticides
business of its Consumer Care Business Group for
386 million
effective December 31, 2002. The operations sold at year
end were those for which regulatory approval of the transactions
had already been given. In addition to the affiliates in
Indonesia and Barbados and the inventories,

F-9



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


SC Johnson has acquired the marketing rights to
products such as Baygon®, Autan®, Bayclin® and
Bayfresh®. Bayer will continue to manufacture the active
ingredients for these products, which it will supply to SC
Johnson and other customers. The divestment of the household
insecticides in fiscal 2002 relates to Australia, Belgium,
Brazil, Costa Rica, El Salvador, Guatemala, Hong Kong,
Indonesia, Italy, the Philippines, South Africa and Spain.
Closing of the transaction for the remaining countries is
expected in the first quarter of 2003, pending the necessary
approval by the relevant antitrust authorities.

In fiscal 2002, conditions set by the European
antitrust authorities, the Federal Trade Commission (FTC) in the
United States and the Canadian Competition Bureau for the
acquisition of Aventis CropScience Holding S.A., France, were
met. At the end of December 2002 the cereal herbicide
Everest® was sold to Arvesta Corporation, which is
headquartered in the United States, for
123 million,
while the crop protection agent Goltix® and the exclusive
marketing licenses for Herold® in Germany and Belgium were
sold to Makhteshim-Agan Industries Ltd., Israel, for
138 million.

In fiscal 2002 the Bayer Group divested its
French and Spanish generic pharmaceuticals operations as part of
its drive to streamline the portfolio. Effective June 28,
2002 Bayer sold its stake in Bayer Classics S.A., France and the
production site in Sens, via its French subsidiary Bayer Pharma
France S.A., to the Israeli company Teva Pharmaceutical
Industries Ltd. for
97 million.
On April 17, 2002 Bayer sold its 50 percent interest
in the Spanish generics company Bayvit S.A., Barcelona, which
specializes in marketing and distribution, for
33 million.
Bayers stake and the remaining 50 percent, which was
held by the privately owned company Vita Invest S.A., Spain,
were acquired by STADA Arzneimittel AG, Bad Vilbel, Germany.

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

|                                         |  |              |        |              |  |  |       | 
|---------------------------------------- |  | ------------ | ------ | ------------ |  |  | ----- | 
|                                         |  | Acquisitions |        | Divestitures
|                                         |  |              |        |             
|                                         |  |             
|                                         |  | ( Million) 
|2002                                     |  |              |        |              |  |  |       | 
|Noncurrent assets                        |  |              | 6,449  |              |  |  | 537   | 
|Current assets (excluding liquid assets) |  |              | 5,101  |              |  |  | 481   | 
|Liquid assets                            |  |              | 353    |              |  |  | 29    | 
|                                         |  |              |        |              |  |  |       | 
|Assets                                   |  |              | 11,903 |              |  |  | 1,047 | 
|                                         |  |              |        |              |  |  |       | 
|Pension provisions                       |  |              | 578    |              |  |  | 74    | 
|Other provision                          |  |              | 133    |              |  |  | 47    | 
|Financial obligations                    |  |              | 2,545  |              |  |  | 170   | 
|Remaining liabilities                    |  |              | 2,725  |              |  |  | 124   | 
|                                         |  |              |        |              |  |  |       | 
|Liabilities                              |  |              | 5,981  |              |  |  | 415   | 
|                                         |  |              |        |              |  |  |       | 

|                                         |  |              |     |              |  |  |      |  
|---------------------------------------- |  | ------------ | --- | ------------ |  |  | ---- | -
|                                         |  | Acquisitions |     | Divestitures
|                                         |  |              |     |             
|                                         |  |             
|                                         |  | ( Million) 
|2001                                     |  |              |     |              |  |  |      |  
|Noncurrent assets                        |  |              | 505 |              |  |  | 366  |  
|Current assets (excluding liquid assets) |  |              | 18  |              |  |  | 357  |  
|Liquid assets                            |  |              |    |              |  |  |     |  
|                                         |  |              |     |              |  |  |      |  
|Assets                                   |  |              | 523 |              |  |  | 723  |  
|                                         |  |              |     |              |  |  |      |  
|Pension provisions                       |  |              |    |              |  |  | (88  | )
|Other provision                          |  |              | (1  | )            |  |  | (50  | )
|Financial obligations                    |  |              |    |              |  |  | (5   | )
|Remaining liabilities                    |  |              | (8  | )            |  |  | (12  | )
|                                         |  |              |     |              |  |  |      |  
|Liabilities                              |  |              | (9  | )            |  |  | (155 | )
|                                         |  |              |     |              |  |  |      |  

F-10



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


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

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

|                                                      |  |                  |      | 
|----------------------------------------------------- |  | ---------------- | ---- | 
|Company Name and Place of Business                    |  | Bayers interest
|                                                      |  |                 
|                                                      |  | (%)             
|Germany                                               |  |                  |      | 
|Bayer Buna GmbH, Marl                                 |  |                  | 100  | 
|Bayer CropScience AG, Monheim                         |  |                  | 100  | 
|Bayer Distribution Service GmbH, Leverkusen           |  |                  | 100  | 
|Bayer Industrieprodukte GmbH & Co. KG,
    Leverkusen |  |                  | 100  | 
|Bayer Vital GmbH, Leverkusen                          |  |                  | 100  | 
|H.C. Starck GmbH, Goslar                              |  |                  | 100  | 
|Wolff Walsrode AG, Walsrode                           |  |                  | 100  | 
|Other European Countries                              |  |                  |      | 
|Bayer A/S, Denmark                                    |  |                  | 100  | 
|Bayer Antwerpen N.V., Belgium                         |  |                  | 100  | 
|Bayer B.V., Netherlands                               |  |                  | 100  | 
|Bayer CropScience France S.A., France                 |  |                  | 100  | 
|Bayer CropScience Holding S.A., France                |  |                  | 100  | 
|Bayer CropScience S.A., France                        |  |                  | 100  | 
|Bayer Hispania, S.A., Spain                           |  |                  | 100  | 
|Bayer International S.A., Switzerland                 |  |                  | 99.7 | 
|Bayer Pharma S.A., France                             |  |                  | 99.9 | 
|Bayer plc, U.K.                                       |  |                  | 100  | 
|Bayer Rubber N.V., Belgium                            |  |                  | 100  | 
|Bayer S.A.S, France                                   |  |                  | 99.9 | 
|Bayer S.p.A., Italy                                   |  |                  | 100  | 
|Quimica Farmaceutica Bayer, S.A., Spain               |  |                  | 100  | 
|North America                                         |  |                  |      | 
|Bayer Corporation, United States                      |  |                  | 100  | 
|Bayer CropScience LP, United States                   |  |                  | 100  | 
|Bayer CropScience Inc., Canada                        |  |                  | 100  | 
|Bayer Inc., Canada                                    |  |                  | 100  | 
|Asia/Pacific                                          |  |                  |      | 
|Bayer (India) Ltd., India                             |  |                  | 55.3 | 
|Bayer (South East Asia) Pte Ltd., Singapore           |  |                  | 100  | 
|Bayer Australia Ltd., Australia                       |  |                  | 99.9 | 
|Bayer China Co. Ltd., Hong Kong                       |  |                  | 99.3 | 
|Bayer CropScience K.K., Japan                         |  |                  | 100  | 
|Bayer Ltd., Japan                                     |  |                  | 100  | 
|Bayer Polymers Co. Ltd., Hong Kong                    |  |                  | 100  | 
|Bayer Yakuhin Ltd., Japan                             |  |                  | 100  | 
|Sumika Bayer Urethane Co., Ltd., Japan                |  |                  | 60   | 

F-11



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                       |  |                  |      | 
|-------------------------------------- |  | ---------------- | ---- | 
|Company Name and Place of Business     |  | Bayers interest
|                                       |  |                 
|                                       |  | (%)             
|Latin America/Africa/Middle East       |  |                  |      | 
|Bayer (Proprietary) Ltd., South Africa |  |                  | 100  | 
|Bayer CropScience Brasil S.A., Brazil  |  |                  | 100  | 
|Bayer de México, S.A. de C.V., Mexico  |  |                  | 100  | 
|Bayer S.A., Argentina                  |  |                  | 99.9 | 
|Bayer S.A., Brazil                     |  |                  | 99.9 | 

The following domestic subsidiaries availed
themselves in 2002 of certain exemptions granted under
Articles 264, paragraph 3 and 264 b, No. 4
of the German Commercial Code regarding the preparation,
auditing and publication of financial statements: Bayer
Distribution Service GmbH, Leverkusen; Bayer-Kaufhaus GmbH,
Leverkusen; Bayer Polymers Customer Services GmbH & Co.
KG, Leverkusen; Generics Holding GmbH, Leverkusen; Bayer
Innovation GmbH, Leverkusen; Bayer Kautschuk GmbH, Dormagen;
Bayer Handelsges. mbH, Leverkusen; Bayer Buna GmbH, Marl; KVP
Pharma + Veterinär Produkte GmbH, Kiel; Euroservices
Bayer GmbH, Leverkusen; Travelboard GmbH, Leverkusen; Chemion
Logistik GmbH, Leverkusen; Bayer Restaurant + Service GmbH,
Leverkusen; Bayer Industrieprodukte GmbH & Co. KG,
Leverkusen; Bayer Bitterfeld GmbH, Greppin; IAB Ionenaustauscher
GmbH, Greppin; Wolff Walsrode AG, Walsrode; Probis GmbH,
Bomlitz; Walothen GmbH, Bomlitz; Wolff Cellulosics KG, Bomlitz;
Epurex Films KG, Bomlitz, and CaseTech KG, Bomlitz.

Foreign currency translation

The financial statements for 2002 are drawn up in
euros ().

In the financial statements of the individual
consolidated companies, foreign currency receivables and
payables are translated at closing rates, irrespective of
whether they are exchange-hedged. Forward contracts that, from
an economic point of view, serve as a hedge against fluctuations
in exchange rates are stated at fair value.

The majority of consolidated companies outside
the euro zone are to be regarded as foreign entities since they
are financially, economically and organizationally autonomous.
Their functional currencies according to IAS 21 (The
Effects of Changes in Foreign Exchange Rates) are thus the
respective local currencies. The assets and liabilities of these
companies are therefore translated at closing rates, income and
expense items at average rates for the year.

Where the operations of a company outside the
euro zone are integral to those of Bayer AG, the functional
currency is the euro. Property, plant and equipment, intangible
assets, investments in affiliated companies and other securities
included in investments are translated at the historical
exchange 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. Income and expense
items (except amortization, depreciation and write-downs) are
translated at average rates for the year.

Companies operating in hyperinflationary
economies prepare their statements in hard currency and thus, in
effect, by the temporal method described above.

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.

F-12



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The exchange rates for major currencies against
the euro varied as follows:

|            |  |  |     |              |  |              |        |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        |  |  |  |       | 
|----------- |  |  | --- | ------------ |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ----- | 
|            |  |  |     |              |  |             
|            |  |  |     | Closing rate |  | Average rate
|            |  |  |     |              |  |             
|            |  |  |     | 2002         |  | 2001         |        | 2000 |  | 2002 |        | 2001 |  | 2000
|            |  |  |     |              |  |              |        |      |  |      |        |      |  |     
|            |  |  |     |             
|            |  |  |     | ( 1)       
|U.S.A.      |  |  | USD |              |  |              | 1.05   |      |  |      | 0.88   |      |  |      | 0.93   |  |  |  | 0.95   |  |  |  | 0.90   |  |  |  | 0.93  | 
|U.K.        |  |  | GBP |              |  |              | 0.65   |      |  |      | 0.61   |      |  |      | 0.62   |  |  |  | 0.63   |  |  |  | 0.62   |  |  |  | 0.61  | 
|Japan       |  |  | JPY |              |  |              | 124.39 |      |  |      | 115.33 |      |  |      | 106.92 |  |  |  | 118.06 |  |  |  | 108.74 |  |  |  | 99.74 | 
|Canada      |  |  | CAD |              |  |              | 1.66   |      |  |      | 1.41   |      |  |      | 1.40   |  |  |  | 1.48   |  |  |  | 1.39   |  |  |  | 1.37  | 
|Switzerland |  |  | CHF |              |  |              | 1.45   |      |  |      | 1.48   |      |  |      | 1.52   |  |  |  | 1.47   |  |  |  | 1.51   |  |  |  | 1.56  | 

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 2002 and
2001.


Cash flow statement

The cash flow statement shows how the liquidity
of the Bayer group was affected by the inflow and outflow of
cash and cash equivalents during the year. The effects of
acquisitions, divestitures and other changes in the scope of
consolidation are eliminated. Cash flows are classified by
operating, investing and financing activities in accordance with
IAS 7 (Cash Flow Statements). Cash and cash equivalents
shown in the balance sheet comprise cash, checks, balances with
banks and securities with original maturities of up to three
months. An adjustment is shown to reconcile cash and cash
equivalents at the end of the year to the liquid assets
reflected in the balance sheet.

The amounts reported by 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.

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

F-13



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


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.

Total reported sales declined by
651 million
compared with 2001, to
29,624 million
(2001:
30,275 million;
2000:
30,971 million).
Sales from continuing operations were
212 million
lower than in 2001 and amounted to
28,958 million
(2001:
29,170 million;
2000:
29,121 million).
In 2002, a
54 million
increase in volumes was offset by negative contributions of
715 million
from lower selling prices and
1,421 million
from adverse shifts in exchange rates. The net effect of
acquisitions and divestitures raised sales by
1,870 million.
Acquisitions and divestitures during 2002 and 2001 affected the
comparison between the two years sales figures by the
following amounts:

|                                                   |  |           |       |  
|-------------------------------------------------- |  | --------- | ----- | -
|2002                                               |  |  million
|                                                   |  |          
|Acquisitions                                       |  |           |       |  
|Aventis CropScience Holding S.A., Lyon, France     |  |           | 1,977 |  
|Tectrade A/S, Copenhagen, Denmark                  |  |           | 12    |  
|Other                                              |  |           | 3     |  
|                                                   |  |           |       |  
|                                                   |  |           | 1,992 |  
|                                                   |  |           |       |  
|Divestitures                                       |  |           |       |  
|ChemDesign Corporation (divested in 2001)          |  |           | (56   | )
|Covexx Films (divested in 2001)                    |  |           | (42   | )
|Sale of the generics business                      |  |           | (16   | )
|Other                                              |  |           | (8    | )
|                                                   |  |           |       |  
|                                                   |  |           | (122  | )
|                                                   |  |           |       |  
|Net effect an sales from continuing
    operations |  |           | 1,870 |  
|                                                   |  |           |       |  

While total reported sales declined 2001 by
696 million,
to
30,275 million,
sales from continuing operations increased by
49 million to
 29,170
million. A
1,168 million
decrease due to lower volumes was offset by positive
contributions of
274 million
from higher selling prices,
84 million
from favorable shifts in exchange rates and
859 million
from the net effect of acquisitions and divestitures.
Acquisitions and divestitures during 2001 and 2000 affected the
comparison between the two years sales figures by the
following amounts:

F-14



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                                                                  |  |           |      |  
|--------------------------------------------------------------------------------- |  | --------- | ---- | -
|2001                                                                              |  |  million
|                                                                                  |  |          
|Acquisitions                                                                      |  |           |      |  
|Sybron Chemicals Inc. (polymers and specialty
    chemicals) (acquired in 2000)   |  |           | 206  |  
|Polyols business of Lyondell Chemical Company
    (acquired in 2000)              |  |           | 202  |  
|CSM Group (acquired in 2000)                                                      |  |           | 133  |  
|Fungicide product lines, primarily FLINT
    (acquired in 2000)                   |  |           | 104  |  
|Full consolidation of Sumika Bayer Urethane Co.
    Ltd., Japan                   |  |           | 99   |  
|Paper chemicals business of Cytec Industries Inc.
    (acquired in 2000)          |  |           | 83   |  
|MIKADO corn herbicide                                                             |  |           | 46   |  
|Other                                                                             |  |           | 110  |  
|                                                                                  |  |           |      |  
|                                                                                  |  |           | 983  |  
|                                                                                  |  |           |      |  
|Divestitures                                                                      |  |           |      |  
|Covexx Films                                                                      |  |           | (61  | )
|U.S. livestock vaccines business to Intervet
    International (divested in 2000) |  |           | (30  | )
|Other                                                                             |  |           | (33  | )
|                                                                                  |  |           |      |  
|                                                                                  |  |           | (124 | )
|                                                                                  |  |           |      |  
|Net effect an sales from continuing
    operations                                |  |           | 859  |  
|                                                                                  |  |           |      |  

2000 sales increased by
3,651 million
compared with 1999, to
30,971 million.
Sales from continuing operations advanced by
5,158 million,
to
29,121 million.
The increase in 2000 comprised
1,684 million
from higher volumes,
568 million
from improvement in selling prices,
2,158 million
from favorable shifts in exchange rates and
748 million
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:

|                                                                              |  |           |        |  
|----------------------------------------------------------------------------- |  | --------- | ------ | -
|2000                                                                          |  |  million
|                                                                              |  |          
|Acquisitions                                                                  |  |           |        |  
|Polyols Business (from Lyondell)                                              |  |           | 646    |  
|Plastic sheet Business (from DSM an 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 | )
|                                                                              |  |           |        |  



|    |                 
|--- | ----------------
|[2] | Selling expenses

Selling expenses include
797 million
(2001: 789 million;
2000:
796 million)
in shipping and handling costs.

F-15



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


They also include advertising and promotion
costs, expensed in the period in which they are incurred. These
costs amount to
1,051 million
(2001:
1,392 million;
2000:
1,336 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

Other operating income from continuing operations
in 2002 arose mainly from portfolio adjustments and the
fulfillment of conditions imposed by the antitrust authorities
in connection with the acquisition of Aventis CropScience
Holding S.A., France. The divestitures of Bayer Wohnungen GmbH,
the household insecticides business of the Consumer Care
Business Group, certain CropScience trademarks, the generics
operations of the Pharmaceuticals Business Group and the sale of
other noncurrent assets generated a total gain of
1,106 million
(2001:
74 million;
2000:
75 million).
A further
154 million
(2001:
68 million;
2000:
85 million)
came from reversals of unutilized provisions and
56 million
(2001:
24 million;
2000:
25 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.



|    |                         
|--- | ------------------------
|[5] | Other operating expenses

Included in other operating expenses for
continuing operations in 2002 are
101 million
(2001:
91 million;
2000:
37 million)
in write-downs of receivables,
189 million
(2001:
94 million,
2000:
77 million)
in amortization of acquired goodwill and
42 million
(2001:
15 million;
2000:
26 million)
in losses from the sale of property, plant and equipment. In
particular, impairment write-downs of intangible assets,
property, plant and equipment of the polyols and fibers
operations in the Polymers business area together accounted for
expenses of
289 million.
In addition,
427 million
(2001:
214 million;
2000:
200 million)
was spent on restructuring. Further details of restructuring
expenses are given in Note 29.



|    |                         
|--- | ------------------------
|[6] | Discontinuing operations

As part of its reorganization Bayer divested the
Haarmann & Reimer Business Group effective
September 30, 2002 as it defined these activities as
non-core. Thus it sold the wholly owned subsidiary
Haarmann & Reimer GmbH, a manufacturer of fragrances
and flavors based in Holzminden, Germany, to EQT Northern Europe
Private Equity Funds. The operating result of this business for
the period of 2002 up to the date of divestiture is therefore
reflected in the operating result from discontinuing operations.
This item also contains the gain from the divestiture recognized
in 2002 income.

The remaining operations of the Fibers business
group, including the production facilities for Dorlastan®
spandex fibers and Perlon® monofil at three
sites  Dormagen and Goch, Germany, and Bushy Park,
South Carolina, U.S.A.  are continuing as part of the
Bayer Group and accordingly are reflected in continuing
operations. The previous years figures have been restated
accordingly.

Effective May 1, 2001 Bayer sold its
50 percent interest in EC Erdölchemie GmbH, Cologne,
Germany, to its former partner Deutsche BP AG, Hamburg, Germany.
The operating result of this business for the period of 2001 up
to the date of divestiture was therefore reflected in the
operating result from discontinuing operations. This item also
contained the gain from the sale of the 50 percent interest
recognized in 2001 income.

F-16



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The non-operating results and the income taxes
attributable to Haarmann & Reimer and Erdölchemie
are reflected in the corresponding items of the income statement.

The non-operating results and the income taxes
attributable to Haarmann & Reimer, Erdölchemie,
DyStar and Agfa are reflected in the corresponding items of the
income statement.

A breakdown of the results of discontinuing
operations is given below.

|                                                   |  |             |      |                   |  |        |      |      |  |       |      |      |  |      |      |      |  |      |      |      |  |      |    |      |  |  |    |   |  |  |      |   |  |  |     |   |  |  |      |   |  |  |       |   |  |  |        |  
|-------------------------------------------------- |  | ----------- | ---- | ----------------- |  | ------ | ---- | ---- |  | ----- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | -- | ---- |  |  | -- | - |  |  | ---- | - |  |  | --- | - |  |  | ---- | - |  |  | ----- | - |  |  | ------ | -
|                                                   |  |             |      |                   |  |        |      |      |  |      
|                                                   |  | Erdölchemie |      | Haarmann & Reimer |  | Dystar |      | Agfa |  | Total
|                                                   |  |             |      |                   |  |        |      |      |  |      
|                                                   |  | 2001        |      | 2000              |  | 2002   |      | 2001 |  | 2000  |      | 2002 |  | 2001 |      | 2000 |  | 2000 |      | 2002 |  | 2001 |    | 2000
|                                                   |  |             |      |                   |  |        |      |      |  |       |      |      |  |      |      |      |  |      |      |      |  |      |    |     
|                                                   |  |            
|                                                   |  | ( million)
|Net sales                                          |  |             | 233  |                   |  |        | 635  |      |  |       | 666  |      |  |      | 872  |      |  |      | 865  |      |  |      |    |      |  |  |    |   |  |  | 350  |   |  |  |     |   |  |  | 666  |   |  |  | 1,105 |   |  |  | 1,850  |  
|Cost of goods sold                                 |  |             | (196 | )                 |  |        | (481 | )    |  |       | (376 | )    |  |      | (481 | )    |  |      | (489 | )    |  |      |    |      |  |  |    |   |  |  | (223 | ) |  |  |     |   |  |  | (376 | ) |  |  | (677  | ) |  |  | (1,193 | )
|Selling expenses                                   |  |             | (16  | )                 |  |        | (45  | )    |  |       | (147 | )    |  |      | (199 | )    |  |      | (197 | )    |  |      |    |      |  |  |    |   |  |  | (68  | ) |  |  |     |   |  |  | (147 | ) |  |  | (215  | ) |  |  | (310   | )
|Research and development expenses                  |  |             | 0    |                   |  |        | (2   | )    |  |       | (45  | )    |  |      | (63  | )    |  |      | (54  | )    |  |      |    |      |  |  |    |   |  |  | (9   | ) |  |  |     |   |  |  | (45  | ) |  |  | (63   | ) |  |  | (65    | )
|General administration expenses                    |  |             | (3   | )                 |  |        | (9   | )    |  |       | (27  | )    |  |      | (38  | )    |  |      | (39  | )    |  |      |    |      |  |  |    |   |  |  | (21  | ) |  |  |     |   |  |  | (27  | ) |  |  | (41   | ) |  |  | (69    | )
|Other operating income                             |  |             | 316  |                   |  |        | 7    |      |  |       | 938  |      |  |      | 23   |      |  |      | 14   |      |  |      |    |      |  |  |    |   |  |  | 6    |   |  |  |     |   |  |  | 938  |   |  |  | 339   |   |  |  | 27     |  
|Other operating expenses                           |  |             | (1   | )                 |  |        | (6   | )    |  |       | (29  | )    |  |      | (41  | )    |  |      | (32  | )    |  |      |    |      |  |  |    |   |  |  | (30  | ) |  |  |     |   |  |  | (29  | ) |  |  | (42   | ) |  |  | (68    | )
|Operating result from discontinuing
    operations |  |             | 333  |                   |  |        | 99   |      |  |       | 980  |      |  |      | 73   |      |  |      | 68   |      |  |      |    |      |  |  |    |   |  |  | 5    |   |  |  |     |   |  |  | 980  |   |  |  | 406   |   |  |  | 172    |  
|Non-operating result                               |  |             | (1   | )                 |  |        | (1   | )    |  |       | (11  | )    |  |      | (4   | )    |  |      | (6   | )    |  |      |    |      |  |  |    |   |  |  | (18  | ) |  |  |     |   |  |  | (11  | ) |  |  | (5    | ) |  |  | (25    | )
|Equity-method income (loss)                        |  |             |      |                   |  |        |      |      |  |       |      |      |  |      |      |      |  |      |      |      |  |      | 10 |      |  |  | 6  |   |  |  |      |   |  |  | 72  |   |  |  | 10   |   |  |  | 6     |   |  |  | 72     |  
|Income (Loss) before income taxes                  |  |             | 332  |                   |  |        | 98   |      |  |       | 969  |      |  |      | 69   |      |  |      | 62   |      |  |      | 10 |      |  |  | 6  |   |  |  | (13  | ) |  |  | 72  |   |  |  | 979  |   |  |  | 407   |   |  |  | 219    |  
|Income taxes                                       |  |             | (6   | )                 |  |        | 0    |      |  |       | (15  | )    |  |      | (35  | )    |  |      | (30  | )    |  |      | (2 | )    |  |  | (3 | ) |  |  | 1    |   |  |  | (26 | ) |  |  | (17  | ) |  |  | (44   | ) |  |  | (55    | )
|Income (Loss) after taxes                          |  |             | 326  |                   |  |        | 98   |      |  |       | 954  |      |  |      | 34   |      |  |      | 32   |      |  |      | 8  |      |  |  | 3  |   |  |  | (12  | ) |  |  | 46  |   |  |  | 962  |   |  |  | 363   |   |  |  | 164    |  



|    |                 
|--- | ----------------
|[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, allowing a reliable assessment of risks and returns.
The aim is to provide users of the financial statements with
information regarding the profitability and future prospects of
the Groups various activities. 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, currently aggregated into the seven reportable
segments listed below according to economic characteristics,
products, production processes, customer relationships and
methods of distribution. These segments, in turn, are grouped
together into the four business areas shown.

F-17



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The segments shown as continuing operations
embrace the following activities:

|            |                                      |          |                                                                                                                                                                                                                                       
|----------- | ------------------------------------ | -------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Segment     |                                      | Activity
|            |                                      |         
|Healthcare  |                                      |         
|            | Pharmaceuticals, Biological Products |          | Development and marketing of prescription
    pharmaceuticals                                                                                                                                                                         
|            | Consumer Care, Diagnostics           |          | Development and marketing of over-the-counter
    medications, nutritional supplements, insecticides and insect
    repellents and diagnostic products for central laboratory, near
    patient testing, and self-testing applications
|            | Animal Health                        |          | Development and marketing of veterinary
    medicines, nutritionals and grooming products for companion
    animals and livestock                                                                                                     
|CropScience |                                      |         
|            | CropScience                          |          | Development and marketing of insecticides,
    fungicides and herbicides for all climate zones; biotechnology
    and agrochemical specialities                                                                                       
|Polymers    |                                      |         
|            | Plastics, Rubber                     |          | Manufacturing and marketing of engineering
    plastics and a variety of raw materials for the rubber and tire
    industries                                                                                                         
|            | Polyurethanes, Coatings, Fibers      |          | Development, manufacturing and marketing of range
    of polyurethane raw materials for a wide variety of
    applications, as well as coating and adhesive raw materials and
    colorants                                           
|Chemicals   |                                      |         
|            | Chemicals                            |          | Manufacture and marketing of bulk and specialty
    chemicals, metal and ceramic powders and cellulose derivatives                                                                                                                    

The reconciliation eliminates intersegment items
and reflects income and expenses not allocable to segments, such
as corporate costs, and revenues and expenses from sideline
operations. It also reflects non-allocable assets and
liabilities.

Business activities that Bayer has already
divested or intends to divest are shown as discontinuing
operations. These are Haarmann & Reimer and, in 2001,
Erdölchemie and in 2000, DyStar.

The segment data are calculated as follows:



| |   |                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The intersegment and interregional sales reflect
    intragroup transactions effected at transfer prices fixed on an
    arms-length basis.                                                                                                                                                               
|
| |  | 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. The operating result
    before exceptional items is therefore 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 charged to the operating
    result; the income reflected in exceptional items was realized
    mainly from divestments.                                                                                                
|
| |  | The return on sales is the ratio of the operating
    result after 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 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.                                                                                                                                                                                                            

F-18



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The equity items are those reflected in the
    balance sheet and income statement. They are allocated to the
    segments where possible. The reconciliation of equity-method
    income to the income statement line Income from
    investments in affiliated companies  net is
    apparent from Note 8.
|
| |  | Capital expenditures, amortization and
    depreciation relate to intangible assets, property, plant and
    equipment.                                                                                                                                                                                        

Key Data by Business Segment

|                                            |  |                  |        |             |  |        |        |         |  |           |        |                |  |           |        |      |  |      |       |      |  |      |       |      |  |      |        |      |  |  |        |  |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |  
|------------------------------------------- |  | ---------------- | ------ | ----------- |  | ------ | ------ | ------- |  | --------- | ------ | -------------- |  | --------- | ------ | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | -
|                                            |  |                  |        |             |  |        |        |         |  |           |        |                |  |           |        |      |  |      |       |      |  |     
|                                            |  | Pharmaceuticals, |        | Consumer    |  |        |        |         |  |           |        | Polyurethanes, |  |           |        |     
|                                            |  | Biological       |        | Care,       |  | Animal |        | Crop    |  | Plastics, |        | Coatings,      |  |          
|                                            |  | Products         |        | Diagnostics |  | Health |        | Science |  | Rubber    |        | Fibers         |  | Chemicals
|                                            |  |                  |        |             |  |        |        |         |  |           |        |                |  |          
|Business Segments                           |  | 2002             |        | 2001        |  | 2002   |        | 2001    |  | 2002      |        | 2001           |  | 2002      |        | 2001 |  | 2002 |       | 2001 |  | 2002 |       | 2001 |  | 2002 |        | 2001
|                                            |  |                  |        |             |  |        |        |         |  |           |        |                |  |           |        |      |  |      |       |      |  |      |       |      |  |      |        |     
|                                            |  |                 
|                                            |  | ( Million)     
|Net sales (external)                        |  |                  | 4,767  |             |  |        | 5,729  |         |  |           | 3,755  |                |  |           | 4,104  |      |  |      | 850   |      |  |      | 858   |      |  |      | 4,697  |      |  |  | 2,838  |  |  |  | 5,378  |   |  |  | 5,581  |   |  |  | 5,397  |   |  |  | 5,439  |   |  |  | 3,304  |   |  |  | 3,749  |  
| Change in
                               |  |                  | (16.8% | )           |  |        | (6.7%  | )       |  |           | (8.5%  | )              |  |           | 5.6%   |      |  |      | (0.9% | )    |  |      | (1.7% | )    |  |      | 65.5%  |      |  |  | 9.9%   |  |  |  | (3.6%  | ) |  |  | (4.0%  | ) |  |  | (0.8%  | ) |  |  | (2.6%  | ) |  |  | (11.9% | ) |  |  | 9.9%   |  
| Change in local currencies                |  |                  | (11.7% | )           |  |        | (6.7%  | )       |  |           | (1.4%  | )              |  |           | 5.0%   |      |  |      | 5.4%  |      |  |      | (1.7% | )    |  |      | 74.9%  |      |  |  | 10.2%  |  |  |  | (0.7%  | ) |  |  | (5.0%  | ) |  |  | 3.4%   |   |  |  | (3.1%  | ) |  |  | (5.7%  | ) |  |  | 10.0%  |  
|Intersegment sales                          |  |                  | 33     |             |  |        | 38     |         |  |           | 2      |                |  |           | 2      |      |  |      | 1     |      |  |      | 4     |      |  |      | 90     |      |  |  | 102    |  |  |  | 115    |   |  |  | 116    |   |  |  | 78     |   |  |  | 138    |   |  |  | 409    |   |  |  | 456    |  
|Other operating income                      |  |                  | 124    |             |  |        | 62     |         |  |           | 329    |                |  |           | 49     |      |  |      | 10    |      |  |      | 13    |      |  |      | 339    |      |  |  | 102    |  |  |  | 84     |   |  |  | 87     |   |  |  | 64     |   |  |  | 52     |   |  |  | 49     |   |  |  | 53     |  
|Operating result before exceptional items   |  |                  | 151    |             |  |        | 383    |         |  |           | 408    |                |  |           | 388    |      |  |      | 180   |      |  |      | 161   |      |  |      | (15    | )    |  |  | 464    |  |  |  | 175    |   |  |  | 288    |   |  |  | 243    |   |  |  | 129    |   |  |  | 160    |   |  |  | 271    |  
|Return on sales before exceptional items    |  |                  | 3.2%   |             |  |        | 6.7%   |         |  |           | 10.9%  |                |  |           | 9.5%   |      |  |      | 21.2% |      |  |      | 18.8% |      |  |      | (0.3%  | )    |  |  | 16.3%  |  |  |  | 3.3%   |   |  |  | 5.2%   |   |  |  | 4.5%   |   |  |  | 2.4%   |   |  |  | 4.8%   |   |  |  | 7.2%   |  
|Exceptional items                           |  |                  | (339   | )           |  |        | (332   | )       |  |           | 193    |                |  |           | (47    | )    |  |      | (11   | )    |  |      | 0     |      |  |      | (107   | )    |  |  | 0      |  |  |  | (102   | ) |  |  | (50    | ) |  |  | (448   | ) |  |  | (120   | ) |  |  | (26    | ) |  |  | (68    | )
|Operating result                            |  |                  | (188   | )           |  |        | 51     |         |  |           | 601    |                |  |           | 341    |      |  |      | 169   |      |  |      | 161   |      |  |      | (122   | )    |  |  | 464    |  |  |  | 73     |   |  |  | 238    |   |  |  | (205   | ) |  |  | 9      |   |  |  | 134    |   |  |  | 203    |  
|Return on sales including exceptional items |  |                  | (3.9%  | )           |  |        | 0.9%   |         |  |           | 16.0%  |                |  |           | 8.3%   |      |  |      | 19.9% |      |  |      | 18.8% |      |  |      | (2.6%  | )    |  |  | 16.3%  |  |  |  | 1.4%   |   |  |  | 4.3%   |   |  |  | (3.8%  | ) |  |  | 0.2%   |   |  |  | 4.1%   |   |  |  | 5.4%   |  
|Gross cash flow                             |  |                  | 1      |             |  |        | 229    |         |  |           | 827    |                |  |           | 534    |      |  |      | 182   |      |  |      | 153   |      |  |      | 502    |      |  |  | 560    |  |  |  | 419    |   |  |  | 587    |   |  |  | 714    |   |  |  | 606    |   |  |  | 375    |   |  |  | 379    |  
|Capital invested                            |  |                  | 4,095  |             |  |        | 5,352  |         |  |           | 3,152  |                |  |           | 3,799  |      |  |      | 592   |      |  |      | 579   |      |  |      | 10,085 |      |  |  | 3,950  |  |  |  | 5,771  |   |  |  | 6,405  |   |  |  | 7,750  |   |  |  | 8,496  |   |  |  | 3,987  |   |  |  | 4,774  |  
|CFROI                                       |  |                  | 0.0%   |             |  |        | 4.2%   |         |  |           | 23.9%  |                |  |           | 13.9%  |      |  |      | 30.4% |      |  |      | 24.3% |      |  |      | 6.4%   |      |  |  | 13.9%  |  |  |  | 6.8%   |   |  |  | 8.9%   |   |  |  | 8.9%   |   |  |  | 7.0%   |   |  |  | 8.6%   |   |  |  | 7.7%   |  
|Net cash flow                               |  |                  | 484    |             |  |        | 343    |         |  |           | 951    |                |  |           | 576    |      |  |      | 140   |      |  |      | 190   |      |  |      | 1,212  |      |  |  | 428    |  |  |  | 459    |   |  |  | 954    |   |  |  | 746    |   |  |  | 1,016  |   |  |  | 465    |   |  |  | 399    |  
|Equity-method income                        |  |                  | 0      |             |  |        | 0      |         |  |           | 0      |                |  |           | 0      |      |  |      | 0     |      |  |      | 0     |      |  |      | 0      |      |  |  | 0      |  |  |  | 0      |   |  |  | 0      |   |  |  | (3     | ) |  |  | 0      |   |  |  | 1      |   |  |  | 0      |  
|Equity-method investments                   |  |                  | 16     |             |  |        | 16     |         |  |           | 0      |                |  |           | 0      |      |  |      | 0     |      |  |      | 0     |      |  |      | 0      |      |  |  | 0      |  |  |  | 10     |   |  |  | 27     |   |  |  | 728    |   |  |  | 773    |   |  |  | 14     |   |  |  | 13     |  
|Total assets                                |  |                  | 4,221  |             |  |        | 5,303  |         |  |           | 3,352  |                |  |           | 3,956  |      |  |      | 637   |      |  |      | 734   |      |  |      | 13,462 |      |  |  | 3,488  |  |  |  | 5,165  |   |  |  | 5,867  |   |  |  | 5,912  |   |  |  | 7,722  |   |  |  | 3,500  |   |  |  | 4,216  |  
|Capital expenditures                        |  |                  | 178    |             |  |        | 375    |         |  |           | 272    |                |  |           | 238    |      |  |      | 26    |      |  |      | 45    |      |  |      | 297    |      |  |  | 199    |  |  |  | 504    |   |  |  | 536    |   |  |  | 506    |   |  |  | 468    |   |  |  | 285    |   |  |  | 444    |  
|Amortization and depreciation               |  |                  | 349    |             |  |        | 364    |         |  |           | 340    |                |  |           | 291    |      |  |      | 50    |      |  |      | 40    |      |  |      | 628    |      |  |  | 247    |  |  |  | 436    |   |  |  | 482    |   |  |  | 1,001  |   |  |  | 639    |   |  |  | 298    |   |  |  | 334    |  
|Liabilities                                 |  |                  | 2,130  |             |  |        | 1,869  |         |  |           | 1,236  |                |  |           | 1,271  |      |  |      | 304   |      |  |      | 379   |      |  |      | 2,944  |      |  |  | 1,130  |  |  |  | 1,377  |   |  |  | 1,339  |   |  |  | 1,615  |   |  |  | 2,385  |   |  |  | 1,315  |   |  |  | 1,797  |  
|Research and development expenses           |  |                  | 1,072  |             |  |        | 1,242  |         |  |           | 235    |                |  |           | 252    |      |  |      | 80    |      |  |      | 91    |      |  |      | 598    |      |  |  | 299    |  |  |  | 125    |   |  |  | 134    |   |  |  | 173    |   |  |  | 194    |   |  |  | 100    |   |  |  | 114    |  
|Number of employees (as of Dec. 31)         |  |                  | 25,900 |             |  |        | 26,800 |         |  |           | 14,700 |                |  |           | 14,900 |      |  |      | 3,400 |      |  |      | 3,900 |      |  |      | 23,000 |      |  |  | 10,900 |  |  |  | 17,100 |   |  |  | 17,900 |   |  |  | 15,500 |   |  |  | 16,100 |   |  |  | 17,800 |   |  |  | 19,500 |  

F-19



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                            |  |                |        |            |  |               |       |             |  |      |         |      |  |      |         |      |  |  |     |  |  |  |       |  |  |  |         |   |  |  |         |  
|------------------------------------------- |  | -------------- | ------ | ---------- |  | ------------- | ----- | ----------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  |  | --- |  |  |  | ----- |  |  |  | ------- | - |  |  | ------- | -
|                                            |  |                |        |            |  |               |       |             |  |      |         |     
|                                            |  |                |        | Continuing |  | Discontinuing |       |            
|                                            |  | Reconciliation |        | Operations |  | Operations    |       | Bayer Group
|                                            |  |                |        |            |  |               |       |            
|Business Segments                           |  | 2002           |        | 2001       |  | 2002          |       | 2001        |  | 2002 |         | 2001 |  | 2002 |         | 2001
|                                            |  |                |        |            |  |               |       |             |  |      |         |      |  |      |         |     
|Net sales (external)                        |  |                | 810    |            |  |               | 872   |             |  |      | 28,958  |      |  |      | 29,170  |      |  |  | 666 |  |  |  | 1,105 |  |  |  | 29,624  |   |  |  | 30,275  |  
| Change in
                               |  |                |        |            |  |               |       |             |  |      | (0.7%   | )    |  |      | 0.2%    |      |  |  |     |  |  |  |       |  |  |  | (2.2%   | ) |  |  | (2.2%   | )
| Change in local currencies                |  |                |        |            |  |               |       |             |  |      | 4.2%    |      |  |      | (0.1%   | )    |  |  |     |  |  |  |       |  |  |  | 2.6%    |   |  |  | (2.5%   | )
|Intersegment sales                          |  |                | (728   | )          |  |               | (856  | )           |  |      |         |      |  |      |         |      |  |  |     |  |  |  |       |  |  |  |         |   |  |  |         |  
|Other operating income                      |  |                | 733    |            |  |               | 63    |             |  |      | 1,732   |      |  |      | 481     |      |  |  | 5   |  |  |  | 339   |  |  |  | 1,737   |   |  |  | 820     |  
|Operating result before exceptional items   |  |                | (313   | )          |  |               | (246  | )           |  |      | 989     |      |  |      | 1,838   |      |  |  | 47  |  |  |  | 93    |  |  |  | 1,036   |   |  |  | 1,931   |  
|Return on sales before exceptional items    |  |                |        |            |  |               |       |             |  |      | 3.4%    |      |  |      | 6.3%    |      |  |  |     |  |  |  |       |  |  |  | 3.5%    |   |  |  | 6.4%    |  
|Exceptional items                           |  |                | 445    |            |  |               | (16   | )           |  |      | (395    | )    |  |      | (633    | )    |  |  | 933 |  |  |  | 313   |  |  |  | 538     |   |  |  | (320    | )
|Operating result                            |  |                | 132    |            |  |               | (262  | )           |  |      | 594     |      |  |      | 1,205   |      |  |  | 980 |  |  |  | 406   |  |  |  | 1,574   |   |  |  | 1,611   |  
|Return on sales including exceptional items |  |                |        |            |  |               |       |             |  |      | 2.1%    |      |  |      | 4.1%    |      |  |  |     |  |  |  |       |  |  |  | 5.3%    |   |  |  | 5.3%    |  
|Gross cash flow                             |  |                | (85    | )          |  |               | (230  | )           |  |      | 2,935   |      |  |      | 2,818   |      |  |  | 77  |  |  |  | 105   |  |  |  | 3,012   |   |  |  | 2,923   |  
|Capital invested                            |  |                | 1,280  |            |  |               | 556   |             |  |      | 36,712  |      |  |      | 33,911  |      |  |  | 0   |  |  |  | 947   |  |  |  | 36,712  |   |  |  | 34,858  |  
|CFROI                                       |  |                |        |            |  |               |       |             |  |      | 8.0%    |      |  |      | 8.2%    |      |  |  |     |  |  |  |       |  |  |  | 8.1%    |   |  |  | 8.2%    |  
|Net cash flow                               |  |                | (124   | )          |  |               | (177  | )           |  |      | 4,333   |      |  |      | 3,729   |      |  |  | 87  |  |  |  | 130   |  |  |  | 4,420   |   |  |  | 3,859   |  
|Equity-method income                        |  |                | 4      |            |  |               | 12    |             |  |      | 2       |      |  |      | 12      |      |  |  | 3   |  |  |  | 14    |  |  |  | 5       |   |  |  | 26      |  
|Equity-method investments                   |  |                | 157    |            |  |               | 158   |             |  |      | 925     |      |  |      | 987     |      |  |  | 170 |  |  |  | 179   |  |  |  | 1,095   |   |  |  | 1,166   |  
|Total assets                                |  |                | 5,443  |            |  |               | 4,933 |             |  |      | 41,692  |      |  |      | 36,219  |      |  |  | 0   |  |  |  | 820   |  |  |  | 41,692  |   |  |  | 37,039  |  
|Capital expenditures                        |  |                | 315    |            |  |               | 255   |             |  |      | 2,383   |      |  |      | 2,560   |      |  |  | 0   |  |  |  | 57    |  |  |  | 2,383   |   |  |  | 2,617   |  
|Amortization and depreciation               |  |                | 163    |            |  |               | 41    |             |  |      | 3,265   |      |  |      | 2,438   |      |  |  | 48  |  |  |  | 78    |  |  |  | 3,313   |   |  |  | 2,516   |  
|Liabilities                                 |  |                | 15,316 |            |  |               | 9,616 |             |  |      | 26,237  |      |  |      | 19,786  |      |  |  | 0   |  |  |  | 233   |  |  |  | 26,237  |   |  |  | 20,019  |  
|Research and development expenses           |  |                | 149    |            |  |               | 170   |             |  |      | 2,532   |      |  |      | 2,496   |      |  |  | 45  |  |  |  | 63    |  |  |  | 2,577   |   |  |  | 2,559   |  
|Number of employees (as of Dec. 31)         |  |                | 5,200  |            |  |               | 3,000 |             |  |      | 122,600 |      |  |      | 113,000 |      |  |  | 0   |  |  |  | 3,900 |  |  |  | 122,600 |   |  |  | 116,900 |  

F-20



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Key Data by Business Segment

|                                            |  |                  |        |                |  |               |        |              |  |           |        |           |  |           |        |                |  |      |       |      |  |      |       |      |  |      |        |      |  |  |        |  |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        | 
|------------------------------------------- |  | ---------------- | ------ | -------------- |  | ------------- | ------ | ------------ |  | --------- | ------ | --------- |  | --------- | ------ | -------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | 
|                                            |  |                  |        |                |  |               |        |              |  |           |        |           |  |           |        |                |  |      |       |      |  |      |       |     
|                                            |  | Pharmaceuticals, |        |                |  |               |        |              |  |           |        |           |  |           |        | Polyurethanes, |  |      |       |     
|                                            |  | Biological       |        | Consumer Care, |  |               |        |              |  | Plastics, |        | Coatings, |  |          
|                                            |  | Products         |        | Diagnostics    |  | Animal Health |        | Crop Science |  | Rubber    |        | Fibers    |  | Chemicals
|                                            |  |                  |        |                |  |               |        |              |  |           |        |           |  |          
|Business Segments                           |  | 2001             |        | 2000           |  | 2001          |        | 2000         |  | 2001      |        | 2000      |  | 2001      |        | 2000           |  | 2001 |       | 2000 |  | 2001 |       | 2000 |  | 2001 |        | 2000
|                                            |  |                  |        |                |  |               |        |              |  |           |        |           |  |           |        |                |  |      |       |      |  |      |       |      |  |      |        |     
|                                            |  |                 
|                                            |  | ( Million)     
|Net sales (external)                        |  |                  | 5,729  |                |  |               | 6,140  |              |  |           | 4,104  |           |  |           | 3,888  |                |  |      | 858   |      |  |      | 873   |      |  |      | 2,838  |      |  |  | 2,582  |  |  |  | 5,581  |   |  |  | 5,816  |   |  |  | 5,439  |   |  |  | 5,582  |   |  |  | 3,749  |   |  |  | 3,410  | 
| Change in
                               |  |                  | (6.7%  | )              |  |               | 22.7%  |              |  |           | 5.6%   |           |  |           | 15.6%  |                |  |      | (1.7% | )    |  |      | 6.9%  |      |  |      | 9.9%   |      |  |  | 13.4%  |  |  |  | (4.0%  | ) |  |  | 25.7%  |   |  |  | (2.6%  | ) |  |  | 30.0%  |   |  |  | 9.9%   |   |  |  | 19.4%  | 
| Change in local currencies                |  |                  | (6.7%  | )              |  |               | 11.9%  |              |  |           | 5.0%   |           |  |           | 5.4%   |                |  |      | (1.7% | )    |  |      | (1.4% | )    |  |      | 10.2%  |      |  |  | 3.9%   |  |  |  | (5.0%  | ) |  |  | 19.5%  |   |  |  | (3.1%  | ) |  |  | 23.4%  |   |  |  | 10.0%  |   |  |  | 13.3%  | 
|Intersegment sales                          |  |                  | 38     |                |  |               | 39     |              |  |           | 2      |           |  |           | 0      |                |  |      | 4     |      |  |      | 6     |      |  |      | 102    |      |  |  | 97     |  |  |  | 116    |   |  |  | 122    |   |  |  | 138    |   |  |  | 462    |   |  |  | 456    |   |  |  | 466    | 
|Other operating income                      |  |                  | 62     |                |  |               | 90     |              |  |           | 49     |           |  |           | 51     |                |  |      | 13    |      |  |      | 41    |      |  |      | 102    |      |  |  | 38     |  |  |  | 87     |   |  |  | 28     |   |  |  | 52     |   |  |  | 37     |   |  |  | 53     |   |  |  | 35     | 
|Operating result before exceptional items   |  |                  | 383    |                |  |               | 1,165  |              |  |           | 388    |           |  |           | 311    |                |  |      | 161   |      |  |      | 148   |      |  |      | 464    |      |  |  | 410    |  |  |  | 288    |   |  |  | 560    |   |  |  | 129    |   |  |  | 577    |   |  |  | 271    |   |  |  | 370    | 
|Return on sales before exceptional items    |  |                  | 6.7%   |                |  |               | 19.0%  |              |  |           | 9.5%   |           |  |           | 8.0%   |                |  |      | 18.8% |      |  |      | 17.0% |      |  |      | 16.3%  |      |  |  | 15.9%  |  |  |  | 5.2%   |   |  |  | 9.6%   |   |  |  | 2.4%   |   |  |  | 10.3%  |   |  |  | 7.2%   |   |  |  | 10.9%  | 
|Exceptional items                           |  |                  | (332   | )              |  |               | (5     | )            |  |           | (47    | )         |  |           | (134   | )              |  |      | 0     |      |  |      | 25    |      |  |      | 0      |      |  |  | 1      |  |  |  | (50    | ) |  |  | (45    | ) |  |  | (120   | ) |  |  | (53    | ) |  |  | (68    | ) |  |  | 24     | 
|Operating result                            |  |                  | 51     |                |  |               | 1,160  |              |  |           | 341    |           |  |           | 177    |                |  |      | 161   |      |  |      | 173   |      |  |      | 464    |      |  |  | 411    |  |  |  | 238    |   |  |  | 515    |   |  |  | 9      |   |  |  | 524    |   |  |  | 203    |   |  |  | 394    | 
|Return on sales including exceptional items |  |                  | 0.9%   |                |  |               | 18.9%  |              |  |           | 8.3%   |           |  |           | 4.6%   |                |  |      | 18.8% |      |  |      | 19.8% |      |  |      | 16.3%  |      |  |  | 15.9%  |  |  |  | 4.3%   |   |  |  | 8.9%   |   |  |  | 0.2%   |   |  |  | 9.4%   |   |  |  | 5.4%   |   |  |  | 11.6%  | 
|Gross cash flow                             |  |                  | 229    |                |  |               | 1,048  |              |  |           | 534    |           |  |           | 371    |                |  |      | 153   |      |  |      | 146   |      |  |      | 560    |      |  |  | 411    |  |  |  | 587    |   |  |  | 801    |   |  |  | 606    |   |  |  | 828    |   |  |  | 379    |   |  |  | 497    | 
|Capital invested                            |  |                  | 5,352  |                |  |               | 5,267  |              |  |           | 3,799  |           |  |           | 3,650  |                |  |      | 579   |      |  |      | 632   |      |  |      | 3,950  |      |  |  | 3,756  |  |  |  | 6,405  |   |  |  | 6,456  |   |  |  | 8,496  |   |  |  | 8,522  |   |  |  | 4,774  |   |  |  | 4,665  | 
|CFROI                                       |  |                  | 4.2%   |                |  |               | 21.3%  |              |  |           | 13.9%  |           |  |           | 10.4%  |                |  |      | 24.3% |      |  |      | 19.7% |      |  |      | 13.9%  |      |  |  | 14.2%  |  |  |  | 8.9%   |   |  |  | 12.7%  |   |  |  | 7.0%   |   |  |  | 10.9%  |   |  |  | 7.7%   |   |  |  | 11.0%  | 
|Net cash flow                               |  |                  | 343    |                |  |               | 906    |              |  |           | 576    |           |  |           | 320    |                |  |      | 190   |      |  |      | 207   |      |  |      | 428    |      |  |  | 200    |  |  |  | 954    |   |  |  | 403    |   |  |  | 1,016  |   |  |  | 707    |   |  |  | 399    |   |  |  | 392    | 
|Equity-method income                        |  |                  | 0      |                |  |               | 0      |              |  |           | 0      |           |  |           | 0      |                |  |      | 0     |      |  |      | 0     |      |  |      | 0      |      |  |  | 0      |  |  |  | 0      |   |  |  | (1     | ) |  |  | 0      |   |  |  | 0      |   |  |  | 0      |   |  |  | 5      | 
|Equity-method Investments                   |  |                  | 16     |                |  |               | 20     |              |  |           | 0      |           |  |           | 0      |                |  |      | 0     |      |  |      | 0     |      |  |      | 0      |      |  |  | 0      |  |  |  | 27     |   |  |  | 23     |   |  |  | 773    |   |  |  | 616    |   |  |  | 13     |   |  |  | 18     | 
|Total assets                                |  |                  | 5,303  |                |  |               | 5,291  |              |  |           | 3.956  |           |  |           | 3,480  |                |  |      | 734   |      |  |      | 768   |      |  |      | 3,488  |      |  |  | 3,218  |  |  |  | 5,867  |   |  |  | 6,176  |   |  |  | 7,722  |   |  |  | 7,901  |   |  |  | 4,216  |   |  |  | 4,421  | 
|Capital expenditures                        |  |                  | 375    |                |  |               | 482    |              |  |           | 238    |           |  |           | 167    |                |  |      | 45    |      |  |      | 42    |      |  |      | 199    |      |  |  | 194    |  |  |  | 536    |   |  |  | 556    |   |  |  | 468    |   |  |  | 338    |   |  |  | 444    |   |  |  | 358    | 
|Amortization and depreciation               |  |                  | 364    |                |  |               | 272    |              |  |           | 291    |           |  |           | 257    |                |  |      | 40    |      |  |      | 38    |      |  |      | 247    |      |  |  | 144    |  |  |  | 482    |   |  |  | 445    |   |  |  | 639    |   |  |  | 515    |   |  |  | 334    |   |  |  | 292    | 
|Liabilities                                 |  |                  | 1,869  |                |  |               | 2,202  |              |  |           | 1,271  |           |  |           | 1,158  |                |  |      | 379   |      |  |      | 337   |      |  |      | 1,130  |      |  |  | 947    |  |  |  | 1,339  |   |  |  | 1,696  |   |  |  | 2,385  |   |  |  | 1,906  |   |  |  | 1,797  |   |  |  | 1,813  | 
|Research and development expenses           |  |                  | 1,242  |                |  |               | 1,096  |              |  |           | 252    |           |  |           | 266    |                |  |      | 91    |      |  |      | 94    |      |  |      | 299    |      |  |  | 276    |  |  |  | 134    |   |  |  | 128    |   |  |  | 194    |   |  |  | 160    |   |  |  | 114    |   |  |  | 105    | 
|Number of employees (as of Dec. 31)         |  |                  | 26,800 |                |  |               | 27,200 |              |  |           | 14,900 |           |  |           | 15,100 |                |  |      | 3,900 |      |  |      | 3,900 |      |  |      | 10,900 |      |  |  | 11,000 |  |  |  | 17,900 |   |  |  | 18,500 |   |  |  | 16,100 |   |  |  | 17,700 |   |  |  | 19,500 |   |  |  | 20,500 | 

|                                            |  |                |       |            |  |               |        |             |  |      |         |      |  |      |         |      |  |  |       |  |  |  |       |   |  |  |         |   |  |  |         |  
|------------------------------------------- |  | -------------- | ----- | ---------- |  | ------------- | ------ | ----------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  |  | ----- |  |  |  | ----- | - |  |  | ------- | - |  |  | ------- | -
|                                            |  |                |       |            |  |               |        |             |  |      |         |     
|                                            |  |                |       | Continuing |  | Discontinuing |        |            
|                                            |  | Reconciliation |       | Operations |  | Operations    |        | Bayer Group
|                                            |  |                |       |            |  |               |        |            
|Business Segments                           |  | 2001           |       | 2000       |  | 2001          |        | 2000        |  | 2001 |         | 2000 |  | 2001 |         | 2000
|                                            |  |                |       |            |  |               |        |             |  |      |         |      |  |      |         |     
|Net sales (external)                        |  |                | 872   |            |  |               | 830    |             |  |      | 29,170  |      |  |      | 29,121  |      |  |  | 1,105 |  |  |  | 1,850 |   |  |  | 30,275  |   |  |  | 30,971  |  
| Change in
                               |  |                |       |            |  |               |        |             |  |      | 0.2%    |      |  |      | 21.5%   |      |  |  |       |  |  |  |       |   |  |  | (2.2%   | ) |  |  | 13.4%   |  
| Change in local currencies                |  |                |       |            |  |               |        |             |  |      | (0.1%   | )    |  |      | 12.2%   |      |  |  |       |  |  |  |       |   |  |  | (2.5%   | ) |  |  | 4.5%    |  
|Intersegment sales                          |  |                | (856  | )          |  |               | (1,192 | )           |  |      |         |      |  |      |         |      |  |  |       |  |  |  |       |   |  |  |         |   |  |  |         |  
|Other operating income                      |  |                | 63    |            |  |               | 100    |             |  |      | 481     |      |  |      | 420     |      |  |  | 339   |  |  |  | 42    |   |  |  | 820     |   |  |  | 462     |  
|Operating result before exceptional items   |  |                | (246  | )          |  |               | (273   | )           |  |      | 1,838   |      |  |      | 3,268   |      |  |  | 93    |  |  |  | 188   |   |  |  | 1,931   |   |  |  | 3,456   |  
|Return on sales before exceptional items    |  |                |       |            |  |               |        |             |  |      | 6.3%    |      |  |      | 11.2%   |      |  |  |       |  |  |  |       |   |  |  | 6.4%    |   |  |  | 11.2%   |  
|Exceptional items                           |  |                | (16   | )          |  |               | 34     |             |  |      | (633    | )    |  |      | (153    | )    |  |  | 313   |  |  |  | (16   | ) |  |  | (320    | ) |  |  | (169    | )
|Operating result                            |  |                | (262  | )          |  |               | (239   | )           |  |      | 1,205   |      |  |      | 3,115   |      |  |  | 406   |  |  |  | 172   |   |  |  | 1,611   |   |  |  | 3,287   |  
|Return on sales including exceptional items |  |                |       |            |  |               |        |             |  |      | 4.1%    |      |  |      | 10.7%   |      |  |  |       |  |  |  |       |   |  |  | 5.3%    |   |  |  | 10.6%   |  
|Gross cash flow                             |  |                | (230  | )          |  |               | (182   | )           |  |      | 2,818   |      |  |      | 3,920   |      |  |  | 105   |  |  |  | 244   |   |  |  | 2,923   |   |  |  | 4,164   |  
|Capital invested                            |  |                | 556   |            |  |               | 442    |             |  |      | 33,911  |      |  |      | 33,390  |      |  |  | 947   |  |  |  | 1,672 |   |  |  | 34,858  |   |  |  | 35,062  |  
|CFROI                                       |  |                |       |            |  |               |        |             |  |      | 8.2%    |      |  |      | 12.6%   |      |  |  |       |  |  |  |       |   |  |  | 8.2%    |   |  |  | 12.7%   |  
|Net cash flow                               |  |                | (177  | )          |  |               | (241   | )           |  |      | 3,729   |      |  |      | 2,894   |      |  |  | 130   |  |  |  | 197   |   |  |  | 3,859   |   |  |  | 3091    |  
|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 |            |  |               | 3,534  |             |  |      | 36,219  |      |  |      | 34,789  |      |  |  | 820   |  |  |  | 1,662 |   |  |  | 37,039  |   |  |  | 36,451  |  
|Capital expenditures                        |  |                | 255   |            |  |               | 380    |             |  |      | 2,560   |      |  |      | 2,517   |      |  |  | 57    |  |  |  | 129   |   |  |  | 2,617   |   |  |  | 2,646   |  
|Amortization and depreciation               |  |                | 41    |            |  |               | 74     |             |  |      | 2,438   |      |  |      | 2,037   |      |  |  | 78    |  |  |  | 102   |   |  |  | 2,516   |   |  |  | 2,139   |  
|Liabilities                                 |  |                | 9,616 |            |  |               | 9,364  |             |  |      | 19,786  |      |  |      | 19,423  |      |  |  | 233   |  |  |  | 651   |   |  |  | 20,019  |   |  |  | 20,074  |  
|Research and development expenses           |  |                | 170   |            |  |               | 203    |             |  |      | 2,496   |      |  |      | 2,328   |      |  |  | 63    |  |  |  | 65    |   |  |  | 2,559   |   |  |  | 2,393   |  
|Number of employees (as of Dec. 31)         |  |                | 3,000 |            |  |               | 1,600  |             |  |      | 113,000 |      |  |      | 115,500 |      |  |  | 3,900 |  |  |  | 6,600 |   |  |  | 116,900 |   |  |  | 122,100 |  

F-21



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Key Data by Business Region

|                                              |  |             |        |               |  |              |        |                     |  |      |        |      |  |      |        |      |  |      |        |      |  |      |        |      |  |  |        |  |  |  |        |   |  |  |        |   |  |  |        |  |  |  |        |   |  |  |        | 
|--------------------------------------------- |  | ----------- | ------ | ------------- |  | ------------ | ------ | ------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | - |  |  | ------ | - |  |  | ------ |  |  |  | ------ | - |  |  | ------ | 
|                                              |  |             |        |               |  |              |        |                     |  |      |        |      |  |      |        |      |  |      |        |     
|                                              |  |             |        |               |  |              |        | Latin America/     
|                                              |  | Europe      |        | North America |  | Asia/Pacific |        | Africa/ Middle East
|                                              |  |             |        |               |  |              |        |                    
|Regions                                       |  | 2002        |        | 2001          |  | 2000         |        | 2002                |  | 2001 |        | 2000 |  | 2002 |        | 2001 |  | 2000 |        | 2002 |  | 2001 |        | 2000
|                                              |  |             |        |               |  |              |        |                     |  |      |        |      |  |      |        |      |  |      |        |      |  |      |        |     
|                                              |  |            
|                                              |  | ( Million)
|Net sales (external)  by market              |  |             | 11,970 |               |  |              | 11,794 |                     |  |      | 11,557 |      |  |      | 8,863  |      |  |      | 9,527  |      |  |      | 9,419  |      |  |  | 4,794  |  |  |  | 4,675  |   |  |  | 4,873  |   |  |  | 3,331  |  |  |  | 3,174  |   |  |  | 3,272  | 
|Net sales (external)  by point
    of origin |  |             | 13,537 |               |  |              | 13,151 |                     |  |      | 13,326 |      |  |      | 8,992  |      |  |      | 9,875  |      |  |      | 9,785  |      |  |  | 3,927  |  |  |  | 3,819  |   |  |  | 3,763  |   |  |  | 2,502  |  |  |  | 2,325  |   |  |  | 2,247  | 
| Change in
                                 |  |             | 2.9%   |               |  |              | (1.3%  | )                   |  |      | 12.0%  |      |  |      | (8.9%  | )    |  |      | 0.9%   |      |  |      | 29.4%  |      |  |  | 2.8%   |  |  |  | 1.5%   |   |  |  | 42.2%  |   |  |  | 7.6%   |  |  |  | 3.5%   |   |  |  | 20.7%  | 
| Change in local currencies                  |  |             | 3.0%   |               |  |              | (1.4%  | )                   |  |      | 11.5%  |      |  |      | (3.5%  | )    |  |      | (2.1%  | )    |  |      | 13.9%  |      |  |  | 8.4%   |  |  |  | 7.3%   |   |  |  | 26.4%  |   |  |  | 35.1%  |  |  |  | 2.6%   |   |  |  | 7.9%   | 
|Interregional sales                           |  |             | 3,181  |               |  |              | 3,157  |                     |  |      | 3,036  |      |  |      | 1,961  |      |  |      | 1,946  |      |  |      | 1,633  |      |  |  | 227    |  |  |  | 227    |   |  |  | 229    |   |  |  | 139    |  |  |  | 116    |   |  |  | 101    | 
|Other operating income                        |  |             | 1,464  |               |  |              | 313    |                     |  |      | 251    |      |  |      | 91     |      |  |      | 70     |      |  |      | 62     |      |  |  | 88     |  |  |  | 48     |   |  |  | 64     |   |  |  | 89     |  |  |  | 50     |   |  |  | 43     | 
|Operating result before exceptional items     |  |             | 537    |               |  |              | 1,709  |                     |  |      | 2,269  |      |  |      | 133    |      |  |      | 3      |      |  |      | 734    |      |  |  | 174    |  |  |  | 242    |   |  |  | 404    |   |  |  | 369    |  |  |  | 219    |   |  |  | 213    | 
|Return on sales before exceptional items      |  |             | 4.0%   |               |  |              | 13.0%  |                     |  |      | 17.0%  |      |  |      | 1.5%   |      |  |      | 0.0%   |      |  |      | 7.5%   |      |  |  | 4.4%   |  |  |  | 6.3%   |   |  |  | 10.7%  |   |  |  | 14.7%  |  |  |  | 9.4%   |   |  |  | 9.5%   | 
|Exceptional items                             |  |             | 404    |               |  |              | (289   | )                   |  |      | 12     |      |  |      | (832   | )    |  |      | (281   | )    |  |      | (144   | )    |  |  | 12     |  |  |  | (14    | ) |  |  | (21    | ) |  |  | 21     |  |  |  | (30    | ) |  |  | 0      | 
|Operating result                              |  |             | 941    |               |  |              | 1,420  |                     |  |      | 2,281  |      |  |      | (699   | )    |  |      | (278   | )    |  |      | 590    |      |  |  | 186    |  |  |  | 228    |   |  |  | 383    |   |  |  | 390    |  |  |  | 189    |   |  |  | 213    | 
|Return on sales including exceptional items   |  |             | 7.0%   |               |  |              | 10.8%  |                     |  |      | 17.1%  |      |  |      | (7.8%  | )    |  |      | (2.8%  | )    |  |      | 6.0%   |      |  |  | 4.7%   |  |  |  | 6.0%   |   |  |  | 10.2%  |   |  |  | 15.6%  |  |  |  | 8.1%   |   |  |  | 9.5%   | 
|Gross cash flow                               |  |             | 1,690  |               |  |              | 1,865  |                     |  |      | 1,984  |      |  |      | 743    |      |  |      | 638    |      |  |      | 1,544  |      |  |  | 361    |  |  |  | 311    |   |  |  | 357    |   |  |  | 366    |  |  |  | 225    |   |  |  | 229    | 
|Capital invested                              |  |             | 21,346 |               |  |              | 16,506 |                     |  |      | 16,074 |      |  |      | 11,593 |      |  |      | 13,099 |      |  |      | 13,305 |      |  |  | 2,458  |  |  |  | 2,712  |   |  |  | 2,628  |   |  |  | 1,323  |  |  |  | 1,609  |   |  |  | 1,433  | 
|CFROI                                         |  |             | 8.6%   |               |  |              | 11.3%  |                     |  |      | 13.4%  |      |  |      | 5.9%   |      |  |      | 4.6%   |      |  |      | 12.3%  |      |  |  | 12.6%  |  |  |  | 11.2%  |   |  |  | 14.3%  |   |  |  | 25.4%  |  |  |  | 14.5%  |   |  |  | 16.2%  | 
|Equity-method income                          |  |             | 2      |               |  |              | 12     |                     |  |      | 0      |      |  |      | 0      |      |  |      | 0      |      |  |      | 0      |      |  |  | 0      |  |  |  | 0      |   |  |  | (1     | ) |  |  | 0      |  |  |  | 0      |   |  |  | 0      | 
|Equity-method investments                     |  |             | 401    |               |  |              | 351    |                     |  |      | 255    |      |  |      | 506    |      |  |      | 618    |      |  |      | 582    |      |  |  | 2      |  |  |  | 2      |   |  |  | 2      |   |  |  | 16     |  |  |  | 16     |   |  |  | 20     | 
|Total assets                                  |  |             | 23,694 |               |  |              | 17,424 |                     |  |      | 16,228 |      |  |      | 11,565 |      |  |      | 12,749 |      |  |      | 12,947 |      |  |  | 3,225  |  |  |  | 3,138  |   |  |  | 3,085  |   |  |  | 1,734  |  |  |  | 1,834  |   |  |  | 1,723  | 
|Capital expenditures                          |  |             | 1,422  |               |  |              | 1,627  |                     |  |      | 1,466  |      |  |      | 676    |      |  |      | 560    |      |  |      | 754    |      |  |  | 188    |  |  |  | 255    |   |  |  | 199    |   |  |  | 97     |  |  |  | 118    |   |  |  | 98     | 
|Amortization and depreciation                 |  |             | 1,698  |               |  |              | 1,237  |                     |  |      | 994    |      |  |      | 1,344  |      |  |      | 943    |      |  |      | 841    |      |  |  | 158    |  |  |  | 150    |   |  |  | 118    |   |  |  | 64     |  |  |  | 104    |   |  |  | 84     | 
|Liabilities                                   |  |             | 14,370 |               |  |              | 9,820  |                     |  |      | 8,888  |      |  |      | 6,390  |      |  |      | 6,433  |      |  |      | 6,642  |      |  |  | 1,613  |  |  |  | 1,379  |   |  |  | 1,489  |   |  |  | 945    |  |  |  | 673    |   |  |  | 672    | 
|Research and development expenses             |  |             | 1,776  |               |  |              | 1,723  |                     |  |      | 1,351  |      |  |      | 694    |      |  |      | 696    |      |  |      | 681    |      |  |  | 48     |  |  |  | 68     |   |  |  | 83     |   |  |  | 14     |  |  |  | 9      |   |  |  | 10     | 
|Number of employees (as of Dec. 31)           |  |             | 70,600 |               |  |              | 66,000 |                     |  |      | 67,700 |      |  |      | 24,600 |      |  |      | 23,400 |      |  |      | 24,300 |      |  |  | 15,400 |  |  |  | 12,600 |   |  |  | 12,100 |   |  |  | 12,000 |  |  |  | 11,000 |   |  |  | 11,400 | 

|                                              |  |                |        |                       |  |               |        |             |  |      |        |      |  |      |         |      |  |      |         |      |  |      |         |      |  |  |     |  |  |  |       |  |  |  |       |   |  |  |         |   |  |  |         |   |  |  |         |  
|--------------------------------------------- |  | -------------- | ------ | --------------------- |  | ------------- | ------ | ----------- |  | ---- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  |  | --- |  |  |  | ----- |  |  |  | ----- | - |  |  | ------- | - |  |  | ------- | - |  |  | ------- | -
|                                              |  |                |        |                       |  |               |        |             |  |      |        |      |  |      |         |      |  |      |         |     
|                                              |  |                |        |                       |  | Discontinuing |        |            
|                                              |  | Reconciliation |        | Continuing Operations |  | Operations    |        | Bayer Group
|                                              |  |                |        |                       |  |               |        |            
|Regions                                       |  | 2002           |        | 2001                  |  | 2000          |        | 2002        |  | 2001 |        | 2000 |  | 2002 |         | 2001 |  | 2000 |         | 2002 |  | 2001 |         | 2000
|                                              |  |                |        |                       |  |               |        |             |  |      |        |      |  |      |         |      |  |      |         |      |  |      |         |     
|                                              |  |               
|                                              |  | ( Million)   
|Net sales (external)  by market              |  |                |        |                       |  |               |        |             |  |      |        |      |  |      | 28,958  |      |  |      | 29,170  |      |  |      | 29,121  |      |  |  | 666 |  |  |  | 1,105 |  |  |  | 1,850 |   |  |  | 29,624  |   |  |  | 30,275  |   |  |  | 30,971  |  
|Net sales (external)  by point
    of origin |  |                |        |                       |  |               |        |             |  |      |        |      |  |      | 28,958  |      |  |      | 29,170  |      |  |      | 29,121  |      |  |  | 666 |  |  |  | 1,105 |  |  |  | 1,850 |   |  |  | 29,624  |   |  |  | 30,275  |   |  |  | 30,971  |  
| Change in
                                 |  |                |        |                       |  |               |        |             |  |      |        |      |  |      | (0.7%   | )    |  |      | 0.2%    |      |  |      | 21.5%   |      |  |  |     |  |  |  |       |  |  |  |       |   |  |  | (2.2%   | ) |  |  | (2.2%   | ) |  |  | 13.4%   |  
| Change in local currencies                  |  |                |        |                       |  |               |        |             |  |      |        |      |  |      | 4.2%    |      |  |      | (0.1%   | )    |  |      | 12.2%   |      |  |  |     |  |  |  |       |  |  |  |       |   |  |  | 2.6%    |   |  |  | (2.5%   | ) |  |  | 4.5%    |  
|Interregional sales                           |  |                | (5,508 | )                     |  |               | (5,446 | )           |  |      | (4,947 | )    |  |      |         |      |  |      |         |      |  |      |         |      |  |  |     |  |  |  |       |  |  |  |       |   |  |  |         |   |  |  |         |   |  |  |         |  
|Other operating income                        |  |                |        |                       |  |               |        |             |  |      |        |      |  |      | 1,732   |      |  |      | 481     |      |  |      | 420     |      |  |  | 5   |  |  |  | 339   |  |  |  | 42    |   |  |  | 1,737   |   |  |  | 820     |   |  |  | 462     |  
|Operating result before exceptional items     |  |                | (224   | )                     |  |               | (335   | )           |  |      | (352   | )    |  |      | 989     |      |  |      | 1,838   |      |  |      | 3,268   |      |  |  | 47  |  |  |  | 93    |  |  |  | 188   |   |  |  | 1,036   |   |  |  | 1,931   |   |  |  | 3,456   |  
|Return on sales before exceptional items      |  |                |        |                       |  |               |        |             |  |      |        |      |  |      | 3.4%    |      |  |      | 6.3%    |      |  |      | 11.2%   |      |  |  |     |  |  |  |       |  |  |  |       |   |  |  | 3.5%    |   |  |  | 6.4%    |   |  |  | 11.2%   |  
|Exceptional items                             |  |                | 0      |                       |  |               | (19    | )           |  |      | 0      |      |  |      | (395    | )    |  |      | (633    | )    |  |      | (153    | )    |  |  | 933 |  |  |  | 313   |  |  |  | (16   | ) |  |  | 538     |   |  |  | (320    | ) |  |  | (169    | )
|Operating result                              |  |                | (224   | )                     |  |               | (354   | )           |  |      | (352   | )    |  |      | 594     |      |  |      | 1,205   |      |  |      | 3,115   |      |  |  | 980 |  |  |  | 406   |  |  |  | 172   |   |  |  | 1.574   |   |  |  | 1,611   |   |  |  | 3,287   |  
|Retum on sales including exceptional items    |  |                |        |                       |  |               |        |             |  |      |        |      |  |      | 2.1%    |      |  |      | 4.1%    |      |  |      | 10.7%   |      |  |  |     |  |  |  |       |  |  |  |       |   |  |  | 5.3%    |   |  |  | 5.3%    |   |  |  | 10.6%   |  
|Gross cash flow                               |  |                | (225   | )                     |  |               | (222   | )           |  |      | (194   | )    |  |      | 2,935   |      |  |      | 2,818   |      |  |      | 3,920   |      |  |  | 77  |  |  |  | 105   |  |  |  | 244   |   |  |  | 3,012   |   |  |  | 2,923   |   |  |  | 4,164   |  
|Capital invested                              |  |                | (8     | )                     |  |               | (15    | )           |  |      | (50    | )    |  |      | 36,712  |      |  |      | 33,911  |      |  |      | 33,390  |      |  |  | 0   |  |  |  | 947   |  |  |  | 1,672 |   |  |  | 36,712  |   |  |  | 34,858  |   |  |  | 35,062  |  
|CFROI                                         |  |                |        |                       |  |               |        |             |  |      |        |      |  |      | 8.0%    |      |  |      | 8.2%    |      |  |      | 12.6%   |      |  |  |     |  |  |  |       |  |  |  |       |   |  |  | 8.1%    |   |  |  | 8.2%    |   |  |  | 12.7%   |  
|Equity-method income                          |  |                |        |                       |  |               |        |             |  |      |        |      |  |      | 2       |      |  |      | 12      |      |  |      | (1      | )    |  |  | 3   |  |  |  | 14    |  |  |  | 72    |   |  |  | 5       |   |  |  | 26      |   |  |  | 71      |  
|Equity-method Investments                     |  |                |        |                       |  |               |        |             |  |      |        |      |  |      | 925     |      |  |      | 987     |      |  |      | 859     |      |  |  | 170 |  |  |  | 179   |  |  |  | 487   |   |  |  | 1,095   |   |  |  | 1,166   |   |  |  | 1,346   |  
|Total assets                                  |  |                | 1,474  |                       |  |               | 1,074  |             |  |      | 803    |      |  |      | 41,692  |      |  |      | 36,219  |      |  |      | 34,789  |      |  |  | 0   |  |  |  | 820   |  |  |  | 1,662 |   |  |  | 41,692  |   |  |  | 37,039  |   |  |  | 36,451  |  
|Capital expenditures                          |  |                | 0      |                       |  |               | 0      |             |  |      | 0      |      |  |      | 2,383   |      |  |      | 2,560   |      |  |      | 2,517   |      |  |  | 0   |  |  |  | 57    |  |  |  | 129   |   |  |  | 2,383   |   |  |  | 2,617   |   |  |  | 2,646   |  
|Amortization and depreciation                 |  |                | 1      |                       |  |               | 4      |             |  |      | 0      |      |  |      | 3,265   |      |  |      | 2,438   |      |  |      | 2,037   |      |  |  | 48  |  |  |  | 78    |  |  |  | 102   |   |  |  | 3,313   |   |  |  | 2,516   |   |  |  | 2,139   |  
|Liabilities                                   |  |                | 2,919  |                       |  |               | 1,482  |             |  |      | 1,732  |      |  |      | 26,237  |      |  |      | 19,786  |      |  |      | 19,423  |      |  |  | 0   |  |  |  | 233   |  |  |  | 651   |   |  |  | 26,237  |   |  |  | 20,019  |   |  |  | 20,074  |  
|Research and development expenses             |  |                | 0      |                       |  |               | 0      |             |  |      | 203    |      |  |      | 2,532   |      |  |      | 2,496   |      |  |      | 2,328   |      |  |  | 45  |  |  |  | 63    |  |  |  | 65    |   |  |  | 2,577   |   |  |  | 2,559   |   |  |  | 2,393   |  
|Number of employees (as of Dec. 31)           |  |                | 0      |                       |  |               | 0      |             |  |      | 0      |      |  |      | 122,600 |      |  |      | 113,000 |      |  |      | 115,500 |      |  |  | 0   |  |  |  | 3,900 |  |  |  | 6,600 |   |  |  | 122,600 |   |  |  | 116,900 |   |  |  | 122,100 |  

F-22



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[8]   Income from investments
in affiliated companies  net

This comprises the following items:

|                                                                                                                 |  |             |     |      |  |      |    |   |  |  |     |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------- | --- | ---- |  | ---- | -- | - |  |  | --- | -
|                                                                                                                 |  | 2002        |     | 2001 |  | 2000
|                                                                                                                 |  |             |     |      |  |     
|                                                                                                                 |  |            
|                                                                                                                 |  | ( million)
|Dividends and similar income                                                                                     |  |             | 25  |      |  |      | 15 |   |  |  | 18  |  
|   of which
    23 million
    (2001:
    12 million;
    2000:
    8 million)
    from subsidiaries         |  |             |     |      |  |      |    |   |  |  |     |  
|Income from profit and loss transfer agreements                                                                  |  |             | 1   |      |  |      | *  |   |  |  | 1   |  
|   of which
    1 million
    (2001: less than
    1 million;
    2000:
    1 million)
    from subsidiaries |  |             |     |      |  |      |    |   |  |  |     |  
|Income (Expense) from companies included at equity                                                               |  |             | 5   |      |  |      | 26 |   |  |  | 71  |  
|Gains from the sale of investments in affiliated
    companies                                                   |  |             | 274 |      |  |      | 16 |   |  |  | 204 |  
|Losses from the sale of investments in affiliated
    companies                                                  |  |             | 0   |      |  |      | (3 | ) |  |  | (1  | )
|Write-downs of investments in affiliated companies                                                               |  |             | (82 | )    |  |      | 0  |   |  |  | (10 | )
|                                                                                                                 |  |             |     |      |  |      |    |   |  |  |     |  
|                                                                                                                 |  |             | 223 |      |  |      | 54 |   |  |  | 283 |  
|                                                                                                                 |  |             |     |      |  |      |    |   |  |  |     |  






|  |                          
|- | -------------------------
|* | less than
     1 million

The increase in income from investments in
affiliated companies is mainly attributable to the
259 million
gain from the sale of the remaining 30 percent interest in
Agfa-Gevaert N.V., Belgium, to investment bank Goldman Sachs.

In the year 2000 this item contained the
65 million
gain from the sale of the 11 percent interest in Myriad
Genetics, Salt Lake City, Utah,
142 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:

|                                                                                                       |  |             |      |      |  |      |      |   |  |  |      |  
|------------------------------------------------------------------------------------------------------ |  | ----------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                                                                       |  | 2002        |      | 2001 |  | 2000
|                                                                                                       |  |             |      |      |  |     
|                                                                                                       |  |            
|                                                                                                       |  | ( million)
|Income from other securities and loans included
    in investments                                     |  |             | 8    |      |  |      | 9    |   |  |  | 10   |  
|Other interest and similar income                                                                      |  |             | 459  |      |  |      | 108  |   |  |  | 143  |  
|   of which
    2 million
    (2001:
    1 million;
    2000:
    4 million)
    from subsidiaries |  |             |      |      |  |      |      |   |  |  |      |  
|Interest and similar expenses                                                                          |  |             | (916 | )    |  |      | (466 | ) |  |  | (464 | )
|   of which
    13 million
    (2001:
    5 million;
    2000:
    24 million)
    to subsidiaries |  |             |      |      |  |      |      |   |  |  |      |  
|                                                                                                       |  |             |      |      |  |      |      |   |  |  |      |  
|                                                                                                       |  |             | (449 | )    |  |      | (349 | ) |  |  | (311 | )
|                                                                                                       |  |             |      |      |  |      |      |   |  |  |      |  

Finance leases are capitalized under property,
plant and equipment in compliance with IAS 17 (Leases). The
interest portion of the lease payments, amounting to
34 million
in 2002 (2001:
9 million;
2000:
13 million),
is reflected in interest expense.

Interest expense incurred to finance the
construction phase of major investment projects is not included
here. Such interest expense, amounting in 2002 to
22 million
(2001:
30 million;
2000:
28 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



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[10]  Other non-operating
expense  net

This item comprises:

|                                                |  |             |      |      |  |      |      |   |  |  |      |  
|----------------------------------------------- |  | ----------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                |  | 2002        |      | 2001 |  | 2000
|                                                |  |             |      |      |  |     
|                                                |  |            
|                                                |  | ( million)
|Interest portion of interest-bearing provisions |  |             | (296 | )    |  |      | (274 | ) |  |  | (272 | )
|Net Exchange gain (loss)                        |  |             | 31   |      |  |      | 49   |   |  |  | (21  | )
|Miscellaneous non-operating expenses            |  |             | (174 | )    |  |      | (28  | ) |  |  | (18  | )
|Miscellaneous non-operating income              |  |             | 47   |      |  |      | 52   |   |  |  | 42   |  
|                                                |  |             |      |      |  |      |      |   |  |  |      |  
|                                                |  |             | (392 | )    |  |      | (201 | ) |  |  | (269 | )
|                                                |  |             |      |      |  |      |      |   |  |  |      |  

Miscellaneous non-operating expenses contain
81 million
in write-downs of other securities included in investments, and
16 million
in write-downs 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:

|                             |  |             |       |      |  |      |       |   |  |  |       | 
|---------------------------- |  | ----------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | 
|                             |  | 2002        |       | 2001 |  | 2000
|                             |  |             |       |      |  |     
|                             |  |            
|                             |  | ( million)
|Income before income taxes   |  |             |       |      |  |      |       |   |  |  |       | 
| Germany                    |  |             | 1,392 |      |  |      | 971   |   |  |  | 1,482 | 
| Other countries            |  |             | (436  | )    |  |      | 144   |   |  |  | 1,508 | 
|                             |  |             |       |      |  |      |       |   |  |  |       | 
|                             |  |             | 956   |      |  |      | 1,115 |   |  |  | 2,990 | 
|                             |  |             |       |      |  |      |       |   |  |  |       | 
|Income taxes paid or accrued |  |             |       |      |  |      |       |   |  |  |       | 
| Germany                    |  |             | 129   |      |  |      | 122   |   |  |  | 442   | 
| Other countries            |  |             | 169   |      |  |      | 502   |   |  |  | 321   | 
|                             |  |             |       |      |  |      |       |   |  |  |       | 
|                             |  |             | 298   |      |  |      | 624   |   |  |  | 763   | 
|Deferred taxes               |  |             |       |      |  |      |       |   |  |  |       | 
| from temporary differences |  |             | (185  | )    |  |      | (272  | ) |  |  | 383   | 
| from loss carry-forwards   |  |             | (220  | )    |  |      | (198  | ) |  |  | 2     | 
|                             |  |             |       |      |  |      |       |   |  |  |       | 
|                             |  |             | (405  | )    |  |      | (470  | ) |  |  | 385   | 
|                             |  |             |       |      |  |      |       |   |  |  |       | 
|                             |  |             | (107  | )    |  |      | 154   |   |  |  | 1,148 | 
|                             |  |             |       |      |  |      |       |   |  |  |       | 

A valuation allowance is recognized against tax
loss carryforwards when it is not sufficiently certain that this
income will be realized.

In September 2002 the German government adopted
legislation to provide assistance to people affected by severe
flooding in summer 2002. This provides for an increase in the
corporate income tax rate from 25 percent to
26.5 percent for 2003 only. Since the higher rate of tax
had no material impact on the Group statements for 2002,
deferred tax expense did not change as a result of changes in
tax rates. In 2001, changes in tax rates diminished deferred tax
expense by
8 million
(2000:
21 million).

F-24



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


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.

The deferred tax assets and liabilities are
allocable to the various balance sheet items as follows:

|                                            |  |               |        |               |  |               |        |              |  |              |        |              |  |  |        |   |  |  |       |   |  |  |       |  
|------------------------------------------- |  | ------------- | ------ | ------------- |  | ------------- | ------ | ------------ |  | ------------ | ------ | ------------ |  |  | ------ | - |  |  | ----- | - |  |  | ----- | -
|                                            |  |               |        |               |  |              
|                                            |  | Dec. 31, 2002 |        | Dec. 31, 2001 |  | Dec. 31, 2000
|                                            |  |               |        |               |  |              
|                                            |  | Deferred tax  |        | Deferred tax  |  | Deferred tax  |        | Deferred tax |  | Deferred tax |        | Deferred tax
|                                            |  | assets        |        | liabilities   |  | assets        |        | liabilities  |  | assets       |        | liabilities 
|                                            |  |               |        |               |  |               |        |              |  |              |        |             
|                                            |  |              
|                                            |  | ( million)  
|Intangible assets                           |  |               | 416    |               |  |               | 1,589  |              |  |              | 438    |              |  |  | 177    |   |  |  | 87    |   |  |  | 72    |  
|Property, plant and equipment               |  |               | 419    |               |  |               | 1,558  |              |  |              | 243    |              |  |  | 1,672  |   |  |  | 68    |   |  |  | 1,745 |  
|Investments                                 |  |               | 52     |               |  |               | 106    |              |  |              | 20     |              |  |  | 88     |   |  |  | 2     |   |  |  | 79    |  
|Inventories                                 |  |               | 308    |               |  |               | 75     |              |  |              | 267    |              |  |  | 86     |   |  |  | 298   |   |  |  | 86    |  
|Receivables                                 |  |               | 113    |               |  |               | 70     |              |  |              | 122    |              |  |  | 53     |   |  |  | 116   |   |  |  | 51    |  
|Other current assets                        |  |               | 52     |               |  |               | 242    |              |  |              | 11     |              |  |  | 189    |   |  |  | 51    |   |  |  | 132   |  
|Pension provisions                          |  |               | 328    |               |  |               | 225    |              |  |              | 357    |              |  |  | 247    |   |  |  | 327   |   |  |  | 202   |  
|Other provisions                            |  |               | 254    |               |  |               | 66     |              |  |              | 166    |              |  |  | 74     |   |  |  | 144   |   |  |  | 46    |  
|Other liabilities                           |  |               | 55     |               |  |               | 172    |              |  |              | 158    |              |  |  | 30     |   |  |  | 163   |   |  |  | 40    |  
|Loss carry-forwards                         |  |               | 743    |               |  |               |       |              |  |              | 282    |              |  |  |       |   |  |  | 82    |   |  |  |      |  
|Valuation allowance for loss carry-forwards |  |               | (123   | )             |  |               |       |              |  |              | (78    | )            |  |  |       |   |  |  | (67   | ) |  |  |      |  
|                                            |  |               |        |               |  |               |        |              |  |              |        |              |  |  |        |   |  |  |       |   |  |  |       |  
|                                            |  |               | 2,617  |               |  |               | 4,103  |              |  |              | 1,986  |              |  |  | 2,616  |   |  |  | 1,271 |   |  |  | 2,453 |  
|Set-off*                                    |  |               | (1,650 | )             |  |               | (1,650 | )            |  |              | (1,378 | )            |  |  | (1,378 | ) |  |  | (858  | ) |  |  | (858  | )
|                                            |  |               |        |               |  |               |        |              |  |              |        |              |  |  |        |   |  |  |       |   |  |  |       |  
|                                            |  |               | 967    |               |  |               | 2,453  |              |  |              | 608    |              |  |  | 1,238  |   |  |  | 413   |   |  |  | 1,595 |  
|                                            |  |               |        |               |  |               |        |              |  |              |        |              |  |  |        |   |  |  |       |   |  |  |       |  






|  |                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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 2002, deferred tax assets of
331 million
(2001:
9 million;
2000:
122 million)
and deferred tax liabilities of
1,340 million
(2001:
10 million;
2000:
167 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 2002 by
11 million
(2001:
88 million;
2000:
7 million).

The value of existing loss carryforwards by
expiration date is as follows:

|                          |  |               |       |               |  |               |     |  |  |  |     | 
|------------------------- |  | ------------- | ----- | ------------- |  | ------------- | --- |  |  |  | --- | 
|                          |  | Dec. 31, 2002 |       | Dec. 31, 2001 |  | Dec. 31, 2000
|                          |  |               |       |               |  |              
|                          |  |              
|                          |  | ( million)  
|One year                  |  |               | 17    |               |  |               | 6   |  |  |  | 3   | 
|Two years                 |  |               | 4     |               |  |               | 11  |  |  |  | 20  | 
|Three years               |  |               | 17    |               |  |               | 16  |  |  |  | 11  | 
|Four years                |  |               | 17    |               |  |               | 50  |  |  |  | 22  | 
|Five years and thereafter |  |               | 1,936 |               |  |               | 653 |  |  |  | 196 | 
|                          |  |               |       |               |  |               |     |  |  |  |     | 
|                          |  |               | 1,991 |               |  |               | 736 |  |  |  | 525 | 
|                          |  |               |       |               |  |               |     |  |  |  |     | 

Deferred tax assets of
620 million
(2001:
204 million;
2000:
15 million)
are recognized on the
1.731 million
(2001:
540 million;
2000:
48 million)
in loss carryforwards that represent income likely to be
realized in the future. Recognition of these deferred tax assets
results in deferred tax income of
220 million
(2001:
198 million).

Deferred tax liabilities have not been recognized
for temporary differences associated with investments in foreign
subsidiaries of
3,327 million
(2001:
3,030 million,
2000:
2,887 million)
as Bayer has determined that

F-25



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


the profits concerned will not be distributed in
the foreseeable future. If deferred taxes were recognized for
these temporary differences, the liability would be based on the
respective withholding tax rates only. 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.

The actual tax income for 2002 is
107 million
(2001:
154 million
expense; 2000:
1,148 million
expense). This figure differs by
465 million
(2001:
259 million;
2000:
31 million)
from the
358 million
expense (2001:
413 million
expense; 2000:
1,179 million
expense) that would result from applying to the pre-tax income
of the Group a tax rate of 37.5 percent (2001:
37.1 percent; 2000: 39.5 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:

|                                                |  |           |       |      |  |           |      |   |  |           |      |   |  |  |     |   |  |  |       |   |  |  |     |  
|----------------------------------------------- |  | --------- | ----- | ---- |  | --------- | ---- | - |  | --------- | ---- | - |  |  | --- | - |  |  | ----- | - |  |  | --- | -
|                                                |  |           |       |      |  |          
|                                                |  | 2002      |       | 2001 |  | 2000     
|                                                |  |           |       |      |  |          
|                                                |  |  million |       | %    |  |  million |      | % |  |  Million |      | %
|                                                |  |           |       |      |  |           |      |   |  |           |      |  
|Theoretical income tax expense                  |  |           | 358   |      |  |           | 100  |   |  |           | 413  |   |  |  | 100 |   |  |  | 1,179 |   |  |  | 100 |  
|Lower taxes due to tax-free income              |  |           | (677  | )    |  |           | (189 | ) |  |           | (283 | ) |  |  | (68 | ) |  |  | (151  | ) |  |  | (13 | )
|Higher taxes due to non-tax-deductible expenses |  |           | 168   |      |  |           | 47   |   |  |           | 47   |   |  |  | 11  |   |  |  | 93    |   |  |  | 8   |  
|Other tax effects                               |  |           | 44    |      |  |           | 12   |   |  |           | (23  | ) |  |  | (5  | ) |  |  | 27    |   |  |  | 2   |  
|                                                |  |           |       |      |  |           |      |   |  |           |      |   |  |  |     |   |  |  |       |   |  |  |     |  
|Actual income tax expense                       |  |           | (107  | )    |  |           | (30  | ) |  |           | 154  |   |  |  | 38  |   |  |  | 1,148 |   |  |  | 97  |  
|                                                |  |           |       |      |  |           |      |   |  |           |      |   |  |  |     |   |  |  |       |   |  |  |     |  
|Effective tax rate in %                         |  |           | (11.2 | )    |  |           |      |   |  |           | 13.8 |   |  |  |     |   |  |  | 38.4  |   |  |  |     |  

[12]  Other taxes

Other taxes amounting to
221 million
(2001:
247 million;
2000:
229 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
12 million
(2001:
6 million;
2000:
29 million),
and minority interest in losses to
9 million
(2001:
10 million;
2000:
3 million).

[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 2002, as in 2001 and in 2000, the number of
shares remained constant at 730,341,920. Earnings per share were
1.45 (2001:
1.32; 2000:
2.49).

There were no subscription rights outstanding in
2002, in 2001 or in 2000, and therefore no dilutive potential
shares.

[15]  Cost of materials

The total cost of materials for continuing
operations amounted to
11,346 million
(2001:
11,093 million;
2000:
10,166 million),
comprising
10,760 million
(2001:
10,387 million;
2000:
9,494 million)
in expenses for raw materials, supplies and goods purchased for
resale, and
586 million
(2001:
706 million;
2000:
673 million)
in expenses for purchased services.

The cost of materials for the discontinuing
operations was
268 million
(2001:
497 million;
2000:
1,042 million).
The figure for 2002 was attributable in its entirety to the
inclusion of the Haarmann & Reimer group for the first nine
months until the date of divestiture. The cost of materials for
Haarmann & Reimer was
268 million
(2001:
344 million;
2000:
393 million),
including
4 million
(2001:
10 million;
2000:

F-26



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


10 million)
for purchased services. The
153 million cost
of materials pertaining to Erdölchemie in 2001 (2000:
545 million)
related solely to raw materials and supplies. In 2000, DyStar
accounted for
104 million,
which included
1 million
for purchased services.

[16]  Personnel expenses

Personnel expenses for continuing operations rose
in 2002 on aggregate by
387 million
(2001 by
251 million)
to
8,001 million
(2001:
7,614 million),
despite a
214 million
reduction (2001:
43 million
increase) due to exchange rate fluctuations.

The breakdown of personnel expenses is as follows:

|                          |  |            |       |      |  |      |       |                          |  |       |       |      |  |      |     |      |  |      |     |      |  |      |      |      |  |  |      |  |  |  |     |  |  |  |     |  |  |  |      |  |  |  |      |  |  |  |      | 
|------------------------- |  | ---------- | ----- | ---- |  | ---- | ----- | ------------------------ |  | ----- | ----- | ---- |  | ---- | --- | ---- |  | ---- | --- | ---- |  | ---- | ---- | ---- |  |  | ---- |  |  |  | --- |  |  |  | --- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- | 
|                          |  |            |       |      |  |      |       |                         
|                          |  |            |       |      |  |      |       | Discontinuing Operations
|                          |  |            |       |     
|                          |  | Continuing |       |      |  |      |       |                          |  |      
|                          |  | Operations |       | EC   |  | HR   |       | Dystar                   |  | Total
|                          |  |            |       |      |  |      |       |                          |  |      
|                          |  | 2002       |       | 2001 |  | 2000 |       | 2001                     |  | 2000  |       | 2002 |  | 2001 |     | 2000 |  | 2000 |     | 2002 |  | 2001 |      | 2000
|                          |  |            |       |      |  |      |       |                          |  |       |       |      |  |      |     |      |  |      |     |      |  |      |      |     
|Wages and salaries        |  |            | 6,317 |      |  |      | 6,037 |                          |  |       | 5,869 |      |  |      | 18  |      |  |      | 55  |      |  |      | 138  |      |  |  | 188  |  |  |  | 184 |  |  |  | 67  |  |  |  | 138  |  |  |  | 206  |  |  |  | 306  | 
|Social expenses           |  |            | 1,684 |      |  |      | 1,577 |                          |  |       | 1,494 |      |  |      | 5   |      |  |      | 15  |      |  |      | 37   |      |  |  | 47   |  |  |  | 39  |  |  |  | 13  |  |  |  | 37   |  |  |  | 52   |  |  |  | 67   | 
|Of which pension expenses |  |            | [519] |      |  |      | [430] |                          |  |       | [400] |      |  |      | [2] |      |  |      | [5] |      |  |      | [25] |      |  |  | [14] |  |  |  | [8] |  |  |  | [3] |  |  |  | [25] |  |  |  | [16] |  |  |  | [16] | 
|                          |  |            |       |      |  |      |       |                          |  |       |       |      |  |      |     |      |  |      |     |      |  |      |      |      |  |  |      |  |  |  |     |  |  |  |     |  |  |  |      |  |  |  |      |  |  |  |      | 
|                          |  |            | 8,001 |      |  |      | 7,614 |                          |  |       | 7,363 |      |  |      | 23  |      |  |      | 70  |      |  |      | 175  |      |  |  | 235  |  |  |  | 223 |  |  |  | 80  |  |  |  | 175  |  |  |  | 258  |  |  |  | 373  | 
|                          |  |            |       |      |  |      |       |                          |  |       |       |      |  |      |     |      |  |      |     |      |  |      |      |      |  |  |      |  |  |  |     |  |  |  |     |  |  |  |      |  |  |  |      |  |  |  |      | 

[17]  Number of employees

The average number of employees in continuing
operations, classified by corporate functions, was as follows:

|                  |  |      |         |      |  |      |         |  |  |  |         | 
|----------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                  |  | 2002 |         | 2001 |  | 2000
|                  |  |      |         |      |  |     
|Marketing         |  |      | 35,985  |      |  |      | 33,875  |  |  |  | 33,397  | 
|Technology        |  |      | 66,051  |      |  |      | 61,055  |  |  |  | 61,196  | 
|Research          |  |      | 12,521  |      |  |      | 11,206  |  |  |  | 11,071  | 
|Administration    |  |      | 10,035  |      |  |      | 9,091   |  |  |  | 9,526   | 
|                  |  |      |         |      |  |      |         |  |  |  |         | 
|                  |  |      | 124,592 |      |  |      | 115,227 |  |  |  | 115,190 | 
|                  |  |      |         |      |  |      |         |  |  |  |         | 
|Of which trainees |  |      | 2,564   |      |  |      | 2,646   |  |  |  | 2,670   | 
|                  |  |      |         |      |  |      |         |  |  |  |         | 

The employees of joint ventures are included in
the above figures in proportion to Bayers interests in the
respective companies. The total number of people employed by our
joint ventures in 2002 was 1,102 (2001: 1,075; 2000: 1,048).

The figures in the above table do not include
people employed in discontinuing operations. In 2002, Haarmann
& Reimer employed an average 3,576 people (2001: 3,660;
2000: 3,742).

[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
(Business Combinations) and amortized an a straight-line basis
over a maximum estimated useful life of 20 years. The value
of goodwill is reassessed regularly based an 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 generally are not
capitalized.

F-27



---



##### Table of Contents



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 2002 were as
follows:

|                                                            |  |                     |       |          |  |          |       |       |  |  |     |   |  |  |        |  
|----------------------------------------------------------- |  | ------------------- | ----- | -------- |  | -------- | ----- | ----- |  |  | --- | - |  |  | ------ | -
|                                                            |  | Acquired            |       |          |  |          |       |      
|                                                            |  | concessions,        |       |          |  |          |       |      
|                                                            |  | industrial property |       |          |  |          |       |      
|                                                            |  | rights, similar     |       |          |  |          |       |      
|                                                            |  | rights and assets,  |       |          |  |          |       |      
|                                                            |  | and licenses        |       | Acquired |  | Advance  |       |      
|                                                            |  | thereunder          |       | goodwill |  | payments |       | Total
|                                                            |  |                     |       |          |  |          |       |      
|                                                            |  |                    
|                                                            |  | ( million)        
|Gross carrying amounts, Dec. 31, 2001                       |  |                     | 5,240 |          |  |          | 1,399 |       |  |  | 42  |   |  |  | 6,681  |  
|Exchange differences                                        |  |                     | (529  | )        |  |          | (163  | )     |  |  | (4  | ) |  |  | (696   | )
|Changes in scope of consolidation                           |  |                     | 2     |          |  |          | 7     |       |  |  |    |   |  |  | 9      |  
|Acquisitions                                                |  |                     | 3,057 |          |  |          | 2,267 |       |  |  |    |   |  |  | 5,324  |  
|Capital expenditures                                        |  |                     | 363   |          |  |          |      |       |  |  | 72  |   |  |  | 435    |  
|Retirements                                                 |  |                     | (249  | )        |  |          | (204  | )     |  |  | (13 | ) |  |  | (466   | )
|Transfers                                                   |  |                     | 39    |          |  |          |      |       |  |  | (39 | ) |  |  |       |  
|                                                            |  |                     |       |          |  |          |       |       |  |  |     |   |  |  |        |  
|Gross carrying amounts, Dec. 31,
    2002                   |  |                     | 7,923 |          |  |          | 3,306 |       |  |  | 58  |   |  |  | 11,287 |  
|                                                            |  |                     |       |          |  |          |       |       |  |  |     |   |  |  |        |  
|Accumulated amortization and write-downs,
    Dec. 31, 2001 |  |                     | 1,243 |          |  |          | 424   |       |  |  |    |   |  |  | 1,667  |  
|Exchange differences                                        |  |                     | (149  | )        |  |          | (43   | )     |  |  |    |   |  |  | (192   | )
|Changes in scope of consolidation                           |  |                     |      |          |  |          |      |       |  |  |    |   |  |  |       |  
|Amortization and write-downs in 2002                        |  |                     | 1,058 |          |  |          | 205   |       |  |  |    |   |  |  | 1,263  |  
|of
    which write-downs                                    |  |                     | [249] |          |  |          | [11]  |       |  |  | [] |   |  |  | [260]  |  
|Write-backs                                                 |  |                     |      |          |  |          |      |       |  |  |    |   |  |  |       |  
|Retirements                                                 |  |                     | (186  | )        |  |          | (144  | )     |  |  |    |   |  |  | (330   | )
|Transfers                                                   |  |                     |      |          |  |          |      |       |  |  |    |   |  |  |       |  
|                                                            |  |                     |       |          |  |          |       |       |  |  |     |   |  |  |        |  
|Accumulated amortization and write-downs,
    Dec. 31, 2002 |  |                     | 1,966 |          |  |          | 442   |       |  |  |    |   |  |  | 2,408  |  
|                                                            |  |                     |       |          |  |          |       |       |  |  |     |   |  |  |        |  
|Net carrying amounts, Dec. 31,
    2002                     |  |                     | 5,957 |          |  |          | 2,864 |       |  |  | 58  |   |  |  | 8,879  |  
|                                                            |  |                     |       |          |  |          |       |       |  |  |     |   |  |  |        |  
|Net carrying amounts, Dec. 31, 2001                         |  |                     | 3,997 |          |  |          | 975   |       |  |  | 42  |   |  |  | 5,014  |  
|                                                            |  |                     |       |          |  |          |       |       |  |  |     |   |  |  |        |  

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. Write-downs
are made for any declines in value that go beyond the depletion
reflected in depreciation. In compliance with IAS 36 (Impairment
of Assets), such write-downs are measured by comparing the
carrying amounts to the discounted cash flows expected to be
generated by the respective assets. Where it is not possible to
estimate the impairment loss for an individual asset, the loss
is assessed an 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

F-28



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


an appropriate share of the depreciation and
write-downs of assets used in construction. It includes the
shares of expenses for company pension plans and discretionary
employee benefits that are attributable to construction.

If the construction phase of property, plant or
equipment extends over a long period, the interest incurred on
borrowed capital up to the date of completion is capitalized as
part of the cost of acquisition or construction.

Expenses for the repair of property, plant and
equipment are normally charged against income, but they are
capitalized if they result in an enlargement or substantial
improvement of the respective assets.

Property, plant and equipment is depreciated by
the straight-line method, except where the declining-balance
method is more appropriate in light of the actual utilization
pattern.

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:

|                                   |  |  |                 | 
|---------------------------------- |  |  | --------------- | 
|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   | 

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



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Changes in property, plant and equipment in 2002
were as follows:

|                                                            |  |             |       |               |  |              |        |                 |  |       |       |   |  |  |        |   |  |  |        |  
|----------------------------------------------------------- |  | ----------- | ----- | ------------- |  | ------------ | ------ | --------------- |  | ----- | ----- | - |  |  | ------ | - |  |  | ------ | -
|                                                            |  |             |       |               |  |              |        | Construction in |  |      
|                                                            |  |             |       |               |  |              |        | progress and    |  |      
|                                                            |  |             |       |               |  | Furniture,   |        | advance         |  |      
|                                                            |  |             |       | Machinery and |  | fixtures and |        | payments to     |  |      
|                                                            |  | Land and    |       | technical     |  | other        |        | vendors and     |  |      
|                                                            |  | buildings   |       | equipment     |  | equipment    |        | contractors     |  | Total
|                                                            |  |             |       |               |  |              |        |                 |  |      
|                                                            |  |            
|                                                            |  | ( Million)
|Gross carrying amounts, Dec. 31, 2001                       |  |             | 8,148 |               |  |              | 19,544 |                 |  |       | 2,500 |   |  |  | 1,698  |   |  |  | 31,890 |  
|Exchange differences                                        |  |             | (538  | )             |  |              | (1,691 | )               |  |       | (233  | ) |  |  | (110   | ) |  |  | (2,572 | )
|Changes in scope of consolidation                           |  |             | (139  | )             |  |              | 3      |                 |  |       | 1     |   |  |  | 15     |   |  |  | (120   | )
|Acquisitions                                                |  |             | 411   |               |  |              | 401    |                 |  |       | 62    |   |  |  | 54     |   |  |  | 928    |  
|Capital expenditures                                        |  |             | 98    |               |  |              | 516    |                 |  |       | 196   |   |  |  | 1,138  |   |  |  | 1,948  |  
|Retirements                                                 |  |             | (521  | )             |  |              | (901   | )               |  |       | (369  | ) |  |  | (78    | ) |  |  | (1,869 | )
|Transfers                                                   |  |             | 602   |               |  |              | 718    |                 |  |       | 88    |   |  |  | (1,408 | ) |  |  |       |  
|                                                            |  |             |       |               |  |              |        |                 |  |       |       |   |  |  |        |   |  |  |        |  
|Gross carrying amounts, Dec. 31,
    2002                   |  |             | 8,061 |               |  |              | 18,590 |                 |  |       | 2,245 |   |  |  | 1,309  |   |  |  | 30,205 |  
|                                                            |  |             |       |               |  |              |        |                 |  |       |       |   |  |  |        |   |  |  |        |  
|Accumulated depreciation and write-downs,
    Dec. 31, 2001 |  |             | 4,168 |               |  |              | 12,486 |                 |  |       | 1,675 |   |  |  | 18     |   |  |  | 18,347 |  
|Exchange differences                                        |  |             | (203  | )             |  |              | (1,053 | )               |  |       | (149  | ) |  |  |       |   |  |  | (1,405 | )
|Changes in scope of consolidation                           |  |             | (108  | )             |  |              | (2     | )               |  |       |      |   |  |  |       |   |  |  | (110   | )
|Depreciation and write-downs in 2002                        |  |             | 285   |               |  |              | 1,460  |                 |  |       | 304   |   |  |  | 1      |   |  |  | 2,050  |  
|of
    which write-downs                                    |  |             | [11]  |               |  |              | [238]  |                 |  |       | [1]   |   |  |  | []    |   |  |  | [250]  |  
|Write-backs                                                 |  |             |      |               |  |              | (3     | )               |  |       | (1    | ) |  |  |       |   |  |  | (4     | )
|Retirements                                                 |  |             | (157  | )             |  |              | (654   | )               |  |       | (280  | ) |  |  | (18    | ) |  |  | (1,109 | )
|Transfers                                                   |  |             | 67    |               |  |              | (58    | )               |  |       | (9    | ) |  |  |       |   |  |  |       |  
|                                                            |  |             |       |               |  |              |        |                 |  |       |       |   |  |  |        |   |  |  |        |  
|Accumulated depreciation and write-downs,
    Dec. 31, 2002 |  |             | 4,052 |               |  |              | 12,176 |                 |  |       | 1,540 |   |  |  | 1      |   |  |  | 17,769 |  
|                                                            |  |             |       |               |  |              |        |                 |  |       |       |   |  |  |        |   |  |  |        |  
|Net carrying amounts, Dec. 31,
    2002                     |  |             | 4,009 |               |  |              | 6,414  |                 |  |       | 705   |   |  |  | 1,308  |   |  |  | 12,436 |  
|                                                            |  |             |       |               |  |              |        |                 |  |       |       |   |  |  |        |   |  |  |        |  
|Net carrying amounts, Dec. 31, 2001                         |  |             | 3,980 |               |  |              | 7,058  |                 |  |       | 825   |   |  |  | 1,680  |   |  |  | 13,543 |  
|                                                            |  |             |       |               |  |              |        |                 |  |       |       |   |  |  |        |   |  |  |        |  

The exchange differences are as defined for
intangible assets.

Capitalized property, plant and equipment
includes assets with a total net value of
504 million
(2001:
588 million)
held under finance leases. The gross carrying amounts of these
assets total
1,106 million
(2001:
1,229 million).
These assets are mainly machinery and technical equipment with a
carrying amount of
358 million
(gross amount
864 million)
and buildings with a carrying amount of
105 million
(gross amount
140 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 an expiration of the
lease.

Also included are products leased to other
parties under operating leases with a carrying amount of
232 million
(2001:
381 million).
The gross carrying amount of these assets was
500 million
(2001:
753 million);
their depreciation in 2002 amounted to
83 million
(2001:
52 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

F-30



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


(Financial Instruments: Recognition and
Measurement) at amortized cost or fair value. Where evidence
exists that such assets may be impaired, they are written down
as necessary on the basis of an impairment test. Investments are
written back if the reasons for previous years write-downs
no longer apply.

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 amortized cost.

Changes in investments in 2002 were as follows:

|                                           |  |                |     |              |  |                      |   |           |  |            |       |            |  |       |       |       |  |  |    |   |  |  |     |   |  |  |      |   |  |  |       |  
|------------------------------------------ |  | -------------- | --- | ------------ |  | -------------------- | - | --------- |  | ---------- | ----- | ---------- |  | ----- | ----- | ----- |  |  | -- | - |  |  | --- | - |  |  | ---- | - |  |  | ----- | -
|                                           |  |                |     |              |  |                      |   |           |  |            |       |            |  |      
|                                           |  |                |     |              |  | 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
|                                           |  |                |     |              |  |                      |   |           |  |            |       |            |  |       |       |      
|                                           |  |               
|                                           |  | ( Million)   
|Gross carrying amounts, Dec. 31, 2001      |  |                | 182 |              |  |                      |  |           |  |            | 1,290 |            |  |       | 1,341 |       |  |  | 13 |   |  |  | 196 |   |  |  | 207  |   |  |  | 3,229 |  
|Exchange differences                       |  |                | (12 | )            |  |                      |  |           |  |            | (137  | )          |  |       | (13   | )     |  |  | (1 | ) |  |  | (33 | ) |  |  | (9   | ) |  |  | (205  | )
|Changes in scope of consolidation          |  |                | (22 | )            |  |                      |  |           |  |            |      |            |  |       | 1     |       |  |  | 3  |   |  |  |    |   |  |  | (1   | ) |  |  | (19   | )
|Changes of fair value                      |  |                |    |              |  |                      |  |           |  |            |      |            |  |       | (570  | )     |  |  |   |   |  |  | (3  | ) |  |  |     |   |  |  | (573  | )
|Acquisitions                               |  |                | 23  |              |  |                      |  |           |  |            |      |            |  |       | 59    |       |  |  |   |   |  |  | 61  |   |  |  | 26   |   |  |  | 169   |  
|Other additions                            |  |                | 4   |              |  |                      |  |           |  |            | 107   |            |  |       | 75    |       |  |  |   |   |  |  | 101 |   |  |  | 345  |   |  |  | 632   |  
|Retirements                                |  |                | (28 | )            |  |                      |  |           |  |            | (55   | )          |  |       | (496  | )     |  |  |   |   |  |  | (84 | ) |  |  | (165 | ) |  |  | (828  | )
|Transfers                                  |  |                | (8  | )            |  |                      |  |           |  |            |      |            |  |       | (6    | )     |  |  | (8 | ) |  |  | 14  |   |  |  | 8    |   |  |  |      |  
|                                           |  |                |     |              |  |                      |   |           |  |            |       |            |  |       |       |       |  |  |    |   |  |  |     |   |  |  |      |   |  |  |       |  
|Gross carrying amounts, Dec. 31,
    2002  |  |                | 139 |              |  |                      |  |           |  |            | 1,205 |            |  |       | 391   |       |  |  | 7  |   |  |  | 252 |   |  |  | 411  |   |  |  | 2,405 |  
|Accumulated write-downs, Dec. 31, 2001     |  |                | 14  |              |  |                      |  |           |  |            | 58    |            |  |       |      |       |  |  |   |   |  |  | 3   |   |  |  | 9    |   |  |  | 84    |  
|Exchange differences                       |  |                | (5  | )            |  |                      |  |           |  |            | (2    | )          |  |       | (1    | )     |  |  |   |   |  |  | (7  | ) |  |  |     |   |  |  | (15   | )
|Changes in scope of consolidation          |  |                |    |              |  |                      |  |           |  |            |      |            |  |       |      |       |  |  | 1  |   |  |  |    |   |  |  |     |   |  |  | 1     |  
|Write-downs in 2002                        |  |                | 22  |              |  |                      |  |           |  |            | 7     |            |  |       | 67    |       |  |  | 1  |   |  |  | 81  |   |  |  | 1    |   |  |  | 179   |  
|Write-backs                                |  |                |    |              |  |                      |  |           |  |            |      |            |  |       |      |       |  |  |   |   |  |  |    |   |  |  | (1   | ) |  |  | (1    | )
|Retirements                                |  |                | (22 | )            |  |                      |  |           |  |            | (17   | )          |  |       |      |       |  |  |   |   |  |  | (1  | ) |  |  | (1   | ) |  |  | (41   | )
|Transfers                                  |  |                |    |              |  |                      |  |           |  |            |      |            |  |       |      |       |  |  |   |   |  |  |    |   |  |  |     |   |  |  |      |  
|                                           |  |                |     |              |  |                      |   |           |  |            |       |            |  |       |       |       |  |  |    |   |  |  |     |   |  |  |      |   |  |  |       |  
|Accumulated write-downs, Dec. 31,
    2002 |  |                | 9   |              |  |                      |  |           |  |            | 46    |            |  |       | 66    |       |  |  | 2  |   |  |  | 76  |   |  |  | 8    |   |  |  | 207   |  
|                                           |  |                |     |              |  |                      |   |           |  |            |       |            |  |       |       |       |  |  |    |   |  |  |     |   |  |  |      |   |  |  |       |  
|Net carrying amounts, Dec. 31,
    2002    |  |                | 130 |              |  |                      |  |           |  |            | 1,159 |            |  |       | 325   |       |  |  | 5  |   |  |  | 176 |   |  |  | 403  |   |  |  | 2,198 |  
|                                           |  |                |     |              |  |                      |   |           |  |            |       |            |  |       |       |       |  |  |    |   |  |  |     |   |  |  |      |   |  |  |       |  
|Net carrying amounts, Dec. 31, 2001        |  |                | 168 |              |  |                      |  |           |  |            | 1,232 |            |  |       | 1,341 |       |  |  | 13 |   |  |  | 193 |   |  |  | 198  |   |  |  | 3,145 |  
|                                           |  |                |     |              |  |                      |   |           |  |            |       |            |  |       |       |       |  |  |    |   |  |  |     |   |  |  |      |   |  |  |       |  

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, which is included 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
34 million
(2001:
45 million).
It mainly relates to goodwill. Retirements of investments in
other companies mainly relate to the divestiture of the
30 percent interest in Agfa-Gevaert N.V., Belgium, which in
2001 was included at fair value under investments in other
companies. Of the additions to other loans,
250 million
relates to the granting of a loan to the financial investor EQT
Northern Europe Private Equity Funds in connection with its
acquisition of the Haarmann & Reimer group.



|     |            
|---- | -----------
|[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
6,342 million
(2001:

F-31



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


5,818 million)
in inventories carried as of December 31, 2002,
833 million
(2001:
824 million)
represents those included at their net realizable value.
Inventories are normally valued by the weighted-average method.

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:

|                                                                   |  |               |       |               |  |  |       | 
|------------------------------------------------------------------ |  | ------------- | ----- | ------------- |  |  | ----- | 
|                                                                   |  | Dec. 31, 2002 |       | Dec. 31, 2001
|                                                                   |  |               |       |              
|                                                                   |  |              
|                                                                   |  | ( million)  
|Raw materials and supplies                                         |  |               | 1,362 |               |  |  | 1,179 | 
|Work in process, finished goods and goods
    purchased for resale |  |               | 4,963 |               |  |  | 4,626 | 
|Advanced payments                                                  |  |               | 17    |               |  |  | 13    | 
|                                                                   |  |               |       |               |  |  |       | 
|                                                                   |  |               | 6,342 |               |  |  | 5,818 | 
|                                                                   |  |               |       |               |  |  |       | 

The changes in inventory write-downs are as
follows:

|                                     |  |               |      |               |  |  |      |  
|------------------------------------ |  | ------------- | ---- | ------------- |  |  | ---- | -
|                                     |  | Dec. 31, 2002 |      | Dec. 31, 2001
|                                     |  |               |      |              
|                                     |  |              
|                                     |  | ( million)  
|Balance at the beginning of the year |  |               | (434 | )             |  |  | (241 | )
|Additions charged to expense         |  |               | (282 | )             |  |  | (362 | )
|Exchange differences                 |  |               | 33   |               |  |  | (2   | )
|Changes in scope of consolidation    |  |               | (82  | )             |  |  | 17   |  
|Deductions due to utilization        |  |               | 308  |               |  |  | 154  |  
|                                     |  |               |      |               |  |  |      |  
|Balance at the end of year           |  |               | (457 | )             |  |  | (434 | )
|                                     |  |               |      |               |  |  |      |  



|     |                          
|---- | -------------------------
|[22] | Trade accounts receivable

Trade accounts receivable are stated at nominal
value, less write-downs of
345 million
(2001:
222 million)
for amounts unlikely to be recovered.

Trade accounts receivable as of December 31,
2002 include
5,529 million
(2001:
5,413 million)
maturing within one year and
13 million
(2001:
2 million)
maturing after one year. Of the total,
47 million
(2001: 18 million)
is receivable from subsidiaries,
60 million
(2001: 66 million)
from other affiliated companies and
5,435 million
(2001:
5,331 million)
from other customers.

Changes in write-downs of trade accounts
receivable are as follows:

|                                     |  |               |      |               |  |  |      |  
|------------------------------------ |  | ------------- | ---- | ------------- |  |  | ---- | -
|                                     |  | Dec. 31, 2002 |      | Dec. 31, 2001
|                                     |  |               |      |              
|                                     |  |              
|                                     |  | ( million)  
|Balance at the beginning of the year |  |               | (222 | )             |  |  | (204 | )
|Additions charged to expense         |  |               | (101 | )             |  |  | (94  | )
|Exchange differences                 |  |               | 49   |               |  |  | (5   | )
|Changes in scope of consolidation    |  |               | (384 | )             |  |  | 5    |  
|Deductions due to utilization        |  |               | 313  |               |  |  | 76   |  
|                                     |  |               |      |               |  |  |      |  
|Balance at the end of year           |  |               | (345 | )             |  |  | (222 | )
|                                     |  |               |      |               |  |  |      |  

F-32



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




|     |                                   
|---- | ----------------------------------
|[23] | Other receivables and other assets

Other receivables and other assets are carried at
amortized cost, less write-downs of
4 million
(2001: 4 million).

They are comprised as follows:

|                                                  |  |               |       |               |  |  |       | 
|------------------------------------------------- |  | ------------- | ----- | ------------- |  |  | ----- | 
|                                                  |  | Dec. 31, 2002 |       | Dec. 31, 2001
|                                                  |  |               |       |              
|                                                  |  |              
|                                                  |  | ( million)  
|Claims for tax refunds                            |  |               | 677   |               |  |  | 448   | 
|Receivables from derivative financial instruments |  |               | 502   |               |  |  | 72    | 
|Interest receivable on loans                      |  |               | 98    |               |  |  | 19    | 
|Short-term loans                                  |  |               | 85    |               |  |  | 102   | 
|Short-term loans from clearing                    |  |               | 51    |               |  |  | 41    | 
|Lease payments receivable                         |  |               | 48    |               |  |  | 94    | 
|Payroll receivables                               |  |               | 14    |               |  |  | 47    | 
|Other receivables                                 |  |               | 2,735 |               |  |  | 1,624 | 
|                                                  |  |               |       |               |  |  |       | 
|                                                  |  |               | 4,210 |               |  |  | 2,447 | 
|                                                  |  |               |       |               |  |  |       | 

Interest receivable and loans consists mainly of
interest earned in the fiscal year but not due to be received
until after the balance sheet date.

Total other receivables and other assets include
47 million
(2001:
66 million)
pertaining to subsidiaries and
60 million
(2001:
124 million)
pertaining to other affiliated companies.

Total other receivables and other assets in the
amount of
711 million
(2001:
444 million)
mature in more than one year. Of this amount,
29 million
(2001:
30 million)
pertains to subsidiaries.

Other receivables in 2002 include
1.1 billion
in assets earmarked for sale because the Bayer Group is mandated
by regulatory conditions imposed in connection with the
acquisition of Aventis CropScience Holding S.A., France, to
divest certain insecticidal active ingredients businesses and
related rights.

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
48 million
(2001:
94 million),
while the interest portion pertaining to future years amounts to
9 million
(2001:
29 million).
The lease payments are due as follows:

|           |  |             |    |          |  |            |   |  |  |  |    | 
|---------- |  | ----------- | -- | -------- |  | ---------- | - |  |  |  | -- | 
|           |  | Lease       |    | Of which |  | Account   
|           |  | payments    |    | interest |  | receivable
|           |  |             |    |          |  |           
|           |  |            
|           |  | ( million)
|2003       |  |             | 20 |          |  |            | 3 |  |  |  | 17 | 
|2004       |  |             | 14 |          |  |            | 2 |  |  |  | 12 | 
|2005       |  |             | 10 |          |  |            | 1 |  |  |  | 9  | 
|2006       |  |             | 7  |          |  |            | 1 |  |  |  | 6  | 
|2007       |  |             | 4  |          |  |            | 1 |  |  |  | 3  | 
|After 2007 |  |             | 2  |          |  |            | 1 |  |  |  | 1  | 
|           |  |             |    |          |  |            |   |  |  |  |    | 
|           |  |             | 57 |          |  |            | 9 |  |  |  | 48 | 
|           |  |             |    |          |  |            |   |  |  |  |    | 

F-33



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




|     |              
|---- | -------------
|[24] | Liquid assets

|                                            |  |               |     |               |  |  |     | 
|------------------------------------------- |  | ------------- | --- | ------------- |  |  | --- | 
|                                            |  | Dec. 31, 2002 |     | Dec. 31, 2001
|                                            |  |               |     |              
|                                            |  |              
|                                            |  | ( million)  
|Marketable securities and other instruments |  |               | 29  |               |  |  | 52  | 
|Cash and cash equivalents                   |  |               | 767 |               |  |  | 719 | 
|                                            |  |               |     |               |  |  |     | 
|                                            |  |               | 796 |               |  |  | 771 | 
|                                            |  |               |     |               |  |  |     | 

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
29 million
(2001: 52 million),
which is
14 million
less
(2001: 13 million
more) than their cost of acquisition. Financial instruments with
original maturities of up to three months are recognized as cash
equivalents in view of their high liquidity.



|     |                 
|---- | ----------------
|[25] | Deferred charges

Total deferred charges include
261 million
(2001:
183 million)
that is expected to be used up in 2003.



|     |                     
|---- | --------------------
|[26] | Stockholders equity

The capital stock of Bayer AG amounts to
1,870 million,
as in the previous year, and is divided into 730,341,920 no-par
bearer shares of a single dass.

Authorized capital totaling
250 million
was approved by the Annual Stockholders Meeting on
April 26, 2002. It expires on April 26, 2007. The
authorized capital can be used to increase the capital stock by
issuing new shares against cash contributions. The Board of
Management is authorized to exclude subscription rights with
respect to
100 million
of this authorized capital; however, in this case the issue
price of the new shares must not be significantly below the
market price. Exclusion of subscription rights for a further
150 million
is only possible in specific cases.

Further authorized capital in the amount of
374 million
was approved by the Annual Stockholders Meeting on
April 27, 2001. This authorized capital, which expires on
April 27, 2006, can be used to increase the capital stock
by issuing new shares against non-cash contributions.
Subscription rights for existing stockholders are excluded.

Conditional capital of
83 million
existed on December 31, 2002. This capital may only be
utilized to the extent necessary to issue the requisite number
of shares as and when conversion or subscription rights are
exercised by the holders of convertible bonds or of warrants
conferring subscription rights, respectively, that may be issued
by Bayer AG or a wholly owned direct or indirect subsidiary
through April 29, 2004.

Capital reserves include the paid-in surplus from
the issuance of shares and subscription rights by Bayer AG.

The retained earnings contain prior years
undistributed income of consolidated companies. Changes in fair
values of financial instruments are recognized in miscellaneous
items of other comprehensive income. Among other factors
affecting these items in 2002 was the sale of our remaining
interest in Agfa-Gevaert N.V., Belgium. The changes in the
various components of stockholders equity during 2002 and
2001 are shown in the statements of changes in
stockholders equity.

The dividend per share paid for the 2001 fiscal
year was 0.90
(2000: 1.40).



|     |                  
|---- | -----------------
|[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



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




|     |                                                               
|---- | --------------------------------------------------------------
|[28] | Provisions for pensions and other
    post-employment benefits

Group companies provide retirement benefits for
most of their employees, either directly or by contributing to
independently administered funds.

The way these benefits are provided varies
according to the legal, fiscal and economic conditions of each
country, the benefits generally being based on the
employees remuneration and years of service. The
obligations relate both to existing retirees pensions and
to pension entitlements of future retirees.

Group companies provide retirement benefits under
defined contribution and/or defined benefit plans.

In the case of defined contribution plans,
the company pays contributions to publicly or privately
administered pension insurance plans on a mandatory, contractual
or voluntary basis. Once the contributions have been paid, the
company has no further payment obligations. The regular
contributions constitute net periodic costs for the year in
which they are due and as such are included in the cost of goods
sold, selling expenses, research and development expenses or
general administration expenses, and thus in the operating
result. In 2002, these expenses totaled
393 million
(2001:
312 million;
2000:
437 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 2002, expenses for defined benefit
plans amounted to
521 million
(2001:
301 million;
2000:
326 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:

|                                  |  |               |      |               |  |  |      |  
|--------------------------------- |  | ------------- | ---- | ------------- |  |  | ---- | -
|                                  |  | Dec. 31, 2002 |      | Dec. 31, 2001
|                                  |  |               |      |              
|                                  |  |              
|                                  |  | ( million)  
|Service cost                      |  |               | 302  |               |  |  | 265  |  
|Past service cost                 |  |               | 12   |               |  |  | 10   |  
|Interest cost                     |  |               | 727  |               |  |  | 669  |  
|Projected return on plan assets   |  |               | (607 | )             |  |  | (640 | )
|Amortization of actuarial amounts |  |               | 67   |               |  |  | (34  | )
|Plan curtailments and settlements |  |               | 20   |               |  |  |     |  
|                                  |  |               |      |               |  |  |      |  
|                                  |  |               | 521  |               |  |  | 270  |  
|                                  |  |               |      |               |  |  |      |  

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 an
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.

F-35



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


All defined benefit plans necessitate actuarial
computations and valuations. These are based not only an life
expectancy but also an the following parameters, which vary from
country to country according to economic conditions:

|                                                              |  |                |  |               
|------------------------------------------------------------- |  | -------------- |  | --------------
|                                                              |  |               
|                                                              |  | Parameters    
|                                                              |  |               
|                                                              |  | Dec. 31, 2002  |  | Dec. 31, 2001 
|                                                              |  |                |  |               
|Discount rate                                                 |  | 2.5%-7.0%      |  | 2.5%-7.0%     
|Projected future remuneration increases                       |  | 2.0%-5.1%      |  | 2.0%-4.8%     
|Projected future pension increases                            |  | 1.7%-3.3%      |  | 2.0%-3.3%     
|Projected employee turnover (according to age
    and gender) |  | Empirical data |  | Empirical data
|Projected return on plan assets                               |  | 1.5%-8.5%      |  | 2.0%-8.5%     

The status of unfunded and funded defined benefit
obligations, computed using the appropriate parameters, is as
follows:

|                                                                     |  |               |         |               |  |  |         |  
|-------------------------------------------------------------------- |  | ------------- | ------- | ------------- |  |  | ------- | -
|                                                                     |  | Dec. 31, 2002 |         | Dec. 31, 2001
|                                                                     |  |               |         |              
|                                                                     |  |              
|                                                                     |  | ( million)  
|Defined benefit obligation                                           |  |               | (12,414 | )             |  |  | (11,303 | )
|Fair value of plan assets                                            |  |               | 7,506   |               |  |  | 8,126   |  
|                                                                     |  |               |         |               |  |  |         |  
|Funded Status                                                        |  |               | (4,908  | )             |  |  | (3,177  | )
|Unrecognized transition liability (asset)                            |  |               | 2       |               |  |  | 3       |  
|Unrecognized actuarial (gain) loss                                   |  |               | 2,352   |               |  |  | 1,366   |  
|Asset limitation due to uncertainty of obtaining
    future benefits |  |               | (1,187  | )             |  |  | (1,249  | )
|                                                                     |  |               |         |               |  |  |         |  
|Net recognized liability                                             |  |               | (3,741  | )             |  |  | (3,057  | )
|                                                                     |  |               |         |               |  |  |         |  

Of the defined benefit obligation,
4,267 million
(2001:
3,929 million)
relates to unfunded benefit obligations and
8,147 million
(2001:
7,374 million)
to funded benefit obligations. 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. This procedure
is also applied to the differences between the projected return
on plan assets and the actual amount of minus
668 million
(2001: minus
563 million).

The net liability under these defined benefit
plans changed as follows:

|                                                          |  |               |        |               |  |  |        |  
|--------------------------------------------------------- |  | ------------- | ------ | ------------- |  |  | ------ | -
|                                                          |  | Dec. 31, 2002 |        | Dec. 31, 2001
|                                                          |  |               |        |              
|                                                          |  |              
|                                                          |  | ( million)  
|Net liability recognized at the beginning of
    the year |  |               | (3,057 | )             |  |  | (3,151 | )
|Pension benefit (cost) income                             |  |               | (521   | )             |  |  | (270   | )
|Employer contributions                                    |  |               | 351    |               |  |  | 313    |  
|Divestitures                                              |  |               | (25    | )             |  |  | 54     |  
|Change in scope of consolidation                          |  |               | (500   | )             |  |  | *      |  
|Plan curtailments and settlements                         |  |               | (10    | )             |  |  | *      |  
|                                                          |  |               |        |               |  |  |        |  
|Change in currency translation                            |  |               | 21     |               |  |  | (3     | )
|                                                          |  |               |        |               |  |  |        |  
|Net liability recognized at end of
    year               |  |               | (3,741 | )             |  |  | (3,057 | )
|                                                          |  |               |        |               |  |  |        |  






|  |                         
|- | ------------------------
|* | less than
    1 million

F-36



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


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 an 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 2002,
provisions for early retirement and other post-retirement
benefits amounted to
629 million
(2001:
635 million).
The resulting expenses for 2002 amounted to
114 million
(2001:
63 million),
comprising
87 million
(2001:
23 million)
for service cost,
57 million
(2001:
58 million)
for interest cost,
26 million
(2001:
31 million)
for projected return on plan assets and
4 million
for actuarial gains (2001:
13 million
for actuarial losses).

[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:

|                                         |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 
|---------------------------------------- |  | ------------- | ----- | ------------- |  | ----- | ----- | -------- |  |  | ----- |  |  |  | ----- | 
|                                         |  |               |       |              
|                                         |  | Dec. 31, 2002 |       | Dec. 31, 2001
|                                         |  |               |       |              
|                                         |  |               |       | Maturing      |  |       |       | Maturing
|                                         |  | Total         |       | in 2003       |  | Total |       | in 2002 
|                                         |  |               |       |               |  |       |       |         
|                                         |  |              
|                                         |  | ( million)  
|Provisions for taxes                     |  |               | 650   |               |  |       | 426   |          |  |  | 524   |  |  |  | 151   | 
|Provisions for personnel commitments     |  |               | 976   |               |  |       | 411   |          |  |  | 923   |  |  |  | 451   | 
|Provisions for environmental remediation |  |               | 202   |               |  |       | 23    |          |  |  | 200   |  |  |  | 19    | 
|Provisions for restructuring             |  |               | 230   |               |  |       | 189   |          |  |  | 145   |  |  |  | 79    | 
|Provisions for trade-related commitments |  |               | 694   |               |  |       | 649   |          |  |  | 438   |  |  |  | 426   | 
|Miscellaneous provisions                 |  |               | 720   |               |  |       | 559   |          |  |  | 535   |  |  |  | 351   | 
|                                         |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 
|                                         |  |               | 3,472 |               |  |       | 2,257 |          |  |  | 2,765 |  |  |  | 1,477 | 
|                                         |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 

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.

F-37



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Changes in provisions were as follows:

|                                         |  |             |       |               |  |          |     |            |  |             |      |          |  |          |       |  |  |  |        |   |  |  |      |   |  |  |       | 
|---------------------------------------- |  | ----------- | ----- | ------------- |  | -------- | --- | ---------- |  | ----------- | ---- | -------- |  | -------- | ----- |  |  |  | ------ | - |  |  | ---- | - |  |  | ----- | 
|                                         |  |             |       | Changes in    |  |          |     |            |  |             |      |          |  |         
|                                         |  | Jan. 1,     |       | scope of      |  | Currency |     |            |  |             |      |          |  | Dec. 31,
|                                         |  | 2002        |       | consolidation |  | effects  |     | Allocation |  | Utilization |      | Reversal |  | 2002    
|                                         |  |             |       |               |  |          |     |            |  |             |      |          |  |         
|                                         |  |            
|                                         |  | ( million)
|Provisions for taxes                     |  |             | 524   |               |  |          | 91  |            |  |             | (52  | )        |  |          | 453   |  |  |  | (311   | ) |  |  | (55  | ) |  |  | 650   | 
|Provisions for personnel commitments     |  |             | 923   |               |  |          | 113 |            |  |             | (43  | )        |  |          | 486   |  |  |  | (448   | ) |  |  | (55  | ) |  |  | 976   | 
|Provisions for environmental remediation |  |             | 200   |               |  |          | 31  |            |  |             | (14  | )        |  |          | 35    |  |  |  | (45    | ) |  |  | (5   | ) |  |  | 202   | 
|Provisions for restructuring             |  |             | 145   |               |  |          | 65  |            |  |             | (28  | )        |  |          | 196   |  |  |  | (140   | ) |  |  | (8   | ) |  |  | 230   | 
|Provisions for trade-related commitments |  |             | 438   |               |  |          | 173 |            |  |             | (40  | )        |  |          | 496   |  |  |  | (336   | ) |  |  | (37  | ) |  |  | 694   | 
|Miscellaneous provisions                 |  |             | 535   |               |  |          | 108 |            |  |             | (34  | )        |  |          | 717   |  |  |  | (557   | ) |  |  | (49  | ) |  |  | 720   | 
|                                         |  |             |       |               |  |          |     |            |  |             |      |          |  |          |       |  |  |  |        |   |  |  |      |   |  |  |       | 
|                                         |  |             | 2,765 |               |  |          | 581 |            |  |             | (211 | )        |  |          | 2,383 |  |  |  | (1,837 | ) |  |  | (209 | ) |  |  | 3,472 | 
|                                         |  |             |       |               |  |          |     |            |  |             |      |          |  |          |       |  |  |  |        |   |  |  |      |   |  |  |       | 

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 shares as bonus shares. In the case of Module 2 of the Stock
Participation Program, employees have the opportunity to
purchase shares at a discounted price.

Stock Option Program

Members of the Board of Management and 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 blocked and may not be sold 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, 2002,
no options were exercisable. No options expired, nor were any
options canceled, during fiscal 2002.

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. In fiscal

F-38



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


2002, the bonus payment for 2000 was used as the
reference base where this was higher. 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 block 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

|                            |  |                           |    | 
|--------------------------- |  | ------------------------- | -- | 
|                            |  | Incentive shares received
|Distribution date at end of |  | (per 10 deposited shares)
|                            |  |                          
|Second year                 |  |                           | 2  | 
|Sixth year                  |  |                           | 4  | 
|Tenth year                  |  |                           | 4  | 
|                            |  |                           |    | 
|Total                       |  |                           | 10 | 
|                            |  |                           |    | 

Participants receive incentive shares only if
Bayer stock has outperformed the Dow Jones EURO STOXX 50 index
an 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 normally
participate in both Module 1 and Module 2. The Module 1 program,
like the Stock Incentive Program, requires participants to
deposit Bayer AG shares of their own in a special account. As
with the Stock Incentive Program, participants in the Stock
Participation Program may sell their deposited shares during the
term of the program; any shares they sell are no longer counted
in calculating the 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

|                            |  |                           |   | 
|--------------------------- |  | ------------------------- | - | 
|                            |  | Incentive shares received
|Distribution date at end of |  | (per 10 deposited shares)
|                            |  |                          
|Second year                 |  |                           | 1 | 
|Sixth year                  |  |                           | 2 | 
|Tenth year                  |  |                           | 2 | 
|                            |  |                           |   | 
|Total                       |  |                           | 5 | 
|                            |  |                           |   | 

In addition, under Module 2 each participant
may purchase 10 Bayer AG shares per year at a tax-free discount.
In 2002 this comprised a discount of
15.40 (2001:
15.34) 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 for the year he or she participates in
the program. In fiscal 2002, in the case of managerial staff,
the bonus payment for 2000 was used as the reference base where
this was higher.

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

F-39



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


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, 2002 amounted to
9 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, 2002, participants in Module 2 received
195,412 shares at a total price of
3.7 million,
resulting in personnel expenses of
3.0 million.
The discount to the price of Bayer AG stock was
45.1 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 an us
in the future.

As is typical for companies involved in the
chemical and related industries, soil and groundwater
contamination has occurred in the past at some of our sites, and
might occur or be discovered at other sites. We are subject to
claims brought by United States Federal or State regulatory
agencies and other private entities and individuals regarding
the remediation of sites that we own, formerly owned or
operated, where materials were produced specifically for us by
contract manufacturers or where waste from our operations was
treated, stored or disposed. 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, 2002 amounted to
202 million
(2001:
200 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 an 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
270 million
(2001:
265 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 an
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.

F-40



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


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 an the Groups
financial position, results of operations or cash flows.

Legal risks

As a global company with a diverse business
portfolio, the Bayer Group is exposed to numerous legal risks,
particularly in the areas of product liability, patent disputes,
tax assessments, competition and antitrust law, and
environmental matters. The outcome of any current or future
proceedings cannot be predicted with certainty. It is therefore
possible that legal judgments could give rise to expenses that
are not covered, or not fully covered, by insurers
compensation payments and could significantly affect our
revenues and earnings.

Legal risks include in particular litigation in
the United States following the voluntary withdrawal of the
statin Lipobay®/Baycol®. By mid-February 2003,
approximately 7,900 suits had been filed with Federal and state
courts, including approximately 160 class actions. The aim
of these class actions is to achieve class status at global,
U.S. or state level for all who allege their health has
been damaged due to the use of Baycol®, all other former
Baycol® users for the purpose of subsequent medical
monitoring, and all purchasers of Baycol® for reimbursement
of the purchase price. Claims for punitive damages have also
been filed. By mid-February 2003, voluntary settlement
agreements had been reached in approximately 450 individual
cases without concession of liability.

As a result of the voluntary withdrawal of
products containing PPA, approximately 1,000 cases have been
filed against Bayer Corporation in the United States, including
class actions. Similarly, the claims primarily relate to
compensation for alleged damage to health, entitlement to
subsequent medical monitoring and reimbursement of the purchase
price. Claims for punitive damages have also been filed.

In the event plaintiffs substantially prevail
despite existing defense arguments, it is possible that Bayer
could incur charges in excess of its insurance coverage. Due to
the considerable uncertainty associated with these proceedings,
it is currently not possible to more accurately estimate
potential liability. Depending on the progress of the
litigation, we will continue to regularly reconsider the need to
establish provisions which may have a negative effect on
financial results.

Restructuring charges

Restructuring charges of
427 million
were incurred in 2002 for closures of facilities and relocation
of business activities, including
196 million
in provisions that are expected to be utilized as the respective
restructuring measures are implemented. The total charges
include
193 million
in severance payments, a total
166 million
in accelerated amortization/ depreciation and write-downs of
intangible assets, property, plant and equipment, and
68 million
in other expenses. Most of the charges taken for severance
payments and other expenses in 2002 will lead to disbursements
in 2003.

Restructuring was a major focus of activity in
fiscal 2002. We continued the restructuring drives designed to
improve the efficiency of our production sites in Hicksville,
New York, and New Martinsville, West Virginia, U.S.A.,
taking
37 million
in charges including
25 million
in write-downs,
5 million
in severance payments and
7 million
in other expenses. Further charges of
30 million
were incurred in connection with the closure of a production
facility at our site in West Virginia. These comprised
10 million
in write-offs of property, plant and equipment no longer
utilized,
7 million
in severance payments and
13 million
in other charges.

F-41



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The restructuring of our rubber production site
in Sarnia, Ontario, Canada, resulted in write-downs of
41 million,
severance payments of
7 million
and other expenses of
19 million.

Of the restructuring charges incurred in 2002,
51 million
related to the integration of the polyols business in the
Polymers business area. This amount included
37 million
in write-downs and
14 million
in severance payments.

Further charges of
20 million
relate to the restructuring of the Consumer Care Division in
Elkhart, Indiana, U.S.A., including
8 million
for write-downs of property, plant and equipment and
6 million
for other expenses. A further
6 million
comprised severance payments.

The restructuring of our styrenics business in
North America led to charges of
9 million,
including
5 million
in write-downs and
4 million
in other expenses.

Further ongoing restructuring programs to improve
the profitability of the business areas and integrate
acquisitions gave rise to total charges of
197 million,
comprising
154 million
in severance payments,
26 million
in write-downs and
17 million
in other expenses. The remaining charges relate to various
small-scale restructuring programs.

Changes in provisions for restructuring were as
follows:

|                                 |  |             |     |       |  |       |     |   |  |  |      |  
|-------------------------------- |  | ----------- | --- | ----- |  | ----- | --- | - |  |  | ---- | -
|                                 |  | Severance   |     | Other |  |      
|                                 |  | payments    |     | Costs |  | Total
|                                 |  |             |     |       |  |      
|                                 |  |            
|                                 |  | ( million)
|Balance at January 1, 2001       |  |             | 86  |       |  |       | 45  |   |  |  | 131  |  
|Additions                        |  |             | 57  |       |  |       | 96  |   |  |  | 153  |  
|Utilization                      |  |             | (69 | )     |  |       | (64 | ) |  |  | (133 | )
|Reclassification to fixed assets |  |             |     |       |  |       | (13 | ) |  |  | (13  | )
|Exchange differences             |  |             | 5   |       |  |       | 2   |   |  |  | 7    |  
|Balance at December 31, 2001     |  |             | 79  |       |  |       | 66  |   |  |  | 145  |  
|Additions                        |  |             | 193 |       |  |       | 68  |   |  |  | 261  |  
|Utilization                      |  |             | (99 | )     |  |       | (48 | ) |  |  | (148 | )
|                                 |  |             |     |       |  |       |     |   |  |  |      |  
|Exchange differences             |  |             | (15 | )     |  |       | (13 | ) |  |  | (28  | )
|                                 |  |             |     |       |  |       |     |   |  |  |      |  
|Balance at December 31, 2002     |  |             | 158 |       |  |       | 72  |   |  |  | 230  |  
|                                 |  |             |     |       |  |       |     |   |  |  |      |  

The other costs are mainly demolition expenses
and other charges related to the abandonment of production
facilities.

F-42



---



##### Table of Contents



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:

|                                                  |  |               |        |               |  |       |       |          |  |  |       |  |  |  |       | 
|------------------------------------------------- |  | ------------- | ------ | ------------- |  | ----- | ----- | -------- |  |  | ----- |  |  |  | ----- | 
|                                                  |  |               |        |              
|                                                  |  | Dec. 31, 2002 |        | Dec. 31, 2001
|                                                  |  |               |        |              
|                                                  |  |               |        | Maturing      |  |       |       | Maturing
|                                                  |  | Total         |        | in 2003       |  | Total |       | in 2002 
|                                                  |  |               |        |               |  |       |       |         
|                                                  |  |              
|                                                  |  | ( million)  
|Debentures                                        |  |               | 6,742  |               |  |       | 477   |          |  |  | 2,592 |  |  |  | 781   | 
|Liabilities to banks                              |  |               | 1,023  |               |  |       | 873   |          |  |  | 1,122 |  |  |  | 829   | 
|Liabilities under lease agreements                |  |               | 708    |               |  |       | 121   |          |  |  | 881   |  |  |  | 99    | 
|Liabilities from the issuance of promissory notes |  |               | 78     |               |  |       | 78    |          |  |  | 84    |  |  |  | 84    | 
|Commercial paper                                  |  |               | 1,084  |               |  |       | 1,084 |          |  |  | 1,365 |  |  |  | 1,365 | 
|Liabilities from derivative financial instruments |  |               | 86     |               |  |       | 85    |          |  |  | 180   |  |  |  | 169   | 
|Other financial obligations                       |  |               | 438    |               |  |       | 123   |          |  |  | 1,156 |  |  |  | 982   | 
|                                                  |  |               |        |               |  |       |       |          |  |  |       |  |  |  |       | 
|                                                  |  |               | 10,159 |               |  |       | 2,841 |          |  |  | 7,380 |  |  |  | 4,309 | 
|                                                  |  |               |        |               |  |       |       |          |  |  |       |  |  |  |       | 

The maturities of financial obligations existing
at December 31, 2002 were as follows:

|              |  |           |        | 
|------------- |  | --------- | ------ | 
|Maturing in   |  |  million
|              |  |          
|2003          |  |           | 2,841  | 
|2004          |  |           | 186    | 
|2005          |  |           | 427    | 
|2006          |  |           | 82     | 
|2007          |  |           | 3,231  | 
|2008 or later |  |           | 3,392  | 
|              |  |           |        | 
|              |  |           | 10,159 | 
|              |  |           |        | 

Financial liabilities in U.S. dollars
amounted to
3.3 billion
(2001:
5.1 billion)
and account for 32 percent (2001: 69 percent) of total
financial liabilities.

Short-term borrowings (excluding the short-term
portion of debentures) amounted to
2.4 billion
(2001:
3.5 billion)
with a weighted average interest rate of 7.9 percent (2001:
5.4 percent). The Bayer Groups financial liabilities
are primarily unsecured and of equal priority.

F-43



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Debentures include the following:

|                               |        |        |  |  |        |        |  |                              |  |               |                    |  |  |  |       |  |  |  |       | 
|------------------------------ | ------ | ------ |  |  | ------ | ------ |  | ---------------------------- |  | ------------- | ------------------ |  |  |  | ----- |  |  |  | ----- | 
|Effective                      |        | Stated |  |  |        |        |  |                              |  |              
|Rate                           |        | Rate   |  |  |        | Volume |  | Dec. 31, 2002                |  | Dec. 31, 2001
|                               |        |        |  |  |        |        |  |                              |  |              
|                               |        |        |  |  |        |        |  |                             
|                               |        |        |  |  |        |        |  | ( million)                 
|Bayer AG                       |        |        |  |  |        |        |  |                              |  |               |                    | 
|                               | 4.103% |        |  |  | 5.375% |        |  | Eurobonds 2002/2007          |  |               | EUR 3,000  million |  |  |  | 3,081 |  |  |  |      | 
|                               | 5.160% |        |  |  | 6.000% |        |  | Eurobonds 2002/2012          |  |               | EUR 2,000  million |  |  |  | 2,102 |  |  |  |      | 
|Bayer Capital Corporation B.V. |        |        |  |  |        |        |  |                              |  |               |                    | 
|                               | 2.820% |        |  |  | 2.500% |        |  | Bonds with Warrants Attached |  |               |                    |  |  |  |       |  |  |  |       | 
|                               |        |        |  |  |        |        |  | 1987/2002                    |  |               | CHF 250 million    |  |  |  |      |  |  |  | 169   | 
|Bayer Corporation              |        |        |  |  |        |        |  |                              |  |               |                    | 
|                               | 6.735% |        |  |  | 6.500% |        |  | Notes 1995/2002              |  |               | USD 400 million    |  |  |  |      |  |  |  | 454   | 
|                               | 5.410% |        |  |  | 7.125% |        |  | Notes 1995/2015              |  |               | USD 200 million    |  |  |  | 191   |  |  |  | 227   | 
|                               | 2.166% |        |  |  | 2.250% |        |  | Bonds 1997/2002              |  |               | CHF 200 million    |  |  |  |      |  |  |  | 135   | 
|                               | 1.200% |        |  |  | 3.500% |        |  | Revenue Bonds 1997/2009      |  |               | USD 20.6 million   |  |  |  | 20    |  |  |  | 23    | 
|                               | 4.000% |        |  |  | 4.000% |        |  | Revenue Bonds 1997/2027      |  |               | USD 25 million     |  |  |  |      |  |  |  | 28    | 
|                               | 6.288% |        |  |  | 6.650% |        |  | Notes 1998/2028              |  |               | USD 350 million    |  |  |  | 334   |  |  |  | 397   | 
|                               | 6.288% |        |  |  | 6.200% |        |  | Bonds 1998/2028              |  |               | USD 250 million    |  |  |  | 238   |  |  |  | 284   | 
|                               | 4.450% |        |  |  | 4.450% |        |  | Money Market Puttable Reset  |  |               |                    |  |  |  |       |  |  |  |       | 
|                               |        |        |  |  |        |        |  | Securities 2001/2011         |  |               | USD 500 million    |  |  |  | 476   |  |  |  | 568   | 
|Bayer Ltd., Japan              |        |        |  |  |        |        |  |                              |  |               |                    | 
|                               | 1.270% |        |  |  | 3.750% |        |  | Bonds 2000/2005              |  |               | CHF 400 million    |  |  |  | 300   |  |  |  | 270   | 
|Other debentures               |        |        |  |  |        |        |  |                              |  |               | 37                 | 
|                               |        |        |  |  |        |        |  |                              |  |               |                    | 
|                               |        |        |  |  |        |        |  |                              |  |               |                    |  |  |  | 6,742 |  |  |  | 2,592 | 
|                               |        |        |  |  |        |        |  |                              |  |               |                    |  |  |  |       |  |  |  |       | 

In April 2002 Bayer AG launched two Eurobond
issues under its
8 billion
European Medium Term Note (EMTN) program. One of these issues,
in the nominal volume of
3,000 million,
carries a 5.375% coupon and has a term of 5 years, maturing
in 2007. Interest is payable annually in arrears. The issue
price was 99.402%. The other Eurobond issue has a nominal volume
of
2,000 million
and a term of 10 years, so it matures in 2012. The bonds
carry a 6% coupon. Again, all interest is payable annually in
arrears. The issue price was 99.45%.

In July 1987, Bayer Capital Corporation B.V.
issued CHF 250 million of 2.50% Bonds with warrants in
Switzerland. The Bonds had a term of 15 years and matured
in July 2002.

In October 1995, Bayer Corporation issued USD
400 million of 6.50% Notes to qualified institutional
buyers. The Notes had a term of 7 years and matured in
October 2002.

Also in October 1995, Bayer Corporation issued
USD 200 million of 7.125% Notes to qualified institutional
buyers. The Notes have a term of 20 years and mature in
October 2015. Interest is paid semi-annually in April and
October. The Group recorded a discount of
USD 2.4 million, which includes commissions paid to
underwriters.

In March 1997, Bayer Corporation issued
USD 20.6 million of Revenue Bonds to
U.S. institutional buyers. The interest rate is reset daily
with monthly interest payments. The Revenue Bonds have a term of
12 years and mature in May 2009.

In April 1997, Bayer Corporation issued
CHF 200 million of 2.25% Bonds in Switzerland. The Bonds
had a term of 5 years and matured in April 2002.

In May 1997, Bayer Corporation issued
USD 25 million of Revenue Bonds to
U.S. institutional buyers. The interest rate was reset
daily with monthly interest payments. The Revenue Bonds had a
term of 30 years but were redeemed at the end of fiscal
2002.

F-44



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


In February 1998, Bayer Corporation issued USD
350 million of 6.65% Notes to qualified institutional
buyers. The Notes have a term of 30 years and mature in
February 2028. Interest is paid semi-annually in August and
February. The Group recorded a discount of
USD 1.9 million, which includes commissions paid to
underwriters. The Notes will be redeemable, in whole or in part,
at the option of Bayer Corporation at any time, upon not less
than 30 but not more than 60 days notice, at a
redemption price equal to the greater of (i) 100% of the
principal amount or (ii) as determined by an independent
investment banker.

In February 1998, Bayer Corporation issued USD
250 million of 6.20% Bonds to qualified institutional
buyers. The Bonds have combined call and put options giving the
lead manager the right to repurchase them, and the investors the
right to cash them, after 10 years. At that time the lead
manager can reset the interest rate and remarket the Bonds for a
further period of 20 years such that they would mature in
2028. If the lead manager does not exercise its call option and
the investors exercise their put option, the Bonds will be
redeemed in 2008. Interest is paid semi-annually in August and
February. The Group recorded a discount of
USD 0.6 million which includes commissions paid to
underwriters. The redemption provision on the 1998 6.65% Notes
also applies for these Bonds.

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 4.45% 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, 2002, the Group had
approximately
6.2 billion
(2001:
6.2 billion)
of total lines of credit, of which
1.0 billion
(2001:
1.1 billion)
was used and
5.2 billion
(2001:
5.1 billion)
was unused and available for borrowing on an unsecured basis.
Liabilities under finance leases are recognized as financial
obligations if the leased assets are capitalized under property,
plant and equipment. They are stated at present values. Lease
payments totaling
899 million
(2001:
1,174 million),
including
191 million
(2001:
293 million)
in interest, are to be made to the respective lessors in future
years.

The liabilities associated with finance leases
mature as follows:

|           |  |             |     |          |  |           |     |  |  |  |     | 
|---------- |  | ----------- | --- | -------- |  | --------- | --- |  |  |  | --- | 
|           |  | Lease       |     | Of which |  |          
|           |  | payments    |     | interest |  | Liability
|           |  |             |     |          |  |          
|           |  |            
|           |  | ( million)
|2003       |  |             | 151 |          |  |           | 30  |  |  |  | 121 | 
|2004       |  |             | 103 |          |  |           | 28  |  |  |  | 75  | 
|2005       |  |             | 100 |          |  |           | 26  |  |  |  | 74  | 
|2006       |  |             | 71  |          |  |           | 17  |  |  |  | 54  | 
|2007       |  |             | 53  |          |  |           | 15  |  |  |  | 38  | 
|After 2007 |  |             | 421 |          |  |           | 75  |  |  |  | 346 | 
|           |  |             |     |          |  |           |     |  |  |  |     | 
|           |  |             | 899 |          |  |           | 191 |  |  |  | 708 | 
|           |  |             |     |          |  |           |     |  |  |  |     | 

Lease payments in 2002 in connection with
operating leases amounted to
191 million
(2001:
244 million;
2000:
162 million).

The other financial obligations include
4 million
(2001:
85 million)
to nonconsolidated subsidiaries.



|     |                       
|---- | ----------------------
|[31] | Trade accounts payable

Trade accounts are payable mainly to third
parties; they are carried at amortized cost. As last year, the
entire amount is due within one year.

F-45



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Trade accounts payable as of December 31,
2002 include
2,534 million
(2001:
1,991 million)
maturing within one year and
0 million
(2001: 2 million)
maturing after one year. Of the total,
4 million
(2001: 8 million)
is payable to subsidiaries,
18 million
(2001: 7 million)
to other affiliated companies and
2,512 million
(2001: 1,978 million)
to other suppliers.



|     |                          
|---- | -------------------------
|[32] | Miscellaneous liabilities

Miscellaneous liabilities are carried at
amortized cost. They are comprised as follows:

|                                          |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 
|----------------------------------------- |  | ------------- | ----- | ------------- |  | ----- | ----- | -------- |  |  | ----- |  |  |  | ----- | 
|                                          |  |               |       |              
|                                          |  | Dec. 31, 2002 |       | Dec. 31, 2001
|                                          |  |               |       |              
|                                          |  |               |       | Maturing      |  |       |       | Maturing
|                                          |  | Total         |       | in 2002       |  | Total |       | in 2001 
|                                          |  |               |       |               |  |       |       |         
|                                          |  |              
|                                          |  | ( million)  
|Payroll liabilities                       |  |               | 442   |               |  |       | 330   |          |  |  | 443   |  |  |  | 320   | 
|Tax liabilities                           |  |               | 346   |               |  |       | 346   |          |  |  | 281   |  |  |  | 280   | 
|Liabilities for social expenses           |  |               | 170   |               |  |       | 170   |          |  |  | 144   |  |  |  | 144   | 
|Accrued interest on liabilities           |  |               | 308   |               |  |       | 308   |          |  |  | 125   |  |  |  | 125   | 
|Advance payments received                 |  |               | 20    |               |  |       | 20    |          |  |  | 25    |  |  |  | 25    | 
|Liabilities from the acceptance of drafts |  |               | 17    |               |  |       | 17    |          |  |  | 17    |  |  |  | 17    | 
|License liabilities                       |  |               | 57    |               |  |       | 57    |          |  |  | 56    |  |  |  | 56    | 
|Other miscellaneous liabilities           |  |               | 890   |               |  |       | 890   |          |  |  | 881   |  |  |  | 865   | 
|                                          |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 
|                                          |  |               | 2,230 |               |  |       | 2,138 |          |  |  | 1,972 |  |  |  | 1,832 | 
|                                          |  |               |       |               |  |       |       |          |  |  |       |  |  |  |       | 

Tax liabilities include not only Group
companies own tax liabilities, but also taxes withheld for
paying over to the authorities an 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
53 million
(2001:
42 million)
to non-consolidated subsidiaries and
4 million
(2001:
3 million)
to other affiliated companies.



|     |                                             
|---- | --------------------------------------------
|[33] | Further Information on other
    liabilities

Other liabilities (financial obligations, trade
accounts payable and miscellaneous liabilities) include
6,593 million
(2001:
1,779 million)
maturing in more than five years.

Of the total,
146 million
(2001:
334 million)
was secured, mainly by mortgages totalling
90 million
(2001: 256 million).

Included is
308 million
(2001:
125 million)
in accrued interest, representing expenses attributable to the
fiscal year but not due to be paid until alter 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.

Deferred income as of December 31, 2002
includes
97 million
(2001:
111 million)
in such grants and subsidies received from governments; the
amount reversed and recognized in income was
19 million
(2001:
17 million).

F-46



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)




|     |                         
|---- | ------------------------
|[35] | Discontinuing operations

The wholly owned subsidiary Haarmann & Reimer
was sold to EQT Northern Europe Private Equity Funds effective
September 30, 2002. Assets and liabilities as of
December 31, 2002 therefore do not include any amounts
pertaining to discontinuing operations.

In 2001, assets of
820 million
and liabilities of
233 million
related to this business group. The assets comprised
419 million
in noncurrent assets,
384 million
in current assets and
17 million
in liquid assets, while the liabilities consisted of
74 million
in pension provisions,
43 million
in other provisions,
12 million
in financial liabilities and
104 million
in miscellaneous liabilities.



|     |                              
|---- | -----------------------------
|[36] | Commitments and contingencies

Contingent liabilities as of December 31,
2002  almost all of which exist toward third
parties  amount to
245 million.
They result from:

|                                  |  |               |     |               |  |  |     | 
|--------------------------------- |  | ------------- | --- | ------------- |  |  | --- | 
|                                  |  | Dec. 31, 2002 |     | Dec. 31, 2001
|                                  |  |               |     |              
|                                  |  |              
|                                  |  | ( million)  
|Issuance and endorsement of bills |  |               | 6   |               |  |  | 22  | 
|Guarantees                        |  |               | 104 |               |  |  | 53  | 
|Warranties                        |  |               | 135 |               |  |  | 118 | 
|                                  |  |               |     |               |  |  |     | 
|                                  |  |               | 245 |               |  |  | 193 | 
|                                  |  |               |     |               |  |  |     | 

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
619 million
(2001: 557 million).
The respective payment obligations mature as follows:

|              |  |           |     | 
|------------- |  | --------- | --- | 
|              |  |  million
|              |  |          
|2003          |  |           | 191 | 
|2004          |  |           | 140 | 
|2005          |  |           | 85  | 
|2006          |  |           | 61  | 
|2007          |  |           | 49  | 
|2008 or later |  |           | 93  | 
|              |  |           |     | 
|              |  |           | 619 | 
|              |  |           |     | 

Financial commitments resulting from orders
already placed under purchase agreements related to planned or
ongoing capital expenditure projects total
286 million
(2001: 354 million).
The respective payments are due almost entirely in 2003.

Under collective agreements an 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

F-47



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


570 million
(2001:
732 million).
At December 31, 2002, the remaining payments expected to be
made to these parties, assuming the milestones or other
conditions are met, were as follows:

|              |  |           |     | 
|------------- |  | --------- | --- | 
|Maturing in   |  |  million
|              |  |          
|2003          |  |           | 208 | 
|2004          |  |           | 153 | 
|2005          |  |           | 89  | 
|2006          |  |           | 74  | 
|2007          |  |           | 36  | 
|2008 or later |  |           | 10  | 
|              |  |           |     | 
|              |  |           | 570 | 
|              |  |           |     | 



|     |                
|---- | ---------------
|[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
an 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 amortized cost.

Fair value

The fair value of a primary financial instrument
is the price at which it could be exchanged in a current
transaction between knowledgeable, willing parties in an active
market. The fair values of other securities included in
investments and of marketable securities are derived from their
market prices and reflected in the financial statements.
Financial liabilities are valued mainly by discounting future
cash flows, or in some cases on the basis of quoted prices.
Their total fair value reflected in the consolidated financial
statements is
24 million
less than their carrying value. The remaining receivables and
liabilities and the liquid assets have such short terms that
there is no significant discrepancy between their fair values
and carrying amounts.

Credit risk

Credit risk arises from the possibility of asset
impairment occurring because counterparties cannot meet their
obligations in transactions involving financial instruments.

Since we do not conclude master netting
arrangements with our customers, the total of the amounts
recognized in assets represents the maximum exposure to credit
risk.

F-48



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


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 an 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:

|                                                           |  |               |        |               |  |  |        |  
|---------------------------------------------------------- |  | ------------- | ------ | ------------- |  |  | ------ | -
|                                                           |  | Dec. 31, 2002 |        | Dec. 31, 2001
|                                                           |  |               |        |              
|                                                           |  |              
|                                                           |  | ( million)  
|Primary asset instruments exposed to currency risk         |  |               | 3,564  |               |  |  | 3,657  |  
|Primary liability instruments exposed to currency
    risk |  |               | 3,154  |               |  |  | 2,314  |  
|Amount naturally hedged                                    |  |               | (3,621 | )             |  |  | (3,011 | )
|Amount hedged through derivative financial
    instruments |  |               | (2,720 | )             |  |  | (2,527 | )
|                                                           |  |               |        |               |  |  |        |  
|Residual unhedged currency exposure                        |  |               | 377    |               |  |  | 433    |  
|                                                           |  |               |        |               |  |  |        |  

In some cases forecasted transactions are also
hedged to further reduce the related anticipated currency risk.
At December 31, 2002 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, 2003 
was
498 million,
which is not included in the hedged amount of
2.7 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 2002, the differences resulting from
fair value measurement and initially recognized in equity, but
not in net income, amounted to
16 million.

On the asset side, 56 percent of currency
risks relate to the U.S. dollar and 5 percent to the
Japanese yen. On the liabilities side, 52 percent of
foreign currency risks relate to the U.S. dollar. The
remaining exposure involves liabilities in British pounds
(11 percent), Japanese yen (2 percent) and a number of
other currencies outside the dollar and euro zones. The
U.S. dollar accounts for 68 percent of the asset
volume hedged through derivative financial instruments, followed
by the yen which accounts for 6 percent. Of the hedged
liabilities, 54 percent are in U.S. dollars,
24 percent in British pounds and the remaining
22 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 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 are exposed to
currency risk, they are hedged through derivative financial
instruments.

Interest rate risk

An interest rate risk  the possibility
that the value of a financial instrument will change due to
movements in market rates of interest  applies mainly
to receivables and payables with maturities of over one year.

F-49



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Items with such long maturities are not of
material significance on the operating side but are relevant in
the case of investments and financial liabilities. 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.

The notional amounts and fair values of the
derivative financial instruments held at the closing date were
as follows:

|                                                                                      |  |                 |       |               |  |               |       |               |  |  |     |  |  |  |     |  
|------------------------------------------------------------------------------------- |  | --------------- | ----- | ------------- |  | ------------- | ----- | ------------- |  |  | --- |  |  |  | --- | -
|                                                                                      |  |                 |       |              
|                                                                                      |  | Notional amount |       | Fair value   
|                                                                                      |  |                 |       |              
|                                                                                      |  | Dec. 31, 2002   |       | Dec. 31, 2001 |  | Dec. 31, 2002 |       | Dec. 31, 2001
|                                                                                      |  |                 |       |               |  |               |       |              
|                                                                                      |  |                
|                                                                                      |  | ( million)    
|Forward foreign exchange contracts                                                    |  |                 | 2,979 |               |  |               | 2,749 |               |  |  | 105 |  |  |  | (28 | )
|Currency options                                                                      |  |                 | 239   |               |  |               | 279   |               |  |  | 9   |  |  |  | *   |  
|Interest rate hedging contracts (including
    interest and principal currency swaps) |  |                 | 5,799 |               |  |               | 4,485 |               |  |  | 365 |  |  |  | (60 | )
|                                                                                      |  |                 |       |               |  |               |       |               |  |  |     |  |  |  |     |  
|                                                                                      |  |                 | 9,017 |               |  |               | 7,513 |               |  |  | 479 |  |  |  | (88 | )
|                                                                                      |  |                 |       |               |  |               |       |               |  |  |     |  |  |  |     |  






|  |                         
|- | ------------------------
|* | less than
    1 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 an 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.

F-50



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Credit risk

Credit risk exposure is
578 million
(2001:
139 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 an the volume
of business in derivative financial instruments transacted with
individual parties.

Currency risk

Exchange hedging instruments in the notional
amount of
3.2 billion
(2001:
2.7 billion)
mature within one year, while instruments in the amount of only
8 million (2001:
0.3 billion)
have longer remaining terms.

Interest rate risk

Short-term interest rate hedging contracts
(including interest and principal currency swaps) total
0.5 billion
(2001:
2.0 billion).
Those maturing after more than one year total
5.3 billion
(2001:
2.5 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.

[39] Net cash provided by operating
activities

The cash flow statement starts from the operating
result. The gross cash flow for 2002 of
3.0 billion
(2001:
2.9 billion;
2000:
4.2 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-19 to F-22.
The net cash flow of
4.4 billion
(2001:
3.9 billion;
2000:
3.1 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 2002 resulted in a cash outflow of
2.2 billion
(2001:
2.6 billion;
2000:
2.6 billion).
Cash outflows for acquisitions, primarily that of Aventis
CropScience, amounted to
7.8 billion
(2001:
0.5 billion;
2000:
4.1 billion).
Sales of property, plant and equipment led to a cash inflow of
2.2 billion
(2001:
0.5 billion;
2000:
0.3 billion),
while the cash inflow from the sale of investments and from
interest and dividend receipts, including marketable securities,
amounted to
1.3 billion
(2001:
0.4 billion;
2000:
0.3 billion).

[41]  Net cash provided by (used in)
financing activities

The main factor in the net cash inflow of
2.2 from
financing activities in 2002 (2001: net cash outflow of
1.5 billion;
2000: net cash inflow of
0.8 billion)
was
3.5 billion
in net borrowings. Dividend payments for and interest payments
totaled
1.4 billion
(2001:
1.5 billion;
2000:
1.3 billion).

F-51



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


[42]  Discontinuing
operations

Discontinuing operations affected the Group cash
flow statements as follows:

|                                                        |  |             |     |                   |  |        |     |       |  |      |       |      |  |      |      |      |  |      |      |   |  |  |     |   |  |  |       |  |  |  |     |  |  |  |      |  
|------------------------------------------------------- |  | ----------- | --- | ----------------- |  | ------ | --- | ----- |  | ---- | ----- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | --- | - |  |  | ----- |  |  |  | --- |  |  |  | ---- | -
|                                                        |  |             |     |                   |  |        |     |      
|                                                        |  | Erdölchemie |     | Haarmann & Reimer |  | DyStar |     | Total
|                                                        |  |             |     |                   |  |        |     |      
|                                                        |  | 2001        |     | 2000              |  | 2002   |     | 2001  |  | 2000 |       | 2000 |  | 2002 |      | 2001 |  | 2000
|                                                        |  |             |     |                   |  |        |     |       |  |      |       |      |  |      |      |      |  |     
|                                                        |  |            
|                                                        |  | ( million)
|Net cash provided by operating activities               |  |             | 13  |                   |  |        | 38  |       |  |      | 87    |      |  |      | 118  |      |  |      | 84   |   |  |  | 66  |   |  |  | 87    |  |  |  | 131 |  |  |  | 188  |  
|Net cash provided by (used in) investing
    activities |  |             | 474 |                   |  |        | (87 | )     |  |      | 1,286 |      |  |      | (164 | )    |  |      | (116 | ) |  |  | (65 | ) |  |  | 1,286 |  |  |  | 310 |  |  |  | (268 | )
|Net cash provided by (used in) financing
    activities |  |             | 0   |                   |  |        | 0   |       |  |      | 1     |      |  |      | 77   |      |  |      | (7   | ) |  |  | 18  |   |  |  | 1     |  |  |  | 77  |  |  |  | 11   |  
|Change in cash and cash equivalents                     |  |             | 487 |                   |  |        | (49 | )     |  |      | 1,374 |      |  |      | 31   |      |  |      | (39  | ) |  |  | 19  |   |  |  | 1,374 |  |  |  | 518 |  |  |  | (69  | )

[43]  Cash and cash
equivalents

Cash and cash equivalents as of December 31,
2002 amounted to
0.8 billion
(2001:
0.7 billion;
2000:
0.5 billion).
In accordance with IAS 7 (Cash Flow Statements), this item also
includes financial securities with original maturities of up to
three months. The liquid asset of
0.8 billion
(2001:
0.8 billion;
2000:
0.7 billion)
shown in the balance sheet also include marketable securities
and other instruments.

[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:

|                                                         |  |       |   |                |  |             |       |             |  |             |       |   |  |  |      |   |  |  |       |  
|-------------------------------------------------------- |  | ----- | - | -------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | - |  |  | ---- | - |  |  | ----- | -
|                                                         |  | Notes |   | 2002           |  | 2002        |       | 2001        |  | 2000       
|                                                         |  |       |   |                |  |             |       |             |  |            
|                                                         |  |       |   | ($ million(1)) |  | ( million) |       | ( million) |  | ( million)
|Net income reported under IAS                            |  |       |   |                |  |             | 1,111 |             |  |             | 1,060 |   |  |  | 965  |   |  |  | 1,816 |  
|Fair value of derivative financial instruments           |  |       | a |                |  |             |      |             |  |             |      |   |  |  | (95  | ) |  |  | 95    |  
|Available for sale securities                            |  |       | b |                |  |             | 31    |             |  |             | 30    |   |  |  | (30  | ) |  |  |      |  
|Business combinations                                    |  |       | c |                |  |             | 215   |             |  |             | 205   |   |  |  | (63  | ) |  |  | (128  | )
|Pensions                                                 |  |       | d |                |  |             | (25   | )           |  |             | (24   | ) |  |  | (24  | ) |  |  | (24   | )
|In-process research and development                      |  |       | e |                |  |             | (139  | )           |  |             | (133  | ) |  |  |     |   |  |  |      |  
|Asset impairments                                        |  |       | f |                |  |             | 215   |             |  |             | 205   |   |  |  |     |   |  |  |      |  
|Other                                                    |  |       | g |                |  |             | (34   | )           |  |             | (33   | ) |  |  | (5   | ) |  |  | 33    |  
|Deferred tax effect on U.S. GAAP adjustments             |  |       |   |                |  |             | (35   | )           |  |             | (33   | ) |  |  | 52   |   |  |  | (9    | )
|                                                         |  |       |   |                |  |             |       |             |  |             |       |   |  |  |      |   |  |  |       |  
|Net income reported under
    U.S. GAAP                  |  |       |   |                |  |             | 1,339 |             |  |             | 1,277 |   |  |  | 800  |   |  |  | 1,783 |  
|                                                         |  |       |   |                |  |             |       |             |  |             |       |   |  |  |      |   |  |  |       |  
|Basic and diluted earnings per share under
    U.S. GAAP |  |       |   |                |  |             | 1.83  |             |  |             | 1.75  |   |  |  | 1.10 |   |  |  | 2.44  |  
|                                                         |  |       |   |                |  |             |       |             |  |             |       |   |  |  |      |   |  |  |       |  

F-52



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                                  |  |       |   |                |  |             |        |             |  |  |        |   |  |  |        |  
|------------------------------------------------- |  | ----- | - | -------------- |  | ----------- | ------ | ----------- |  |  | ------ | - |  |  | ------ | -
|                                                  |  |       |   |               
|                                                  |  |       |   | December 31,  
|                                                  |  |       |   |               
|                                                  |  | Notes |   | 2002           |  | 2002        |        | 2001       
|                                                  |  |       |   |                |  |             |        |            
|                                                  |  |       |   | ($ million(1)) |  | ( million) |        | ( million)
|Stockholders equity reported under
    IAS       |  |       |   |                |  |             | 16,079 |             |  |  | 15,335 |   |  |  | 16,922 |  
|Fair value of derivative financial instruments    |  |       | a |                |  |             |       |             |  |  |       |   |  |  |       |  
|Available for sale securities                     |  |       | b |                |  |             |       |             |  |  |       |   |  |  |       |  
|Business combinations                             |  |       | c |                |  |             | 943    |             |  |  | 900    |   |  |  | 786    |  
|Pensions                                          |  |       | d |                |  |             | 765    |             |  |  | 730    |   |  |  | 881    |  
|In-process research and development               |  |       | e |                |  |             | (152   | )           |  |  | (145   | ) |  |  | (15    | )
|Asset impairments                                 |  |       | f |                |  |             | 215    |             |  |  | 205    |   |  |  |       |  
|Other                                             |  |       | g |                |  |             | 88     |             |  |  | 84     |   |  |  | 120    |  
|Deferred tax effect on U.S. GAAP adjustments      |  |       |   |                |  |             | (393   | )           |  |  | (375   | ) |  |  | (394   | )
|                                                  |  |       |   |                |  |             |        |             |  |  |        |   |  |  |        |  
|Stockholders equity reported under
    U.S. GAAP |  |       |   |                |  |             | 17,545 |             |  |  | 16,734 |   |  |  | 18,300 |  
|                                                  |  |       |   |                |  |             |        |             |  |  |        |   |  |  |        |  

|                                                                                                                                          |  |                |        |             |  |             |        |   |  |  |        |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ----------- |  | ----------- | ------ | - |  |  | ------ | -
|                                                                                                                                          |  |               
|                                                                                                                                          |  | December 31,  
|                                                                                                                                          |  |               
|                                                                                                                                          |  | 2002           |        | 2002        |  | 2001       
|                                                                                                                                          |  |                |        |             |  |            
|                                                                                                                                          |  | ($ million(1)) |        | ( million) |  | ( million)
|Components of stockholders equity in
    accordance with U.S. GAAP:                                                                      |  |                |        |             |  |             |        |   |  |  |        |  
|Capital stock of Bayer AG                                                                                                                 |  |                | 1,961  |             |  |             | 1,870  |   |  |  | 1,870  |  
|Capital reserves of Bayer AG                                                                                                              |  |                | 3,085  |             |  |             | 2,942  |   |  |  | 2,942  |  
|Retained earnings                                                                                                                         |  |                | 13,399 |             |  |             | 12,780 |   |  |  | 12,270 |  
|Accumulated other comprehensive income:                                                                                                   |  |                |        |             |  |             |        |   |  |  |        |  
| Unrealized market value adjustment on
    securities available for sale (net of taxes of $14 million,
    13 million,
    42 million) |  |                | (21    | )           |  |             | (20    | ) |  |  | 561    |  
| Unrealized market value adjustment on
    cash flow hedges (net of taxes of $6 million,
    6 million,
    1 million)                 |  |                | (12    | )           |  |             | (11    | ) |  |  | 1      |  
| Additional minimum pension liability
    (net of taxes of $207 million,
    197 million,
    and
    171 million)                     |  |                | (297   | )           |  |             | (283   | ) |  |  | (244   | )
|Translation differences                                                                                                                   |  |                | (570   | )           |  |             | (544   | ) |  |  | 900    |  
|                                                                                                                                          |  |                |        |             |  |             |        |   |  |  |        |  
|Total                                                                                                                                     |  |                | 17,545 |             |  |             | 16,734 |   |  |  | 18,300 |  
|                                                                                                                                          |  |                |        |             |  |             |        |   |  |  |        |  






|    |                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 2001 U.S. dollar figures have been
    translated at an exchange rate of
    1.0000 =
    $1.0485. 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
U.S. GAAP. The Group uses foreign currency forward
contracts for hedging of anticipated transactions. Prior to the
adoption of IAS 39 and SFAS 133, these forward
contracts were recorded at the lower of cost or market value
under IAS and marked to market through the income statement in
accordance with U.S. GAAP applicable at the time. The
95 million
difference between IAS and U.S. GAAP net income for the
year ended December 31, 2000 arose from the recognition of
a
95 million
gain relating to the anticipated cash flow forward contracts
under U.S. GAAP.

During 2001, the fair value of the foreign
currency forward contracts that had been entered into during
2000 declined to
68 million.
As the hedged anticipated transactions were realized during
2001, this
68 million
was recorded as gain under IAS. Conversely, under
U.S. GAAP, the
27 million
decline in value was recognized as an

F-53



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


expense. Therefore, the reconciling item between
net income under IAS and U.S. GAAP for the year ended
December 31, 2001 of
95 million
results from the difference between the
68 million
gain under IAS compared to the
27 million
expense under U.S. GAAP. Subsequent to the adoption of
IAS 39 and SFAS 133, the accounting for new foreign
currency forward contracts for hedging of anticipated
transactions is consistent between 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. Bayers policy
is to evaluate all declines in market value if they have
exceeded 20% of the carrying value over a continual period of
6 months. If there is no indication of a significant
increase in fair value in the short-term, the declines are
considered other-than-temporary. Principally, other declines in
fair value that do not meet these criteria may be considered
other-than-temporary depending upon the circumstances
surrounding the underlying investment.

Prior to the adoption of IAS 39 in 2001,
investments in debt and certain equity securities were reflected
in the balance sheet at nominal value less any necessary
write-downs under 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. The adjustment recorded in 2001
reflects an other-than-temporary decline for U.S. GAAP
purposes where no impairment was recognized under IAS;
therefore, the amounts were reclassified from other
comprehensive income to net income. The adjustment in 2002
reflects the recognition under IAS of the impairment that had
been recognized under U.S. GAAP in 2001.

c.   Business
Combinations

Prior to the adoption of IAS 22 (revised 1993) on
January 1, 1995, the Group wrote-off all goodwill directly
to equity in accordance with 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, in 2001 and 2000, the pre-1995
goodwill is being amortized through the income statement over
estimated useful lives between 20 and 40 years. In addition
to the normally recurring amortization expense on these amounts
during 2001, the Group wrote-off
22 million
of goodwill capitalized under U.S. GAAP. The write-off was
due to the disposal of the entity to which the goodwill relates.

In 2002, as required by the newly implemented
SFAS 142, the Group ceased amortization of its goodwill
recorded under IAS, its indefinite-lived intangible asset, the
Bayer Cross, and the pre-1995 goodwill recognized
for U.S. GAAP purposes. The adjustment reverses the
amortization recorded under IAS for the Groups IAS
goodwill of
194 million
and the Bayer Cross indefinite-lived intangible
asset of
11 million.



|   |                   
|-- | ------------------
|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 accommodation of the United States
Securities and Exchange Commission (SEC) to foreign
private issuers, the Group adopted SFAS No. 87 on
January 1, 1994, for its non-U.S. plans, which was
also the date of adoption for IAS 19 for those plans. It
was not feasible to apply SFAS No. 87 on the effective date
specified in the standard. IAS 19 as applied by the Group
from 1994 was substantially similar to the methodology required
under SFAS No. 87. The adjustment between IAS and
U.S. GAAP comprises required SFAS 87 amortization of the
unrecognized transition obligation over the remaining average
service lives of employees from 1994 of
238 million,
the recognition of an asset limitation under IAS 19, which
is not allowed under SFAS No. 87, and the recognition of an
additional minimum liability under SFAS No. 87, which is
not required under IAS 19.

F-54



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


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:

|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|------------------------------------------------------ |  | ----------- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                                       |  | 2002        |        | 2001 |  | 2000
|                                                       |  |             |        |      |  |     
|                                                       |  |            
|                                                       |  | ( million)
|Pension benefits:                                      |  |             |        |      |  |      |        |   |  |  |        |  
|Liability recognized for IAS                           |  |             | (3,741 | )    |  |      | (3,057 | ) |  |  | (3,151 | )
|Asset limitation under IAS 19                          |  |             | 1,187  |      |  |      | 1,249  |   |  |  | 1,249  |  
|Additional minimum liability under SFAS
    No. 87     |  |             | (480   | )    |  |      | (415   | ) |  |  | (215   | )
|Difference in unrecognized transition obligation       |  |             | 23     |      |  |      | 47     |   |  |  | 71     |  
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|Liability recognized for
    U.S. GAAP                 |  |             | (3,011 | )    |  |      | (2,176 | ) |  |  | (2,046 | )
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|Net periodic benefit cost recognized for IAS           |  |             | 521    |      |  |      | 270    |   |  |  | 260    |  
|Amortization of transition obligation                  |  |             | 24     |      |  |      | 24     |   |  |  | 24     |  
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  
|Net periodic benefit cost recognized for
    U.S. GAAP |  |             | 545    |      |  |      | 294    |   |  |  | 284    |  
|                                                       |  |             |        |      |  |      |        |   |  |  |        |  

e.   In-process Research and
Development

IAS does not consider that in-process research
and development (IPR&D) is an intangible asset
that can be separated from goodwill. Under U.S. GAAP it is
considered to be a separate asset that needs to be written-off
immediately following an acquisition as the feasibility of the
acquired research and development has not been fully tested and
the technology has no alternative future use.

During 2002, IPR&D has been identified for
U.S. GAAP purposes in connection with the Aventis
CropScience and Visible Genetics acquisitions. Fair value
determinations were used to establish
133 million
of IPR&D for both acquisitions, which was expensed
immediately. The independent appraisers used a discounted cash
flow approach and relied upon information provided by Group
management. The discounted cash flow approach uses the expected
future net cash flows, discounted to their present value, to
determine an assets current fair value.

As a whole, the income booked for the reversal of
the amortization of IPR&D recorded under IAS as a component
of other operating expense and selling expense amounted to
5 million
in 2002.

f.   Asset
Impairments

While the triggering events under both IAS and
U.S. GAAP that require an impairment test on long-lived
assets are the same, there is a difference in the indicator of
an impairment. Under IAS, impairments on long-lived assets are
recognized when the recoverable amount of an asset is less than
its carrying amount. An assets recoverable amount is the
higher of its net selling price, which is the sales price less
costs of disposal, and value in use, which is the estimated
discounted cash flows from the use and disposal of the asset.
Under U.S. GAAP, a two-step model is used. The first step
is an analysis of an assets carrying value as compared to
the sum of its undiscounted cash flows. Only if the undiscounted
cash flows are less than the assets carrying value will an
impairment be indicated, in which case, the loss is measured as
the difference between the assets carrying value and its
fair value.

In 2002, the carrying values of long-lived assets
of the Polyether business were adjusted for a
205 million
impairment loss under IAS. However, as the undiscounted cash
flows of the Polyether business were greater than its carrying
value, under U.S. GAAP no further impairment test was
required and; therefore, no impairment loss was recorded.

F-55



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


g.   Other

There are also differences between IAS and
U.S. GAAP in relation to (1) restructuring provisions,
(2) equity compensation and (3) other employee
benefits. None of the differences are individually significant
and they are therefore shown as a combined total.

Additional U.S. GAAP
disclosures

Purchase Accounting

On June 1, 2002, Bayer acquired 100% of the
issued share capital of Aventis CropScience for
7.8 billion,
the sum of the cash consideration and the assumption of debt.
The results of Aventis CropSciences operations have been
included in the Groups consolidated financial statements
since that date. Aventis CropScience is one of the leading
companies in the areas of crop protection, biotechnology and
agrochemical specialties. The purchase of Aventis CropScience,
which was combined with Bayer CropScience, is intended to allow
Bayer CropScience to become one of the leading competitors in
the industry, by achieving an outstanding product offering to
customers on a global level, and to substantially boost its
earning power. Bayer CropScience will take advantage of
synergies and economies of scale to meet market demands and
competitive challenges. The business will cover all agrochemical
activities as well as biotechnology and seeds.

As a result of the fair value appraisal,
increases in the values of Aventis CropSciences net assets
were recognized and fair market values attributed to its other
intangible assets and in-process research and development,
together with associated deferred taxation effects. The
difference between the cost of acquisition and the fair value of
assets less liabilities of Aventis CropScience has been
recognized as goodwill. The amount allocated to in-process
research and development was written off at the date of
acquisition, as the technological feasibility has not yet been
established and it has no alternative future use, as required
under U.S. GAAP. Fair value adjustments to the recorded
amount of inventory were expensed in 2002 and additional
amortization and depreciation was recorded in respect of the
fair value adjustments to tangible and intangible assets over
the period of their respective economic useful lives. In
accordance with SFAS 142, goodwill will not be amortized,
but instead tested on an annual basis for impairment.

F-56



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


The adjustments to the assets and liabilities of
Aventis CropScience to reflect the fair values and allocation of
the excess purchase consideration over the fair value of net
assets acquired and liabilities assumed, based on an independent
appraisal prepared using estimates and assumptions provided by
management, are summarized in the table below:

|                          |                                 |                                          |        |       |       | 
|------------------------- | ------------------------------- | ---------------------------------------- | ------ | ----- | ----- | 
|                          |                                 | ( million)                             
|At June 1, 2002           |                                 |                                          |        |      
|Current Assets:           |                                 |                                          |        |      
|                          | Trade accounts receivable       |                                          |        | 1,660 |      
|                          | Inventory                       |                                          |        | 1,334 |      
|                          | Other assets                    |                                          |        | 980   |      
|Noncurrent Assets:        |                                 |                                          |        |      
|                          | Property, plant and equipment   |                                          |        | 874   |      
|                          | Identifiable Intangible assets: |                                          |        |       |      
|                          |                                 | Existing Technology/ Patents             |        |       | 2,239 | 
|                          |                                 | Trademarks and trade names/ Registration |        |       | 742   | 
|                          |                                 | Assets held for Sale                     |        |       | 1,138 | 
|                          |                                 | In-process R&D projects                  |        |       | 129   | 
|                          |                                 |                                          |        |      
|                          | Subtotal Intangible Assets      |                                          |        | 4,248 |      
|                          | Investments                     |                                          |        | 186   |      
|                          | Goodwill                        |                                          |        | 2,153 |      
|                          |                                 |                                          |        |      
|Total Assets Acquired     |                                 |                                          | 11,435 |      
|                          |                                 |                                          |        |      
|Trade liabilities         |                                 |                                          | (488   | )    
|Other liabilities         |                                 |                                          | (721   | )    
|Pensions                  |                                 |                                          | (578   | )    
|Borrowings                |                                 |                                          | (2,545 | )    
|Deferred taxes            |                                 |                                          | (1,365 | )    
|                          |                                 |                                          |        |      
|Total Liabilities Assumed |                                 |                                          | (5,697 | )    
|                          |                                 |                                          |        |      
|Net assets acquired       |                                 |                                          | 5,738  |      
|                          |                                 |                                          |        |      

Of the
4,248 million
of acquired identifiable intangible assets,
1,138 million
was assigned to assets to be sold, as mandated by regulatory
conditions imposed in connection with the acquisition of Aventis
CropScience, and
129 million
to research and development assets that were written off at the
date of acquisition. The remaining
2,981 million
of acquired intangible assets have a weighted average useful
life of approximately 13 years which was determined based
on managements appraisal of each assets remaining
useful life. The intangible assets that comprise that amount
have weighted average useful lives as noted in the table below:

|                           |  |         
|-------------------------- |  | --------
|Existing Technology        |  | 12 years
|Patents                    |  | 11 years
|Trademarks and trade names |  | 14 years
|Registration               |  | 13 years
|Total                      |  | 13 years

The
2,153 million
of goodwill was assigned to the CropScience business segment.
The goodwill is not deductible for tax purposes.

The following unaudited pro forma financial
information presents the combined results of operations of the
Group and Aventis CropScience as if the acquisition had occurred
as of the beginning of the periods presented, based on
U.S. GAAP applicable at that time. The unaudited pro forma
financial information is not intended to represent or be
indicative of the consolidated results of operations or
financial condition of the Group that would

F-57



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


have been reported had the acquisition been
completed as of the dates presented, and should not be taken as
representative of the future consolidated result of operations
or financial condition of the Group. Pro forma results were as
follows for the fiscal years ended December 31, 2002 and
2001:

|                                |  |             |        |      |  |  |        | 
|------------------------------- |  | ----------- | ------ | ---- |  |  | ------ | 
|Pro forma Financial Information |  | 2002        |        | 2001
|                                |  |             |        |     
|                                |  |            
|                                |  | (unaudited)
|                                |  | ( million)
|Revenue                         |  |             | 30,789 |      |  |  | 33,407 | 
|Operating result                |  |             | 2,442  |      |  |  | 1,230  | 
|Net income                      |  |             | 1,561  |      |  |  | 385    | 
|Earnings per share              |  |             | 2.14   |      |  |  | 0.53   | 

The unaudited pro forma financial information
above includes the following material, non-recurring charges:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reversal of purchase accounting adjustments of
    258 million,
    net of tax of
    194 million,
    in 2002                                
|
| |  | Reversal of purchased IPR&D charges of
    94 million,
    net of tax of
    35 million,
    in 2002, and recognition of those charges in 2001
|
| |  | Reversal of restructuring charges of
    38 million,
    net of tax of
    22 million,
    in 2002, and recognition of those charges in 2001  
|
| |  | Additional inventory charges related to the
    acquisition step-up in basis of
    138 million,
    net of tax of
    78 million,
    in 2001
|
| |  | Amortization of intangibles of
    186 million,
    net of tax of
    87 million,
    in 2002                                                 
|
| |  | Amortization of intangibles and goodwill of
    204 million,
    net of tax of
    87 million,
    in 2001                                    
|
| |  | The revenue, operating result and net income for
    the assets held for sale are included in the 2002 and 2001
    figures                     

Goodwill and Other Intangible
Assets

Effective January 1, 2002, the Group began
applying the provisions of SFAS 142, Goodwill and
Other Intangible Assets. SFAS 142 requires that
goodwill no longer be amortized over its estimated useful life.
The Group must instead identify and value its reporting units
for the purpose of assessing, at least annually, potential
impairment of goodwill allocated to each reporting unit.
Goodwill must be evaluated for impairment between these annual
tests if events or changes in circumstances indicate that
goodwill might be impaired.

The testing of goodwill for impairment involves
two steps:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The first step is to compare each reporting
    units fair value with its carrying amount including
    goodwill. If a reporting units carrying amount exceeds its
    fair value, this indicates that its goodwill may be impaired and
    the second step is required.                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The second step is to compare the implied fair
    value of the reporting units goodwill with the carrying
    amount of its goodwill. The implied fair value is computed by
    allocating the reporting units fair value to all of its
    assets and liabilities in a manner that is similar to a purchase
    price allocation in a business combination in accordance with
    SFAS 141. The remaining unallocated fair value amount is
    the implied fair value of the reporting units goodwill. If
    the implied fair value of goodwill is less than its carrying
    value, the difference is recorded as an impairment.

The Group also reassessed the useful lives of
existing recognized intangible assets. Intangible assets deemed
to have indefinite lives are no longer amortized, instead they
are tested annually for potential impairment, or more frequently
if events or changes in circumstances indicate that the asset
might be impaired. Intangible assets with finite lives continue
to be amortized over their useful lives. No changes in useful
lives were made as a result of this reassessment.

F-58



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Since the early 1900s, the Bayer
Cross has served to distinguish the Bayer name.
After World War I, the U.S. government expropriated
the U.S. rights to the Bayer name and trademarks as
enemy property. In 1986, Bayer reacquired the
U.S. rights to the Bayer trademark with respects to
products in the manufacturing industry and, in 1994, reacquired
the full U.S. rights to its name and trademarks, including
the Bayer Cross. We believe that the use of the
Bayer Cross by the business groups distinguishes
Bayer products, particularly in the U.S. markets. The Bayer
Cross is utilized on substantially all products sold
worldwide. There is no regulatory or legal life imposed on the
Bayer Cross. Bayer protects the value of the Bayer
Cross through its policy of not licensing its use to
any parties outside the Bayer Group. Based on these reasons, the
value associated with the Bayer Cross is assessed to
have an indefinite life and, accordingly, will not be amortized.
The intangible assets, related to the Bayer Cross
(primarily trademarks), had a total carrying value of
139 million
as of January 1, 2002.

The Group has identified its reporting units as
their business groups. Upon implementation of SFAS 142,
transitional impairment testing was performed as of the
beginning of the year in accordance with the requirements of the
Standard. This testing resulted in no impairment of the
Groups goodwill and indefinite-lived intangible assets.

The adoption of SFAS 142, required the Group to
reclassify as goodwill any intangible assets that were acquired
in business combinations completed before July 1, 2001,
that do not meet the criteria for separate recognition apart
from goodwill under SFAS 141. In addition any intangible
asset acquired that meets the new separability criteria but had
been previously included in the amount reported as goodwill must
be reclassified and accounted for as an asset apart from
goodwill. Application of these standards did not result in any
reclassifications.

The following table provides details of the
Groups total purchased intangible assets and related
accumulated amortization:

|                                     |  |             |       |            |  |               |       |       |  |       |       |   |  |  |       |   |  |  |        |  
|------------------------------------ |  | ----------- | ----- | ---------- |  | ------------- | ----- | ----- |  | ----- | ----- | - |  |  | ----- | - |  |  | ------ | -
|                                     |  |             |       |            |  | Marketing,    |       |       |  |      
|                                     |  |             |       |            |  | Selling and   |       |       |  |      
|                                     |  | Patents     |       | Trademarks |  | Access Rights |       | Other |  | Total
|                                     |  |             |       |            |  |               |       |       |  |      
|                                     |  |            
|                                     |  | ( million)
|Gross Carrying amounts, Dec 31, 2001 |  |             | 1,351 |            |  |               | 704   |       |  |       | 2,249 |   |  |  | 985   |   |  |  | 5,289  |  
|Accumulated Amortization             |  |             | (253  | )          |  |               | (149  | )     |  |       | (518  | ) |  |  | (324  | ) |  |  | (1,244 | )
|                                     |  |             |       |            |  |               |       |       |  |       |       |   |  |  |       |   |  |  |        |  
|Net book value, Dec 31, 2001         |  |             | 1,098 |            |  |               | 555   |       |  |       | 1,731 |   |  |  | 661   |   |  |  | 4,045  |  
|                                     |  |             |       |            |  |               |       |       |  |       |       |   |  |  |       |   |  |  |        |  
|Gross Carrying amounts, Dec 31, 2002 |  |             | 1,426 |            |  |               | 1,009 |       |  |       | 4,409 |   |  |  | 1,098 |   |  |  | 7,942  |  
|Accumulated Amortization             |  |             | (344  | )          |  |               | (212  | )     |  |       | (783  | ) |  |  | (423  | ) |  |  | (1,762 | )
|                                     |  |             |       |            |  |               |       |       |  |       |       |   |  |  |       |   |  |  |        |  
|Net book value, Dec 31, 2002         |  |             | 1,082 |            |  |               | 797   |       |  |       | 3,626 |   |  |  | 675   |   |  |  | 6,180  |  
|                                     |  |             |       |            |  |               |       |       |  |       |       |   |  |  |       |   |  |  |        |  

The Group recorded aggregate amortization expense
of
852 million,
553 million,
and
344 million
in 2002, 2001, and 2000, respectively, on its intangible assets.
In 2002 additional amortization of
55 million
is included. This incremental amortization is due to the
reorganization of the Group, which will require certain entities
to run their business on individual ERP-Systems, thus,
significantly shortening the useful life of the current
ERP-System.

F-59



---



##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Based on the current amount of intangible assets,
subject to amortization, estimated amortization expenses for
each of the five succeeding fiscal years are as follows:

|                     |  |             |     | 
|-------------------- |  | ----------- | --- | 
|Estimated Aggregated |  |            
|Amortization Expense |  | ( million)
|                     |  |            
|2003                 |  |             | 783 | 
|2004                 |  |             | 760 | 
|2005                 |  |             | 756 | 
|2006                 |  |             | 750 | 
|2007                 |  |             | 745 | 

As acquisitions and dispositions occur in the
future, actual amounts will vary.

The carrying amount of goodwill had the following
changes in 2002 in each of Bayers segments:

|                                       |  |                  |   |                |  |        |      |             |  |           |   |  |  |  |       |  |  |  |     |  
|-------------------------------------- |  | ---------------- | - | -------------- |  | ------ | ---- | ----------- |  | --------- | - |  |  |  | ----- |  |  |  | --- | -
|                                       |  | Pharmaceuticals, |   |                |  |        |      |             |  |          
|                                       |  | Biological       |   | Consumer Care, |  | Animal |      |             |  | Plastics,
|                                       |  | Products         |   | Diagnostics    |  | Health |      | CropScience |  | Rubber   
|                                       |  |                  |   |                |  |        |      |             |  |          
|                                       |  |                 
|                                       |  | ( million)     
|Book value as of January 1,
    2002   |  |                  | 1 |                |  |        | 787  |             |  |           | 1 |  |  |  | 148   |  |  |  | 335 |  
|                                       |  |                  |   |                |  |        |      |             |  |           |   |  |  |  |       |  |  |  |     |  
|Goodwill additions                     |  |                  |  |                |  |        | 8    |             |  |           |  |  |  |  | 2,173 |  |  |  |    |  
|Goodwill impairment                    |  |                  |  |                |  |        |     |             |  |           |  |  |  |  |      |  |  |  |    |  
|Other changes*                         |  |                  |  |                |  |        | (132 | )           |  |           |  |  |  |  | 32    |  |  |  | (17 | )
|                                       |  |                  |   |                |  |        |      |             |  |           |   |  |  |  |       |  |  |  |     |  
|Book value as of December 31,
    2002 |  |                  | 1 |                |  |        | 663  |             |  |           | 1 |  |  |  | 2,353 |  |  |  | 318 |  
|                                       |  |                  |   |                |  |        |      |             |  |           |   |  |  |  |       |  |  |  |     |  

|                                       |  |                |     |           |  |               |     |       |  |  |     |   |  |  |       |  
|-------------------------------------- |  | -------------- | --- | --------- |  | ------------- | --- | ----- |  |  | --- | - |  |  | ----- | -
|                                       |  | Polyurethanes, |     |           |  |               |     |      
|                                       |  | Coatings,      |     |           |  | Discontinuing |     | Bayer
|                                       |  | Fibers         |     | Chemicals |  | Operations    |     | Group
|                                       |  |                |     |           |  |               |     |      
|                                       |  |               
|                                       |  | ( million)   
|Book value as of January 1,
    2002   |  |                | 236 |           |  |               | 170 |       |  |  | 82  |   |  |  | 1,760 |  
|                                       |  |                |     |           |  |               |     |       |  |  |     |   |  |  |       |  
|Goodwill additions                     |  |                | 16  |           |  |               | 13  |       |  |  |    |   |  |  | 2,210 |  
|Goodwill impairment                    |  |                |    |           |  |               |    |       |  |  |    |   |  |  |      |  
|Other changes*                         |  |                | (43 | )         |  |               | (25 | )     |  |  | (82 | ) |  |  | (267  | )
|                                       |  |                |     |           |  |               |     |       |  |  |     |   |  |  |       |  
|Book value as of December 31,
    2002 |  |                | 209 |           |  |               | 158 |       |  |  |    |   |  |  | 3,703 |  
|                                       |  |                |     |           |  |               |     |       |  |  |     |   |  |  |       |  






|  |                                                                  
|- | -----------------------------------------------------------------
|* | Other changes include transfers and exchange rate
    differences

If the Group accounted for goodwill and
indefinite-lived intangibles under the nonamortization method of
SFAS 142, the impact on reported US GAAP results would
have been as follows:

|                                                |                                   |             |       |      |  |      |      |     |  |  |       |     | 
|----------------------------------------------- | --------------------------------- | ----------- | ----- | ---- |  | ---- | ---- | --- |  |  | ----- | --- | 
|For the year ended Dec. 31,                     |                                   | 2002        |       | 2001 |  | 2000
|                                                |                                   |             |       |      |  |     
|                                                |                                   |            
|                                                |                                   | ( million)
|Net income under US GAAP                        |                                   |             | 1,277 |      |  |      | 800  |     |  |  | 1,783 |    
|Amortization, net of tax                        |                                   |             |       |      |  |      |      |     |  |  |       |    
|                                                | Goodwill                          |             |       |     |  |      |      | 178 |  |  |       | 227 | 
|                                                | Indefinite-lived intangible asset |             |       |     |  |      |      | 6   |  |  |       | 6   | 
|                                                |                                   |             |       |      |  |      |      |     |  |  |       |    
|Adjusted net income under U.S. GAAP             |                                   |             | 1,277 |      |  |      | 984  |     |  |  | 2,016 |    
|                                                |                                   |             |       |      |  |      |      |     |  |  |       |    
|Adjusted basic and diluted net income per share |                                   |             | 1.75  |      |  |      | 1.35 |     |  |  | 2.76  |    
|                                                |                                   |             |       |      |  |      |      |     |  |  |       |    

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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Discontinued operations

Under IAS, the Group has classified Haarmann
& Reimer, which was disposed in 2002, and EC
Erdölchemie, which was disposed in 2001, as discontinuing
operations as they met the requirements under IAS, which
requires an analysis of a disposition at the level of a major
line of business or geographical area of operations. Under the
new requirements of SFAS 144 Accounting for the
Impairment or Disposal of Long-lived Assets, the
threshold, a component of an entity, for reporting discontinued
operations is lower than under IAS. Accordingly, dispositions or
assets and disposal groups held for sale qualifying as a
component of an entity, which is defined as comprising
operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes from the rest
of the entity, shall be reported as discontinued operations.
Therefore, under U.S. GAAP, the divestitures of Bayer
Wohnungen GmbH, included in the Reconciliation column in segment
reporting; the French and Spanish generic pharmaceuticals
operations, included in the Pharmaceutical and Biological
Products segment; and the sale of Bayers global household
insecticides business (Flora), included in the
Consumer Care and Diagnostics segment, qualify for reporting as
discontinued operations. The Fibers business group was
reclassified as part of continuing operations in all periods
presented due to the Groups decision in May 2002 to retain
it as a part of Polymers.

Sales from discontinued operations are
1,027 million,
1,574 million
and 1,965, in
2002, 2001 and 2000, respectively. The operating result of
discontinued operations, including gains on disposals of
1,732 million,
316 million
and  nil in
2002, 2001 and 2000, respectively, is
1,846 million,
522 million
and
261 million
in 2002, 2001 and 2000, respectively.

The following U.S. GAAP income statement
information includes these businesses as discontinued operations:

|                                        |  |             |       |             |  |             |       |             |  |  |     |  |  |  |       | 
|--------------------------------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | ----------- |  |  | --- |  |  |  | ----- | 
|                                        |  | 2002        |       | 2002        |  | 2001        |       | 2000       
|                                        |  |             |       |             |  |             |       |            
|                                        |  | ($ million) |       | ( million) |  | ( million) |       | ( million)
|Income from continuing operations       |  |             | (312  | )           |  |             | (297  | )           |  |  | 404 |  |  |  | 1,596 | 
|Discontinued operations  net of tax    |  |             | 1,651 |             |  |             | 1,574 |             |  |  | 396 |  |  |  | 187   | 
|                                        |  |             |       |             |  |             |       |             |  |  |     |  |  |  |       | 
|Net income reported under
    U.S. GAAP |  |             | 1,339 |             |  |             | 1,277 |             |  |  | 800 |  |  |  | 1,783 | 
|                                        |  |             |       |             |  |             |       |             |  |  |     |  |  |  |       | 

|                                     |                                     |             |      |             |   |             |      |             |   |  |      |      |  |  |      |      | 
|------------------------------------ | ----------------------------------- | ----------- | ---- | ----------- | - | ----------- | ---- | ----------- | - |  | ---- | ---- |  |  | ---- | ---- | 
|Earnings per share                   |                                     | 2002        |      | 2002        |   | 2000        |      | 2001       
|                                     |                                     |             |      |             |   |             |      |            
|                                     |                                     | ($ million) |      | ( million) |   | ( million) |      | ( million)
|Basic and diluted:                   |                                     |             |      |             |   |             |      |             |   |  |      |      |  |  |      |     
|                                     | Income from continuing operations   |             |      | (0.43       | ) |             |      | (0.41       | ) |  |      | 0.56 |  |  |      | 2.19 | 
|                                     | Income from discontinued operations |             |      | 2.26        |   |             |      | 2.16        |   |  |      | 0.54 |  |  |      | 0.25 | 
|                                     |                                     |             |      |             |   |             |      |             |   |  |      |      |  |  |      |     
|Basic and diluted earnings per share |                                     |             | 1.83 |             |   |             | 1.75 |             |   |  | 1.10 |      |  |  | 2.44 |     
|                                     |                                     |             |      |             |   |             |      |             |   |  |      |      |  |  |      |     

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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Financial assets and
liabilities

The components of marketable securities under
U.S. GAAP at December 31, 2002 and 2001 are the
following:

|                               |                   |             |     |            |  |            |     |                |  |  |     |     |   |  |       |       | 
|------------------------------ | ----------------- | ----------- | --- | ---------- |  | ---------- | --- | -------------- |  |  | --- | --- | - |  | ----- | ----- | 
|                               |                   |             |     | Gross      |  | Gross      |     | Carrying value
|                               |                   |             |     | unrealized |  | unrealized |     | and estimated 
|                               |                   | Cost        |     | gains      |  | losses     |     | fair value    
|                               |                   |             |     |            |  |            |     |               
|                               |                   |            
|                               |                   | ( million)
|As of December 31, 2002        |                   |             |     |            |  |            |     |                |  |  |     |     |   |  |       |      
|Available for sale securities: |                   |             |     |            |  |            |     |                |  |  |     |     |   |  |       |      
|                               | Equity securities |             |     | 516        |  |            |     | 85             |  |  |     | (95 | ) |  |       | 506   | 
|                               | Debt securities   |             |     | 29         |  |            |     |               |  |  |     |    |   |  |       | 29    | 
|                               |                   |             |     |            |  |            |     |                |  |  |     |     |   |  |       |      
|Total                          |                   |             | 545 |            |  |            | 85  |                |  |  | (95 | )   |   |  | 535   |      
|                               |                   |             |     |            |  |            |     |                |  |  |     |     |   |  |       |      
|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 |      
|                               |                   |             |     |            |  |            |     |                |  |  |     |     |   |  |       |      

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
714 million,
195 million,
and
296 million
in 2002, 2001 and 2000, respectively. Gross realized gains of
261 million,
25 million,
and
73 million
were included in those sales in 2002, 2001 and 2000,
respectively. There were no gross realized losses in 2002, 2001
or 2000. The gain or loss on these sales was determined using
the weighted average cost method.

The maturities of debt securities at
December 31, 2002 are as follows:

|                                 |  |               |    | 
|-------------------------------- |  | ------------- | -- | 
|                                 |  | Available for
|                                 |  | Sale         
|                                 |  |              
|                                 |  | ( million)  
|Within one year                  |  |               | 29 | 
|Over one year through five years |  |               |   | 
|                                 |  |               |    | 
|Total                            |  |               | 29 | 
|                                 |  |               |    | 

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. As of December 31, 2002, Bayer

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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


recognized no ineffectiveness for any of the
fair-value hedges. All components of the Groups interest
rate swap and cross average interest rate swap gains or losses
were included in the assessment of hedge effectiveness.

Cash Flow Hedges

While each risk management program has a
different time horizon, no program currently extends beyond the
next twelve months. The effects of hedges of foreign
currency-denominated cash receipts are reported in other
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 31, 2002, and no
amounts were reclassified to earnings for forecasted
transactions that did not occur. The estimated net amount of the
existing gains or losses on the reporting date that are expected
to be reclassified as earnings within the next twelve months
amount to
13 million.

Cash flow hedge results are reclassified into
earnings during the same period in which the related exposure
impacts earnings. If it appears that a forecasted transaction
will not materialize, reclassifications are made sooner.

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.

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##### Table of Contents



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 and all changes in
equity during a period that arise from non-owner sources, such
as foreign currency items and unrealized gains and losses on
securities available for sale. The additional disclosures
required under U.S. GAAP are as follows:

|                                                                                                                                                                    |  |             |        |             |  |             |      |   |  |  |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ---- | - |  |  | ----- | -
|                                                                                                                                                                    |  | 2002        |        | 2001        |  | 2000       
|                                                                                                                                                                    |  |             |        |             |  |            
|                                                                                                                                                                    |  | ( million) |        | ( million) |  | ( million)
|Net income under U.S. GAAP                                                                                                                                          |  |             | 1,277  |             |  |             | 800  |   |  |  | 1,783 |  
|Other comprehensive income:                                                                                                                                         |  |             |        |             |  |             |      |   |  |  |       |  
|Unrealized market value adjustment on
    available-for-sale securities (net of taxes of
    51 million,
    28 million
    and
    3 million,
    respectively) |  |             | (725   | )           |  |             | (884 | ) |  |  | 799   |  
|Unrealized market value adjustment on cash flow
    hedges (net of taxes of
    2 million,
    1 million,
    and  nil,
    respectively)                        |  |             | (13    | )           |  |             | 1    |   |  |  |      |  
|Reclassification adjustment:                                                                                                                                        |  |             |        |             |  |             |      |   |  |  |       |  
|Net realized gains (losses) on sales of
    securities (net of taxes of
    1 million,
    nil and
    4 million,
    respectively)                              |  |             | 154    |             |  |             | 25   |   |  |  | (12   | )
|Net realized gains (losses) on sales of cash flow
    hedges (net of taxes of
    4 million,
    27 million
    and  nil,
    respectively)                      |  |             | (9     | )           |  |             | 68   |   |  |  |      |  
|Additional minimum pension liability (net of
    taxes of
    26 million,
    80 million
    and
    1 million,
    respectively)                                |  |             | (39    | )           |  |             | (120 | ) |  |  | 2     |  
|Foreign currency translation adjustment                                                                                                                             |  |             | (1,444 | )           |  |             | 322  |   |  |  | 288   |  
|                                                                                                                                                                    |  |             |        |             |  |             |      |   |  |  |       |  
|Comprehensive income under
    U.S. GAAP                                                                                                                            |  |             | (799   | )           |  |             | 212  |   |  |  | 2,860 |  
|                                                                                                                                                                    |  |             |        |             |  |             |      |   |  |  |       |  

F-64



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Employee Benefit Plans

Presented below are the disclosures required by
SFAS No. 132 Employers Disclosures about
Pensions and Other Post-Retirement Benefits), which
provide a roll forward of benefit obligations, plan assets and
funded status of the plan:

|                                             |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  
|-------------------------------------------- |  | ---------------- | ------ | ---------- |  | ----------- | ------ | ---- |  |  | ---- | - |  |  | ---- | -
|                                             |  |                  |        |            |  |            
|                                             |  |                  |        |            |  | Other Post-
|                                             |  |                  |        | Employment
|                                             |  | Pension Benefits |        | Benefits  
|                                             |  |                  |        |           
|                                             |  | 2002             |        | 2001       |  | 2002        |        | 2001
|                                             |  |                  |        |            |  |             |        |     
|                                             |  |                 
|                                             |  | ( million)     
|Benefit obligation                           |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  
|At beginning of year                         |  |                  | 11,303 |            |  |             | 10,684 |      |  |  | 957  |   |  |  | 949  |  
|Service cost                                 |  |                  | 302    |            |  |             | 265    |      |  |  | 87   |   |  |  | 23   |  
|Interest cost                                |  |                  | 727    |            |  |             | 669    |      |  |  | 57   |   |  |  | 58   |  
|Employee contributions                       |  |                  | 46     |            |  |             |       |      |  |  |     |   |  |  |     |  
|Plan amendments                              |  |                  | 7      |            |  |             |       |      |  |  |     |   |  |  | (94  | )
|Plan settlements                             |  |                  | (33    | )          |  |             | (1     | )    |  |  |     |   |  |  |     |  
|Actuarial (gain) loss                        |  |                  | (37    | )          |  |             | 305    |      |  |  | 46   |   |  |  | 84   |  
|Foreign currency translation                 |  |                  | (531   | )          |  |             | 66     |      |  |  | (149 | ) |  |  | 25   |  
|Benefit payments                             |  |                  | (586   | )          |  |             | (503   | )    |  |  | (103 | ) |  |  | (90  | )
|Acquisitions/ Mergers                        |  |                  | 1,290  |            |  |             | 2      |      |  |  | 69   |   |  |  | 2    |  
|Divestitures                                 |  |                  | (88    | )          |  |             | (184   | )    |  |  | (4   | ) |  |  |     |  
|Curtailments                                 |  |                  | 14     |            |  |             |       |      |  |  | 1    |   |  |  |     |  
|                                             |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  
|Benefit obligation at end of year            |  |                  | 12,414 |            |  |             | 11,303 |      |  |  | 961  |   |  |  | 957  |  
|                                             |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  
|Plan assets at fair value                    |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  
|At beginning of year                         |  |                  | 8,126  |            |  |             | 8,790  |      |  |  | 337  |   |  |  | 389  |  
|Actual return on plan assets                 |  |                  | (668   | )          |  |             | (563   | )    |  |  | (18  | ) |  |  | (43  | )
|Acquisitions/ Mergers                        |  |                  | 790    |            |  |             | 2      |      |  |  |     |   |  |  |     |  
|Divestitures                                 |  |                  | (67    | )          |  |             | (130   | )    |  |  |     |   |  |  |     |  
|Plan settlements                             |  |                  | (8     | )          |  |             |       |      |  |  |     |   |  |  |     |  
|Foreign currency translation                 |  |                  | (478   | )          |  |             | 178    |      |  |  | (51  | ) |  |  | 9    |  
|Employer contribution                        |  |                  | 351    |            |  |             | 313    |      |  |  | 92   |   |  |  | 72   |  
|Employee contributions                       |  |                  | 46     |            |  |             | 39     |      |  |  |     |   |  |  |     |  
|Benefit payments                             |  |                  | (586   | )          |  |             | (503   | )    |  |  | (103 | ) |  |  | (90  | )
|                                             |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  
|Plan assets at fair value at end of
    year |  |                  | 7,506  |            |  |             | 8,126  |      |  |  | 257  |   |  |  | 337  |  
|                                             |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  
|Funded status                                |  |                  | (4,908 | )          |  |             | (3,177 | )    |  |  | (704 | ) |  |  | (620 | )
|Unrecognized transition obligation           |  |                  | 25     |            |  |             | 50     |      |  |  |     |   |  |  |     |  
|Unrecognized prior service cost              |  |                  | 7      |            |  |             | 16     |      |  |  | (68  | ) |  |  | (85  | )
|Unrecognized actuarial losses                |  |                  | 2,345  |            |  |             | 1,350  |      |  |  | 143  |   |  |  | 70   |  
|Limitation                                   |  |                  |       |            |  |             |       |      |  |  |     |   |  |  |     |  
|Additional minimum liability                 |  |                  | (480   | )          |  |             | (415   | )    |  |  |     |   |  |  |     |  
|                                             |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  
|Prepaid (accrued) benefit cost               |  |                  | (3,011 | )          |  |             | (2,176 | )    |  |  | (629 | ) |  |  | (635 | )
|                                             |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  
|Amounts recognized in the balance sheet      |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  
|Prepaid benefit assets                       |  |                  | 1,742  |            |  |             | 1,792  |      |  |  |     |   |  |  |     |  
|Accrued benefit liability                    |  |                  | (4,753 | )          |  |             | (3,968 | )    |  |  | (629 | ) |  |  | (635 | )
|                                             |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  
|Net amount recognized                        |  |                  | (3,011 | )          |  |             | (2,176 | )    |  |  | (629 | ) |  |  | (635 | )
|                                             |  |                  |        |            |  |             |        |      |  |  |      |   |  |  |      |  

F-65



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##### Table of Contents



Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


|                                                |  |                  |      |            |  |             |      |      |  |  |     |   |  |  |     |  
|----------------------------------------------- |  | ---------------- | ---- | ---------- |  | ----------- | ---- | ---- |  |  | --- | - |  |  | --- | -
|                                                |  |                  |      |            |  |            
|                                                |  |                  |      |            |  | Other Post-
|                                                |  |                  |      | Employment
|                                                |  | Pension Benefits |      | Benefits  
|                                                |  |                  |      |           
|                                                |  | 2002             |      | 2001       |  | 2002        |      | 2001
|                                                |  |                  |      |            |  |             |      |     
|                                                |  |                 
|                                                |  | ( million)     
|Benefit cost                                    |  |                  |      |            |  |             |      |      |  |  |     |   |  |  |     |  
|Service cost                                    |  |                  | 302  |            |  |             | 265  |      |  |  | 87  |   |  |  | 23  |  
|Flat-rate tax on employer contributions         |  |                  |     |            |  |             | 7    |      |  |  |    |   |  |  |    |  
|Interest cost                                   |  |                  | 727  |            |  |             | 669  |      |  |  | 57  |   |  |  | 58  |  
|Expected return on plan assets                  |  |                  | (607 | )          |  |             | (608 | )    |  |  | (26 | ) |  |  | (31 | )
|Employee contributions                          |  |                  |     |            |  |             | (39  | )    |  |  |    |   |  |  |    |  
|Amortisation of unrecognized prior service cost |  |                  | 12   |            |  |             | 10   |      |  |  |    |   |  |  |    |  
|Amortisation of transition obligation           |  |                  | 24   |            |  |             | (22  | )    |  |  |    |   |  |  |    |  
|Amortisation of actuarial (gains) losses        |  |                  | 67   |            |  |             | 12   |      |  |  | (4  | ) |  |  | 13  |  
|Gains (losses) from settlements                 |  |                  | 20   |            |  |             |     |      |  |  |    |   |  |  |    |  
|                                                |  |                  |      |            |  |             |      |      |  |  |     |   |  |  |     |  
|Net periodic benefit cost                       |  |                  | 545  |            |  |             | 294  |      |  |  | 114 |   |  |  | 63  |  
|                                                |  |                  |      |            |  |             |      |      |  |  |     |   |  |  |     |  

|                                                     |  |      |       |      |  |  |       | 
|---------------------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | 
|Other Post-Retirement Benefit Plans weighted-average |  |      |       |     
|assumptions as of December 31,                       |  | 2002 |       | 2001
|                                                     |  |      |       |     
|Discount rate                                        |  |      | 6.80% |      |  |  | 7.00% | 
|Rate of compensation increase                        |  |      | N/A   |      |  |  | N/A   | 
|Expected return on plan assets                       |  |      | 7.00% |      |  |  | 8.50% | 

The assumed health care cost trend rate at
December 31, 2002 was 7.0% 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 2002
would have the following effects:

|                                                             |  |             |    |          |  |  |     |  
|------------------------------------------------------------ |  | ----------- | -- | -------- |  |  | --- | -
|                                                             |  | 1% point    |    | 1% point
|                                                             |  | increase    |    | decrease
|                                                             |  |             |    |         
|                                                             |  |            
|                                                             |  | ( million)
|Effects on total of service and interest cost
    components |  |             | 13 |          |  |  | (11 | )
|Effect on post retirement benefit obligations                |  |             | 89 |          |  |  | (78 | )

Stock-Based Compensation

The Group applies Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (ABP 25) and related interpretations
in accounting for its stock compensation program. SFAS 123
Accounting for Stock-Based Compensation would result
in the same accounting treatment for the Groups stock
incentive plans as was applied under APB 25. Hence the
additional pro forma disclosures required under SFAS 123 do not
apply.

Proportional Consolidation

The Group accounts for its investment in 11 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
SEC permits the omission of such differences in classification
and display in the reconciliation to U.S. GAAP provided
certain criteria have been met.

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Condensed financial information relating to the
Groups pro-rata interest in joint ventures accounted for
using the proportionate consolidation method is as follows:

|                          |  |               |     |               |  |  |     | 
|------------------------- |  | ------------- | --- | ------------- |  |  | --- | 
|Balance Sheet Information |  | Dec. 31, 2002 |     | Dec. 31, 2001
|                          |  |               |     |              
|                          |  |              
|                          |  | ( million)  
|Current assets            |  |               | 114 |               |  |  | 175 | 
|Noncurrent assets         |  |               | 221 |               |  |  | 236 | 
|Short-term liabilities    |  |               | 46  |               |  |  | 128 | 
|Long-term liabilities     |  |               |    |               |  |  | 38  | 

|                                |  |               |     |               |  |  |     | 
|------------------------------- |  | ------------- | --- | ------------- |  |  | --- | 
|Statement of Income Information |  | Dec. 31, 2002 |     | Dec. 31, 2001
|                                |  |               |     |              
|                                |  |              
|                                |  | ( million)  
|Net sales                       |  |               | 176 |               |  |  | 492 | 
|Operating result                |  |               | 52  |               |  |  | 63  | 
|Net income                      |  |               | 47  |               |  |  | 55  | 

|                                          |  |               |     |               |  |  |     |  
|----------------------------------------- |  | ------------- | --- | ------------- |  |  | --- | -
|Statement of Cash Flow Information        |  | Dec. 31, 2002 |     | Dec. 31, 2001
|                                          |  |               |     |              
|                                          |  |              
|                                          |  | ( million)  
|Net cash provided by operating activities |  |               | 80  |               |  |  | 61  |  
|Net cash (used in) investing activities   |  |               | (7  | )             |  |  | (16 | )
|Net cash (used in) financing activities   |  |               | (70 | )             |  |  | (44 | )

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
10 million
per occurrence, and product liability up to
14 million
per occurrence. For claims against our U.S. subsidiary, the
product liability self-insurance is limited to a maximum of
22 million
per year.

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.

The following describes the most significant
proceedings in which Bayer AG or its subsidiaries were involved
as of December 31, 2002.

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Patent validity challenges and infringement
proceedings; patent-related antitrust actions

In the United States, Bayer AG and its
U.S. subsidiary Bayer Corporation are and have been
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 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.

Ciprofloxacin-related actions

Patent-related actions.In January 1997 Bayer AG and Bayer
Corporation settled a patent infringement suit against Barr
Laboratories, Inc. This suit arose when Barr filed an ANDA
(IV) seeking regulatory approval of a generic form of
Bayers ciprofloxacin anti-infective product, which we sell
in the United States under the trademark Cipro®. Under the
settlement agreement, Barr and Rugby Laboratories Inc., another
generic manufacturer that supported Barr during the infringement
suit, agreed to dismiss the litigation, acknowledging the
validity and enforceability of Bayers patent rights, and
we agreed to pay each company $24.5 million. The agreement
gave us the option, until our patent 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 re-examination of our patent. The Patent
and Trademark Office reissued the patent in February 1999. See
below, Antitrust actions.

After the settlement with Barr, a series of
generics manufacturers filed ANDA (IV)s seeking regulatory
approval of generic versions of ciprofloxacin. We filed patent
infringement suits against these manufacturers, all of whom
challenged the validity of our patents covering the sales of
Cipro. During 2002 all patent infringement actions then still
pending were concluded by final judgments in our favor.

Antitrust actions.Since July 2000 Bayer Corporation has been named as a defendant
in 39 putative class action lawsuits, one individual lawsuit and
one consumer protection group lawsuit filed in a number of state
and federal courts in the United States. Bayer AG has also been
named as a defendant in 20 of those cases, including the
individual lawsuit and the consumer protection group lawsuit;
however, to date it has only been served with process in the
individual lawsuit and twelve of the putative class action
lawsuits. In addition, Barr Laboratories, Aventis S.A., Hoechst
Marion Roussel, Inc., Rugby Laboratories, Inc., and Watson
Pharmaceuticals, Inc. have each been named as a defendant in one
or more of these lawsuits. The plaintiffs in these suits allege
that they are

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


direct or indirect purchasers of Cipro® who
were damaged because Bayers settlement of the Barr ANDA
(IV) litigation prevented generic manufacturers from
selling a generic version of Cipro®. The plaintiffs allege
that the settlement violates various federal antitrust and state
business, antitrust, unfair trade practices, and consumer
protection statutes, and seek treble damages and injunctive
relief.

None of the relevant courts in any of the
putative class action lawsuits have certified a class. The
Judicial Panel for Multidistrict Litigation (or MDL Panel)
transferred 35 of these cases to the U.S. District Court
for the Eastern District of New York for coordinated pre-trial
proceedings. The district court later remanded nine of those
cases to various state courts.

On January 25, 2002, Bayer filed a motion to
dismiss all of the cases pending in the District Court for the
Eastern District of New York, and the plaintiffs filed
motions for partial summary judgment that the conduct alleged in
the complaints constitutes an agreement that is unlawful on its
face.

Nine cases have been consolidated and are
currently pending in a California state court. The California
state court denied Bayers demurrer, and Bayer answered
plaintiffs claims on December 23, 2002. Bayer is also
involved in state court proceedings in Florida, New York,
Kansas, Tennessee and Wisconsin. Bayer has answered
plaintiffs claims in the Florida case and filed motions to
dismiss in the other four jurisdictions.

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

Because these cases, which may involve joint and
several liability among the defendants, in the aggregate allege
substantial unquantified damages and also seek treble and
punitive damages and penalties, it is possible that the ultimate
liability could be materially adverse 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.

Additionally, due to the considerable uncertainty
associated with these proceedings, it is currently not possible
to accurately estimate potential liability. Depending on the
progress of the litigation, we will continue to reconsider the
need to establish provisions, which may have a negative effect
on our financial results.

Nifedipine-related actions

Patent-related actions.Since 1997 Bayer AG and Bayer
Corporation have been involved in a number of patent
infringement actions arising from ANDA (IV)s filed by generic
manufacturers seeking regulatory marketing approval for
allegedly bio-equivalent versions of our brand-name product
Adalat®CC and Pfizer, Inc.s brand-name product
Procardia®XL. The active ingredient of these products is
nifedipine. We own patent rights related to nifedipine drug
product formulations. In addition, because Pfizer markets
Procardia®XL under a license from Bayer, Bayer AG and Bayer
Corporation became Pfizers co-plaintiffs in the
infringement actions relating to that product. We have concluded
these cases related to nifedipine with all of the defendants,
with the exception of the Biovail and Teva cases described in
the following two paragraphs.

Bayer AG and Bayer Corporation filed four ANDA
(IV) patent infringement suits against Biovail Laboratories
and Biovail Corporation in the U.S. District Court for the
District of Puerto Rico. Two of these suits relate to Biovail
ANDAs directed to 30 mg and 60 mg dosage strengths of
nifedipine extended release tablets assertedly bioequivalent to
Pfizers 30 mg and 60 mg Procardia®XL. The
other two ANDA lawsuits relate to Biovails 30 mg and
60 mg dosage strength tablets assertedly bioequivalent to
Bayers 30 and 60 mg Adalat®CC drug products.

In addition, Bayer and Pfizer filed a suit
against Biovail and Teva Pharmaceuticals U.S.A., Inc. asserting
that Tevas commercial sales of Biovails 60 mg
tablet asserted to be bioequivalent to Pfizers 60 mg
Procardia®XL drug product infringed Bayers related
U.S. patent. Bayer also filed suit against Biovail and Teva
asserting that Tevas commercial sales of Biovails
60 mg tablet asserted to be bioequivalent to Bayers
60 mg Adalat®CC drug

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


product infringed Bayers patent. All of
these lawsuits are currently proceeding on the limited question
of claim construction.

Antitrust actions.Biovail filed an antitrust lawsuit
against Bayer AG, Bayer Corporation and Pfizer in the
U.S. District Court for the District of Western
Pennsylvania in April 1998. Biovail was seeking a declaratory
judgment that Bayers nifedipine patents are invalid.
Biovail was also seeking damages under federal and state
antitrust statutes alleging, among other things, that Bayer
illegally asserted its patent rights. The district court stayed
this litigation pending resolution of the nifedepine-related
patent infringement actions against Biovail.

Vardenafil-related actions

In October 2002 Pfizer, Inc. filed a declaratory
judgment action against Bayer AG and Bayer Corporation in the
U.S. District Court for the District of Delaware claiming
that the expected sale of Levitra®, Bayers product
for the treatment of erectile dysfunction, will infringe upon
Pfizers U.S. patent relating to products for the
treatment of erectile dysfunction. Levitra® has not yet
been approved in the United States by the Food and Drug
Administration. The action seeks a permanent injunction to
prevent Bayer AG and Bayer Corporation from selling
Levitra® in the United States. If Levitra® is approved
and launched in the United States, Pfizer may make a motion for
a preliminary injunction to prevent sales of Levitra®.
Bayer AG and Bayer Corporation are coordinating their defense
with SmithKline Beecham Corporation (a GlaxoSmithKline Company),
Bayers co-promotion partner in the United States and other
countries and a co-defendant in this suit. In some other
countries the local Pfizer affiliate has initiated similar
proceedings to prevent the marketing of Levitra. We believe that
we have meritorious defenses in these actions and intend to
defend them 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. 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.

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. In the
United States, we co-promoted this product with SmithKline
Beecham Corporation pursuant to an agreement dated July 21,
1997. As of December 31, 2002, approximately
7,200 lawsuits were pending in both federal and state
courts, including 158 putative class actions. The actions in the
United States have been based primarily on theories of product
liability, consumer fraud, medical monitoring, predatory
pricing, and unjust enrichment. These lawsuits seek remedies
including compensatory and punitive damages, disgorgement of
funds received from the marketing and sale of cerivastatin and
the establishment of a trust fund to finance the medical
monitoring of former cerivastatin users. The federal cases are
being transferred to the U.S. District Court for the
District of Minnesota for coordinated

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


discovery and other pre-trial proceedings. In
addition, several actions have been initiated against other
companies of the Bayer Group in other countries, including class
actions in Canada. We expect additional lawsuits to be filed in
the United States and elsewhere.

In the event that plaintiffs substantially
prevail, despite existing defense arguments, it is possible that
Bayer could incur charges in excess of our insurance coverage.
Due to the considerable uncertainty associated with these
proceedings, it is currently not possible to more accurately
estimate potential liability. Depending on the progress of the
litigation, we will continue to reconsider the need to establish
provisions, which may have a negative effect on financial
results. Without acknowledging any liability, we have settled
650 cases as of December 31, 2002, resulting in
settlement payments of approximately $100 million. Bayer
will continue to offer fair compensation to people who
experienced serious side effects while taking cerivastatin on a
voluntary basis and without concession of liability. In cases
where an examination of the facts indicates that Baycol played
no part in the patients medical situation, or where a
settlement is not achieved, Bayer will continue to defend itself
vigorously. We believe we have meritorious defenses in these
actions. In some countries, criminal proceedings have been
initiated by the relevant authorities. SmithKline Beecham
Corporation and Bayer Corporation have signed an allocation
agreement under which SmithKline Beecham has agreed to pay
5 percent of all settlements and compensatory damages
judgments arising out of actions based on the sale or
distribution of cerivastatin in the United States, with each
party responsible for paying its own attorneys fees.

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. As of
December 31, 2002, approximately 1,025 lawsuits have been
initiated in the United States against Bayer Corporation,
including 14 purported class actions of which 11 have been
denied. Three are pending and appeals are possible. Bayer AG has
also been recently named as a defendant. The MDL Panel has
assigned management of the federal court cases to the
U.S. District Court for the Western District of Washington.
The claims primarily relate to compensation for alleged damage
to health, entitlement to subsequent monitoring and
reimbursement of the purchase price. Claims for punitive damages
have also been filed. It is probable that additional actions
will be initiated in the U.S. 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. We may, on a case-by-case
basis, settle cases for reasonable amounts when, in our
judgment, settlement is economically feasible given the risks
and costs inherent in the litigation. In the event that
plaintiffs in these PPA actions substantially prevail, Bayer
could be subject to monetary judgments in excess of our
insurance coverage, which could materially affect our business,
results of operations, cash flows and financial position. Since
the amount of damages to which we could be subject if plaintiffs
do prevail is highly uncertain, we have not made any provisions
for amounts that may exceed our insurance coverage. We will
continue to monitor the progress of these cases and may, in
appropriate circumstances, consider establishing such
provisions, which may have a material negative effect on our
financial results.

Medicaid Rebate Program allegations

Our U.S. subsidiary Bayer Corporation was
under investigation by the U.S. Attorneys Office for
the District of Massachusetts. The investigation, which was
assisted by the Department of Health & Human Services,
focused primarily on allegations that Bayer Corporation
improperly underpaid rebates under the Medicaid Rebate Program
during a period from 1995 to 2000. Under the settlement
agreement, we will make payments of approximately
$260 million to cover the claims. A reserve for these
payments was set up in 2002. In addition, Bayer Corporation
pleaded guilty to a single felony count for failing to list
private label Cipro® with the U.S. Food and Drug
Administration during the second half of 1995.

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Average wholesale price manipulation
proceedings

Fourteen 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. All of the state court
actions have been removed to federal court, subject to potential
remand. Nine cases filed in federal court were transferred to
the U.S. District Court for the District of Massachusetts
for coordinated pretrial proceedings. All but two actions are
private class actions alleging injury to patients or payors. Two
cases are brought by governmental entities, one by the State of
Nevada and one by Suffolk County, New York, claiming
recovery of their portion of Medicaid cost sharing. Due to the
considerable uncertainty associated with these proceedings, it
is currently not possible to more accurately estimate potential
liability. Depending on the progress of the litigation, we will
continue to reconsider the need to establish provisions, which
may have a negative effect on financial results.

Rubber-related actions

Beginning in late 2002, Bayer AG and certain
of its U.S. and Canadian subsidiaries became the subjects
of criminal and civil investigations being conducted by the
Antitrust Division of the U.S. Department of Justice
(DOJ), the Directorate General for Competition of
the European Commission (EC), and the Canadian
Competition Bureau (CCB). The investigations were
based on allegations of cartel-related activities involving
certain of Bayers rubber-related lines of business in
violation of antitrust or competition laws.

The DOJ undertook criminal grand jury
investigations of alleged cartel activities involving
Bayers rubber chemicals and ethylene propylene diene
monomer (EPDM) lines of business. The EC undertook
civil investigations of similar allegations involving
Bayers rubber chemicals and EPDM lines of business. The
CCB undertook a criminal investigation of alleged cartel
activities involving Bayers rubber chemicals line of
business. Each of these investigations remains ongoing.

Bayer AG and certain of its direct and
indirect subsidiaries have been named as defendants in twenty
putative class action lawsuits that were filed in state and
federal courts in the United States based on allegations related
to these governmental investigations. Bayer became aware that
twenty cases had been filed in the state courts of eighteen
states on behalf of putative classes of plaintiffs who allegedly
purchased rubber chemicals indirectly from one or more of the
named defendants by purchasing a product containing or
manufactured using such chemicals. Crompton Corporation,
Uniroyal Chemical Company, Inc., Uniroyal Chemical Company Ltd.,
Flexsys NV, and Flexsys America LP were also named as defendants
in one or more of these lawsuits. The plaintiffs seek to recover
from Bayer and each of the other defendants damages equal to
three times any proven negative effect on commerce caused by
their alleged conspiracy to fix prices for rubber chemicals, as
well as injunctive relief against each defendant to prevent its
future participation in such a conspiracy.

All of these lawsuits were in preliminary stages
at the end of 2002. Bayer Corporation and Rhein Chemie
Corporation were served in fourteen of the twenty cases that had
been filed, but neither company filed responsive pleadings
before the end of 2002. Bayer AG and Rhein Chemie Rheinau
GmbH were not served in any of these cases in 2002.

Because these cases, which may involve joint and
several liability among the defendants, in the aggregate allege
substantial, unquantified damages and also seek treble and
punitive damages and penalties, it is possible that the ultimate
liability could be materially adverse to our results of
operations and cash flows in one or more periods.

Bayer is also aware that a number of private
civil lawsuits have been filed in state and federal courts in
the United States asserting claims based on alleged
cartel-related activities involving EPDM. Bayer AG has been
named as a defendant in two cases, and Bayer Corporation has
been named and served in one case, all of which were filed in
the U.S. District Court for the Northern District of
California on behalf of a putative class of

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


plaintiffs who allegedly purchased EPDM in the
United States directly from one or more of the named defendants.
Crompton Corporation, DuPont Dow Elastomers LLC,
DSM N.V., and Exxon Mobil Chemical Co. are also named
in one or more of these complaints. The plaintiffs are seeking
damages from Bayer and each of the other defendants equal to
three times any proven negative effect on commerce caused by
their alleged conspiracy to fix prices for EPDM sold in the
United States, as well as injunctive relief against each
defendant to prevent its future participation in such a
conspiracy. Neither Bayer AG nor any of its direct or
indirect subsidiaries with the exception of Bayer Corporation
and Rhein Chemie Corporation has been served with complaints in
any of these actions.

We are aware that our competitors are subject to
investigations by governmental authorities based on their
alleged participation in cartel-related activities involving
additional rubber-related products in violation of relevant
antitrust or competition laws. It is possible that additional
governmental investigations may be commenced in the United
States or other jurisdictions and that private civil lawsuits
may arise out of these investigations, which may involve both
Bayer and our competitors. Bayer also became aware that our
competitors were subject to investigations by governmental
authorities based on their alleged participation in
cartel-related activities involving additional rubber-related
products in violation of antitrust or competition law. It is
possible that additional governmental investigations may be
commenced in the United States or other jurisdictions and that
private civil lawsuits may arise out of these investigations. If
the latter occurs, Bayer could be named in those lawsuits.

Because these cases, which may involve joint and
several liability among the defendants, in the aggregate allege
substantial, unquantified damages and also seek treble and
punitive damages and penalties, it is possible that the ultimate
liability could be materially adverse to our results of
operations and cash flows in one or more periods.

Additionally, due to the considerable uncertainty
associated with these proceedings, it is currently not possible
to accurately estimate potential liability. Depending on the
progress of the litigation, we will continue to reconsider the
need to establish provisions, which may have a negative effect
on our financial results.

Asbestos litigation

We are currently involved in asbestos litigation
in the United States, primarily as a premises defendant,
predominantly in the states in which Bayer has industrial sites.
The overwhelming majority of Bayers cases are filed in
West Virginia and Texas and involve allegations of exposure at
Bayers sites. Texas law and West Virginia law permit
consolidated asbestos actions in which multiple plaintiffs can
sue multiple defendants for asbestos-related conditions without
specifying which plaintiff has a claim against which defendant.
While Bayer may be named as a defendant in the case, each
plaintiff does not have to assert a claim against Bayer. As of
December 31, 2002, 177 cases had been filed against
us. In West Virginia, Bayer is a defendant in approximately
26 cases involving 2,424 plaintiffs. Bayer has been
identified by less than 10 percent of the named plaintiffs
in these actions, i.e. of the 2,424 plaintiffs,
approximately 240 have claimed that they worked at a Bayer
site. In addition, after past settlements in principle are
finalized, we will be involved in only seven West Virginia cases
involving 353 plaintiffs, as well as one medical monitoring
class action that is currently inactive. Bayer is involved in
56 cases in Texas involving 6,329 plaintiffs, and, as
in West Virginia, is typically identified by a small percentage
of plaintiffs (less than 5 percent). Bayer also has cases
pending in Indiana and California.

The allegations as to Bayer and numerous other
premises defendants are that Bayer employed many contractors on
our industrial sites, yet failed to warn them or protect them
from the known hazards of asbestos exposures throughout the
1960s, 1970s and 1980s. Since premises owners
now form a new group of targeted corporate defendants in these
litigations, these types of actions may become material to our
business in the future.

One of our U.S. subsidiaries, Bayer
CropScience, Inc., is the legal successor to entities that sold
asbestos-containing products from the 1940s until 1976 and
is named as a defendant in asbestos-related litigation. Bayer
CropScience is and has been fully indemnified for its costs and
exposure in relation to this litigation by Union Carbide. Union
Carbide continues to accept Bayer CropSciences tender of
these cases, and it defends and settles

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


them in Bayer CropSciences name, in its own
name and in the name of the several predecessor companies to
Bayer CropScience.

We believe that we have meritorious defenses in
these actions and are defending them vigorously. Without
acknowledging any liability, we have settled a number of these
cases in the past. We may, on a case-by-case basis, settle
additional cases for reasonable amounts when, in our judgment,
settlement is economically feasible given the risks and costs
inherent in the litigation. We have made what we believe to be
appropriate provisions should these suits result in judgments in
favor of the plaintiffs.

For a discussion of the developments in certain
of the actions discussed in this item since December 31,
2002, see Note [45], Subsequent Events below.

Effect of New Accounting
Pronouncements

U.S. GAAP

In June 2001 the Financial Accounting Standards
Board (FASB) approved Statement of Financial
Accounting Standards (SFAS) 143,
Accounting for Obligations Associated with the Retirement
of Long-Lived Assets (SFAS 143), which
requires that the fair values of an obligation associated with
the retirement of long-lived assets be recognized in the period
in which such obligation is incurred if a reasonable estimate of
fair value can be made. When the liability is recorded, the
Group must capitalize the costs of the liability by increasing
the carrying amount of the long-lived asset. Over the estimated
life of the asset, the liability is accreted to its present
value and the related capitalized charge is depreciated over the
useful life of an asset. This is required to be implemented by
the Group with the effect from January 1, 2003. We do not
believe the adoption of this standard will have a material
impact on our financial position, results of operations or cash
flows.

In April 2002 SFAS 145, Rescission of
FASB Statements no. 4, 44 and 64, Amendment of FASB
Statement no. 13 and Technical Corrections was
issued. The statement updates, clarifies and simplifies existing
accounting standards related to the presentation of gains and
losses from certain extinguishments of debt, the accounting for
certain intangible assets and the accounting for certain
sale-leaseback transactions. Significant provisions of this
statement applicable to Bayer are effective for our 2003 fiscal
year. We do not believe the adoption of this standard will have
a material impact on our financial position, results of
operations or cash flows.

SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities
(SFAS 146), was issued in June 2002.
SFAS 146, which rescinds Emerging Issues Task Force
(EITF) Issue 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring), requires a liability for costs associated
with exit or disposal activities to be recognized and measured
initially at fair value only when they are incurred rather than
at the date of a commitment to an exit or disposal plan.
SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Group
will adopt this standard effective January 1, 2003. We do
not believe the adoption of this standard will have a material
impact on our financial position, results of operations or cash
flows.

In November 2002 the FASB published FASB
Interpretation no. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(FIN 45). FIN 45 expands on the accounting
guidance of other SFASs by extending the disclosures to be made
by a guarantor in its financial statements about its obligations
under certain guarantees, and it requires the guarantor to
recognize a liability for the fair value of an obligation
assumed under a guarantee. The disclosure requirements are
effective for financial years ending after December 15,
2002, and require disclosure of the nature of the guarantee, the
maximum potential amount of future payments that the guarantor
could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantors
obligations under the guarantee. FIN 45s provisions
for initial recognition and measurement should be applied
prospectively to guarantees issued or modified after
December 31, 2002. The Group will apply the standard on
January 1, 2003. We do not believe

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


the adoption of this standard will have a
material impact on our financial position, results of operations
or cash flows.

In January 2003 the FASB published FASB
Interpretation no. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46
addresses the consolidation of entities for which control is
achieved through means other than through voting rights (such
entities are designated variable interest entities
or VIE) by clarifying the application of ARB
No. 51, Consolidated Financial Statements to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. The primary objective of this interpretation
is to provide guidance on how to identify a VIE and to determine
when a VIEs assets, liabilities, noncontrolling interests
and result of operations need to be included in a companys
consolidated financial statements. The measurement principles
will apply to the Groups 2003 financial statements, while
the disclosure principles are effective immediately. While we
are currently in the process of assessing the impact of the
adoption of FIN 46, we do not believe it will have a
material impact on our financial position, results of operations
or cash flows.

In May 2003 the FASB published SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS
150). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. This
statement is effective for our 2003 fiscal year reporting. We do
not believe the adoption of this standard will have a material
impact on our financial position, results of operations or cash
flows.

In May 2003 the FASB EITF published
Issue 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which it will perform multiple
revenue generating activities. The Issue is effective for
revenue arrangements entered into for fiscal periods beginning
after June 15, 2002. We do not believe the adoption of
EITF 00-21 will have a material impact on our financial
position, results of operations or cash flows.

In April 2003 the FASB issued SFAS No 149
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives) and
for hedging activities under SFAS no. 133, Accounting
for Derivative Instruments and Hedging Activities. The
Group is currently evaluating the impact of this change.

[45]  Subsequent Events
(unaudited)

On January 31, 2003 the sale of the Organic
Pigments Division of Bayer Corporation to Sun Chemical Group was
completed.

Bayer CropScience AG has completed the sale of
several insecticides and fungicides to BASF AG. The total
package is valued at
1,185 million.
With the completion of this transaction, Bayer has fulfilled the
most important condition imposed by the antitrust authorities
for the Aventis CropScience acquisition.

On May 9, 2003 Bayer and Degussa sold
Polymer Latex GmbH & Co. KG of Marl, Germany, for
235 million
to financial investor Soros Private Equity Partners after
approval had been received from the relevant antitrust
authorities. Bayer and Degussa each owned 50 percent of
PolymerLatex, a joint venture established in 1996 that has
become a leading supplier of latex products for paper, carpets/
molded foam and speciality applications.

Bayer will use the proceeds of these divestments
to further reduce net debt.

Legal Proceedings

For a discussion of the developments prior to
December 31, 2002 in the actions discussed below, see
Item 8, Financial Information  Legal
Proceedings and Note [44] U.S. GAAP
Information  Legal Proceedings.

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Ciprofloxacin-related actions

Patent-related actions.Since concluding the Barr settlement
agreement, we have opted to make payments. In addition, as of
June 9, 2003, Barr began selling ciprofloxacin
hydrochloride tablets in the United States using licensed
product purchased from Bayer. These purchases are being made
pursuant to a separate obligation of Bayer under the settlement
agreement to supply such product to Barr during the
six month period immediately proceeding the
December 2003 expiration of the patent protecting the sale
of Cipro© in the United States. Bayer further intends to
seek pediatric exclusivity for Cipro, which, if granted by the
FDA, could delay the introduction of generic versions of
ciprofloxacin for six months beyond expiration of the
patent. If Bayer is successful, we expect that the agreement
term will be extended to include the additional six-month
pediatric exclusivity period.

Antitrust actions.On January 25, 2002, Bayer filed a motion to dismiss all of
the cases pending in the District Court for the Eastern District
of New York, and the plaintiffs filed motions for partial
summary judgment that the conduct alleged in the complaints
constitutes an agreement that is unlawful on its face. On
May 20, 2003, the district court denied the
plaintiffs motions for partial summary judgment,
concluding that the alleged conduct was not per se
anticompetitive under U.S. antitrust laws. The district
court also denied Bayers motion to dismiss, except as to
the consumer protection group lawsuit, which the court held to
be time-barred under the applicable statute of limitations.

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

Aventis Behring action

Nattermann & Cie GmbH and Aventis
Behring LLC filed a suit on April 11, 2003 against Bayer
Corporation and Bayer Healthcare LLC in the U.S. District
Court for the Eastern District of Pennsylvania alleging that
Bayers Kogenate FS composition containing recombinant
Factor VIII, which is used to treat hemophilia, infringes
upon the U.S. patent owned by either Nattermann &
Cie or Aventis Behring. Bayer counterclaimed, seeking
inter alia a declaration of patent invalidity and
non-infringement, and asserting that Bayers use of the
patented process is pursuant to an implied license. The
proceedings are at an early stage. We believe that we have
meritorious defenses in these actions and intend to defend them
vigorously.

Product liability proceedings

HIV-related actions.In June 2003 a U.S. law firm
filed a putative class action against Bayer Corporation and
other manufacturers on behalf of non-U.S. residents
claiming compensation for HIV/HCV infections allegedly acquired
through blood plasma products manufactured in the U.S. This
case is at an early stage. Although we have not yet responded to
the complaint in this action, we believe that we have
meritorious defenses to this action and intend to defend it
vigorously.

Cerivastatin-related actions.As of June 26, 2003,
approximately 9,400 lawsuits are pending in both federal and
state courts, including 158 putative class actions. The actions
in the United States have been based primarily on theories of
product liability, consumer fraud, medical monitoring, predatory
pricing and unjust enrichment. These lawsuits seek remedies
including compensatory and punitive damages, disgorgement of
funds received from the marketing and sale of cerivastatin and
the establishment of a trust fund to finance the medical
monitoring of former cerivastatin users. The federal cases are
being transferred to the U.S. District Court for the
District of Minnesota for coordinated discovery and other
pre-trial proceedings. A decision by the court as to whether
class certification will be granted for personal injury, medical
monitoring and economic refund classes is currently pending. In
addition, several actions have been initiated against other
companies of the Bayer Group in other countries, including class
actions in Canada. We expect additional lawsuits to be filed in
the United States and elsewhere. On March 18, 2003, a jury
in an action brought against us in state court in Corpus
Christi, Texas delivered a verdict in our favor. On
April 3, 2003, a jury in an action brought against us in a
state court in Hinds County, Mississippi also delivered a
verdict in our favor. A motion for certification of nationwide
personal injury, medical monitoring and economic refund classes
is awaiting decision by this court. On June 16, 2002, the

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


Oklahoma District Court of Pottawatomie County
certified a class of all Oklahoma residents who took
cerivastatin and sustained muscular/skeletal injuries as a
result. Bayer appealed this ruling to the Oklahoma Court of
Appeals, which affirmed the lower courts class
certification ruling on June 20, 2003. Bayer has
meritorious defenses against class certification and intends to
seek further appellate review of this ruling. The certification
of a class, if such a decision is upheld, is unrelated to a
determination of the Companys liability.

Without acknowledging any liability, we have
settled over 1,000 cases as of June 26, 2003,
resulting in settlement payments of approximately
$343 million. Bayer will continue to offer fair
compensation to people who experienced serious side effects
while taking cerivastatin on a voluntary basis and without
concession of liability.

Phenylpropanolamine (PPA) actions.As of May 30, 2003, approximately
1,100 lawsuits have been initiated in the United States against
Bayer Corporation, including 14 purported class actions of which
11 have been denied. Three are pending and appeals are possible.
Bayer AG has also been recently named as a defendant.

Average wholesale price manipulation
proceedings

On May 13, 2003, the District Court of
Massachusetts granted Bayers motion to dismiss the master
consolidated complaint governing some, but not all of the
private party class actions pending against Bayer. Plaintiffs
are expected to seek leave to file an amended complaint. Still
pending before the court are motions to remand to state court
the Nevada action and several of the private party class actions
that were not included in the master consolidated complaint. The
plaintiff in the Suffolk County action has advised Bayer that it
intends to file an amended complaint.

Rubber-related actions

In early 2003, Bayer AG and certain of its
U.S. and Canadian subsidiaries became the subjects of
criminal and civil investigations being conducted by the
Antitrust Division of the U.S. Department of Justice
(DOJ), the Directorate General for Competition of
the European Commission (EC), and the Canadian
Competition Bureau (CCB). The investigations are
based on allegations of cartel-related activities involving
certain of Bayers rubber-related lines of business in
violation of antitrust or competition laws.

The DOJ undertook a criminal grand jury
investigation, and the EC undertook a civil investigation, of
alleged cartel activities involving Bayers acrylonitrile
butadiene rubber (NBR) line of business. The CCB
undertook criminal investigations of alleged cartel activities
involving Bayers ethylene propylene diene monomer
(EPDM) and NBR lines of business. These
investigations follow the DOJs and the ECs
respective criminal and civil investigations of alleged cartel
activities involving Bayers rubber chemicals and EPDM
lines of business that were initiated in 2002, as well as the
criminal investigation of alleged cartel activities involving
Bayers rubber chemicals line of business that was
initiated by the CCB in 2002. Each of those investigations
remains ongoing.

Bayer AG and certain of its direct and indirect
subsidiaries were named as defendants in a number of putative
class action lawsuits that were filed in state and federal
courts in the United States based on allegations related to
these governmental investigations. In 2002, Bayer became aware
that twenty cases had been filed in the state courts of eighteen
states on behalf of putative classes of plaintiffs who allegedly
purchased rubber chemicals indirectly from one or more of the
named defendants by purchasing a product containing or
manufactured using such chemicals. Crompton Corporation,
Uniroyal Chemical Company, Inc., Uniroyal Chemical Company Ltd.,
Flexsys NV, and Flexsys America LP were also named as defendants
in one or more of these lawsuits. The plaintiffs seek to recover
from Bayer and each of the other defendants damages equal to
three times any proven negative effect on commerce caused by
their alleged conspiracy to fix prices for rubber chemicals, as
well as injunctive relief against each defendant to prevent its
future participation in such a conspiracy.

Bayer Corporation and Rhein Chemie Corporation
were served in the six remaining state court cases in which they
had not received service of process in 2002, and they filed
responsive pleadings in each of the twenty

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


state court cases. The complaint filed in state
court in North Dakota was dismissed as to Rhein Chemie
Corporation for lack of jurisdiction, and the plaintiffs
voluntarily dismissed without prejudice the complaint filed in
Nebraska. Bayer AG and Rhein Chemie Rheinau GmbH were served in
three of these state court cases. Bayer AG did not yet file
responsive pleadings in any of these three cases, but Rhein
Chemie Rheinau GmbH filed responsive pleadings in each of them.

Bayer AG and certain of its direct and indirect
subsidiaries were also named as defendants in private civil
lawsuits that have been filed in federal courts in the United
States on behalf of putative classes of plaintiffs who allegedly
purchased rubber chemicals in the United States directly from
one or more of the named defendants. Crompton Corporation,
Uniroyal Chemical Company, Inc., Uniroyal Chemical Company Ltd.,
Flexsys NV, Flexsys America LP, Akzo Nobel NV, Akzo Nobel, Inc.,
and Solutia, Inc. were also named as defendants in the federal
lawsuits. The plaintiffs seek to recover from Bayer and each of
the other defendants damages equal to three times any proven
negative effect on commerce caused by their alleged conspiracy
to fix prices for rubber chemicals sold in the United States, as
well as injunctive relief against each defendant to prevent its
future participation in such a conspiracy.

Bayer Corporation was served in two and Rhein
Chemie Corporation was served in one of these federal cases, but
neither company filed responsive pleadings yet. Neither Bayer AG
nor any other of its direct or indirect subsidiaries except
Bayer Corporation and Rhein Chemie Corporation was served in
these federal cases.

Bayer also became aware that in 2003 a number of
private civil lawsuits were filed in state and federal courts in
the United States asserting claims based on alleged
cartel-related activities involving EPDM. Bayer AG was named in
two cases, and Bayer Corporation was named and served in another
case, all of which were filed in the U.S. District Court
for the Northern District of California on behalf of a putative
class of plaintiffs who allegedly purchased EPDM in the United
States directly from one or more of the named defendants.
Crompton Corporation, DuPont Dow Elastomers LLC, DSM NV, and
Exxon Mobil Chemical Co. were also named in one or more of these
complaints. The plaintiffs seek to recover from Bayer and each
of the other defendants damages equal to three times any proven
negative effect on commerce caused by their alleged conspiracy
to fix prices for EPDM sold in the United States, as well as
injunctive relief against each defendant to prevent its future
participation in such a conspiracy. Neither Bayer AG nor any
other of its direct or indirect subsidiaries except Bayer
Corporation was served with complaints in any of these actions.

Bayer also became aware that our competitors were
subject to investigations by governmental authorities based on
their alleged participation in cartel-related activities
involving additional rubber-related products in violation of
antitrust or competition law. It is possible that additional
governmental investigations may be commenced in the United
States or other jurisdictions and that private civil lawsuits
may arise out of these investigations. If the latter occurs,
Bayer could be named in those lawsuits.

Because these cases, which may involve joint and
several liability among the defendants, in the aggregate allege
substantial, unquantified damages and also seek treble and
punitive damages and penalties, it is possible that the ultimate
liability could be materially adverse to our results of
operations and cash flows in one or more periods.

Securities litigation

Since March 6, 2003 Bayer AG, along with
certain of its current and former officers and members of the
Bayer AG Board of Management, has been named as a defendant in
seven purported class action lawsuits filed in the
U.S. District Court for the Southern District of New York.
Each class action alleges violations of the U.S. securities
laws and asserts that the defendants made false and misleading
statements and omissions with respect to the commercial
prospects, safety and efficacy of our cerivastatin
anticholesterol products and with respect to the extent of the
potential product liability exposure following our voluntary
decision to cease marketing and withdraw these products in
August 2001. Each case seeks damages on behalf of class members
who allegedly purchased Bayer securities at inflated prices.
There are differences between the seven complaints, both with
respect to the length of the purported class period, with the
longest alleging claims on behalf of persons

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


who purchased securities from June 27, 1997
to February 21, 2003, as well as with respect to the
purported class definition, with several seeking certification
of a class consisting of persons who purchased American
Depository Shares and others seeking certification of a class
consisting of persons who purchased Bayer AGs publicly
traded securities.

The cases are at an early stage. We expect that
all seven cases will be consolidated before a single judge, and
that a single consolidated amended class action complaint will
be filed. Although Bayer AG has not yet responded to the
complaints in these actions, we believe that we have meritorious
defenses to these actions and intend to defend them vigorously.

German shareholder lawsuit

In June 2003 a shareholder of Bayer AG filed a
lawsuit in the regional court of Cologne, Germany
(Landgericht Köln). This plaintiff is challenging
certain resolutions approved by the Shareholders Meeting
of April 25, 2003, including the financial statements of
Bayer AG (not the consolidated financial statements) and
consequently the distribution of profit. In effect, the
plaintiff seeks to prevent the implementation of our planned new
corporate structure. See Item 4, Information on the
Company  Business. While this case is pending,
the asset transfers within the Bayer Group to our new operating
and support subsidiaries cannot be recorded in the commercial
register.

We believe that the plaintiffs lawsuit is
without merit and intend to defend ourselves vigorously.
Furthermore, in cases of this type German law permits the
defendant to seek dismissal in an accelerated proceeding
(Eilverfahren). We intend to make use of this accelerated
proceeding.

We do not believe that this lawsuit will affect
our day-to-day business. On an operational level, we began to
put our new structure into place in July 2002 and expect to
continue to be able to do so. If we cannot resolve this matter
satisfactorily within a reasonable period of time, however, or
if the plaintiff prevails, it could be more difficult for us to
implement some elements of our long-term strategic plans.

Plant Genetic Systems litigation

Former shareholders of Plant Genetic Systems NV
(PGS) have initiated arbitration proceedings in the
Netherlands against AgrEvo, now Bayer CropScience GmbH.
Claimants seeks damages of up to $400 million based on
alleged violations of a confidentiality agreement in connection
with the acquisition of PGS by AgrEvo in 1996, which allegedly
prevented claimants from obtaining a higher purchase price.
Bayer CropScience believes that claimants allegations are
without merit and will continue to contest these allegations
vigorously. The stock purchase agreement between Aventis and
Bayer for Aventis CropScience provides that, in case of a
decision against Bayer CropScience, Bayer CropScience will be
fully indemnified by Hoechst AG and/or Aventis
Nutrition S.A.

Total remuneration of the Board of Management
and the Supervisory Board, advances and loans

The remuneration of the Board of Management for
2002 amounted to
5,700,737 (2001:
8,153,562).
Emoluments to retired members of the Board of Management and
their surviving dependants amounted to
14,383,353
(2001:
8,355,270).

Pension provisions for these individuals
amounting to
106,152,766
(2001:
69,341,493) are
reflected in the balance sheet of Bayer AG.

The remuneration of the Supervisory Board
amounted to
1,293,750 (2001:
1,293,750).

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Notes to the Consolidated Financial Statements
of the Bayer Group  (Continued)


There were no loans to members of the Board of
Management or the Supervisory Board outstanding as of
December 31, 2002, nor any repayments of such loans during
the year.

Leverkusen, February 26, 2003

Bayer Aktiengesellschaft

The Board of Management


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For further Information please
contact:

Bayer AG

Investor Relations


Dr. Alexander Rosar


Building W 11


51368 Leverkusen


Germany


Phone: ++ 49 214 30 72704

Fax: ++ 49 214 30 66242


E-Mail: alexander.rosar.arl@bayer-ag.de


Bayer AG

Corporate Communications


Günter Forneck


Building W 11


51368 Leverkusen


Germany Phone:
++ 49 214 30 50446

Fax: ++ 49 214 30 55156