Management Report

Liquidity and Capital Resources

Operating cash flow

Gross cash flow in the third quarter rose by 0.5 percent, from €1,165 million in the prior-year period to €1,171 million. Net cash flow declined to €1,234 million (Q3 2007: €1,623 million) due to a smaller decline in working capital than in the prior-year quarter.

Gross cash flow in the first three quarters of 2008 advanced to €4,144 million (9M 2007: €3,763 million). Net cash flow fell by 5.8 percent to €2,651 million (9M 2007: €2,814 million).

Bayer Group Summary Cash Flow Statements	3rd Quarter 2007	3rd Quarter 2008	First Nine Months 2007	First Nine Months 2008
€ million
Gross cash flow*	1,165	1,171	3,763	4,144
Changes in working capital/other non-cash items	458	63	(949)	(1,493)
Net cash provided by (used in) operating activities (net cash flow), continuing operations	1,623	1,234	2,814	2,651
Net cash provided by (used in) operating activities (net cash flow), discontinued operations	(2)	0	0	0
Net cash provided by (used in) operating activities (net cash flow) (total)	1,621	1,234	2,814	2,651
Net cash provided by (used in) investing activities (net cash flow) (total)	(603)	(667)	3,933	(1,452)
Net cash provided by (used in) financing activities (net cash flow) (total)	(1,538)	(332)	(7,191)	(1,428)
Change in cash and cash equivalents due to business activities (total)	(520)	235	(444)	(229)
Cash and cash equivalents at beginning of period	2,980	2,058	2,915	2,531
Change due to exchange rate movements and to changes in scope of consolidation	(79)	(12)	(90)	(21)
Cash and cash equivalents at end of period	2,381	2,281	2,381	2,281

* for definition see Bayer Group Key Data.

Investing cash flow

In the third quarter of 2008, there was a net cash outflow of €667 million for investing activities (Q3 2007: €603 million). This amount contained disbursements of €367 million for acquisitions, including those of the OTC business of the Chinese Topsun group (€109 million) and German-based DIREVO Biotech AG (€185 million). Cash outflows for property, plant and equipment and intangible assets in the third quarter of 2008 totaled €492 million (Q3 2007: €482 million). This figure also included the expenditures for the expansion of our polymers production facilities in Caojing, near Shanghai, China, and for the acquisition of the hematology portfolio of Maxygen, Inc. Inflows consisted primarily of €126 million in “interest and dividends received.”

Net cash outflow for investing activities in the first nine months of 2008 totaled €1,452 million. This included €227 million related to the acquisition of U.S.-based Possis Medical, Inc., €265 million to the purchase of the eastern European OTC business of Sagmel, Inc., €109 million to the acquisition of the OTC business of the Chinese Topsun group and €185 million to the purchase of DIREVO Biotech AG, Germany. In the prior-year period, there was a cash inflow of €3,933 million, mainly comprising the net proceeds from the sale of the Diagnostics business, H.C. Starck and Wolff Walsrode. Cash outflows for property, plant and equipment and intangible assets in the first three quarters came to €1,127 million (9M 2007: €1,123 million). Inflows consisted primarily of €424 million in “interest and dividends received” and €148 million in proceeds from the sale of property, plant, equipment and other assets.

Financing cash flow

Net cash outflow for financing activities in the first nine months of 2008 amounted to €1,428 million. The outflow in the prior-year period came to €7,191 million. This figure included €5.2 billion for net loan repayments, especially the scheduled redemption of our 2002/2007 Eurobond in April 2007 (€2.1 billion). The Bayer AG dividend and dividend payments to minority stockholders of consolidated companies amounted to €1,042 million (9M 2007: €775 million).

Liquid assets and net debt

As of September 30, 2008 the Bayer Group held cash and cash equivalents of €2,281 million, including €751 million deposited in escrow accounts. This amount was earmarked for payments to be made in connection with the squeeze-out of the remaining minority stockholders of Bayer Schering Pharma AG and civil law settlements of antitrust proceedings. In view of the restriction on its use, the liquidity held in escrow accounts was not deducted when calculating net debt.

With the entry of the squeeze-out of the remaining minority stockholders of Bayer Schering Pharma AG in the commercial register on September 25, 2008, all shares of the minority stockholders of Bayer Schering Pharma AG were transferred by operation of law to Bayer Schering GmbH, a wholly owned subsidiary of Bayer AG. In accordance with the resolution of the Extraordinary Stockholders’ Meeting of Bayer Schering Pharma AG on January 17, 2007, the remaining minority stockholders have received cash compensation of €98.98 per share. The required sum of €695 million held in escrow accounts for this purpose was paid out to the stockholders at the beginning of October. No final decision has yet been issued in the main proceedings involving lawsuits brought by dissenting stockholders seeking to have the squeeze-out resolution set aside or declared null and void.

Net Debt	Dec. 31, 2007	June 30, 2008	Sept. 30, 2008
€ million
Noncurrent financial liabilities as per balance sheets (including derivatives)	12,911	8,925	9,420
of which hybrid bond	1,237	1,221	1,229
Current financial liabilities as per balance sheets (including derivatives)	1,287	6,010	6,004
Derivative receivables	(230)	(314)	(207)
Financial liabilities	13,968	14,621	15,217
Cash and cash equivalents*	(1,776)	(1,311)	(1,530)
Current financial assets	(8)	(6)	0
Net debt from continuing operations	12,184	13,304	13,687
Net debt from discontinued operations	0	0	0
Net debt (total)	12,184	13,304	13,687

* In view of the restriction on its use, the €751 million liquidity in escrow accounts in the third quarter of 2008 (June 30, 2008: €747 million; Dec. 31, 2007: €755 million) was not deducted when calculating net debt. Sept. 30, 2008: €1,530 million = €2,281 million - €751 million.

In the third quarter net debt (total) rose by €0.4 billion to €13.7 billion. This increase was due in part to shifts in exchange rates between the euro and other major currencies, which had a €0.5 billion effect, and to €0.4 billion in disbursements for acquisitions. As of September 30, 2008 we had financial liabilities of €15.2 billion, including the €1.2 billion subordinated hybrid bond issued in July 2005 and the €2.3 billion mandatory convertible bond issued in April 2006. Net debt should be viewed against the fact that Moody’s and Standard & Poor’s treat 75 percent and 50 percent, respectively, of the hybrid bond as equity. Both rating agencies consider the mandatory convertible bond wholly as equity. Unlike conventional borrowings, the hybrid bond thus only has a limited effect on the Group’s rating-specific indicators, while the mandatory convertible bond has no effect. In light of their maturity dates, the mandatory convertible bond issued in 2006, the floating rate note of Bayer AG, also issued in 2006, and the Eurobonds of Bayer Corporation issued in 2004 have been reclassified in 2008 from noncurrent to current financial liabilities. Our noncurrent financial liabilities as of September 30, 2008 amounted to €9.4 billion.

Standard & Poor’s gives Bayer a long-term issuer rating of A- with stable outlook, while Moody’s gives the company a rating of A3 with stable outlook. The short-term ratings are A-2 (Standard & Poor’s) and P-2 (Moody’s). These investment-grade ratings document good creditworthiness.

Net pension liability

Capital market interest rates continued to rise in the third quarter of 2008. The net pension liability fell once again, to €3.4 billion. Provisions for pensions and other post-employment benefits declined from €4.7 billion to €4.4 billion. At the same time prepaid benefit assets, reflected in the balance sheet under “Other receivables,” increased by €0.3 billion to €1.1 billion.

Net pension liability	Dec. 31, 2007	June 30, 2008	Sept. 30, 2008
€ million
Provisions for pensions and other post-employment benefits	5,501	4,696	4,442
Prepaid benefit assets	(533)	(760)	(1,057)
Net pension liability	4,968	3,936	3,385