Management Report

Liquidity and Capital Resources

Operating cash flow

Gross cash flow in the first quarter of 2008 rose by 17.0 percent, from €1,411 million in the prior-year period to €1,651 million, as a result of the strong business performance. Net cash flow improved by €153 million to €528 million (Q1 2007: €375 million) despite an increase in cash tied up in working capital.

Bayer Group Summary Cash Flow Statements	1st Quarter 2007	1st Quarter 2008
€ million
Gross cash flow*	1,411	1,651
Changes in working capital/other non-cash items	(1,036)	(1,123)
Net cash provided by (used in) operating activities (net cash flow), continuing operations	375	528
Net cash provided by (used in) operating activities (net cash flow), discontinued operations	38	0
Net cash provided by (used in) operating activities (net cash flow) (total)	413	528
Net cash provided by (used in) investing activities (net cash flow) (total)	4,589	(464)
Net cash provided by (used in) financing activities (net cash flow) (total)	(1,764)	131
Change in cash and cash equivalents due to business activities (total)	3,238	195
Cash and cash equivalents at beginning of period	2,915	2,531
Change due to exchange rate movements and to changes in scope of consolidation	(10)	(9)
Cash and cash equivalents at end of period	6,143	2,717

* for definition see Bayer Group Key Data

Investing cash flow

In the first three months of 2008, there was a net cash outflow of €464 million for investing activities (Q1 2007: €4,589 million inflow). This amount mainly comprised €203 million – net of acquired cash – in payments relating to the purchase of 91.8 percent of the shares of Possis Medical, Inc. along with tax payments of €40 million in connection with the divestiture of the diagnostics business. The prior-year figure consisted primarily of the net proceeds totaling €4.7 billion from the divestitures of the diagnostics business and H.C. Starck.

Cash outflows for property, plant and equipment in the first quarter of 2008 came to €239 million (Q1 2007: €193 million) and those for intangible assets to €49 million (Q1 2007: €8 million), giving a total of €288 million (Q1 2007: €201 million). This figure included the expenditures for the expansion of our polymers production facilities in Caojing, near Shanghai, China.

Financing cash flow

Net cash inflow for financing activities in the first quarter of 2008 amounted to €131 million (Q1 2007: €1,764 million outflow). Payments to minority stockholders of consolidated companies amounted to €9 million (Q1 2007: €9 million).

Liquid assets and net debt

As of March 31, 2008 the Bayer Group held cash and cash equivalents of €2,717 million, including €750 million deposited in escrow accounts. This amount is 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. Pursuant to a resolution of the Extraordinary Stockholders’ Meeting of Bayer Schering Pharma AG on January 17, 2007, the shares of that company that are still held by minority stockholders will be transferred to the main stockholder, Bayer Schering GmbH, a wholly owned subsidiary of Bayer AG, in return for cash compensation of €98.98 per share. Dissenting stockholders are seeking to have the stockholder resolution set aside or to have it declared null and void. As of March 31, 2008, we held a 96.3 percent interest in Bayer Schering Pharma AG. In view of the restriction on its use, the liquidity held in escrow accounts was not deducted when calculating net debt.

Net Debt	Dec. 31, 2007	March 31, 2008
€ million
Noncurrent financial liabilities as per balance sheets (including derivatives)	12,911	12,648
of which mandatory convertible bond	2,285	2,288
of which hybrid bond	1,237	1,237
Current financial liabilities as per balance sheets (including derivatives)	1,287	1,757
Derivative receivables	(230)	(301)
Financial liabilities	13,968	14,104
Cash and cash equivalents*	(1,776)	(1,967)
Current financial assets	(8)	(35)
Net debt from continuing operations	12,184	12,102
Net debt from discontinued operations	-	-
Net debt (total)	12,184	12,102

* In view of the restriction on its use, the €750 million liquidity in escrow accounts in the first quarter 2008 (Dec. 31, 2007: €755 million) was not deducted when calculating net debt. March 31, 2008: €1,967 million = €2,717 million - €750 million (Dec. 31, 2007: €1,776 million = €2,531 million - €755 million).

In the first quarter we reduced net debt (total) by €0.1 billion to €12.1 billion. As of March 31, 2008 we had noncurrent financial liabilities of €12.6 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 has only a limited effect on the Group’s rating-specific debt indicators, while the mandatory convertible bond has no effect.

Standard & Poor’s has given Bayer a long-term issuer rating of BBB+ with positive outlook, while Moody’s has assigned the company an A3 rating with negative 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

The net pension liability fell in the first quarter from €5.0 billion to €4.1 billion, mainly due to the increase in capital market interest rates. Provisions for pensions and other post-employment benefits declined from €5.5 billion to €5.0 billion. At the same time prepaid benefit assets, reflected in the balance sheet as other receivables, rose from €0.5 billion to €0.9 billion.

Net pension liability	Dec. 31, 2007	March 31, 2008
€ million
Provisions for pensions and other post-employment benefits	5,501	4,970
Prepaid benefit assets	(533)	(882)
Net pension liability	4,968	4,088