Bayer AG - Stockholders' Newsletter Third Quarter 2006

Management Report

Asset and Capital Structure

Except where explicitly stated otherwise, the following commentary compares the Bayer Group’s balance sheets as of September 30, 2006 and December 31, 2005. Explanations concerning the consolidation of Schering are provided in the Notes to the Interim Report. The data relating to the Schering purchase price allocation are preliminary.

As of the second quarter of 2006, the Diagnostics business is recognized under “Assets held for sale and discontinued operations” and the corresponding liability item. In September 2006 we announced the sale of our interest in GE Bayer Silicones to General Electric, the majority partner in that joint venture. As of the third quarter, therefore, this interest is also recognized under “Assets held for sale and discontinued operations.”

Total assets increased by €20.1 billion to €56.8 billion, mainly as a result of the Schering acquisition. The growth in noncurrent assets to €36.2 billion was primarily the result of recognizing the intangible assets of Schering – primarily production- related rights and know-how – at their fair value of €10.7 billion. In addition, goodwill of €6.2 billion was capitalized. The higher goodwill compared to June 30, 2006 results mainly from the increase in our interest in Schering by 6.4 percentage points to 96.1 percent as of September 30, 2006.

Current assets of continuing operations rose by €2.3 billion to €18.9 billion, largely because of the trade accounts receivable, inventories and liquid assets acquired from Schering.

	Dec. 31, 2005	June 30, 2006	Sept. 30, 2006	Change vs. Dec. 31, 2005 %
€ million
Noncurrent assets	20,130	36,406	36,167	+79.7
Current assets	16,592	18,388	18,937	+14.1
Assets held for sale and discontinued operations	–	1,396	1,654	•
Total current assets	16,592	19,784	20,591	+24.1
Assets	36,722	56,190	56,758	+54.6

Stockholders’ equity	11,157	12,827	13,164	+18.0
Noncurrent liabilities	16,495	23,138	27,550	+67.0
Current liabilities	9,070	19,789	15,675	+72.8
Liabilities directly related to assets held for sale and discontinued operations	–	436	369	•
Total current liabilities	9,070	20,225	16,044	+76.9
Liabilities	25,565	43,363	43,594	+70.5
Stockholders’ equity and liabilities	36,722	56,190	56,758	+54.6

Stockholders’ equity expanded by €2.0 billion to €13.2 billion. While Group net income amounted to €1.4 billion and other comprehensive income increased by €0.2 billion, stockholders’ equity was diminished by the dividend payment (€0.7 billion) and negative currency effects (€0.4 billion). In addition, minority interest in equity rose by €0.4 billion because of the remaining minority stockholders of Schering AG. The proceeds of the capital increase effected in the third quarter of 2006 amounted to €1.2 billion. The capital stock of Bayer AG thus grew to €2.0 billion. Equity coverage of total assets as of September 30, 2006 was 23.2 percent (December 31, 2005: 30.4 percent). We expect the equity ratio to be at about the 2005 level once the planned portfolio measures have been implemented.

Liabilities grew by €18.0 billion to €43.6 billion. Current and noncurrent financial liabilities rose by €12.9 billion, mainly due to the financing of the Schering acquisition. Despite the inclusion of Schering’s pension commitments, provisions for pensions were down by €131 million in light of actuarial changes not recognized in income.