Explanatory Notes

Pursuant to Section 315a of the German Commercial Code, the consolidated interim financial statements as of June 30, 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 IFRS Interpretations Committee 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. Inflows from interest rate hedging transactions and outflows for the subsequent purchase of ownership interests in subsidiaries are recognized in the consolidated statements of cash flows under “Net cash provided by (used in) financing activities”. The prior-year figures are restated accordingly.

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.

Changes in the scope of consolidation
As of June 30, 2010, the Bayer Group comprised 291 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).

Acquisitions and divestitures
The total cost of acquisitions made in the first half of 2010 was €36 million. In addition to smaller acquisitions, MaterialScience acquired Artificial Muscle, Inc., Sunnyvale, California, United States, for €21 million on March 9, 2010. 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.

At the end of May 2009, we implemented the strategic alliance with Genzyme Corp., United States, announced on March 31, 2009. In accordance with the agreement signed, we transferred products from our hematological oncology portfolio to Genzyme. In the first half of 2010 this agreement led to a net cash inflow of €41 million, comprising the balance of revenue-based payments received from Genzyme Corp. and taxes paid.

We recorded total income from divestitures of €134 million before taxes in the first half of 2009. The aforementioned agreement with Genzyme accounted for most of this amount. In May 2009, furthermore, we acquired the remaining 49% interest in Berlimed, S.A., Spain, from Juste S.A. Química Farmacéutica (Juste), and in return sold our 51% share of Justesa Imagen, S.A., Spain, to Juste. In addition, the Thermoplastics Testing Center, Krefeld, Germany, was sold to Underwriters Laboratories Inc., United States, in May 2009.

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 second quarter and first half 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 July 12, 2010, there were approximately 1,450 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 120 plaintiffs as of July 6, 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 was about 2,700 as of July 10, 2010. The number of Canadian class actions served upon Bayer has increased to 12. 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.

Yasmin®: In 2005, Bayer filed suit against Barr Pharmaceuticals, Inc. and Barr Laboratories, Inc. in U.S. federal court alleging patent infringement by Barr relating to the intended generic version of Bayer’s Yasmin® oral contraceptive product in the United States. In 2008, the U.S. federal court invalidated Bayer’s ’531 patent for Yasmin®. In August 2009, the U.S. Court of Appeals for the Federal Circuit affirmed this decision. In May 2010, the U.S. Supreme Court rejected Bayer’s petition for review.

YAZ®: In 2007 and 2008, Bayer received notices from Barr Laboratories, Inc. and from two further companies that each company had filed an ANDA IV seeking approval of a generic version of Bayer’s YAZ® oral contraceptive in the United States. In 2008, Bayer and Barr agreed that Bayer will grant Barr a license to market a generic version of YAZ® in the United States starting July 2011. According to this agreement, Bayer will supply Barr with the product for this purpose. In December 2008, Barr was acquired by Teva Pharmaceutical Industries Ltd. In June 2010, Teva Pharmaceutical Industries Ltd. announced that it had commercially launched in the United States Gianvi™, a generic version of YAZ®. The product for Gianvi™ was not supplied by Bayer. Bayer filed a patent infringement suit against Teva Pharmaceutical Industries Ltd., Teva Pharmaceuticals USA, Inc., Barr Pharmaceuticals LLC and Barr Laboratories, Inc. in U.S. federal court claiming that certain of Bayer’s patents have been infringed. Teva Pharmaceuticals USA, Inc. and Barr Laboratories, Inc. filed a declaratory judgment action in another U.S. federal court seeking a declaration by the court that the patents are invalid and not infringed. Bayer intends to pursue its rights vigorously.

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, but granted Abbott’s petition for rehearing in April 2010. Bayer believes it has meritorious defenses and will continue to defend itself vigorously.

Kogenate®: In 2008, Novartis Vaccines and Diagnostics Inc. and Novo Nordisk 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.

Betaferon®/Betaseron®: In May 2010, Bayer filed a complaint against Biogen Idec MA Inc. in U.S. federal court seeking a declaration by the court that a patent issued to Biogen in 2009 is invalid and not infringed by Bayer‘s production and distribution of Betaseron®, Bayer’s drug product for the treatment of multiple sclerosis. The next day, Biogen Idec MA Inc. filed a complaint against Bayer in the same court alleging that Bayer would infringe the patent through production and distribution of Betaseron® and Extavia®. Betaseron® is manufactured and distributed in the United States by Bayer. Extavia® is also a drug product for the treatment of multiple sclerosis; it is manufactured by Bayer, but distributed in the United States by Novartis Pharmaceuticals Corporation, another defendant in the lawsuit. Bayer does not believe that it has infringed any valid patent and intends to vigorously defend itself against the complaint.

Proceedings involving genetically modified rice: As of July 9, 2010, Bayer was aware of a total of approximately 460 lawsuits, involving about 7,200 plaintiffs, pending in U.S. federal and state courts against several Bayer Group companies in connection with genetically modified rice in the United States. The number of plaintiffs is calculated by totaling the number of plaintiffs identified in the complaints. However, the number of plaintiffs does not allow any conclusions on the number of farming operations involved. U.S. rice farmers often have a number of entities associated with their operation. In some cases just an individual sued, in others all the entities sued. In addition, a partnership and its individual partners are counted separately if they are listed as plaintiffs in the complaints.

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. Two trials in the multidistrict litigation (MDL) at the U.S. District Court in St. Louis, Missouri, were decided by two juries in December 2009 and February 2010. The juries found that Bayer should pay a total of approximately US$3.5 million in compensatory damages for losses sustained by five farming operations comprising 29 plaintiffs. 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 farming operation comprising two plaintiffs 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 11 farming operations comprising 14 plaintiffs for compensatory and punitive damages totaling approximately US$48 million. In a fifth trial in July 2010, a jury at the U.S. District Court in St. Louis, Missouri, found Bayer liable in a case involving one farming operation in Louisiana comprising 10 plaintiffs. Compensatory damages were fixed by the jury at approximately US$500,000, one third of the amount sought in trial. Punitive damages were not available under the laws of Louisiana applicable in this case.

Bayer disagrees completely with the present findings of liability and the awards of compensatory and punitive damages. To the extent it has not already done so, Bayer will appeal the adverse findings.

Another trial started in July 2010 in a state court in Desha County, Arkansas. Additional trials have been scheduled for 2010, including one in the MDL and one in a state court 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.

Klaus Kühn completed his tenure as a member of the Board of Management of Bayer AG at midnight on the day on which the Annual Stockholders’ Meeting was held. Mr. Kühn’s successor as Chief Financial Officer, Werner Baumann, had been appointed to the Board of Management already effective January 1, 2010.

Karl-Josef Ellrich retired as at midnight on June 30, 2010 and thus left the Supervisory Board. Mr. Ellrich was succeeded by Roswitha Süßelbeck as his elected substitute.

The Annual Stockholders’ Meeting on April 30, 2010 approved the proposal by the Board of Management and the Supervisory Board that a dividend of €1.40 per share be paid for the 2009 fiscal year.

The meeting ratified the actions of the Board of Management and the Supervisory Board.

The compensation system for members of the Board of Management was approved.

The rescission of existing and the creation of new Authorized Capital and the required amendment to the Articles of Incorporation were approved. The Annual Stockholders’ Meeting also granted the Board of Management authorization to acquire treasury shares and to sell treasury shares subject to exclusion of the subscription right or a potential tender right.

The proposed amendments to the Articles of Incorporation of Bayer AG to satisfy the terms of the Act Implementing the Stockholder Rights Directive  were approved.

PricewaterhouseCoopers Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Essen, was elected as auditor for the fiscal year 2010 and for the audit review of the 2010 half-year financial report.

Leverkusen, July 26, 2010

Bayer Aktiengesellschaft

The Board of Management