Explanatory Notes

Pursuant to Section 315a of the German Commercial Code, the consolidated interim financial statements as of March 31, 2010 have been prepared in condensed form according to the International Financial Reporting Standards (IFRS) – including IAS 34 – of the International Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Interpretations of the International Financial Reporting Interpretations Committee (IFRIC) in effect at the closing date.

Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2009 fiscal year, particularly with regard to the main recognition and valuation principles. Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations.

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

The most important interest rates applied in the calculation of actuarial gains and losses from pension obligations are given below:

The following table contains the reconciliation of the operating result (EBIT) of the operating segments to income before income taxes of the Group.

As of March 31, 2010, the Bayer Group comprised 292 fully or proportionately consolidated companies (December 31, 2009: 302 companies). Four joint ventures were included by proportionate consolidation according to IAS 31 (Interests in Joint Ventures). In addition, five associated companies were included in the consolidated financial statements by the equity method according to IAS 28 (Investments in Associates).

On March 9, 2010, MaterialScience acquired Artificial Muscle Inc., Sunnyvale, California, United States, for €21 million. Artificial Muscle Inc. is a technology leader in the field of electroactive polymers for the consumer electronics industry. The purchase price pertained mainly to patented technologies and goodwill.

No acquisitions were made in the first quarter of 2009.

On the basis of the agreement signed with Genzyme Corp., United States, on March 31, 2009, the relevant assets in the form of goodwill, other intangible assets and inventories were reflected in the statement of financial position as of March 31, 2009 in the item “Assets held for sale and discontinued operations.” This agreement was implemented at the end of May 2009. In the first quarter of 2010 it led to a net cash inflow of €17 million, comprising the balance of revenue-based payments received from Genzyme Corp. and taxes paid.

The ordinary shares issued upon conversion of the mandatory convertible bond on June 1, 2009, were treated as already issued shares. Diluted earnings per share were therefore equal to basic earnings per share in the first quarter of 2009 as well.

To find out more about the Bayer Group’s legal risks, please see the Bayer Annual Report 2009, which can be downloaded free of charge at http://www.bayer.com/. Since the Bayer Annual Report 2009, the following significant changes have occurred in respect of the legal risks:

Trasylol® (aprotinin) is a drug approved for use in managing bleeding in patients undergoing coronary artery bypass graft surgery. As of April 21, 2010, there were approximately 1,500 lawsuits pending in the United States and served upon Bayer on behalf of persons alleging, in particular, personal injuries, including renal failure and death, and economic loss from the use of Trasylol®. Without admission of liability, Bayer has reached settlement agreements with about 60 plaintiffs as of April 13, 2010. Bayer will continue to consider the option of settling individual lawsuits on a case-by-case basis, but will continue to defend itself vigorously against all claims that are not considered for settlement.

Yasmin®/YAZ®: The number of lawsuits pending in the United States and served upon Bayer has increased from about 1,100 as of February 15, 2010 to about 1,750 as of April 12, 2010. The number of Canadian class actions served upon Bayer has increased to eight. Plaintiffs allege to have suffered personal injuries, some of them fatal, from the use of Bayer’s oral contraceptive products Yasmin®, YAZ® and/or Ocella, a generic version of Yasmin® distributed by Barr Laboratories, Inc. in the U.S. market.

Blood glucose monitoring devices: In 2005, Abbott Laboratories commenced a lawsuit in the United States against Bayer and another party alleging infringement of two of Abbott’s patents relating to blood glucose monitoring devices. In 2008 the court decided in favor of Bayer with regard to both patents. In January 2010, the U.S. Court of Appeals for the Federal Circuit affirmed both decisions. In March 2010, Abbott filed a petition for rehearing. Bayer believes it has meritorious defenses and will continue to defend itself vigorously.

Kogenate®: In 2008, Novartis Vaccines and Diagnostics Inc. and Novo Nordisc A/S commenced a patent infringement suit in the United States alleging that Bayer’s manufacturing and marketing of the recombinant Factor VIII product Kogenate® infringe a patent granted in 2006. In the
second half of February 2010, the parties reached a settlement on mutually acceptable terms.

Proceedings involving genetically modified rice: As of March 9, 2010, Bayer was aware of a total of approximately 500 lawsuits, involving about 6,600 rice farmers and resellers, pending in U.S. federal and state courts against several Bayer Group companies in connection with genetically modified rice in the United States. In development of the genetically modified rice, field testing was conducted in the United States in cooperation with third parties from 1998 to 2001. The genetically modified rice was never commercialized. In two trials in December 2009 and February 2010, two juries at the U.S. District Court in St. Louis, Missouri, found that Bayer should pay a total of approximately US$3.5 million in compensatory damages for losses sustained by five plaintiff farmers. The juries rejected the farmers´ claims for punitive damages. In a third trial in February 2010, a jury in an Arkansas state court found Bayer liable to one farmer for compensatory and punitive damages totaling approximately US$1 million. In a fourth trial in April 2010, a jury in an Arkansas state court found Bayer liable to 14 farmer entities for compensatory and punitive damages totaling approximately US$48 million. Bayer disagrees completely with the findings of liability and the awards of compensatory and punitive damages. Bayer will appeal the adverse findings. Additional trials have been scheduled for 2010, including two in the multidistrict litigation (MDL) and two in state courts in Arkansas. The facts and the types and amounts of damages claimed differ significantly from case to case. Management believes that the outcomes of these first trials do not allow any direct conclusions on the outcomes of the other cases. Bayer believes it has meritorious defenses in these actions and intends to continue to defend itself vigorously. With regard to the aforementioned decisions, Bayer has taken appropriate accounting measures.

Our business partners include companies in which an interest is held, and companies with which members of the Supervisory Board of Bayer AG are associated. Transactions with these companies are carried out on an arm’s-length basis. Business with such companies was not material from the viewpoint of the Bayer Group. The Bayer Group was not a party to any transaction of an unusual nature or structure that was material to it or to companies or persons closely associated with it. Business transactions with companies included in the consolidated financial statements at equity, or at cost less impairment charges, mainly comprised trade in goods and services. The value of these transactions was, however, immaterial from the point of view of the Bayer Group. The same applies to financial receivables and payables vis-à-vis related parties.