UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

Commission file number 1-3285

3M COMPANY

State of Incorporation: Delaware

I.R.S. Employer Identification No. 41-0417775

Principal executive offices: 3M Center, St. Paul, Minnesota 55144

Telephone number: (651) 733-1110

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes x. No o.

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o. No x.

Shares of common stock outstanding at September 30, 2008: 692,955,037.

This document (excluding exhibits) contains 52 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 50.

3M COMPANY

Form 10-Q for the Quarterly Period Ended September 30, 2008

TABLE OF CONTENTS

		PAGE
PART I	FINANCIAL INFORMATION

ITEM 1.	Financial Statements	3

	Index to Financial Statements:
	Consolidated Statement of Income	3
	Consolidated Balance Sheet	4
	Consolidated Statement of Cash Flows	5
	Notes to Consolidated Financial Statements
	Note 1. Basis of Presentation	6
	Note 2. Acquisitions and Divestitures	9
	Note 3. Goodwill and Intangible Assets	10
	Note 4. Restructuring Actions and Exit Activities	12
	Note 5. Supplemental Stockholders’ Equity and Comprehensive Income Information	13
	Note 6. Income Taxes	14
	Note 7. Marketable Securities	14
	Note 8. Long-Term Debt	15
	Note 9. Pension and Postretirement Benefit Plans	16
	Note 10. Derivatives and Other Financial Instruments	17
	Note 11. Fair Value Measurements	17
	Note 12. Commitments and Contingencies	20
	Note 13. Management Stock Ownership Program (MSOP) and General Employees’ Stock Purchase Plan (GESPP)	24
	Note 14. Business Segments	27
	Note 15. Review Report of Independent Registered Public Accounting Firm	28
	Report of Independent Registered Public Accounting Firm	29

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
	Index to Management’s Discussion and Analysis:
	Overview	30
	Results of Operations	33
	Performance by Business Segment	36
	Financial Condition and Liquidity	43
	Forward-Looking Statements	47

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	47

ITEM 4.	Controls and Procedures	47

PART II	OTHER INFORMATION

ITEM 1.	Legal Proceedings	48

ITEM 1A.	Risk Factors	48

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

ITEM 3.	Defaults Upon Senior Securities	49

ITEM 4.	Submission of Matters to a Vote of Security Holders	49

ITEM 5.	Other Information	50

ITEM 6.	Exhibits	50

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended September 30, 2008

PART I. Financial Information

Item 1. Financial Statements.

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

	Three months ended September 30						Nine months ended September 30
(Millions, except per share amounts)	2008			2007			2008			2007
Net sales	$	6,558		$	6,177		$	19,760		$	18,256
Operating expenses
Cost of sales	3,432			3,240			10,278			9,437
Selling, general and administrative expenses	1,269			1,174			3,938			3,741
Research, development and related expenses	344			338			1,058			1,009
(Gain)/loss on sale of businesses	—			—			23			(854		)
Total	5,045			4,752			15,297			13,333
Operating income	1,513			1,425			4,463			4,923

Interest expense and income
Interest expense	52			53			158			139
Interest income	(28		)	(37		)	(76		)	(94		)
Total	24			16			82			45

Income before income taxes and minority interest	1,489			1,409			4,381			4,878
Provision for income taxes	479			433			1,402			1,586
Minority interest	19			16			55			47
Net income	$	991		$	960		$	2,924		$	3,245

Weighted average common shares outstanding — basic	695.5			714.5			701.3			720.7
Earnings per share — basic	$	1.43		$	1.34		$	4.17		$	4.50

Weighted average common shares outstanding — diluted	703.1			729.9			710.7			734.3
Earnings per share — diluted	$	1.41		$	1.32		$	4.11		$	4.42

Cash dividends paid per common share	$	0.50		$	0.48		$	1.50		$	1.44

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.

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3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

(Dollars in millions, except per share amount)	Sept. 30 2008			Dec. 31 2007

Assets
Current assets
Cash and cash equivalents	$	2,240		$	1,896
Marketable securities — current	727			579
Accounts receivable — net	3,763			3,362
Inventories
Finished goods	1,513			1,349
Work in process	933			880
Raw materials and supplies	632			623
Total inventories	3,078			2,852
Other current assets	980			1,149
Total current assets	10,788			9,838

Marketable securities - non-current	652			480
Investments	285			298
Property, plant and equipment	18,854			18,390
Less: Accumulated depreciation	(12,045		)	(11,808		)
Property, plant and equipment — net	6,809			6,582
Goodwill	5,573			4,589
Intangible assets — net	1,263			801
Prepaid pension and postretirement benefits	1,684			1,378
Other assets	555			728
Total assets	$	27,609		$	24,694

Liabilities and Stockholders’ Equity
Current liabilities
Short-term borrowings and current portion of long-term debt	$	2,257		$	901
Accounts payable	1,557			1,505
Accrued payroll	660			580
Accrued income taxes	570			543
Other current liabilities	1,964			1,833
Total current liabilities	7,008			5,362

Long-term debt	4,779			4,019
Other liabilities	3,621			3,566
Total liabilities	$	15,408		$	12,947

Commitments and contingencies (Note 12)

Stockholders’ equity
Common stock par value, $.01 par value, 944,033,056 shares issued	9			9
Additional paid-in capital	2,964			2,785
Retained earnings	22,070			20,316
Treasury stock, at cost; 251,078,019 shares at Sept. 30, 2008; 234,877,025 shares at Dec. 31, 2007	(11,717		)	(10,520		)
Unearned compensation	(60		)	(96		)
Accumulated other comprehensive income (loss)	(1,065		)	(747		)
Stockholders’ equity — net	12,201			11,747
Total liabilities and stockholders’ equity	$	27,609		$	24,694

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.

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3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

	Nine months ended September 30
(Dollars in millions)	2008			2007

Cash Flows from Operating Activities
Net income	$	2,924		$	3,245
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	846			796
Company pension and postretirement contributions	(342		)	(373		)
Company pension and postretirement expense	77			188
Stock-based compensation expense	164			182
Loss/(gain) from sale of businesses	23			(854		)
Deferred income taxes	33			(179		)
Excess tax benefits from stock-based compensation	(21		)	(65		)
Changes in assets and liabilities
Accounts receivable	(369		)	(458		)
Inventories	(179		)	(89		)
Accounts payable	(36		)	60
Accrued income taxes	(73		)	85
Product and other insurance receivables and claims	130			145
Other — net	231			36
Net cash provided by operating activities	3,408			2,719

Cash Flows from Investing Activities
Purchases of property, plant and equipment (PP&E)	(1,008		)	(1,031		)
Proceeds from sale of PP&E and other assets	80			90
Acquisitions, net of cash acquired	(834		)	(255		)
Purchases of marketable securities and investments	(2,091		)	(6,967		)
Proceeds from sale of marketable securities and investments	1,239			5,541
Proceeds from maturities of marketable securities	517			547
Proceeds from sale of businesses	88			897
Net cash used in investing activities	(2,009		)	(1,178		)

Cash Flows from Financing Activities
Change in short-term debt — net	1,562			(144		)
Repayment of debt (maturities greater than 90 days)	(930		)	(1,071		)
Proceeds from debt (maturities greater than 90 days)	862			2,843
Purchases of treasury stock	(1,597		)	(2,756		)
Reissuances of treasury stock	257			689
Dividends paid to stockholders	(1,052		)	(1,039		)
Distributions to minority interests	(23		)	(20		)
Excess tax benefits from stock-based compensation	21			65
Other — net	(3		)	(4		)
Net cash used in financing activities	(903		)	(1,437		)

Effect of exchange rate changes on cash and cash equivalents	(152		)	124

Net increase (decrease) in cash and cash equivalents	344			228
Cash and cash equivalents at beginning of year	1,896			1,447
Cash and cash equivalents at end of period	$	2,240		$	1,675

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.

3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1. Basis of Presentation

The interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair statement of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. The interim consolidated financial statements and notes are presented as permitted by the requirements for Quarterly Reports on Form 10-Q.

As described in 3M’s Current Report on Form 8-K dated May 19, 2008, (which updated 3M’s 2007 Annual Report on Form 10-K) and 3M’s Quarterly Report on Form 10-Q for the period ended March 31, 2008, during the first quarter of 2008 the Company reorganized its business segments (refer to Note 14). This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Current Report on Form 8-K dated May 19, 2008.

Significant Accounting Policies

Earnings per share: The difference in the weighted average shares outstanding for calculating basic and diluted earnings per share is attributable to the dilution associated with the Company’s stock-based compensation plans. Certain Management Stock Ownership Program (MSOP) options outstanding were not included in the computation of diluted earnings per share because they would not have had a dilutive effect (43.7 million average options for the three months ended September 30, 2008; 34.5 million average options for the nine months ended September 30, 2008; 10.0 million average options for the three months ended September 30, 2007; 24.0 million average options for the nine months ended September 30, 2007). The conditions for conversion related to the Company’s “Convertible Notes” were not met (refer to 3M’s Current Report on Form 8-K dated May 19, 2008, Note 10 to the Consolidated Financial Statements, for more detail). If the conditions for conversion are met, 3M may choose to pay in cash and/or common stock; however, if this occurs, the Company has the intent and ability to settle this debt security in cash. Accordingly, there was no impact on 3M’s diluted earnings per share. The computations for basic and diluted earnings per share follow:

Earnings Per Share Computations

	Three months ended September 30				Nine months ended September 30
(Amounts in millions, except per share amounts)	2008		2007		2008		2007
Numerator:
Net income	$	991	$	960	$	2,924	$	3,245

Denominator:
Denominator for weighted average common shares outstanding — basic	695.5		714.5		701.3		720.7

Dilution associated with the Company’s stock-based compensation plans	7.6		15.4		9.4		13.6

Denominator for weighted average common shares outstanding — diluted	703.1		729.9		710.7		734.3

Earnings per share — basic	$	1.43	$	1.34	$	4.17	$	4.50
Earnings per share — diluted	1.41		1.32		4.11		4.42

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify the source of information used in fair value measurements, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. This statement applies under other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued Staff Positions (FSPs) No. 157-1 and No. 157-2, which, respectively, remove leasing

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transactions from the scope of SFAS No. 157 and defer its effective date for one year relative to certain nonfinancial assets and liabilities. As a result, the application of the definition of fair value and related disclosures of SFAS No. 157 (as impacted by these two FSPs) was effective for 3M beginning January 1, 2008 on a prospective basis with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. This adoption did not have a material impact on 3M’s consolidated results of operations or financial condition. The remaining aspects of SFAS No. 157 for which the effective date was deferred under FSP No. 157-2 are currently being evaluated by the Company. Areas impacted by the deferral relate to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applies to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups measured at fair value for an impairment assessment. The effects of these remaining aspects of SFAS No. 157 are to be applied by 3M to fair value measurements prospectively beginning January 1, 2009. The Company does not expect them to have a material impact on 3M’s consolidated results of operations or financial condition. Refer to Note 11 for disclosures required by this new pronouncement.

In early October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active,” which amended SFAS No. 157 to illustrate key considerations in determining the fair value of a financial asset in an inactive market. This FSP was effective for 3M beginning with the quarter ended September 30, 2008. Its additional guidance was incorporated in the measurements of fair value of applicable financial assets disclosed in Note 11 and did not have a material impact on 3M’s consolidated results of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits an entity to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity reports unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected are recognized in earnings as incurred and not deferred. SFAS No. 159 also established presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 was effective for financial statements issued for fiscal years beginning after November 15, 2007 (January 1, 2008 for 3M). At the effective date, an entity could elect the fair value option for eligible items that existed at that date. The entity was required to report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. The Company did not elect the fair value option for eligible items that existed as of January 1, 2008.

In June 2007, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” that required nonrefundable advance payments made by the Company for future R&D activities to be capitalized and recognized as an expense as the goods or services are received by the Company. EITF Issue No. 07-3 was effective for 3M with respect to new arrangements entered into beginning January 1, 2008. The adoption of EITF Issue No. 07-3 did not have a material impact on 3M’s consolidated results of operations or financial condition.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which changes accounting for business acquisitions. SFAS No. 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. For 3M, SFAS No. 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. The Company is currently evaluating the future impacts and disclosures of this standard.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” which establishes new standards governing the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also requires changes to certain presentation and disclosure

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requirements. For 3M, SFAS No. 160 is effective beginning January 1, 2009. The provisions of the standard are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented. The Company is currently evaluating the future impacts and disclosures of this standard.

In December 2007, the FASB ratified the Emerging Issues Task Force consensus on EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” that discusses how parties to a collaborative arrangement (which does not establish a legal entity within such arrangement) should account for various activities. The consensus indicates that costs incurred and revenues generated from transactions with third parties (i.e. parties outside of the collaborative arrangement) should be reported by the collaborators on the respective line items in their income statements pursuant to EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent.” Additionally, the consensus provides that income statement characterization of payments between the participants in a collaborative arrangement should be based upon existing authoritative pronouncements; analogy to such pronouncements if not within their scope; or a reasonable, rational, and consistently applied accounting policy election. EITF Issue No. 07-1 is effective for 3M beginning January 1, 2009 and is to be applied retrospectively to all periods presented for collaborative arrangements existing as of the date of adoption. The Company is currently evaluating the impacts and disclosures of this standard, but would not expect EITF Issue No. 07-1 to have a material impact on 3M’s consolidated results of operations or financial condition.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which will require increased disclosures about an entity’s strategies and objectives for using derivative instruments; the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities;” and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. Certain disclosures will also be required with respect to derivative features that are credit-risk-related. SFAS No. 161 is effective for 3M beginning January 1, 2009 on a prospective basis. The Company does not expect this standard to have a material impact on 3M’s consolidated results of operations or financial condition.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. Under FSP No. FAS 142-3, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. For 3M, this FSP will require certain additional disclosures beginning January 1, 2009 and application to useful life estimates prospectively for intangible assets acquired after December 31, 2008. The Company does not expect this standard to have a material impact on 3M’s consolidated results of operations or financial condition.

In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).” This FSP applies to convertible debt securities that, upon conversion by the holder, may be settled by the issuer fully or partially in cash (rather than settled fully in shares) and specifies that issuers of such instruments should separately account for the liability and equity components in a manner that reflects the issuer’s nonconvertible debt borrowing rate when related interest cost is recognized. This FSP is effective for 3M beginning January 1, 2009 with retrospective application to all periods presented. This standard impacts the Company’s “Convertible Notes” (refer to 3M’s Current Report on Form 8-K dated May 19, 2008, Note 10 to the Consolidated Financial Statements, for more detail), and will require that additional interest expense essentially equivalent to the portion of issuance proceeds retroactively allocated to the instrument’s equity component be recognized over the period from the Convertible Notes’ issuance in 2002 through late 2005 (the first date holders of these Notes had the ability to put them back to 3M). 3M is evaluating the impact of this standard and anticipates that its retrospective application will have no impact on results of operations for periods following 2005, but will result in an increase in opening additional paid in capital and a corresponding decrease in opening retained earnings, net of deferred tax impacts, on post-2005 consolidated balance sheets.

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NOTE 2. Acquisitions and Divestitures

Divestitures:

In June 2008, 3M completed the sale of HighJump Software, a 3M Company, to Battery Ventures, a technology venture capital and private equity firm. 3M received proceeds of $85 million for this transaction and recognized, net of assets sold, transaction and other costs, a pre-tax loss of $23 million (recorded in the Safety, Security and Protection Services segment) in the second quarter of 2008.

Acquisitions:

During the nine months ended September 30, 2008, 3M completed 11 business combinations. The purchase price paid for business combinations (net of cash acquired) and certain contingent consideration paid during the nine months ended September 30, 2008 for previous acquisitions aggregated to $834 million.

The largest of these 2008 acquisitions was the April 2008 purchase of 100 percent of the outstanding shares of Aearo Holding Corp. (Safety, Security and Protection Services Business), the parent company of Aearo Technologies Inc. (hereafter referred to as Aearo), a manufacturer of personal protection and energy absorbing products. Cash paid, net of cash acquired, for Aearo totaled approximately $518 million and debt assumed from Aearo totaled approximately $684 million, which was immediately paid off.

The 10 additional business combinations are summarized as follows:

(1) In March 2008, 3M (Industrial and Transportation Business) purchased certain assets of Hitech Polymers Inc., a manufacturer of specialty thermoplastic polymers and provider of toll thermoplastic compounding services based in Hebron, Kentucky.

(2) In April 2008, 3M (Health Care Business) purchased 100 percent of the outstanding shares of Les Entreprises Solumed Inc., a Quebec-based developer and marketer of leading-edge medical products designed to prevent infections in operating rooms and hospitals.

(3) In April 2008, 3M (Consumer and Office Business) purchased 100 percent of the outstanding shares of Kolors Kevarkian, S.A., a manufacturer of branded floor cleaning tools based in Argentina.

(4) In July 2008, 3M (Industrial and Transportation Business) purchased 100 percent of the outstanding shares of K&H Surface Technologies Pty. Ltd., an Australian-based manufacturing company specializing in a range of repair products for the professional do-it-yourself automotive refinish markets.

(5) In July 2008, 3M (Safety, Security and Protection Services Business) purchased 100 percent of the outstanding shares of Quest Technologies Inc., a manufacturer of environmental monitoring equipment, including noise, heat stress and vibration monitors that is headquartered in Oconomowoc, Wisconsin.

(6) In July 2008, 3M (Health Care Business) purchased 100 percent of the outstanding shares of IMTEC Corp., a manufacturer of dental implants and cone beam computed tomography scanning equipment for dental and medical radiology headquartered in Ardmore, Oklahoma.

(7) In August 2008, 3M (Health Care Business) purchased 100 percent of the outstanding shares of TOP-Service für Lingualtechnik GMbH, an orthodontic technology and services company based in Bad Essen, Germany offering a digital lingual orthodontic solution.

(8) In August 2008, 3M (Industrial and Transportation Business) purchased 100 percent of the outstanding shares of Polyfoam Products Inc., a structural adhesives company specializing in foam adhesives for tile roofing and other adhesive products for the building industry that is headquartered in Tomball, Texas.

(9) In August 2008, 3M (Industrial and Transportation Business) purchased 100 percent of the outstanding shares of
Dedication to Detail, Inc., a Philadelphia-based manufacturer of paint finishing systems, including buffing and polishing pads.

(10) In September 2008, 3M (Industrial and Transportation Business) purchased 100 percent of the outstanding shares of Ligacon AG, a Switzerland-based manufacturer and supplier of filtration systems and filter elements for the pharmaceutical, biotech and general industrial markets.

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Purchased identifiable intangible assets totaled $591 million and will be amortized on a straight-line basis over a weighted-average life of 14 years (lives ranging from 1 to 19 years). Acquired patents of $35 million will be amortized over a weighted-average life of 11 years and other acquired intangibles of $556 million, primarily customer relationships and tradenames, will be amortized over a weighted-average life of 14 years. Pro forma information related to the above acquisitions is not included because the impact on the Company’s consolidated results of operations is not considered to be material. In-process research and development charges associated with these business combinations were not material.

The purchase price allocation for all 2008 business combinations, including Aearo, and certain other 2007 business combinations is considered preliminary. The impact on the consolidated balance sheet of the purchase price allocations related to acquisitions, including adjustments relative to other acquisitions within the allocation period, follow:

Asset (Liability) (Millions)	Aearo Holding Corp.			Other Acquisitions			2008 Total
Accounts receivable	$	76		$	17		$	93
Inventory	81			23			104
Other current assets	7			4			11
Property, plant, and equipment — net	82			45			127
Purchased intangible assets	485			106			591
Purchased goodwill	906			207			1,113
Accounts payable and other liabilities, net of other assets	(222		)	(26		)	(248		)
Interest bearing debt	(684		)	(27		)	(711		)
Deferred tax asset/(liability)	(213		)	(33		)	(246		)

Net assets acquired	$	518		$	316		$	834

Supplemental information:
Cash paid	$	557		$	326		$	883
Less: Cash acquired	39			10			49
Cash paid, net of cash acquired	$	518		$	316		$	834
Non-cash (3M shares at fair value)	—			—			—
Net assets acquired	$	518		$	316		$	834

In addition to business combinations, 3M periodically acquires certain tangible and/or intangible assets and purchases interests in certain enterprises that do not otherwise qualify for accounting as business combinations. These transactions are largely reflected as additional asset purchase and investment activity.

Subsequent Events

On October 1, 2008, 3M (Industrial and Transportation Business) announced that it completed its acquisition of EMFI S.A. and SAPO S.A.S., manufacturers of polyurethane-based structural adhesives and sealants, which are headquartered in Haguenau, France.

On October 2, 2008, 3M (Industrial and Transportation Business) announced that it completed its acquisition of Meguiar’s Inc., a 100-year-old family business that manufactures the leading Meguiar’s brand of car care products for cleaning and protecting automotive surfaces, which is headquartered in Irvine, California.

NOTE 3. Goodwill and Intangible Assets

As discussed in Note 14, 3M made certain changes to its business segments effective in the first quarter of 2008, which resulted in no material changes to the goodwill balances by business segment. For those changes that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact to reporting units. SFAS No. 142 requires that goodwill be tested for impairment at least annually and when reporting units are changed. During the first quarter of 2008, the Company completed its assessment of any potential goodwill impairment under this new structure and determined that no impairment existed.

Purchased goodwill related to the 11 acquisitions which closed in the first nine months of 2008 totaled $1.123 billion, $2 million of which is deductible for tax purposes. The acquisition activity in the preceding and following table also includes the impacts of purchase accounting adjustments and contingent consideration for previously closed acquisitions, which reduced goodwill by $10 million. The amounts in the “Translation and other” column in the following table primarily relate to changes in foreign currency exchange rates, except for the $77 million decrease in goodwill related to the second-quarter 2008 sale of 3M’s HighJump Software business (included in the Safety,

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Security and Protection Services business). The goodwill balance by business segment as of December 31, 2007 and September 30, 2008, follow:

Goodwill

(Millions)	Dec. 31, 2007 Balance		Acquisition activity		Translation and other			Sept. 30, 2008 Balance
Industrial and Transportation	$	1,524	$	18	$	(32	)	$	1,510
Health Care	839		169		(15		)	993
Display and Graphics	894		—		(4		)	890
Consumer and Office	94		3		18			115
Safety, Security and Protection Services	611		923		(97		)	1,437
Electro and Communications	627		—		1			628
Total Company	$	4,589	$	1,113	$	(129	)	$	5,573

Acquired Intangible Assets

For the nine months ended September 30, 2008, acquired intangible asset activity through business combinations increased balances by $591 million, while the sale of 3M’s HighJump Software business reduced net intangible asset balances by $23 million. The carrying amount and accumulated amortization of acquired intangible assets as of September 30, 2008, and December 31, 2007, follow:

	Sept. 30			Dec. 31
(Millions)	2008			2007
Patents	$	470		$	446
Other amortizable intangible assets (primarily tradenames and customer related intangibles)	1,287			801
Non-amortizable intangible assets (tradenames)	73			75
Total gross carrying amount	$	1,830		$	1,322

Accumulated amortization — patents	(314		)	(305		)
Accumulated amortization — other	(253		)	(216		)
Total accumulated amortization	(567		)	(521		)
Total intangible assets — net	$	1,263		$	801

Amortization expense for acquired intangible assets for the three-month and nine-month periods ended September 30, 2008 and 2007 follows:

	Three months ended Sept. 30				Nine months ended Sept. 30
(Millions)	2008		2007		2008		2007
Amortization expense	$	33	$	22	$	89	$	64

The table below shows expected amortization expense for acquired intangible assets recorded as of September 30, 2008:

(Millions)

Last
Quarter
2008

2009

2010

2011

2012

After
2012

Amortization expense

132

117

111

103

694

The expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets and other events.

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NOTE 4. Restructuring Actions and Exit Activities

2006/2007 Restructuring Actions

During the fourth quarter of 2006 and the first nine months of 2007, management approved and committed to undertake the following restructuring actions:

· Pharmaceuticals business actions — employee-related, asset impairment and other costs pertaining to the Company’s exit of its branded pharmaceuticals operations in late 2006 and early 2007. These costs included severance and benefits for pharmaceuticals business employees who were not obtaining employment with the buyers of the pharmaceuticals business as well as impairment charges associated with certain assets not transferred to the buyers.

· Overhead reduction actions — employee-related costs for severance and benefits, costs associated with actions to reduce the Company’s cost structure.

· Business-specific actions — employee-related costs for severance and benefits, fixed and intangible asset impairments, certain contractual obligations, and expenses from the exit of certain product lines.

In aggregate, total charges in 2006 and 2007 for the preceding restructuring program totaled $441 million. Actions with respect to the above activities were substantially completed in 2007 and additional charges and adjustments are not expected to be material.

The remaining accrued liability balances and cash payments in 2008 follow:

Restructuring Activity

(Millions)	Accrued Liability Balances at Dec. 31, 2007		Cash Payments in 2008			Accrued Liability Balances at Sept. 30, 2008
Employee-Related Items and Benefits
Pharmaceuticals business actions	$	5	$	(5	)	$	—
Overhead reduction actions	10		(9		)	1
Business-specific actions	5		(4		)	1
Total	$	20	$	(18	)	$	2

2008 Exit Activities

In the second quarter of 2008, the Company recorded pre-tax charges of $19 million related to exit activities. These charges related to employee reductions at an Industrial and Transportation manufacturing facility located in the United Kingdom. These charges were recorded in cost of sales.

In the third quarter of 2008, the Company recorded pre-tax charges of $49 million related to exit activities. These charges related to employee reductions and fixed asset impairments, with actions taken in Display and Graphics ($20 million), Industrial and Transportation ($11 million), Health Care ($10 million), Corporate and Unallocated ($5 million), and Safety, Security and Protection Services ($3 million). These charges were recorded in cost of sales ($25 million), selling, general and administrative expenses ($20 million), and research, development and related expenses ($4 million).

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NOTE 5. Supplemental Stockholders’ Equity and Comprehensive Income Information

Accumulated Other Comprehensive Income (Loss)

(Millions)	Sept. 30, 2008			Dec. 31, 2007
Cumulative translation — net	$	299		$	742
Defined benefit pension and postretirement plans adjustment — net	(1,385		)	(1,453		)
Debt and equity securities, unrealized gain (loss) — net	(18		)	(8		)
Cash flow hedging instruments, unrealized gain (loss) — net	39			(28		)
Total accumulated other comprehensive income (loss)	$	(1,065	)	$	(747	)

	Comprehensive Income
	Three-months ended Sept. 30,						Nine-months ended Sept. 30,
(Millions)	2008			2007			2008			2007
Net income	$	991		$	960		$	2,924		$	3,245

Cumulative translation	(600		)	245			(390		)	390
Tax effect	(72		)	51			(53		)	57
Cumulative translation - net of tax	(672		)	296			(443		)	447

Defined benefit pension and postretirement plans adjustment	20			50			88			146
Tax effect	3			(20		)	(20		)	(52		)
Defined benefit pension and postretirement plans adjustment - net of tax	23			30			68			94

Debt and equity securities, unrealized gain (loss)	(11		)	(13		)	(15		)	(6		)
Tax effect	4			5			5			2
Debt and equity securities, unrealized gain (loss) - net of tax	(7		)	(8		)	(10		)	(4		)

Cash flow hedging instruments, unrealized gain (loss)	57			(21		)	102			(28		)
Tax effect	(15		)	8			(35		)	11
Cash flow hedging instruments, unrealized gain (loss) - net of tax	42			(13		)	67			(17		)

Total — net of tax	$	377		$	1,265		$	2,606		$	3,765

Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income. As disclosed in Note 9, for the three and nine-months ended September 30, 2008, $20 million pre-tax ($23 million after tax) and $62 million pre-tax ($52 million after tax), respectively, were reclassified to earnings from accumulated other comprehensive income to pension and postretirement expense in the income statement. These pension and postretirement expense amounts are shown in the table in Note 9 as amortization of transition (asset) obligation, amortization of prior service cost (benefit) and amortization of net actuarial (gain) loss. Reclassifications to earnings from accumulated other comprehensive income for debt and equity securities, which primarily include marketable securities, totaled a loss of approximately $6 million pre-tax ($4 million after tax) for the nine-months ended September 30, 2008, as shown in the auction rate securities table in Note 11. Refer to Note 10 for a table that recaps cash flow hedging instruments reclassifications. Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation does include impacts from items such as net investment hedge transactions.

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NOTE 6. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 1999. During the first nine months of 2008, the Company paid IRS assessments related to tax and interest for the 2001 through 2004 tax years. The IRS’s adjustments to the Company’s tax positions including interest were fully reserved. As a result of these additional tax payments, the Company’s unrecognized tax benefits were reduced by $71 million for the first nine months of 2008.

In addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign jurisdictions. Currently, the Company expects the liability for unrecognized tax benefits will change by an insignificant amount during the next 12 months.

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2007 and September 30, 2008, respectively, are $334 million and $272 million.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. At December 31, 2007 and September 30, 2008 respectively, accrued interest and penalties on a gross basis were $69 million and $41 million. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

NOTE 7. Marketable Securities

The Company invests in agency securities, asset-backed securities, corporate securities, treasury securities and other securities. The following is a summary of amounts recorded on the Consolidated Balance Sheet for marketable securities (current and non-current) at September 30, 2008.

	Sept. 30,
(Millions)	2008

Agency securities	$	398
Corporate securities	141
Asset-backed securities:
Automobile loans related	53
Other	27
Asset-backed securities total	80
Other	108

Current marketable securities	$	727

Agency securities	$	346
Asset-backed securities:
Credit cards related	110
Automobile loans related	37
Other	28
Asset-backed securities total	175
Corporate securities	89
Treasury securities	38
Auction rate securities	4

Non-current marketable securities	$	652

Total marketable securities	$	1,379

Classification of marketable securities as current or non-current is dependent upon management’s intended holding period, the security’s maturity date and liquidity considerations based on market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current. At September 30, 2008, gross unrealized losses totaled approximately $24 million (pre-tax), while gross unrealized gains were not material. Gross unrealized losses primarily relate to auction rate securities, which are discussed further below, but also include other securities which have experienced unrealized losses as credit spreads have widened. Gross realized gains and losses on sales or maturities of marketable securities were not material for the first nine months of

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2008 and 2007. Cost of securities sold or reclassified use the first in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into earnings upon sale or “other-than-temporary” impairment.

3M has a diversified marketable securities portfolio of $1.379 billion as of September 30, 2008. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $255 million) are primarily comprised of interests in automobile loans and credit cards. At September 30, 2008, the asset-backed securities credit ratings were AAA or A-1+, with the following exceptions: two securities rated AA with a fair market value of $15.5 million, one security rated A with a fair market value of $4.9 million and one security rated BBB with a fair market value of $5.2 million. 3M’s marketable securities portfolio also includes auction rate securities (estimated fair value of $4 million) that represent interests in investment grade credit default swaps. During the second half of 2007 and the first nine months of 2008, these auction rate securities failed to auction due to sell orders exceeding buy orders. Liquidity for these auction-rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 7, 28, 35, or 90 days. The funds associated with failed auctions will not be accessible until a successful auction occurs or a buyer is found outside of the auction process. Based upon an analysis of “temporary” and “other-than-temporary” impairment factors, auction rate securities with an original par value of approximately $34 million were written-down to an estimated fair value of $16 million as of December 31, 2007 and subsequently written-down to an estimated fair value of $4 million as of September 30, 2008. 3M recorded “other-than-temporary” impairment charges that reduced pre-tax income by approximately $8 million in the fourth quarter of 2007, approximately $1 million in the first quarter of 2008, and approximately $8 million in the second quarter of 2008. There are $13 million (pre-tax) of temporary impairments at September 30, 2008, which were recorded as unrealized losses within other comprehensive income. As of September 30, 2008, these investments in auction rate securities have been in a loss position for approximately twelve months. These auction rate securities are classified as non-current marketable securities as of September 30, 2008 as indicated in the preceding table. Refer to Note 11 for a table that reconciles the beginning and ending balances of auction rate securities for 2008.

3M reviews impairments associated with the above in accordance with Emerging Issues Task Force (EITF) 03-1 and FSP SFAS 115-1 and 124-1, “The Meaning of Other-Than-Temporary-Impairment and Its Application to Certain Investments,” to determine the classification of the impairment as “temporary” or “other-than-temporary.” A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income component of stockholders’ equity. Such an unrealized loss does not reduce net income for the applicable accounting period because the loss is not viewed as other-than-temporary. The company believes that a portion of the impairment of its auction rate securities investments is temporary and a portion is other-than-temporary. The factors evaluated to differentiate between temporary and other-than-temporary include the projected future cash flows, credit ratings actions, and assessment of the credit quality of the underlying collateral.

The balances at September 30, 2008 for marketable securities by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

	Sept. 30,
(Millions)	2008

Due in one year or less	$	457
Due after one year through three years	715
Due after three years through five years	178
Due after five years	29

Total marketable securities	$	1,379

NOTE 8. Long-Term Debt

The Company has a “well-known seasoned issuer” shelf registration statement, effective February 24, 2006, to register an indeterminate amount of debt or equity securities for future sales. The Company intends to use the proceeds from future securities sales off this shelf for general corporate purposes. In connection with this shelf registration, in June 2007 the Company established a medium-term notes program through which up to $3 billion of medium-term notes may be offered. In December 2007, 3M issued a five-year, $500 million, fixed rate note with a coupon rate of 4.65% under this medium-term notes program. In August 2008, 3M issued a five-year, $850 million, fixed rate note with a coupon rate of 4.375% under this medium-term notes program. This program has a remaining capacity of $1.65 billion as of September 30, 2008. In October 2008, subsequent to quarter-end, the Company issued a three-year $800 million, fixed rate note with a coupon rate of 4.50%, under this medium-term notes program, reducing remaining capacity to $850 million as of the date of this filing.

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NOTE 9. Pension and Postretirement Benefit Plans

Components of net periodic benefit cost and other supplemental information for the three months and nine months ended September 30 follow:

Benefit Plan Information

	Three months ended September 30
	Qualified and Non-qualified
	Pension Benefits												Postretirement
	United States						International						Benefits
(Millions)	2008			2007			2008			2007			2008			2007

Service cost	$	48		$	48		$	31		$	29		$	14		$	14
Interest cost	149			142			65			55			24			26
Expected return on plan assets	(222		)	(210		)	(80		)	(70		)	(26		)	(28		)
Amortization of transition (asset) obligation	—			—			1			2			—			—
Amortization of prior service cost (benefit)	4			3			—			(1		)	(25		)	(17		)
Amortization of net actuarial (gain) loss	14			32			10			12			16			19
Net periodic benefit cost (benefit)	$	(7	)	$	15		$	27		$	27		$	3		$	14
Settlements, curtailments and special termination benefits	2			4			—			—			—			—
Net periodic benefit cost (benefit) after settlements, curtailments and special termination benefits	$	(5	)	$	19		$	27		$	27		$	3		$	14

Benefit Plan Information

	Nine months ended September 30
	Qualified and Non-qualified
	Pension Benefits												Postretirement
	United States						International						Benefits
(Millions)	2008			2007			2008			2007			2008			2007

Service cost	$	144		$	144		$	93		$	89		$	40		$	42
Interest cost	447			426			197			165			75			78
Expected return on plan assets	(666		)	(630		)	(240		)	(210		)	(78		)	(80		)
Amortization of transition (asset) obligation	—			—			3			4			—			—
Amortization of prior service cost (benefit)	12			10			(2		)	(3		)	(71		)	(53		)
Amortization of net actuarial (gain) loss	42			95			30			38			48			55
Net periodic benefit cost (benefit)	$	(21	)	$	45		$	81		$	83		$	14		$	42
Settlements, curtailments and special termination benefits	3			5			—			—			—			13
Net periodic benefit cost (benefit) after settlements, curtailments and special termination benefits	$	(18	)	$	50		$	81		$	83		$	14		$	55

During the first quarter of 2008, the Company made modifications to its U.S. postretirement benefits plan. The changes are effective beginning January 1, 2009, and allow current retired employees and employees who retire before January 1, 2013 the option to continue on the existing postretirement plans or elect the new plans. Current employees who retire after December 31, 2012, will receive a savings account benefits-based plan. As a result of the modification to the U.S. postretirement benefits plan, the Company remeasured its U.S. plans’ assets and accumulated postretirement benefit obligation (APBO) as of March 31, 2008. The impact of the plan modifications reduced the APBO by $148 million, which was partially offset by asset values being $97 million lower than on December 31, 2007. Therefore, the accrued benefit cost liability recorded on the balance sheet as of March 31, 2008, was reduced by $51 million. The remeasurement did not impact the postretirement expense for the quarter ended March 31, 2008, but reduces the expense for April 1 through December 31, 2008 by $15 million.

For the nine months ended September 30, 2008, contributions totaling $340 million were made to the Company’s U.S. and international pension plans and $2 million to its postretirement plans. In 2008, the Company expects to contribute up to $400 million to its U.S. and international pension plans. The Company does not have a required minimum pension contribution obligation for its U.S. plans in 2008. The amount of discretionary pension contributions can vary significantly depending on the U.S plans’ funding status as of the measurement date and the anticipated tax

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deductibility of the contribution. 3M’s annual measurement date for pension and postretirement assets and liabilities is December 31 each year, which is also the date used for the related annual measurement assumptions.

NOTE 10. Derivatives and Other Financial Instruments

The Company uses interest rate swaps, currency swaps, and forward and option contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. For a more detailed discussion of the company’s derivative instruments, refer to 3M’s Current Report on Form 8-K dated May 19, 2008.

The Company enters into foreign exchange forward contracts, options and swaps to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies and certain intercompany financing transactions. These transactions are designated as cash flow hedges. Based on exchange rates at September 30, 2008, the Company expects to reclassify to earnings over the next 12 months a majority of the cash flow hedging instruments after-tax gain of $39 million (with the impact offset by cash flows from underlying hedged items). Amounts recorded in accumulated other comprehensive income (loss) related to cash flow hedging instruments follow:

Cash Flow Hedging Instruments

	Three months ended						Nine months ended
Net of Tax	September 30						September 30
(Millions)	2008			2007			2008			2007

Beginning balance	$	(3	)	$	(22	)	$	(28	)	$	(18	)

Changes in fair value of derivatives	33			(24		)	44			(35		)
Reclassifications to earnings from equity	9			11			23			18
Total activity	42			(13		)	67			(17		)

Ending balance	$	39		$	(35	)	$	39		$	(35	)

During late 2007 and early 2008, the Company entered into foreign currency forward contracts with an aggregate notional amount of $229 million, of which $29 million related to 2008, that were designated as a partial hedge of the Company’s net investment in its Chinese subsidiaries. These forwards mature in December 2008. In September 2008, the Company de-designated approximately $145 million of these hedges and entered into offsetting non-hedge-designated forward contracts. Similar actions were taken in early October 2008 relative to the remaining notional amount of these net investment hedges.

NOTE 11. Fair Value Measurements

As discussed in Note 1, 3M adopted SFAS No. 157, “Fair Value Measurements,” (as impacted by FSP Nos. 157-1 and 157-2) effective January 1, 2008, with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities.

Under SFAS No. 157, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. SFAS No. 157 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:

At 3M, effective January 1, 2008, fair value under SFAS No. 157 (as impacted by FSP Nos. 157-1 and 157-2) principally applied to financial asset and liabilities such as available-for-sale marketable securities, available-for-sale investments (included as part of investments in the Consolidated Balance Sheet) and certain derivative instruments. Derivatives include cash flow hedges, interest rate swaps and most net investment hedges. These items were previously and will continue to be marked-to-market at each reporting period; however, the definition of fair value used for these mark-to-markets is now applied using SFAS No. 157. The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities. The information incorporates guidance of FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active,” which was effective for 3M beginning with the quarter ended September 30, 2008. Separately, there were no material fair value measurements with respect to nonfinancial assets or liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis subsequent to the effective date of SFAS No. 157 (as impacted by FSP Nos. 157-1 and 157-2).

3M uses various valuation techniques, which are primarily based upon the market and income approaches, with respect to financial assets and liabilities. Following is a description of the valuation methodologies used for the respective financial assets and liabilities measured at fair value.

Available-for-sale marketable securities — except auction rate securities:

Marketable securities, except auction rate securities, are valued utilizing multiple sources. A weighted average price is used for these securities. Market prices are obtained for these securities from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources. These multiple prices are used as inputs into a distribution-curve-based algorithm to determine the daily fair value to be used. 3M classifies treasury securities as level 1, while all other marketable securities (excluding auction rate securities) are classified as level 2. Marketable securities are discussed further in Note 7.

Available-for-sale marketable securities — auction rate securities only:

As discussed in Note 7, auction rate securities held by 3M failed to auction during the second half of 2007 and first nine months of 2008. As a result, investments in auction rate securities are valued utilizing broker-dealer valuation models and third-party indicative bid levels in markets that are not active. 3M classifies these securities as level 3.

Available-for-sale investments:

Investments include equity securities that are traded in an active market. Closing stock prices are readily available from active markets and are used as being representative of fair value. 3M classifies these securities as level 1.

Certain derivative instruments:

Derivative assets and liabilities within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, are required to be recorded at fair value. The Company’s derivatives that are impacted by SFAS No. 157 include foreign currency forward and option contracts, commodity price swaps, interest rate swaps, and net investment hedges where the hedging instrument is recorded at fair value. Net investment hedges that use foreign currency denominated debt to hedge 3M’s net investment are not impacted by SFAS No. 157 as the debt used as the hedging instrument is marked to a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may impact fair value.

3M has determined that foreign currency forwards and commodity hedges will be considered level 1 measurements as these are traded in active markets which have identical asset or liabilities, while currency swaps, foreign exchange options, interest rate swaps and cross-currency interest rate swaps will be considered level 2. For level 2 derivatives, 3M uses inputs other than quoted prices that are observable for the asset. These inputs include foreign currency exchange rates, volatilities, and interest rates. The level 2 derivative positions are primarily valued using standard calculations/models that use as their basis readily observable market parameters. Industry standard data providers are 3M’s primary source for forward and spot rate information for both interest rates and currency rates, with resulting valuations periodically validated through third-party or counterparty quotes and a net present value stream of cash flows model.

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The following table provides information by level for assets and liabilities that are measured at fair value, as defined by SFAS No. 157, on a recurring basis.

	Fair Value
(Millions)	at Sept. 30,		Fair Value Measurements Using Inputs Considered as
Description	2008		Level 1		Level 2		Level 3
Assets:
Available-for-sale:
Marketable securities — except auction rate securities	$	1,375	$	38	$	1,337	$	—
Marketable securities - auction rate securities only	4		—		—		4
Investments	7		7		—		—
Derivative assets	115		93		22		—

Liabilities:
Derivative liabilities	94		20		74		—

The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3).

(Millions) Marketable securities — auction rate securities only	Three months ended Sept. 30, 2008			Nine months ended Sept. 30, 2008
Beginning balance	$	10		$	16
Total gains or losses:
Included in earnings	—			(3		)
Included in other comprehensive income	(6		)	(9		)
Purchases, issuances, and settlements	—			—
Transfers in and/or out of Level 3	—			—
Ending balance (September 30, 2008)	$	4		$	4

Additional losses included in earnings due to reclassifications from other comprehensive income for securities still held at September 30, 2008	$	—		$	(6	)

In addition, the plan assets of 3M’s pension and postretirement benefit plans are measured at fair value on a recurring basis (at least annually). During the quarter ended March 31, 2008, the Company remeasured the plan assets of its U.S. postretirement benefits plan in connection with a change in the benefits provided by this plan as discussed in Note 9.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:

During the nine months ended September 30, 2008, the Company had no significant measurements of assets or liabilities at fair value (as defined in SFAS No. 157) on a nonrecurring basis subsequent to their initial recognition. As indicated in Note 1, the aspects of SFAS No. 157 for which the effective date for 3M was deferred under FSP No. 157-2 until January 1, 2009 relate to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applies to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups measured at fair value for an impairment assessment. During the nine months ended September 30, 2008, such measurements of fair value impacted by the deferral under FSP No. 157-2 related primarily to the nonfinancial assets and liabilities with respect to the business combinations in 2008 as discussed in Note 2 and the portion of 2008 exit activities related to fixed asset impairments as discussed in Note 4.

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NOTE 12. Commitments and Contingencies

Legal Proceedings:

The Company and some of its subsidiaries are involved in numerous claims and lawsuits, principally in the United States, and regulatory proceedings worldwide. These include various products liability (involving products that the Company now or formerly manufactured and sold), intellectual property, and commercial claims and lawsuits, including those brought under the antitrust laws, employment litigation and environmental proceedings. The following sections first describe the significant legal proceedings in which the Company is involved, and then describe the liabilities and associated insurance receivables the Company has accrued relating to its significant legal proceedings. Unless otherwise stated, the Company is vigorously defending all such litigation. Additional information can be found in Note 13 “Commitments and Contingencies” in the Company’s Current Report on Form 8-K dated May 19, 2008, including information about the Company’s process for establishing and disclosing accruals and insurance receivables.

Shareholder Derivative Litigation

As previously reported, in July 2007, a shareholder derivative lawsuit was filed in the U.S. District Court for the District of Delaware against the Company as nominal defendant and against each then current member of the Board of Directors and the officers named in the Summary Compensation Table of the 2007 Proxy Statement. The suit alleges that the Company’s 2007 Proxy Statement contained false and misleading statements concerning the tax deductibility of compensation payable under the Executive Annual Incentive Plan (“Plan”) and the standards for determining the amounts payable under the Plan. The lawsuit seeks a declaration voiding shareholder approval of the Plan, termination of the Plan, voiding the elections of directors, equitable accounting, and awarding costs, including attorneys’ fees.

In May 2008, the Company and the individual defendants agreed to settle the litigation without admitting any liability or wrongdoing of any kind. The settlement agreement, which is subject to court approval, calls for the Compensation Committee of the Company’s Board of Directors to adopt a resolution formally stating its interpretation of certain aspects of the Plan, and the Company to issue a press release to the same effect, and to pay up to $600,000 in attorney’s fees to the plaintiff’s counsel. Upon receipt of the Court’s scheduling order, the Company will notify all stockholders of the proposed settlement and its terms. Stockholders have a right to object to the terms of the settlement, and final consummation of the settlement must await the entry of the Court’s final judgment approving the settlement.

Respirator Mask/Asbestos Litigation

As of September 30, 2008, the Company is a named defendant, with multiple co-defendants, in numerous lawsuits in various courts that purport to represent approximately 3,960 individual claimants, a reduction from the approximately 4,700 individual claimants with actions pending at June 30, 2008.

The vast majority of the lawsuits and claims resolved by and currently pending against the Company allege use of some of the Company’s mask and respirator products and seek damages from the Company and other defendants for alleged personal injury from workplace exposures to asbestos, silica or other occupational dusts found in products manufactured by other defendants or generally in the workplace. A minority of claimants generally allege personal injury from occupational exposure to asbestos from products previously manufactured by the Company, which are often unspecified, as well as products manufactured by other defendants, or occasionally at Company premises.

Since approximately 2006, the Company has experienced a significant decline in the number of new claims filed annually by apparently unimpaired claimants. The Company attributes this decline to several factors, including certain changes enacted in several states in recent years of the law governing asbestos-related claims, and the highly-publicized decision in mid-2005 of the United States District Court for the Southern District of Texas that identified and criticized abuses by certain attorneys, doctors and x-ray screening companies on behalf of primarily unimpaired claimants, many of whom were recruited by plaintiffs’ lawyers through mass chest x-ray screenings. The Company expects the filing of claims by unimpaired claimants in the future to continue at much lower levels than in the past. The Company believes that due to this change in the type and volume of incoming claims, it is likely that the number of claims alleging more serious injuries, including mesothelioma and other malignancies, while remaining relatively constant, will represent a greater percentage of total claims than in the past. The Company has demonstrated in past trial proceedings that its respiratory protection products are effective as claimed when used in the intended manner and in the intended circumstances. Consequently the Company believes that claimants are unable to establish that their medical conditions, even if significant, are attributable to the Company’s respiratory protection products. Nonetheless the Company’s litigation experience indicates that claims of persons with malignant conditions are costlier to resolve than the claims of unimpaired persons, and it therefore anticipates an increase in the average cost of resolving pending and future claims on a per-claim basis than it experienced in prior periods when the vast majority of claims were asserted by the unimpaired.

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Respirator Mask/Asbestos Litigation — Aearo Technologies

On April 1, 2008, a subsidiary of the Company purchased the stock of Aearo Holding Corp., the parent of Aearo Technologies (“Aearo”). Aearo manufactures and sells various products, including personal protection equipment, such as eye, ear, head, face, fall and respiratory protection products.

As of September 30, 2008, Aearo and/or other companies that previously owned and operated Aearo’s respirator business (American Optical Corporation, Warner-Lambert LLC, AO Corp. and Cabot Corporation (“Cabot”)) are named defendants, with multiple co-defendants, including the Company, in numerous lawsuits in various courts in which plaintiffs allege use of mask and respirator products and seek damages from Aearo and other defendants for alleged personal injury from workplace exposures to asbestos, silica-related, or other occupational dusts found in products manufactured by other defendants or generally in the workplace.

As of September 30, 2008, the Company, through its newly acquired Aearo subsidiary, has recorded $35 million as an estimate of the probable liabilities for product liabilities and defense costs related to current and future Aearo-related asbestos and silica-related claims. As part of the process of finalizing the purchase price allocation, the Company increased this estimate from $8 million as of June 30, 2008 to $35 million. Responsibility for legal costs, as well as for settlements and judgments, is currently shared in an informal arrangement among Aearo, Cabot, American Optical Corporation and a subsidiary of Warner Lambert and their insurers (the “Payor Group”). Liability is allocated among the parties based on the number of years each company sold respiratory products under the “AO Safety” brand and/or owned the AO Safety Division of American Optical Corporation and the alleged years of exposure of the individual plaintiff. Aearo’s share of the contingent liability is further limited by an agreement entered into between Aearo and Cabot on July 11, 1995. This agreement provides that, so long as Aearo pays to Cabot an annual fee of $400,000, Cabot will retain responsibility and liability for, and indemnify Aearo against, asbestos and silica-related product liability claims for respirators manufactured prior to July 11, 1995. Because the date of manufacture for a particular respirator allegedly used in the past is often difficult to determine, Aearo and Cabot have applied the agreement to claims arising out of the use of respirators while exposed to asbestos or silica or products containing asbestos or silica prior to January 1, 1997. With these arrangements in place, Aearo’s potential liability is limited to exposures alleged to have arisen from the use of respirators while exposed to asbestos, silica or other occupational dusts on or after January 1, 1997.

To date, Aearo has elected to pay the annual fee. Aearo could potentially be exposed to additional claims for some part of the pre-July 11, 1995 period covered by its agreement with Cabot if Aearo elects to discontinue its participation in this arrangement, or if Cabot is no longer able to meet its obligations in these matters.

Developments may occur that could affect the estimate of Aearo’s liabilities. These developments include, but are not limited to: (i) significant changes in the number of future claims, (ii) significant changes in the average cost of resolving claims, (iii) significant changes in the legal costs of defending these claims, (iv) significant changes in the mix and nature of claims received, (v) trial and appellate outcomes, (vi) significant changes in the law and procedure applicable to these claims, (vii) significant changes in the liability allocation among the co-defendants, (viii) the financial viability of members of the Payor Group including exhaustion of available coverage limits, (ix) the outcome of the pending insurance coverage litigation among certain other members of the Payor Group and their respective insurers, and (x) a determination that the interpretation of the contractual obligations on which Aearo has estimated its share of liability is inaccurate. The Company cannot determine the impact of these potential developments on its current estimate of Aearo’s share of liability for these existing and future claims. If any of the developments described above were to occur, the actual amount of these liabilities for existing and future claims could be significantly larger than the reserved amount.

Employment Litigation

As previously reported, one current and one former employee of the Company filed a purported class action in the District Court of Ramsey County, Minnesota, in December 2004, seeking to represent a class of all current and certain former salaried employees employed by the Company in Minnesota below a certain salary grade who were age 46 or older at any time during the applicable period to be determined by the Court. The complaint alleges the plaintiffs suffered various forms of employment discrimination on the basis of age in violation of the Minnesota Human Rights Act and seeks injunctive relief, unspecified compensatory damages (which they seek to treble under the statute), including back and front pay, punitive damages (limited by statute to $8,500 per claimant) and attorneys’ fees. In January 2006, the plaintiffs filed a motion to join four additional named plaintiffs. This motion was unopposed by the Company and the four plaintiffs were joined in the case, although one claim has been dismissed following an individual settlement. The class certification hearing was held in December 2007. On April 11, 2008, the Court granted the plaintiffs’ motion to certify the case as a class action and defined the class as all persons who were 46 or older when employed by 3M in Minnesota in a salaried exempt position below a certain salary grade at any time on or after May 10, 2003, and who did not sign a document on their last day of employment purporting to release claims arising out of their employment with 3M. On June 25, 2008, the Minnesota Court of Appeals granted the Company’s petition for interlocutory review of the

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District Court’s decision granting class certification in the case. While the appeal is pending, all other activity on the case is stayed. No trial date or calendar of pretrial proceedings has been set at this time.

In addition, three former employees filed age discrimination charges against the Company with the U.S. Equal Employment Opportunity Commission and the pertinent state agencies in Minnesota and California during 2005; two of these charges were amended in 2006. Such filings include allegations that the release of claims signed by certain former employees in the purported class defined in the charges is invalid for various reasons and assert age discrimination claims on behalf of certain current and former salaried employees in states other than Minnesota and New Jersey. In 2006, one current employee filed an age discrimination charge against the Company with the U.S. Equal Employment Opportunity Commission and the pertinent state agency in Missouri, asserting claims on behalf of a class of all current and certain former salaried employees who worked in Missouri and other states other than Minnesota and New Jersey. The same law firm represents the plaintiffs and claimants in each of these proceedings.

Environmental Matters and Litigation

The Company’s operations are subject to environmental laws and regulations including those pertaining to air emissions, wastewater discharges, toxic substances, and the handling and disposal of solid and hazardous wastes enforceable by national, state, and local authorities around the world, and private parties in the United States and abroad. These laws and regulations provide, under certain circumstances, a basis for the remediation of contamination and for personal injury and property damage claims. The Company has incurred, and will continue to incur, costs and capital expenditures in complying with these laws and regulations, defending personal injury and property damage claims, and modifying its business operations in light of its environmental responsibilities. In its effort to satisfy its environmental responsibilities and comply with environmental laws and regulations, the Company has established, and periodically updates, policies relating to environmental standards of performance for its operations worldwide.

Remediation: Under certain environmental laws, including the United States Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state laws, the Company may be jointly and severally liable, typically with other companies, for the costs of environmental contamination at current or former facilities and at off-site locations. The Company has identified numerous locations, most of which are in the United States, at which it may have some liability. Please refer to the “Environmental remediation liabilities” in the table in the following section, “Accrued Liabilities and Insurance Receivables Related to Legal Proceedings,” for information on the amount of the reserve.

Regulatory Activities: As previously reported, the Company has been voluntarily cooperating with ongoing reviews by local, state, national (primarily the U.S. Environmental Protection Agency (EPA)), and international agencies of possible environmental and health effects of perfluorooctanyl compounds (“PFCs”) (perflurooctanoic acid or “PFOA” and perfluorooctane sulfonate or “PFOS”) and related compounds. As a result of its phase-out decision in May 2000, the Company no longer manufactures perfluorooctanyl compounds, except that a subsidiary recovers and recycles PFOA in Gendorf, Germany, for internal use in production processes and has agreed to a product stewardship initiative with the EPA to end its use of PFOA by 2015.

Regulatory activities concerning PFOA and/or PFOS continue in Europe and elsewhere, and before certain international bodies. These activities include gathering of exposure and use information, risk assessment, and consideration of regulatory approaches. In December 2006, the European Union adopted an amendment to the Marketing and Use Directive to limit use of PFOS. Member States were required to enact the Directive into national law by December 27, 2007 with an effective date of June 27, 2008.

As previously reported, the Minnesota Department of Health (“MDH”) detected low levels of another perfluoronated compound called perfluorobutanoic acid (PFBA) in municipal wells (and in private wells as announced by the MDH in June 2007) in six nearby communities (Woodbury, Cottage Grove, Newport, St. Paul Park, South St. Paul, and Hastings, all communities located southeast of St. Paul), some of which slightly exceeded the MDH’s interim advisory level for PFBA of 1 part per billion (ppb). In February 2008, the MDH established a health-based value (HBV) for PFBA of 7 ppb based on a clearer understanding of PFBA through the results of three major studies and sampling more than 1,000 private wells. An HBV is the amount of a chemical in drinking water considered by the MDH staff to be safe for people to drink for a lifetime. As a result of this new HBV for PFBA, well advisories will no longer be required for certain wells in the Minnesota communities of Lake Elmo, Oakdale and Cottage Grove. Residents in the affected communities where the levels of PFBA in private wells exceed the HBV either have been provided water treatment systems or connected to a city water system. As part of legislation passed during the 2007 Minnesota legislative session directing the MDH to develop and implement a statewide Environmental Health Tracking and Biomonitoring program, the MDH announced in July 2008 that it will measure the amount of PFCs in the blood of 200 adults who live in the Minnesota communities of Oakdale, Lake Elmo and Cottage Grove.

The Company continues to work with the Minnesota Pollution Control Agency (MPCA) pursuant to the terms of the previously disclosed May 2007 Settlement Agreement and Consent Order to address the presence of perfluoronated compounds in the soil and groundwater at former disposal sites in Washington County Minnesota and at the Company’s manufacturing facility at Cottage Grove Minnesota. Under this agreement, the Company’s principal obligations include (i) evaluation of releases of perfluoronated compounds from these sites and propose response actions; (ii) providing

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alternative drinking water if and when an HBV or Health Risk Limit (“HRL”) (i.e., the amount of a chemical in drinking water determined by the MDH to be safe for people to drink for a lifetime) is exceeded for any perfluoronated compounds as a result of contamination from these sites; (iii) remediation of any source of PFBA and provide alternative drinking water if and when levels are found above an HBV or HRL; and (iv) sharing information with the MPCA about perfluoronated compounds.

As previously reported, the Company entered into a voluntary remedial action agreement with the Alabama Department of Environmental Management (ADEM) to address the presence of PFCs in the soil on the Company’s manufacturing facility in Decatur, Alabama. For approximately twenty years, the Company incorporated wastewater treatment plant sludge containing PFCs in fields surrounding its Decatur facility pursuant to a permit issued by ADEM. After a review of the available options to address the presence of PFCs in the soil, ADEM agreed that the preferred remediation option is to use a multilayer cap over the former sludge incorporation areas on the manufacturing site with groundwater migration controls and treatment.

Please refer to the “Other environmental liabilities” in the table in the following section, “Accrued Liabilities and Insurance Receivables Related to Legal Proceedings” for information on the balance of the reserve established to implement the Settlement Agreement and Consent Order with the MPCA, the remedial action agreement with ADEM, and to address trace amounts of perfluorinated compounds in drinking water sources in the City of Oakdale and Lake Elmo, Minnesota, as well as presence in the soil and groundwater at the Company’s manufacturing facilities in Decatur, Alabama, and Cottage Grove, Minnesota, and at two former disposal sites in Minnesota.

The Company cannot predict what regulatory actions arising from the foregoing proceedings and activities, if any, may be taken regarding such compounds or the consequences of any such actions.

Litigation: As previously reported, a former employee filed a purported class action lawsuit in 2002 in the Circuit Court of Morgan County, Alabama, involving perfluorooctanyl chemistry, alleging that the plaintiffs suffered fear, increased risk, subclinical injuries, and property damage from exposure to perfluorooctanyl chemistry at or near the Company’s Decatur, Alabama, manufacturing facility. The Circuit Court in 2005 granted the Company’s motion to dismiss the named plaintiff’s personal injury-related claims on the basis that such claims are barred by the exclusivity provisions of the state’s Workers Compensation Act. The plaintiffs’ counsel filed an amended complaint in November 2006, limiting the case to property damage claims on behalf of a purported class of residents and property owners in the vicinity of the Decatur plant. Also in 2005, the judge in a second purported class action lawsuit (filed by three residents of Morgan County, Alabama, seeking unstated compensatory and punitive damages involving alleged damage to their property from emissions of perfluorooctanyl compounds from the Company’s Decatur, Alabama, manufacturing facility that formerly manufactured those compounds) granted the Company’s motion to abate the case, effectively putting the case on hold pending the resolution of class certification issues in the action described above filed in the same court in 2002. Despite the stay, plaintiffs filed an amended complaint seeking damages for alleged personal injuries and property damage on behalf of the named plaintiffs and the members of a purported class. No further action in the case is expected unless and until the stay is lifted.

As previously reported, two residents of Washington County, Minnesota, filed in October 2004 a purported class action in the District Court of Washington County on behalf of Washington county residents who have allegedly suffered personal injuries and property damage from alleged emissions from the former perfluorooctanyl production facility at Cottage Grove, Minnesota, and from historic waste disposal sites in the vicinity of that facility. After the District Court granted the Company’s motion to dismiss the claims for medical monitoring and public nuisance in April 2005, the plaintiffs filed an amended complaint adding additional allegations involving other perfluorinated compounds manufactured by the Company, alleging additional legal theories in support of their claims, adding four plaintiffs, and seeking relief based on alleged contamination of the City of Oakdale municipal water supply and certain private wells in the vicinity of Lake Elmo, Minnesota. In April 2006, the plaintiffs filed a second amended complaint adding two additional plaintiffs. The two original plaintiffs thereafter dismissed their claims against the Company. After a hearing on the plaintiffs’ motion to certify the case as a class action at the end of March 2007, the Court on June 19, 2007 denied the plaintiffs’ motion to certify the litigation as a class action. The Company’s motion for summary judgment and the plaintiffs’ motion to add a claim for punitive damages are scheduled for argument in December 2008. The trial of the individual cases is scheduled to begin on May 4, 2009.

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Accrued Liabilities and Insurance Receivables Related to Legal Proceedings

The following table shows the major categories of on-going litigation, environmental remediation and other environmental liabilities for which the Company has been able to estimate its probable liability and for which the Company has taken reserves and the related insurance receivables:

Liability and Receivable Balances	Sept. 30			Dec. 31
(Millions)	2008			2007

Breast implant liabilities	$	1		$	1
Breast implant insurance receivables	14			64

Respirator mask/asbestos liabilities (includes Aearo in Sept. 30, 2008 balance)	$		126	$		121
Respirator mask/asbestos insurance receivables	200			332

Environmental remediation liabilities	$		33	$		37
Environmental remediation insurance receivables	15			15

Other environmental liabilities	$	141		$	147

For those significant pending legal proceedings that do not appear in the table and that are not the subject of pending settlement agreements, the Company has determined that liability is not probable or the amount of the liability is not estimable, or both, and the Company is unable to estimate the possible loss or range of loss at this time. The amounts in the preceding table with respect to environmental remediation represent the Company’s best estimate of the liability. The Company does not believe that there is any single best estimate of the respirator mask/asbestos liability or the other environmental liabilities shown above, nor that it can reliably estimate the amount or range of amounts by which those liabilities may exceed the reserves the Company has established.

On January 5, 2007 the Company was served with a declaratory judgment action filed on behalf of two of its insurers (Continental Casualty and Continental Insurance Co. — both part of the Continental Casualty Group) disclaiming coverage for respirator mask/asbestos claims. These insurers represent approximately $14 million of the $200 million insurance recovery receivable referenced in the above table. The action was filed in Hennepin County, Minnesota and names, in addition to the Company, over 60 of the Company’s insurers. This action is similar in nature to an action filed in 1994 with respect to breast implant coverage, which ultimately resulted in the Minnesota Supreme Court’s ruling of 2003 that was largely in the Company’s favor. At the Company’s request, the case was transferred to Ramsey County, over the objections of the insurers. The Minnesota Supreme Court heard oral argument of the insurers’ appeal of that decision in March 2008 and ruled in May 2008 that the proper venue of that case is Ramsey County.

As a result of settlements reached with its insurers, the Company was paid approximately $14 million in the third quarter and the Company currently has agreements in place to receive another $31 million in payments over the next three quarters in connection with the respirator mask/asbestos receivable.

NOTE 13. Management Stock Ownership Program (MSOP) and General Employees’ Stock Purchase Plan (GESPP)

In May 2008, shareholders approved 35 million shares for issuance under the “3M 2008 Long-Term Incentive Plan”, which replaced and succeeded the 2005 MSOP, the 3M Performance Unit Plan, and the 1992 Directors Stock Ownership Program. Shares under this plan may be issued in the form of Incentive Stock Options, Nonqualified Stock Options, Progressive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Other Stock Awards, and Performance Units and Performance Shares. Awards denominated in shares of common stock other than options and Stock Appreciation Rights, per the 2008 Plan, will be counted against the 35 million share limit as 3.38 shares for every one share covered by such award. The remaining total MSOP shares available for grant under the 2008 Long Term Incentive Plan Program are 26,735,649 as of September 30, 2008. The Company issues options to eligible employees annually in May using the closing stock price on the grant date, which is the date of the Annual Stockholders’ Meeting. In addition to these annual grants, the Company makes other minor grants of stock options, restricted stock units and other stock-based grants.

Effective with the May 2005 MSOP annual grant, the Company changed its vesting period from one to three years with the expiration date remaining at 10 years from date of grant. Beginning in 2007, the Company reduced the number of traditional stock options granted under the MSOP plan by reducing the number of employees eligible to receive annual grants and by shifting a portion of the annual grant away from traditional stock options primarily to restricted stock units.

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However, associated with the reduction in the number of eligible employees, the Company provided a one-time “buyout” grant of restricted stock units to the impacted employees. The income tax benefits shown in the following table can fluctuate by period due to the amount of Incentive Stock Options (ISO) exercised since the Company receives the ISO tax benefit upon exercise. The Company last granted ISO in 2002. Amounts recognized in the financial statements with respect to both the MSOP and GESPP (refer to Note 15 in 3M’s Current Report on Form 8-K dated May 19, 2008) are as follows:

	Three months ended						Nine months ended
	September 30						September 30
(Millions, except per share amounts)	2008			2007			2008			2007
Cost of sales	$	9		$	11		$	35		$	37
Selling, general and administrative expenses	26			31			99			110
Research, development and related expenses	7			11			30			35

Operating Income (Loss)	$	(42	)	$	(53	)	$	(164	)	$	(182	)

Income tax benefits	$	9		$	21		$	60		$	78

Net Income (Loss)	$	(33	)	$	(32	)	$	(104	)	$	(104	)

Earnings per share impact— diluted	$	(0.05	)	$	(0.04	)	$	(0.15	)	$	(0.14	)

The following table summarizes MSOP stock option activity during the nine months ended September 30, 2008:

Remaining

Aggregate

Number of

Exercise

Contractual

Intrinsic Value

Stock Options

Options

Price*

Life* (months)

(millions)

Under option —

January 1

74,613,051

70.50

Granted

Annual

5,239,660

77.22

Progressive (Reload)

78,371

79.53

Other

20,389

79.25

Exercised

(3,597,285

)

49.44

Canceled

(489,972

)

78.36

September 30

75,864,214

71.92

344

Options exercisable

September 30

63,478,607