NOTES TO THE INCOME STATEMENT

18 Sales Sales of €7,120 million (2009: €5,057 million) comprise principally goods sold less discounts and rebates.

A breakdown of sales and the change in sales by segment and region is given in the segment information (see Note [35]).

19 Cost of sales Cost of Sales

€ million 2009 2010

Expenses for raw materials and merchandise 2,291 3,451 Direct manufacturing and other production costs 1,665 1,930

3,956 5,381

Direct manufacturing costs include those for personnel, depreciation, impairments, energies, and goods and services procured. The other production costs mainly comprise inventory valuation effects and inventory discrepancies.

20 Selling expenses Selling Expenses

€ million 2009 2010

Marketing costs 330 375

Outward freight charges and

other selling expenses 200 271

530 646

The selling expenses mainly comprise those for the internal and exter- nal sales organization, freight charges, warehousing, packaging and the provision of advice to customers.

21 Research and development expenses The research and develop- ment expenses of €116 million (2009: €101 million) mainly include the costs incurred to gain new scientifi c and technical knowledge, expenses relating to the search for alternative products and production processes, and costs for applying the results of research.

22 General administration expenses General administration expenses comprise costs not directly related to operational business processes and the costs for the country organizations.

23 Other operating income Other Operating Income

€ million 2009 2010

Income from non-core business 132 124 Income from the reversal of provisions 15 24 Income from reversals of write-downs of

receivables and other assets 15 6 Gains from the disposal of non-current assets 19 1 Miscellaneous operating income 56 34

237 189

24 Other operating expenses Other Operating Expenses

€ million 2009 2010

Expenses for non-core business 119 108 Expenses for hedging with derivative

fi nancial instruments 10 20 Expenses for allocations to restructuring provisions 41 11 Write-downs of trade receivables and

other current assets 9 4 Losses from the disposal of non-current assets 1 1 Miscellaneous operating expenses 143 117

323 261

Among the items of miscellaneous operating expenses are allocations to environmental provisions.

25 Financial result The components of this item are as follows:

Financial Result

€ million 2009 2010

Income from investments accounted for

using the equity method 8 16

Interest income 17 10

Interest expense (90) (93)

Net interest expense (73) (83)

Interest portion of interest-bearing provisions (30) (18) Net exchange loss (2) (16) Miscellaneous fi nancial expenses (21) (12) Dividends and income from other

affi liated companies 1 (1)

ST

A

TEMENTS

Notes to the Consolidated Financial Statements

Interest expense mainly includes payments of bond interest. In compli- ance with IAS 17, the interest portion of the lease payments under fi nance leases amounting to €5 million (2009: €3 million) is included in interest expense. Income from investments accounted for using the equity method comprises the €16 million (2009: €8 million) share in the income of Currenta GmbH & Co. OHG, Leverkusen, Germany, that is attributable to LANXESS.

26 Income taxes This item comprises the income taxes paid or accrued in the individual countries, plus deferred taxes. Income taxes are computed on the basis of local tax rates.

The breakdown of income taxes by origin is as follows:

Income Taxes by Origin

€ million 2009 2010

Current taxes (3) (60)

Deferred taxes resulting from

temporary differences (41) (37) statutory changes in tax rates (1) 0 loss carryforwards 52 (15)

Income taxes 7 (112)

The deferred tax assets and liabilities are allocable to the various items of the statement of fi nancial position as follows:

Deferred Taxes

€ million Dec. 31, 2009 Dec. 31, 2010

Deferred tax assets Deferred tax liabilities Deferred tax assets Deferred tax liabilities Intangible assets 16 6 8 17 Property, plant and equipment 6 140 4 136

Inventories 16 2 13 3

Receivables and other assets 14 72 5 66 Pension provisions 57 0 83 0 Other provisions 95 3 104 0 Liabilities 55 2 55 5 Loss carryforwards 91 – 85 – 350 225 357 227 of which non-current 170 169 180 180 Set-off (187) (187) (187) (187) 163 38 170 40

The change in deferred taxes is calculated as follows:

Changes in Deferred Taxes

€ million 2009 2010

Deferred taxes as of January 1 113 125

Tax income/expense refl ected in the

income statement 10 (52) Changes in scope of consolidation (5) – Taxes recognized in other comprehensive income 1 49 Exchange differences 6 8

Deferred taxes as of December 31 125 130

Deferred tax assets of €140 million (2009: €128 million) related to tax jurisdictions in which losses were recorded in 2010 or 2009. In this respect, the LANXESS Group has taken into consideration tax planning calculations and customary and feasible tax strategies. Based on tax planning calculations and strategies, deferred tax assets of €85 million (2009: €91 million) were recognized on the €274 million (2009: €294 million) in tax loss carryforwards that represent income likely to be realized in the future.

Deferred taxes were not recognized for €208 million (2009: €192 mil- lion) of tax loss carryforwards that in most cases can theoretically be utilized over more than fi ve years. Deferred tax assets also were not recognized in 2010 for tax-deductible temporary differences of €34 million (2009: €27 million). Accordingly, deferred taxes on loss carryforwards of €66 million and deferred tax assets on tax-deductible temporary differences of €13 million were not recognized.

The actual tax expense for 2010 was €112 million (2009: tax income of €7 million). This fi gured differed by €42 million (2009: €17 million) from the expected tax expense of €154 million (2009: €10 million). The expected tax expense for the LANXESS Group is calculated by applying an overall tax rate of 31.2% (2009: 31.2%) for the German companies. This comprises a corporation tax rate of 15.0%, plus a solidarity surcharge (5.5% of corporation tax) and trade tax.

LANXESS

ANNUAL

REPORT

2010 The reconciliation of the expected tax result to the actual tax result

is as follows:

Reconciliation to Reported Tax Income

€ million 2009 2010

Income before income taxes 32 493 Aggregated income tax rate of LANXESS AG 31.2% 31.2% Expected tax expense (10) (154) Tax difference due to differences between local

tax rates and the hypothetical tax rate 18 52 Reduction in taxes due to tax-free income

Utilization of unrecognized loss carryforwards 5 3

Other 7 8

Increase in taxes due to

non-tax-deductible expenses (10) (6) Other tax effects (3) (15)

Actual tax income (expense) 7 (112)

Effective tax rate (21.9%) 22.7%

27 Earnings per share The calculation of earnings per share for 2010 was based on the weighted average number of shares outstanding (83,198,360 shares), including only earnings from continuing opera- tions and disregarding the effects of accounting changes. Since there are currently no equity instruments in issue that could dilute earnings per share, basic and diluted earnings per share are identical. Further information on equity instruments that could dilute earnings per share in the future is contained in Note [11].

Earnings per Share

2009 2010 Change in % Net income (€ million) 40 379 > 100 No. of outstanding shares

(weighted) 83,202,670 83,198,3601) _0.0

Earnings per share in €

( undiluted/diluted) 0.48 4.56 > 100

1) The difference between this fi gure and the capital stock of €83,202,670 results from the weighted inclusion of a temporary holding of the company’s own shares.

LANXESS AG reported a distributable profi t of €104 million for fi scal 2010 (2009: €106 million) for statutory purposes.

28 Personnel expenses Personnel expenses amounted to €1,141 mil- lion in fi scal 2010 (2009: €981 million). Wages and salaries, at €912 million (2009: €770 million), accounted for the greater part of this fi gure. Social security contributions were €160 million (2009: €162 million), while retirement benefi t expenses totaled €61 million (2009: €45 million), and social assistance benefi ts came to €8 million (2009: €4 million). The increase in personnel expenses compared with the previous year is principally due to higher annual performance- related compensation, multi-year compensation programs and currency effects (see Note [13]). Personnel expenses do not include the interest portion of personnel-related provisions, especially pension provisions, which is refl ected in the fi nancial result (see Note [25]).