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3M Company (96OI)

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Monday 18 February, 2008

3M Company

Final Results - Part 2

3M Company
18 February 2008


        10-K
      
              0000066740
              xxxxxxx
              Large  Accelerated  Filer
      
        12/31/2007
        No
        No
        CHX
        NYSE
      
              EDGAR  Advantage  Service  Team
              (800)  688  -  1933
      
        No
        Yes

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Item 8. Financial Statements and Supplementary Data.

           Index to Financial Statements


                                                                                                  Reference
                                                                                                   (pages)


Management's Responsibility for Financial Reporting                                                   38

Management's Report on Internal Control Over Financial Reporting                                      38

Report of Independent Registered Public Accounting Firm                                               39

Consolidated Statement of Income for the years ended December 31, 2007, 2006 and 2005                 40

Consolidated Balance Sheet at December 31, 2007 and 2006                                              41

Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
Income for the years ended December 31, 2007, 2006 and 2005                                           42

Consolidated Statement of Cash Flows for the years ended December 31, 2007,
2006 and 2005                                                                                         43

Notes to Consolidated Financial Statements
                                                                                                      44

     Note 1.  Significant Accounting Policies                                                         44
     Note 2.  Acquisitions and Divestitures                                                           48
     Note 3.  Goodwill and Intangible Assets                                                          52
     Note 4.  Restructuring Actions and Other Exit Activities                                         53
     Note 5.  Supplemental Balance Sheet Information                                                  56
     Note 6.  Supplemental Stockholders' Equity and Accumulated Other Comprehensive
              Income Information                                                                      57
     Note 7.  Supplemental Cash Flow Information                                                      58
     Note 8.  Income Taxes                                                                            59
     Note 9.  Marketable Securities                                                                   61
     Note 10. Long-Term Debt and Short-Term Borrowings                                                63
     Note 11. Pension and Postretirement Benefit Plans                                                65
     Note 12. Derivatives and Other Financial Instruments                                             71
     Note 13. Commitments and Contingencies                                                           73
     Note 14. Employee Savings and Stock Ownership Plans                                              80
     Note 15. Management Stock Ownership Program (MSOP) and General Employees'
              Stock Purchase Plan (GESPP)                                                             81
     Note 16. Business Segments                                                                       84
     Note 17. Geographic Areas                                                                        86
     Note 18. Quarterly Data (Unaudited)                                                              87





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              Management's Responsibility for Financial Reporting


Management is responsible for the integrity and objectivity of the financial
information included in this report. The financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America. Where necessary, the financial statements reflect estimates based on
management's judgment.

Management has established and maintains a system of internal accounting and
other controls for the Company and its subsidiaries. This system and its
established accounting procedures and related controls are designed to provide
reasonable assurance that assets are safeguarded, that the books and records
properly reflect all transactions, that policies and procedures are implemented
by qualified personnel, and that published financial statements are properly
prepared and fairly presented. The Company's system of internal control is
supported by widely communicated written policies, including business conduct
policies, which are designed to require all employees to maintain high ethical
standards in the conduct of Company affairs. Internal auditors continually
review the accounting and control system.



3M Company


        Management's Report on Internal Control Over Financial Reporting


Management is responsible for establishing and maintaining an adequate system of
internal control over financial reporting. Management conducted an assessment of
the Company's internal control over financial reporting based on the framework
established by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control - Integrated Framework. Based on the assessment,
management concluded that, as of December 31, 2007, the Company's internal
control over financial reporting is effective.

The Company's internal control over financial reporting as of December 31, 2007
has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included herein, which
expresses an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting as of December 31, 2007.


3M Company




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            Report of Independent Registered Public Accounting Firm



To the Stockholders and Board of Directors of 3M Company:



In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of 3M
Company and its subsidiaries (the 'Company') at December 31, 2007 and 2006, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in 'Management's Report on
Internal Control Over Financial Reporting' in the accompanying index. Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.



As discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for conditional asset retirement
obligations in 2005, the manner in which it accounts for defined benefit pension
and other post-retirement plans in 2006, and the manner in which it accounts for
uncertain tax positions in 2007.



A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 11, 2008



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Consolidated Statement of Income




3M Company and Subsidiaries
Years ended December 31
(Millions, except per share amounts)                                             2007           2006           2005
Net sales                                                                  $    24,462    $    22,923    $    21,167
Operating expenses
Cost of sales                                                                   12,735         11,713         10,408
Selling, general and administrative expenses                                     5,015          5,066          4,631
Research, development and related expenses                                       1,368          1,522          1,274
Gain on sale of businesses                                                        (849 )       (1,074 )            -
Total                                                                           18,269         17,227         16,313
Operating income                                                                 6,193          5,696          4,854

Interest expense and income
Interest expense                                                                   210            122             82
Interest income                                                                   (132 )          (51 )          (56 )
Total                                                                               78             71             26

Income before income taxes, minority interest and cumulative effect of           6,115          5,625          4,828
accounting change
Provision for income taxes                                                       1,964          1,723          1,627
Minority interest                                                                   55             51             55
Income before cumulative effect of accounting change                             4,096          3,851          3,146
Cumulative effect of accounting change                                               -              -            (35 )
Net income                                                                 $     4,096    $     3,851    $     3,111

Weighted average common shares outstanding - basic                               718.3          747.5          764.9
Earnings per share - basic
Income before cumulative effect of accounting change                       $      5.70    $      5.15    $      4.11
Cumulative effect of accounting change                                               -              -          (0.04 )
Net income                                                                 $      5.70    $      5.15    $      4.07

Weighted average common shares outstanding - diluted                             732.0          761.0          781.3
Earnings per share - diluted
Income before cumulative effect of accounting change                       $      5.60    $      5.06    $      4.03
Cumulative effect of accounting change                                               -              -          (0.05 )
Net income                                                                 $      5.60    $      5.06    $      3.98



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



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Consolidated Balance Sheet


3M Company and Subsidiaries
At December 31
(Dollars in millions, except per share amount)                                                   2007           2006
Assets
Current assets
Cash and cash equivalents                                                                 $     1,896    $     1,447
Marketable securities - current                                                                   579            471
Accounts receivable - net of allowances of $75 and $71                                          3,362          3,102
Inventories
Finished goods                                                                                  1,349          1,235
Work in process                                                                                   880            795
Raw materials and supplies                                                                        623            571
Total inventories                                                                               2,852          2,601
Other current assets                                                                            1,149          1,325
Total current assets                                                                            9,838          8,946

Marketable securities - non-current                                                               480            166
Investments                                                                                       298            314
Property, plant and equipment                                                                  18,390         17,017
Less: Accumulated depreciation                                                                (11,808 )      (11,110 )
Property, plant and equipment - net                                                             6,582          5,907
Goodwill                                                                                        4,589          4,082
Intangible assets - net                                                                           801            708
Prepaid pension and postretirement benefits                                                     1,378            395
Other assets                                                                                      728            776
Total assets                                                                              $    24,694    $    21,294

Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings and current portion of long-term debt                               $       901    $     2,506
Accounts payable                                                                                1,505          1,402
Accrued payroll                                                                                   580            520
Accrued income taxes                                                                              543          1,134
Other current liabilities                                                                       1,833          1,761
Total current liabilities                                                                       5,362          7,323

Long-term debt                                                                                  4,019          1,047
Other liabilities                                                                               3,566          2,965
Total liabilities                                                                         $    12,947    $    11,335

Commitments and contingencies (Note 13)

Stockholders' equity
Common stock, par value $.01 per share                                                              9              9
Shares outstanding - 2007: 709,156,031
Shares outstanding - 2006: 734,362,802
Additional paid-in capital                                                                      2,785          2,484
Retained earnings                                                                              20,316         17,933
Treasury stock                                                                                (10,520 )       (8,456 )
Unearned compensation                                                                             (96 )         (138 )
Accumulated other comprehensive income (loss)                                                    (747 )       (1,873 )
Stockholders' equity - net                                                                     11,747          9,959
Total liabilities and stockholders' equity                                                $    24,694    $    21,294



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



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Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
Income


3M Company and Subsidiaries
Years Ended December 31
(Millions)                                                                      2007           2006           2005
Common Stock, par value                                                    $         9    $         9    $         9

Additional Paid-in Capital
Beginning balance                                                                2,484          2,225          2,018
Stock-based compensation expense (excluding tax benefit)                           228            200            155
Stock-based compensation tax benefit                                                73             59             52
Ending balance                                                                   2,785          2,484          2,225

Retained Earnings
Beginning balance                                                               17,933         15,715         14,198
Adjustment to beginning balance to initially apply FIN 48                           (1 )            -              -
Net income                                                                       4,096          3,851          3,111
Dividends paid                                                                  (1,380 )       (1,376 )       (1,286 )
Issuances pursuant to stock option and benefit plans                              (332 )         (257 )         (308 )
Ending balance                                                                  20,316         17,933         15,715

Treasury Stock
Beginning balance                                                               (8,456 )       (6,965 )       (5,503 )
Reacquired stock                                                                (3,237 )       (2,332 )       (2,377 )
Issuances pursuant to stock option and benefit plans                             1,160            841            915
Issuances pursuant to acquisitions                                                  13              -              -
Ending balance                                                                 (10,520 )       (8,456 )       (6,965 )

Unearned Compensation
Beginning balance                                                                 (138 )         (178 )         (196 )
Amortization of unearned compensation                                               42             40             18
Ending balance                                                                     (96 )         (138 )         (178 )

Accumulated Other Comprehensive Income (Loss)
Beginning balance                                                               (1,873 )         (411 )          132
Cumulative translation adjustment                                                  532            506           (578 )
Defined benefit pension plans adjustment                                           614              7            (46 )
Adjustment to initially apply SFAS No. 158                                           -         (1,918 )            -
Debt and equity securities - unrealized gain (loss)                                (10 )           (1 )            1
Cash flow hedging instruments - unrealized gain (loss)                             (10 )          (56 )           80
Ending balance                                                                    (747 )       (1,873 )         (411 )

Total Stockholder's Equity                                                 $    11,747    $     9,959    $    10,395

Comprehensive Income
Net income                                                                       4,096          3,851          3,111
Cumulative translation adjustment                                                  532            506           (578 )
Defined benefit pension plans adjustment                                           614              7            (46 )
Debt and equity securities - unrealized gain (loss)                                (10 )           (1 )            1
Cash flow hedging instruments - unrealized gain (loss)                             (10 )          (56 )           80
Total Comprehensive Income                                                 $     5,222    $     4,307    $     2,568

Supplemental share information:                                                   2007           2006           2005
Treasury stock
Beginning balance                                                                209.7          189.5          170.5
Reacquired stock                                                                  39.7           31.2           30.7
Issuances pursuant to stock options and benefit plans                            (14.3 )        (11.0 )        (11.7 )
Issuances pursuant to acquisitions                                                (0.2 )            -              -
Ending balance                                                                   234.9          209.7          189.5



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



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Consolidated Statement of Cash Flows


3M Company and Subsidiaries
Years ended December 31
(Millions)                                                                  2007            2006            2005

Cash Flows from Operating Activities
Net income                                                           $      4,096    $      3,851    $      3,111
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization                                               1,072           1,079             986
Company pension and postretirement contributions                             (379 )          (385 )          (788 )
Company pension and postretirement expense                                    255             440             437
Stock-based compensation expense                                              228             200             155
Gain from sale of businesses                                                 (849 )        (1,074 )             -
Deferred income taxes                                                          11            (316 )           132
Excess tax benefits from stock-based compensation                             (74 )           (60 )           (54 )
Changes in assets and liabilities
Accounts receivable                                                           (35 )          (103 )          (184 )
Inventories                                                                   (54 )          (309 )          (294 )
Accounts payable                                                               (4 )            68             113
Accrued income taxes                                                          (45 )           138             270
Product and other insurance receivables and claims                            158              58             122
Other - net                                                                  (105 )           252             198
Net cash provided by operating activities                                   4,275           3,839           4,204

Cash Flows from Investing Activities
Purchases of property, plant and equipment (PP&E)                          (1,422 )        (1,168 )          (943 )
Proceeds from sale of PP&E and other assets                                   103              49              41
Acquisitions, net of cash acquired                                           (539 )          (888 )        (1,293 )
Purchases of marketable securities and investments                         (8,194 )        (3,253 )        (1,627 )
Proceeds from sale of marketable securities and investments                 6,902           2,287           1,573
Proceeds from maturities of marketable securities                             886             304               8
Proceeds from sale of businesses                                              897           1,209               -
Net cash used in investing activities                                      (1,367 )        (1,460 )        (2,241 )

Cash Flows from Financing Activities
Change in short-term debt - net                                            (1,222 )           882            (258 )
Repayment of debt (maturities greater than 90 days)                        (1,580 )          (440 )          (656 )
Proceeds from debt (maturities greater than 90 days)                        4,024             693             429
Purchases of treasury stock                                                (3,239 )        (2,351 )        (2,377 )
Reissuances of treasury stock                                                 796             523             545
Dividends paid to stockholders                                             (1,380 )        (1,376 )        (1,286 )
Distributions to minority interests                                           (20 )           (38 )           (56 )
Excess tax benefits from stock-based compensation                              74              60              54
Other - net                                                                     -             (14 )           (20 )
Net cash used in financing activities                                      (2,547 )        (2,061 )        (3,625 )

Effect of exchange rate changes on cash and cash equivalents                   88              57             (23 )
Net increase/(decrease) in cash and cash equivalents                          449             375          (1,685 )
Cash and cash equivalents at beginning of year                              1,447           1,072           2,757
Cash and cash equivalents at end of year                             $      1,896    $      1,447    $      1,072



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



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Notes to Consolidated Financial Statements



NOTE 1.  Significant Accounting Policies



Consolidation: 3M is a diversified global manufacturer, technology innovator and
marketer of a wide variety of products. All significant subsidiaries are
consolidated. All significant intercompany transactions are eliminated. As used
herein, the term '3M' or 'Company' refers to 3M Company and subsidiaries unless
the context indicates otherwise.

Foreign currency translation: Local currencies generally are considered the
functional currencies outside the United States. Assets and liabilities for
operations in local-currency environments are translated at year-end exchange
rates. Income and expense items are translated at average rates of exchange
prevailing during the year. Cumulative translation adjustments are recorded as a
component of accumulated other comprehensive income (loss) in stockholders'
equity.

Reclassifications: Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.

Use of estimates: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.

Cash and cash equivalents: Cash and cash equivalents consist of cash and
temporary investments with maturities of three months or less when purchased.

Investments: Investments primarily include the cash surrender value of life
insurance policies, real estate not used in the business, venture capital and
equity-method investments. Unrealized gains and losses relating to investments
classified as available-for-sale are recorded as a component of accumulated
other comprehensive income (loss) in stockholders' equity.


Inventories: Inventories are stated at the lower of cost or market, with cost
generally determined on a first-in, first-out basis.

Property, plant and equipment: Property, plant and equipment, including
capitalized interest and internal engineering costs, are recorded at cost.
Depreciation of property, plant and equipment generally is computed using the
straight-line method based on the estimated useful lives of the assets. The
estimated useful lives of buildings and improvements primarily range from 10 to
40 years, with the majority in the range of 20 to 40 years. The estimated useful
lives of machinery and equipment primarily range from three to 15 years, with
the majority in the range of five to 10 years. Fully depreciated assets are
retained in property and accumulated depreciation accounts until disposal. Upon
disposal, assets and related accumulated depreciation are removed from the
accounts and the net amount, less proceeds from disposal, is charged or credited
to operations. Property, plant and equipment amounts are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset (asset group) may not be recoverable. An impairment loss would be
recognized when the carrying amount of an asset exceeds the estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition. The amount of the impairment loss to be recorded is
calculated by the excess of the asset's carrying value over its fair value. Fair
value is generally determined using a discounted cash flow analysis.

Goodwill: Goodwill is the excess of cost of an acquired entity over the amounts
assigned to assets acquired and liabilities assumed in a business combination.
Goodwill is not amortized. Goodwill is tested for impairment annually, and will
be tested for impairment between annual tests if an event occurs or
circumstances change that would indicate the carrying amount may be impaired.
Impairment testing for goodwill is done at a reporting unit level. Reporting
units are one level below the business segment level, but can be combined when
reporting units within the same segment have similar economic characteristics.
The majority of goodwill relates to and is assigned directly to specific
reporting units. An impairment loss generally would be recognized when the
carrying amount of the reporting unit's net assets exceeds the estimated fair
value of the reporting unit. The estimated fair value of a reporting unit is
determined using earnings for the reporting unit multiplied by a price/earnings
ratio for comparable industry groups, or by using a discounted cash flow
analysis. The Company completed its annual goodwill impairment test in the
fourth quarter of 2007 and determined that no goodwill was impaired.

Intangible assets: Intangible assets include patents, tradenames and other
intangible assets acquired from an independent party. Intangible assets with an
indefinite life, namely certain tradenames, are not amortized. Intangible assets
with a definite life are amortized on a straight-line basis, with estimated
useful lives ranging from one to 20 years. Indefinite-lived intangible assets
are tested for impairment annually, and will be tested for impairment between
annual tests if an event occurs or circumstances change that would indicate that
the carrying amount may be impaired. Intangible assets with a definite life are
tested for impairment whenever events or circumstances indicate that the





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carrying amount of an asset (asset group) may not be recoverable. An impairment
loss is recognized when the carrying amount of an asset exceeds the estimated
undiscounted cash flows used in determining the fair value of the asset. The
amount of the impairment loss to be recorded is calculated by the excess of the
asset's carrying value over its fair value. Fair value is generally determined
using a discounted cash flow analysis. Costs related to internally developed
intangible assets, such as patents, are expensed as incurred, primarily in '
Research, development and related expenses.'

Revenue (sales) recognition: The Company sells a wide range of products to a
diversified base of customers around the world and has no material concentration
of credit risk. Revenue is recognized when the risks and rewards of ownership
have substantively transferred to customers. This condition normally is met when
the product has been delivered or upon performance of services. The Company
records estimated reductions to revenue for customer and distributor incentives,
such as rebates, at the time of the initial sale. The estimated reductions are
based on the sales terms, historical experience, trend analysis and projected
market conditions in the various markets served. Sales, use, value-added and
other excise taxes are not recognized in revenue.

The majority of 3M's sales agreements are for standard products and services
with customer acceptance occurring upon delivery of the product or performance
of the service. 3M also enters into agreements that contain multiple elements
(such as equipment, installation and service) or non-standard terms and
conditions. For multiple-element arrangements, 3M recognizes revenue for
delivered elements when it has stand-alone value to the customer, the fair
values of undelivered elements are known, customer acceptance of the delivered
elements has occurred, and there are only customary refund or return rights
related to the delivered elements. In addition to the preceding conditions,
equipment revenue is not recorded until the installation has been completed if
equipment acceptance is dependent upon installation, or if installation is
essential to the functionality of the equipment. Installation revenues are not
recorded until installation has been completed. For prepaid service contracts,
sales revenue is recognized on a straight-line basis over the term of the
contract, unless historical evidence indicates the costs are incurred on other
than a straight-line basis. License fee revenue is recognized as earned, and no
revenue is recognized until the inception of the license term. On occasion,
agreements will contain milestones, or 3M will recognize revenue based on
proportional performance. For these agreements, and depending on the specifics,
3M may recognize revenue upon completion of a substantive milestone, or in
proportion to costs incurred to date compared with the estimate of total costs
to be incurred.

Accounts Receivable and Allowances: Trade accounts receivable are recorded at
the invoiced amount and do not bear interest. The Company maintains allowances
for bad debts, cash discounts, product returns and various other items. The
allowance for doubtful accounts and product returns is based on the best
estimate of the amount of probable credit losses in existing accounts receivable
and anticipated sales returns. The Company determines the allowances based on
historical write-off experience by industry and regional economic data and
historical sales returns. The Company reviews the allowance for doubtful
accounts monthly. The Company does not have any significant off-balance-sheet
credit exposure related to its customers.

Advertising and merchandising: These costs are charged to operations in the year
incurred, and totaled $469 million in 2007, $471 million in 2006 and $457
million in 2005.

Research, development and related expenses: These costs are charged to
operations in the year incurred and are shown on a separate line of the
Consolidated Statement of Income. Research, development and related expenses
totaled $1.368 billion in 2007, $1.522 billion in 2006 and $1.274 billion in
2005. In 2006, this included a $95 million in-process research and development
charge (discussed in Note 2) and $75 million in restructuring actions (Note 4).
Research and development expenses, covering basic scientific research and the
application of scientific advances in the development of new and improved
products and their uses, totaled $788 million in 2007 compared to $943 million
in 2006, decreasing due to the $95 million for purchased in-process research and
development discussed above and also due to the pharmaceuticals business
divestiture (Note 2). Research and development expenses totaled $818 million in
2005. Related expenses primarily include technical support provided by 3M to
customers who are using existing 3M products, and internally developed patent
costs, which include costs and fees incurred to prepare, file, secure and
maintain patents.

Internal-use software: The Company capitalizes direct costs of materials and
services used in the development of internal-use software. Amounts capitalized
are amortized on a straight-line basis over a period of three to five years and
are reported as a component of machinery and equipment within property, plant
and equipment.

Environmental: Environmental expenditures relating to existing conditions caused
by past operations that do not contribute to current or future revenues are
expensed. Reserves for liabilities for anticipated remediation costs are
recorded on an undiscounted basis when they are probable and reasonably
estimable, generally no later than the completion of feasibility studies or the
Company's commitment to a plan of action. Environmental expenditures for capital
projects that contribute to current or future operations generally are
capitalized and depreciated over their estimated useful lives.





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Income taxes: The provision for income taxes is determined using the asset and
liability approach. Under this approach, deferred income taxes represent the
expected future tax consequences of temporary differences between the carrying
amounts and tax basis of assets and liabilities. The Company records a valuation
allowance to reduce its deferred tax assets when uncertainty regarding their
reliability exists. As of December 31, 2007, no significant valuation allowances
were recorded.

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 average options outstanding during the years
2007, 2006 and 2005 were not included in the computation of diluted earnings per
share because they would not have had a dilutive effect (21.6 million average
options for 2007, 31.5 million average options for 2006, and 15.4 million
average options for 2005). As discussed in Note 10, the conditions for
conversion related to the Company's Convertible Notes have never been met. 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 for the years ended December 31 follow:


Earnings Per Share Computations
(Amounts in millions, except per share amounts)       2007          2006          2005
Numerator:
Net income                                         $    4,096    $    3,851    $    3,111

Denominator:
Denominator for weighted average commonshares           718.3         747.5         764.9
outstanding - basic

Dilution associated with the Company's                   13.7          13.5          16.4
stock-based compensation plans

Denominator for weighted average common shares          732.0         761.0         781.3
outstanding - diluted

Earnings per share - basic                         $     5.70    $     5.15    $     4.07
Earnings per share - diluted                       $     5.60    $     5.06    $     3.98



Stock-based compensation: In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123 (revised 2004). SFAS No. 123R supersedes APB
Opinion No. 25. Under APB Opinion No. 25, no compensation expense is recognized
for employee stock option grants if the exercise price of the Company's stock
option grants is at or above the fair market value of the underlying stock on
the date of grant. Under SFAS No. 123R, compensation expense is recognized for
both the General Employees' Stock Purchase Plan (GESPP) and the Management Stock
Ownership Plan (MSOP). SFAS No. 123R requires the determination of the fair
value of the share-based compensation at the grant date and the recognition of
the related expense over the period in which the share-based compensation vests.
The Company adopted SFAS No. 123R effective January 1, 2006. The Company adopted
SFAS No. 123R using the modified retrospective method. All prior periods have
been restated to give effect to the fair-value-based method of accounting for
awards granted in fiscal years beginning on or after January 1, 1995. The
Company believes that the modified retrospective application of this standard
achieves the highest level of clarity and comparability among the presented
periods. On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123
(R)-3, Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards (the FSP). The FSP provides that companies may elect
to use a specified 'short-cut' method to calculate the historical pool of
windfall tax benefits upon adoption of SFAS No. 123R. The Company elected to use
the 'short-cut' method when it adopted SFAS No. 123R on January 1, 2006. Refer
to Note 15 for additional information.

Comprehensive income: Total comprehensive income and the components of
accumulated other comprehensive income (loss) are presented in the Consolidated
Statement of Changes in Stockholders' Equity and Comprehensive Income.
Accumulated other comprehensive income (loss) is composed of foreign currency
translation effects (including hedges of net investments in international
companies), defined benefit pension plan adjustments, unrealized gains and
losses on available-for-sale debt and equity securities, and unrealized gains
and losses on cash flow hedging instruments.

Derivatives and hedging activities: All derivative instruments are recorded on
the balance sheet at fair value. The Company uses interest rate swaps, currency
swaps, and forward and option contracts to manage risks generally





                                       46
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associated with foreign exchange rate, interest rate and commodity market
volatility. All hedging instruments that qualify for hedge accounting are
designated and effective as hedges, in accordance with U.S. generally accepted
accounting principles. If the underlying hedged transaction ceases to exist, all
changes in fair value of the related derivatives that have not been settled are
recognized in current earnings. Instruments that do not qualify for hedge
accounting are marked to market with changes recognized in current earnings. The
Company does not hold or issue derivative financial instruments for trading
purposes and is not a party to leveraged derivatives. However, the Company does
have contingently convertible debt that, if conditions for conversion are met,
is convertible into shares of 3M common stock (refer to Note 10 in this
document).



New Accounting Pronouncements

As of December 31, 2005, the Company adopted FASB Interpretation No. 47, '
Accounting for Conditional Asset Retirement Obligations' (FIN 47). This
accounting standard applies to the fair value of a liability for an asset
retirement obligation associated with the retirement of tangible long-lived
assets and where the liability can be reasonably estimated. Conditional asset
retirement obligations exist for certain of the Company's long-term assets. The
fair value of these obligations is recorded as liabilities on a discounted
basis. Over time the liabilities are accreted for the change in the present
value and the initial capitalized costs are depreciated over the useful lives of
the related assets. The adoption of FIN 47 effective December 31, 2005, resulted
in the recognition of an asset retirement obligation liability of $59 million at
December 31, 2005, and an after-tax charge of $35 million for 2005, which is
reflected as a cumulative effect of change in accounting principle in the
Consolidated Statement of Income. At December 31, 2007, the asset retirement
obligation liability was $59 million.

In February 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 155, 'Hybrid Instruments.'  SFAS No. 155 amends SFAS No. 133 and SFAS
No. 140, 'Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.' SFAS No. 155 also resolves issues addressed in
Statement 133 Implementation Issue No. D1, 'Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets.' SFAS No. 155: a) permits
fair value remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation, b) clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, c) establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, and e) amends
SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity
from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. The Company adopted
SFAS No. 155 effective January 1, 2007; however, there was no material impact.

In June 2006, the FASB issued Interpretation No. 48 (FIN 48), 'Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.' This
interpretation was effective as of January 1, 2007. Refer to Note 8 for
additional information concerning this standard.

In September 2006, the 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. SFAS No. 157 is effective for all fiscal years beginning
after November 15, 2007 (January 1, 2008 for 3M) and is to be applied
prospectively. In February 2008, the FASB issued Staff Positions No. 157-1 and
No. 157-2 which partially defer the effective date of SFAS No. 157 for one year
for certain nonfinancial assets and liabilities and remove certain leasing
transactions from its scope. The Company is currently evaluating the impacts and
disclosures of this standard, but would not expect SFAS No. 157 to have a
material impact on 3M's consolidated results of operations or financial
condition.

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 158, 'Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132
(R).' Refer to Note 11 for additional information concerning this standard.

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 shall report 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 shall be recognized in earnings as incurred and not
deferred. SFAS No. 159 also establishes 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
is effective for financial statements issued for fiscal years beginning after
November 15, 2007 (January 1, 2008 for 3M) and interim periods within those
fiscal years. At the





                                       47
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effective date, an entity may elect the fair value option for eligible items
that exist at that date. The entity shall report the effect of the first
remeasurement to fair value as a cumulative-effect adjustment to the opening
balance of retained earnings. The Company has not elected 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 would
require 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 is effective for 3M
with respect to new arrangements entered into beginning January 1, 2008. The
Company is currently evaluating the impacts and disclosures of this standard,
but would not expect EITF Issue No. 07-3 to 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 how business acquisitions are accounted.  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 decrease 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 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 to 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.



NOTE 2.  Acquisitions and Divestitures



Divestitures:

In January 2007, 3M completed the sale of its global branded pharmaceuticals
business in Europe to Meda AB. 3M received proceeds of $817 million for this
transaction and recognized, net of assets sold, a pre-tax gain of $781 million
(recorded in the Health Care segment) in 2007.

In December 2006, 3M completed the sale of its global branded pharmaceuticals
business in the United States, Canada, and Latin America region and the Asia
Pacific region, including Australia and South Africa. 3M received proceeds of
$1.209 billion for this transaction and recognized, net of assets sold, a
pre-tax gain of $1.074 billion (recorded in Health Care Business) in 2006.





                                       48
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Buyer and sale price information by region is as follows:


•   Meda AB acquired 3M's pharmaceuticals business in Europe for $817 million 
    in 2007.

•   Graceway Pharmaceuticals Inc. acquired 3M's pharmaceutical operations
    in the United States, Canada, and Latin America for $860 million in 2006.

•   Ironbridge Capital and Archer Capital acquired 3M's pharmaceuticals business 
    in the Asia Pacific region, including Australia and South Africa for $349 
    million in 2006.


The agreements are the result of a review of strategic options for the branded
pharmaceuticals business and its immune response modifier (IRM) platform that 3M
announced in April 2006. Under the agreements, the purchasers acquired regional
marketing and intellectual property rights for 3M's well-known branded
pharmaceuticals, including Aldara, Difflam, Duromine, Tambocor, Maxair,
Metrogel-Vaginal and Minitran. As part of the transaction, Graceway
Pharmaceuticals also acquired the rights to certain IRM molecules.

In connection with these transactions, 3M entered into agreements whereby its
Drug Delivery Systems Division became a source of supply to the acquiring
companies. Because of the extent of 3M cash flows from these agreements in
relation to those of the disposed-of businesses, the operations of the branded
pharmaceuticals business are not classified as discontinued operations. See Note
4 for further discussion of restructuring actions that resulted from the
divesture of the Company's global branded pharmaceuticals business.

In June 2007, 3M completed the sale of its Opticom Priority Control Systems and
Canoga Traffic Detection businesses to TorQuest Partners Inc., a Toronto-based
investment firm. 3M received proceeds of $80 million for this transaction and
recognized, net of assets sold, transaction and other costs, a pre-tax gain of
$68 million (recorded in the Display and Graphics segment) in 2007.



Acquisitions:

During 2007, the purchase price paid for business combinations totaled $539
million, net of cash acquired, plus approximately 150 thousand shares of 3M
common stock, which had a market value of approximately $13 million.


The 16 business combinations completed during 2007 are summarized as follows:

1) In February 2007, 3M (Industrial and Transportation Business) purchased
certain assets of Accuspray Application Technologies Inc., a manufacturer of
spray paint equipment with a wide array of spray guns for architectural,
automotive refinishing, industrial and woodworking applications.

2) In February 2007, 3M (Industrial and Transportation Business) purchased
Sealed Air Corporation's 50 percent interest in PolyMask Corporation, a joint
venture between 3M and Sealed Air that produces protective films. The
acquisition of Sealed Air's interest results in 100 percent ownership by 3M.

3) In February 2007, 3M (Health Care Business) purchased 100 percent of the
outstanding shares of Acolyte Biomedica Ltd., a Salisbury, U.K.-based provider
of an automated microbial detection platform that aids in the rapid detection,
diagnosis, and treatment of infectious diseases.

4) In May 2007, 3M (Safety, Security and Protection Services Business) purchased
100 percent of the outstanding shares of E Wood Holdings PLC, a North Yorkshire,
UK-based manufacturer of high performance protective coatings for oil, gas,
water, rail and automotive industries.

5) In May 2007, 3M (Electro and Communications Business) purchased certain
assets of Innovative Paper Technologies LLC, a manufacturer of inorganic-based
technical papers, boards and laminates for a wide variety of high temperature
applications and Powell LLC, a supplier of non-woven polyester mats for the
electrical industry.

6) In May 2007, 3M (Health Care Business) purchased certain assets of Articulos
de Papel DMS Chile, a Santiago, Chile-based manufacturer of disposable surgical
packs, drapes, gowns and kits.

7) In June 2007, 3M (Industrial and Transportation Business) purchased certain
assets of Diamond Productions Inc., a manufacturer of superabrasive diamond and
cubic boron nitride wheels and tools for dimensioning and finishing
hard-to-grind materials in metalworking, woodworking and stone fabrication
markets in exchange for approximately 150 thousand shares of 3M common stock,
which had a market value of $13 million at the acquisition measurement date and
was previously held as 3M treasury stock.

8) In July 2007, 3M (Safety, Security and Protection Services Business)
purchased 100 percent of the outstanding shares of Rochford Thompson Equipment
Ltd., a manufacturer of optical character recognition passport readers used by
airlines and immigration authorities, headquartered in Newbury, U.K.

9) In August 2007, 3M (Health Care Business) purchased certain assets of
Neoplast Co. Ltd., a manufacturer/distributor of surgical tapes and dressings
and first aid bandages for both the professional and consumer markets across the
Asia Pacific region.

10) In October 2007, 3M (Health Care Business) purchased 100 percent of the
outstanding shares of Abzil Industria e Comercio Ltda., a manufacturer of
orthodontic products based in Sao Jose do Rio Preto, Sao Paulo, Brazil.

11) In October 2007, 3M (Industrial and Transportation Business) purchased 100
percent of the outstanding shares of Venture Tape Corp. and certain related
entities, a global provider of pressure sensitive adhesive tapes based in
Rockland, Mass.





                                       49
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12) In October 2007, 3M (Display and Graphics Business) purchased certain assets
of Macroworx Media Pvt Ltd., a software company that specializes in the design
and development of digital signage solutions based in Bangalore, India.

13) In October 2007, 3M (Health Care Business) purchased 100 percent of the
outstanding shares of Lingualcare Inc., a Dallas-based orthodontic technology
and services company offering the iBraces system, a customized, lingual
orthodontic solution.

14) In November 2007, 3M (Industrial and Transportation Business) purchased
certain assets of Standard Abrasives, a manufacturer of coated abrasive
specialties and non-woven abrasive products for the metalworking industry
headquartered in Simi Valley, Ca.

15) In November 2007, 3M (Industrial and Transportation Business) purchased 100
percent of the outstanding shares of Unifam Sp. z o.o., a manufacturer of
cut-off wheels, depressed center grinding wheels and flap discs based in Poland.

16) In November 2007, 3M (Industrial and Transportation Business) purchased
certain assets of Bondo Corp., a manufacturer of auto body repair products for
the automotive aftermarket and various other professional and consumer
applications based in Atlanta, Ga.


In addition to the business combinations above, 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.

Purchased identifiable intangible assets for the 16 business combinations closed
during the twelve months ended December 31, 2007 totaled $124 million and will
be amortized on a straight-line basis over lives ranging from 2 to 10 years
(weighted-average life of six years).

In 2007 and 2006, pro forma information related to acquisitions was not included
because the impact on the Company's consolidated results of operations was not
considered to be material. There were no material in-process research and
development charges associated with 2007, while 2006 included $95 million in
charges for the Brontes Technologies Inc. acquisition. The purchase price
allocation of certain 2007 business combinations is considered preliminary. The
impact on the Consolidated Balance Sheet of the purchase price allocations
related to acquisitions and adjustments relative to other acquisitions within
the allocation period follow:


Asset (Liability)                                                 2007            2006
(Millions)                                                       Impact          Impact
Accounts receivable                                            $        69     $        76
Inventory                                                               79              55
Other current assets                                                     5               8
Property, plant, and equipment - net                                    68              65
Purchased intangible assets                                            131             282
Purchased goodwill                                                     326             536
In-process R&D                                                           1              95
Accounts payable and other current liabilities, net of                (115 )          (152 )
other assets
Deferred tax liability                                                 (12 )           (77 )

Net assets acquired                                            $       552     $       888

Supplemental information:
Cash paid                                                      $       546     $       962
Less: Cash acquired                                                      7              74
Cash paid, net of cash acquired                                $       539     $       888
Non-cash (3M shares at fair value)                                      13               -
Net assets acquired                                            $       552     $       888



Year 2006 acquisitions:



During the 12 months ended December 31, 2006, 3M completed 19 business
combinations for a total purchase price of $888 million, net of cash acquired.
Purchased identifiable intangible assets of $282 million for these acquisitions
will be amortized on a straight-line basis over lives ranging from 1 to 17 years
(weighted-average life of 9 years). The purchase price of several of these
acquisitions is subject to increases, which could be triggered by the
achievement of certain milestones.





                                       50
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The largest of these acquisitions was the August 2006 purchase of 100 percent of
the outstanding shares of Security Printing and Systems Limited (Safety,
Security and Protection Services Business) from authentos GmbH, Germany. The
acquired company is a producer of finished, personalized passports and secure
cards.

In October 2006, 3M (Health Care Business) purchased 100 percent of the
outstanding shares of Brontes Technologies Inc. (Brontes), a Lexington,
Massachusetts-based developer of proprietary 3-D imaging technology for dental
and orthodontic applications, for $95 million in cash. Brontes was a '
development stage enterprise' that did not yet have revenues from its principal
operations and the technology acquired did not have any alternative future use.
This transaction resulted in a 2006 charge of $95 million, or $0.13 per diluted
share, reflecting the write-off of acquired in-process research and development
costs, which are recognized as research, development and related expenses in the
Consolidated Statement of Income.


The 17 additional business combinations are summarized as follows:

1) In January 2006, 3M (Consumer and Office Business) purchased 100 percent of
the outstanding common shares of Interchemall Dom., a provider of household
cleaning products based in Poland.

2) In March 2006, 3M (Industrial and Transportation Business) purchased certain
assets of General Industrial Diamond Company Inc., a U.S. operation. The
acquired company is a manufacturer of superabrasive grinding wheels, dressing
tools and machines used to dimension and finish hard-to-grind materials in the
industrial and commercial markets.

3) In April 2006, 3M (Health Care Business) purchased 100 percent of the
outstanding shares of OMNII Oral Pharmaceuticals, a provider of differentiated
preventive dental products, solutions and support for dental professionals.

4) In April 2006, 3M (Health Care Business) purchased certain assets of ClozeX
Medical LLC, a provider of unique skin closure devices to treat lacerations and
close surgical incisions. The agreement gives 3M exclusive worldwide rights for
the manufacturing and distribution of ClozeX Wound Closures.

5) In June 2006, 3M (Health Care Business) purchased 100 percent of the
outstanding shares of SBG (Software und Beratung im Gesundheitswesen) GmbH, a
Berlin-based developer of software for managing diagnosis-related information in
hospitals.

6) In June 2006, 3M (Safety, Security and Protection Services Business)
purchased certain assets of POMP Medical and Occupational Health Products LLC, a
Porto Alegre, Brazil-based provider of earplugs, eyewear and hand cream.

7) In July 2006, 3M (Industrial and Transportation Business) purchased certain
assets of Pinnacle Distribution Concepts Inc., a leading transportation
management system (TMS) provider specializing in the delivery of Web-based, '
on-demand' solutions.

8) In July 2006, 3M (Electro and Communications Business) purchased certain
assets of SCC Products Inc. and JJ Converting LLC, both based in Sanford, N.C.
SCC Products Inc. is a provider of flexible static control packaging and
workstation products for electronic devices. JJ Converting LLC is a producer of
films used to make static control bags.

9) In August 2006, 3M (Display and Graphics Business) purchased 100 percent of
the outstanding shares of Archon Technologies Inc., a Denver, Colorado-based
provider of enterprise software solutions for motor vehicle agencies.

10) In August 2006, 3M (Safety, Security and Protection Services Business)
purchased 100 percent of the outstanding shares of Aerion Technologies, a
Denver, Colorado-based maker of safety products, including heat stress monitors,
thermal cameras and carbon monoxide detectors.

11) In September 2006, 3M (Electro and Communications Business) purchased 100
percent of the outstanding shares of Credence Technologies Inc., a Soquel,
California-based provider of instruments and high-end monitoring equipment for
electrostatic discharge control and electromagnetic compliance.

12) In October 2006, 3M (Consumer and Office Business) purchased certain assets
of Nylonge Corp., a global provider of household cleaning products, including
cellulose sponges, scrub sponges and household wipes.

13) In October 2006, 3M (Industrial and Transportation Business) purchased 100
percent of the outstanding shares of NorthStar Chemicals, Inc., a Cartersville,
Georgia-based adhesive manufacturer.

14) In November 2006, 3M (Industrial and Transportation Business) purchased 100
percent of the outstanding shares of Global Beverage Group Inc., a
Canadian-based provider of delivery management software solutions for the
direct-store-delivery of consumer packaged goods.

15) In November 2006, 3M (Health Care Business) purchased 100 percent of the
outstanding shares of Biotrace International PLC, a Bridgend, UK-based
manufacturer and supplier of industrial microbiology products used in food
processing safety, health care, industrial hygiene and defense applications.

16) In December 2006, 3M (Electro and Communications Business) purchased certain
assets of Mahindra Engineering and Chemical Products LTD, an India-based
manufacturer of cable jointing kits and accessories.

17) In December 2006, 3M (Health Care Business) purchased 100 percent of the
outstanding shares of SoftMed Systems Inc., a Maryland-based provider of health
information management software and services that improve the workflow and
efficiency of health care organizations.


The 2006 impact on the Consolidated Balance Sheet of the purchase price
allocations related to the 2006 acquisitions and adjustments relative to other
acquisitions within the allocation period were provided in the preceding table.





                                       51
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Year 2005 acquisitions:

The Company acquired CUNO on August 2, 2005. The operating results of CUNO are
included in the Industrial and Transportation Business segment. CUNO is engaged
in the design, manufacture and marketing of a comprehensive line of filtration
products for the separation, clarification and purification of fluids and gases.
3M and CUNO have complementary sets of filtration technologies, creating an
opportunity to bring an even wider range of filtration solutions to customers
around the world. 3M acquired CUNO for approximately $1.36 billion, comprised of
$1.27 billion of cash paid (net of cash acquired) and the acquisition of $80
million of debt, most of which has been repaid.

Purchased identifiable intangible assets of $268 million for the CUNO
acquisition will be amortized on a straight-line basis over lives ranging from 5
to 20 years (weighted-average life of 15 years). In-process research and
development charges from the CUNO acquisition were not material. Pro forma
information related to this acquisition is not included because its impact on
the Company's consolidated results of operations is not considered to be
material. The allocation of the purchase price is presented in the table that
follows.


        2005 CUNO ACQUISITION
        Asset (Liability)
        (Millions)
        Accounts receivable                               $        96
        Inventory                                                  61
        Property, plant, and equipment - net                      121
        Purchased intangible assets                               268
        Purchased goodwill                                        992
        Other assets                                               30
        Deferred tax liability                                   (102 )
        Accounts payable and other current liabilities           (104 )
        Interest bearing debt                                     (80 )
        Other long-term liabilities                               (16 )

        Net assets acquired                               $     1,266

        Supplemental information:
        Cash paid                                         $     1,294
        Less: Cash acquired                                        28
        Cash paid, net of cash acquired                   $     1,266



During the year ended December 31, 2005, 3M entered into two immaterial
additional business combinations for a total purchase price of $27 million, net
of cash acquired.


1) 3M (Electro and Communications Business) purchased certain assets of Siemens
Ultrasound division's flexible circuit manufacturing line, a U.S. operation. The
acquired operation produces flexible interconnect circuits that provide
electrical connections between components in electronics systems used primarily
in the transducers of ultrasound machines.

2) 3M (Display and Graphics Business) purchased certain assets of Mercury Online
Solutions Inc., a U.S. operation. The acquired operation provides hardware and
software technologies and network management services for digital signage and
interactive kiosk networks.



NOTE 3.  Goodwill and Intangible Assets



As discussed in Note 16 to the Consolidated Financial Statements, effective in
the first quarter of 2007, 3M made certain product moves between its business
segments, which resulted in changes in the goodwill balances by business segment
as presented below. 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, 'Goodwill and Other Intangible Assets,' requires
that goodwill be tested for impairment at least annually and when reporting
units are changed.

Purchased goodwill from acquisitions totaled $326 million in 2007, $55 million
of which is deductible for tax purposes. Purchased goodwill from acquisitions
totaled $536 million in 2006, $41 million of which is deductible for tax
purposes. The sale of 3M's global branded pharmaceuticals business (Health Care)
resulted in the write-off of $54 million in goodwill, which is reflected in the
2006 translation and other column below. Changes in foreign currency exchange
rates impacted both 2007 and 2006 goodwill balances. The goodwill balance by
business segment follows:



                                       52
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Goodwill


                                                          2006                                      2007
                            Dec. 31,       2006        translation    Dec. 31,       2007        translation    Dec. 31,
                              2005      acquisition        and          2006      acquisition        and          2007
(Millions)                  Balance      activity         other       Balance      activity         other       Balance
Industrial and              $  1,283    $        26    $        (7 )  $  1,302    $       155    $        67    $  1,524
Transportation
Health Care                      559            191            (37 )       713             73             53         839
Display and Graphics             871             12              3         886              -              8         894
Consumer and Office               71             11              7          89              -              5          94
Safety, Security and             234            264             27         525             70             16         611
Protection Services
Electro and                      512             32             23         567             28             32         627
Communications
Total Company               $  3,530    $       536    $        16    $  4,082    $       326    $       181    $  4,589



Acquired Intangible Assets

The carrying amount and accumulated amortization of acquired intangible assets
as of December 31 follow:


(Millions)                                                        2007             2006
Patents                                                       $        446     $        419
Other amortizable intangible assets (primarily tradenames              801              641
and customer-related intangibles)
Non-amortizable intangible assets (tradenames)                          75               68
Total gross carrying amount                                   $      1,322     $      1,128

Accumulated amortization - patents                                    (305 )           (266 )
Accumulated amortization - other                                      (216 )           (154 )
Total accumulated amortization                                        (521 )           (420 )
Total intangible assets - net                                 $        801     $        708



Amortization expense for acquired intangible assets for the years ended December
 31 follows:


         (Millions)                   2007        2006        2005
         Amortization expense       $     87    $     89    $     48



Expected amortization expense for acquired intangible assets recorded as of
December 31, 2007 follows:


                                                                          After
(Millions)              2008       2009      2010      2011      2012      2012
Amortization           $   100    $   98    $   89    $   81    $   72    $  286
expense



The preceding 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.



NOTE 4.  Restructuring Actions and Other Exit Activities



Restructuring Actions:



During the fourth quarter of 2006 and the first six 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. These costs included severance and benefits for pharmaceuticals
business employees who are not obtaining employment with the buyers 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.




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Components of these restructuring actions include:



Restructuring Actions


                                                     Employee-        Contract
                                                      Related       Terminations       Asset
                                                       Items
(Millions)                                          And Benefits     and Other      Impairments        Total

Expense incurred in 2006:
Pharmaceuticals business actions                    $         97    $          8    $         61    $        166
Overhead reduction actions                                   112               -               -             112
Business-specific actions                                     34               8              83             125
Total 2006 expense                                  $        243    $         16    $        144    $        403

Non-cash changes in 2006:
Pharmaceuticals business actions                    $        (19 )  $          -    $        (61 )  $        (80 )
Overhead reduction actions                                   (12 )             -               -             (12 )
Business-specific actions                                     (4 )             -             (83 )           (87 )
Total 2006 non-cash                                 $        (35 )  $          -    $       (144 )  $       (179 )

Cash payments in 2006:
Pharmaceuticals business actions                    $          -    $         (2 )  $          -    $         (2 )
Overhead reduction actions                                     -               -               -               -
Business-specific actions                                      -               -               -               -
Total 2006 cash payments                            $          -    $         (2 )  $          -    $         (2 )

Accrued liability balances as of Dec. 31, 2006:
Pharmaceuticals business actions                    $         78    $          6    $          -    $         84
Overhead reduction actions                                   100               -               -             100
Business-specific actions                                     30               8               -              38
Total accrued balance                               $        208    $         14    $          -    $        222

Expenses (credits) incurred in 2007:
Pharmaceuticals business actions                    $        (12 )  $         (4 )  $          -    $        (16 )
Overhead reduction actions                                     2               -               -               2
Business-specific actions                                     13               4              35              52
2007 expense                                        $          3    $          -    $         35    $         38

Non-cash changes in 2007:
Pharmaceuticals business actions                    $        (21 )  $          4    $          -    $        (17 )
Overhead reduction actions                                    (5 )             -               -              (5 )
Business-specific actions                                    (12 )            (4 )           (35 )           (51 )
2007 non-cash                                       $        (38 )  $          -    $        (35 )  $        (73 )

Cash payments in 2007:
Pharmaceuticals business actions                    $        (40 )  $         (6 )  $          -    $        (46 )
Overhead reduction actions                                   (87 )             -               -             (87 )
Business-specific actions                                    (26 )            (8 )             -             (34 )
2007 cash payments                                  $       (153 )  $        (14 )  $          -    $       (167 )

Accrued liability balances as of Dec. 31, 2007:
Pharmaceuticals business actions                    $          5    $          -    $          -    $          5
Overhead reduction actions                                    10               -               -              10
Business-specific actions                                      5               -               -               5
Total accrued liability balance                     $         20    $          -    $          -    $         20





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Income statement line in which the preceding 2007 and 2006 expenses (credits)
are reflected:


(Millions)                                                                             2007            2006
Cost of sales                                                                      $        40     $      130
Selling, general and administrative expenses                                                 5            198
Research, development and related expenses                                                  (7 )           75
Total                                                                              $        38     $      403



The amount of expenses (credits) incurred in 2007 and 2006 associated with the
preceding  are reflected in the Company's business segments as follows:


(Millions)                                                                             2007            2006
Industrial and Transportation                                                      $         2     $       15
Health Care                                                                                (11 )          293
Display and Graphics                                                                         3             39
Safety, Security and Protection Services                                                    28             10
Electro and Communications                                                                  18             46
Corporate and Unallocated                                                                   (2 )            -
Total                                                                              $        38     $      403



Actions with respect to the above activities were substantially completed in
2007 and additional charges and adjustments are not expected to be material.



In connection with this targeted restructuring plan, the Company eliminated a
total of approximately 1,900 positions from various functions within the
Company. Approximately 390 positions were pharmaceuticals business employees,
approximately 960 positions related primarily to corporate staff overhead
reductions, and approximately 550 positions were business-specific reduction
actions. Of the 1,900 employment reductions, about 58% are in the United States,
21% in Europe, 12% in Latin America and Canada, and 9% in the Asia Pacific area.
As a result of the second-quarter 2007 phase-out of operations at a New Jersey
roofing granule facility and the sale of the Company's Opticom Priority Control
Systems and Canoga Traffic Detection businesses, the Company eliminated
approximately 100 additional positions.



Employee-related severance charges are largely based upon distributed employment
policies and substantive severance plans and were reflected in the quarter in
which management approved the restructuring actions. Severance amounts for which
affected employees were required to render service in order to receive benefits
at their termination dates were measured at the date such benefits were
communicated to the applicable employees and recognized as expense over the
employees' remaining service periods.



Non-cash employee-related changes in 2007 and 2006 primarily relate to special
termination pension and medical benefits granted to certain U.S. eligible
employees. These pension and medical benefits were reflected as a component of
the benefit obligation of the Company's pension and medical plans as of December
 31, 2007 and 2006. In addition, these changes also reflect non-cash stock
option expense due to the reclassification of certain employees age 50 and older
to retiree status, resulting in a modification of their original stock option
awards for accounting purposes.



Contract termination and other charges primarily reflect costs to terminate a
contract before the end of its term (measured at fair value at the time the
Company provided notice to the counterparty) or costs that will continue to be
incurred under the contract for its remaining term without economic benefit to
the Company.



Business-specific asset impairment charges for 2007 totaled $35 million. This
included charges of $24 million related to property, plant and equipment
associated with the Company's decision to phase-out operations at a New Jersey
roofing granule facility (Safety, Security and Protection Services segment) and
charges of $11 million ($10 million related to property, plant and equipment and
$1 million related to intangible assets) related to the Company's decision to
close an Electro and Communications facility in Wisconsin. Asset impairment
charges related to intangible assets and property, plant and equipment reflect
the excess of the assets' carrying values over their fair values.



Asset impairment charges in 2006 associated with the pharmaceuticals business
and business-specific actions include $109 million relative to property, plant
and equipment; $30 million relative to intangible assets; and $5 million
relative to other assets. Impairment charges relative to intangible assets and
property, plant and equipment reflect the excess of the assets' carrying values
over their fair values as discussed in Note 1. The pharmaceuticals business
asset impairment charges are for certain assets not transferred to the buyers
and primarily relate to the write-down of the assets to salvage value. The
business-specific asset impairment charges primarily relate to decisions the
Company made in the fourth quarter of 2006 to exit certain marginal product
lines in the Display and Graphics segment and Electro and Communications
segment.





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Other Exit Activities:



During the second half of 2007, the Company recorded net pre-tax charges of $45
million related to exit activities. These charges related to employee reductions
and fixed asset impairments, including the consolidation of certain flexible
circuit manufacturing operations ($23 million recorded in the Electro and
Communications segment) and other actions, primarily in the Display and Graphics
segment and Industrial and Transportation segment. These charges were recorded
in cost of sales and selling, general and administrative expenses and research,
development and related expenses.



NOTE 5.  Supplemental Balance Sheet Information




(Millions)                                                                 2007             2006
Other current assets
Product and other insurance receivables                             $         220    $        255
Deferred income taxes                                                         428             412
Prepaid expenses and other                                                    501             658
Total other current assets                                          $       1,149    $      1,325

Investments
Available-for-sale (fair value)                                     $          16    $         14
Equity-method                                                                  64              86
Cash surrender value of life insurance policies, real estate and              218             214
other (cost, which approximates fair value)
Total investments                                                   $         298    $        314

Property, plant and equipment - at cost
Land                                                                $         303    $        281
Buildings and leasehold improvements                                        5,496           5,002
Machinery and equipment                                                    11,801          11,130
Construction in progress                                                      684             505
Capital leases                                                                106              99
Gross property, plant and equipment                                        18,390          17,017
Accumulated depreciation*                                                 (11,808 )       (11,110 )
Property, plant and equipment - net                                 $       6,582    $      5,907


--------------------

*Includes accumulated depreciation for capital leases of $42 million for 2007
and $37 million for 2006.


Other assets
Product and other insurance receivables                             $         318    $        373
Deferred income taxes                                                         176             253
Other                                                                         234             150
Total other assets                                                  $         728    $        776

Other current liabilities
Accrued trade payables                                              $         458    $        556
Employee benefits and withholdings                                            228             168
Deferred income                                                               323             299
Property and other taxes                                                      169             176
Product and other claims                                                      120             115
Non-funded pension benefits                                                    35              31
Deferred income taxes                                                          22               7
Other                                                                         478             409
Total other current liabilities                                     $       1,833    $      1,761



Accounts payable (included as a separate line item in the Consolidated Balance
Sheet) includes drafts payable on demand of $44 million and $65 million as of
December 31, 2007, and 2006, respectively.





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Supplemental Balance Sheet Information (continued)


(Millions)                                                    2007         2006
Other liabilities
Non-funded pension and postretirement benefits            $   1,348    $   1,437
Employee benefits                                               576          602
Product and other claims                                        372          311
Deferred income taxes                                           355           84
Long term taxes payable                                         310            -
Minority interest in subsidiaries                               325          278
Deferred income                                                  36           50
Capital lease obligations                                        69           65
Other                                                           175          138
Total other liabilities                                   $   3,566    $   2,965



NOTE 6.  Supplemental Stockholders' Equity and Accumulated Other Comprehensive
Income Information



Common stock ($.01 par value per share) of 3.0 billion shares is authorized,
with 944,033,056 shares issued. Treasury stock is reported at cost, with
234,877,025 shares at December 31, 2007, 209,670,254 shares at December 31,
2006, and 189,494,669 shares at December 31, 2005. Preferred stock, without par
value, of 10 million shares is authorized but unissued.



The components of the ending balances of accumulated other comprehensive income
(loss) as of December 31 follow:



Accumulated Other Comprehensive Income (Loss)


(Millions)                                                  2007         2006         2005
Cumulative translation adjustment
Balance at January 1                                      $     210    $    (296 )  $     282
Pre-tax amount                                                  456          503         (597 )
Tax effect                                                       76            3           19
Net of tax amount                                               532          506         (578 )
Balance at December 31                                          742          210         (296 )

Defined benefit pension plans adjustment
Balance at January 1                                         (2,067 )       (156 )       (110 )
Pre-tax amount                                                  941       (3,208 )        (28 )
Tax effect                                                     (327 )      1,297          (18 )
Net of tax amount                                               614       (1,911 )        (46 )
Balance at December 31                                       (1,453 )     (2,067 )       (156 )

Unrealized gain (loss) on debt and equity securities
Balance at January 1                                              2            3            2
Pre-tax amount                                                  (16 )         (1 )          2
Tax effect                                                        6            -           (1 )
Net of tax amount                                               (10 )         (1 )          1
Balance at December 31                                           (8 )          2            3

Unrealized gain (loss) on cash flow hedging
instruments
Balance at January 1                                            (18 )         38          (42 )
Pre-tax amount                                                  (24 )        (85 )        126
Tax effect                                                       14           29          (46 )
Net of tax amount                                               (10 )        (56 )         80
Balance at December 31                                          (28 )        (18 )         38

Total accumulated other comprehensive income (loss)
Balance at January 1                                         (1,873 )       (411 )        132
Pre-tax amount                                                1,374       (2,791 )       (497 )
Tax effect                                                     (248 )      1,329          (46 )
Net of tax amount                                             1,126       (1,462 )       (543 )
Balance at December 31                                    $    (747 )  $  (1,873 )  $    (411 )



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In September 2006, the FASB issued SFAS No. 158, 'Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R).' This standard eliminated the requirement
for a 'minimum pension liability adjustment' that was previously required under
SFAS No. 87 and required employers to recognize the underfunded or overfunded
status of a defined benefit plan as an asset or liability in its statement of
financial position. In 2006, as a result of the implementation of SFAS No. 158,
the Company recognized an after-tax decrease in accumulated other comprehensive
income of $1.187 billion and $513 million for the U.S. and International pension
benefit plans, respectively, and $218 million for the postretirement health care
and life insurance benefit plan. See Note 11 for additional detail.



Reclassification adjustments are made to avoid double counting in comprehensive
income items that are also recorded as part of net income. In 2007, as disclosed
in the net periodic benefit cost table in Note 11, $198 million pre-tax ($123
million after-tax) 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 11 as amortization of transition (asset) obligation, amortization
of prior service cost (benefit) and amortization of net actuarial (gain) loss.
Other reclassification adjustments (except for cash flow hedging instruments
adjustments provided in Note 12) were not material. No tax provision has been
made for the translation of foreign currency financial statements into U.S.
dollars.



NOTE 7.  Supplemental Cash Flow Information


(Millions)                                                  2007         2006         2005
Cash income tax payments                                  $  1,999     $  1,842     $  1,277
Cash interest payments                                         162          119           79
Capitalized interest                                            25           16           12



Individual amounts in the Consolidated Statement of Cash Flows exclude the
impacts of acquisitions, divestitures and exchange rate impacts, which are
presented separately. 'Other - net' in the Consolidated Statement of Cash Flows
within operating activities in 2007 and 2006 includes changes in liabilities
related to 3M's restructuring actions (Note 4) and in 2005 includes the non-cash
impact of adopting FIN 47 ($35 million cumulative effect of accounting change).



Transactions related to investing and financing activities with significant
non-cash components are as follows: In 2007, 3M purchased certain assets of
Diamond Productions, Inc. for approximately 150 thousand shares of 3M common
stock, which has a market value of approximately $13 million at the
acquisition's measurement date. Liabilities assumed from acquisitions are
provided in the tables in Note 2.



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NOTE 8.  Income Taxes


Income Before Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change
(Millions)                                                   2007         2006         2005
United States                                             $  2,820     $  3,191     $  2,604
International                                                3,295        2,434        2,224
Total                                                     $  6,115     $  5,625     $  4,828


Provision for Income Taxes
(Millions)                                                   2007         2006         2005
Currently payable
Federal                                                   $  1,116     $  1,087     $    709
State                                                           58          128           82
International                                                  779          824          704
Deferred
Federal                                                       (105 )       (261 )        127
State                                                            1          (24 )         11
International                                                  115          (31 )         (6 )
Total                                                     $  1,964     $  1,723     $  1,627


Components of Deferred Tax Assets and Liabilities
(Millions)                                                    2007         2006
Accruals not currently deductible
Employee benefit costs                                    $     240    $     206
Product and other claims                                        258          190
Pension costs                                                   (99 )        478
Restructuring costs                                               2           66
Stock-based compensation                                        377          335
Product and other insurance receivables                        (154 )       (156 )
Accelerated depreciation                                       (403 )       (541 )
Other                                                             6           (4 )
Net deferred tax asset (liability)                        $     227    $     574


Reconciliation of Effective Income Tax Rate                   2007        2006        2005
Statutory U.S. tax rate                                       35.0 %      35.0 %      35.0 %
State income taxes - net of federal benefit                    0.9         1.0         1.3
International income taxes - net                              (2.8 )      (1.5 )      (2.2 )
Jobs Act repatriation                                            -           -         1.6
Foreign export sales benefit                                     -        (0.9 )      (1.0 )
U.S. business credits                                         (0.3 )      (0.3 )      (0.4 )
Reserves for tax contingencies/return to provision             0.4        (2.7 )         -
Gain on sale of pharmaceuticals business                         -         0.4           -
Restructuring actions                                          0.1        (0.3 )         -
In-process research and development write-off                    -         0.6           -
Medicare Modernization Act                                    (0.4 )      (0.4 )      (0.3 )
Domestic Manufacturer's deduction                             (0.8 )      (0.3 )      (0.2 )
All other - net                                                  -           -        (0.1 )
Effective worldwide tax rate                                  32.1 %      30.6 %      33.7 %



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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. It is anticipated that
its examination for the Company's U.S. income tax returns for the years 2002
through 2004 will be completed by the end of first quarter 2008. As of December
31, 2007, the IRS has proposed adjustments to the Company's tax positions for
which the Company is fully reserved. Payments relating to any proposed
assessments arising from the 2002 through 2004 audit may not be made until a
final agreement is reached between the Company and the IRS on such assessments
or upon a final resolution resulting from the administrative appeals process or
judicial action. 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 to
change by an insignificant amount during the next 12 months.



The Company adopted the provisions of FASB Interpretation No. 48, 'Accounting
for Uncertainty in Income Taxes,' on January 1, 2007. As a result of the
implementation of Interpretation 48, the Company recognized an immaterial
increase in the liability for unrecognized tax benefits, which was accounted for
as a reduction to the January 1, 2007, balance of retained earnings. A
reconciliation of the beginning and ending amount of gross unrecognized tax
benefits ('UTB') is as follows:


(Millions)                                                                   Federal, State,
                                                                             and Foreign Tax
Gross UTB Balance at January 1, 2007                                         $           691

Additions based on tax positions related to the current year                              79
Additions for tax positions of prior years                                               143
Reductions for tax positions of prior years                                             (189 )
Settlements                                                                              (24 )
Reductions due to lapse of applicable statute of limitations                             (20 )

Gross UTB Balance at December 31, 2007                                       $           680

Net UTB impacting the effective tax rate at December 31, 2007                $           334



The total amount of unrecognized tax benefits that, if recognized, would affect
the effective tax rate as of January 1, 2007 and December 31, 2007,
respectively, are $261 million and $334 million. The ending net UTB results from
adjusting the gross balance at December 31, 2007 for items such as Federal,
State, and non-U.S. deferred items, interest and penalties, and deductible
taxes. The net UTB is included as components of Accrued Income Taxes and Other
Liabilities within the Consolidated Balance Sheet.



The Company recognizes interest and penalties accrued related to unrecognized
tax benefits in tax expense. At January 1, 2007 and December 31, 2007, accrued
interest and penalties on a gross basis were $65 million and $69 million,
respectively. Included in these interest and penalty amounts is 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.



In 2007, the Company completed the preparation and filing of its 2006 U.S.
federal and state income tax returns, which did not result in any material
changes to the Company's financial position. In 2006, an audit of the Company's
U.S. tax returns for years through 2001 was completed. The Company and the
Internal Revenue Service reached a final settlement for these years, including
an agreement on the amount of a refund claim to be filed by the Company. The
Company also substantially resolved audits in certain European countries. In
addition, the Company completed the preparation and filing of its 2005 U.S.
federal income tax return and the corresponding 2005 state income tax returns.
The adjustments from amounts previously estimated in the U.S. federal and state
income tax returns (both positive and negative) included lower U.S. taxes on
dividends received from the Company's foreign subsidiaries. The Company also
made quarterly adjustments (both positive and negative) to its reserves for tax
contingencies. Considering the developments noted above and other factors,
including the impact on open audit years of the recent resolution of issues in
various audits, these reassessments resulted in a reduction of the reserves in
2006 by $149 million, inclusive of the expected amount of certain refund claims.



In 2005, the Company announced its intent to reinvest $1.7 billion of foreign
earnings in the United States pursuant to the provisions of the American Jobs
Creation Act of 2004. This Act provided the Company the opportunity to tax-



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efficiently repatriate foreign earnings for U.S. qualifying investments
specified in its domestic reinvestment plan. As a consequence, in 2005, 3M
recorded a charge of $75 million.



The Company made discretionary contributions to its U.S. qualified pension plan
of $200 million in 2007, $200 million in 2006, and $500 million in 2005. The
current income tax provision includes a benefit for the pension contributions;
the deferred tax provision includes a cost for the related temporary difference.



As a result of certain employment commitments and capital investments made by
3M, income from manufacturing activities in certain countries is subject to
reduced tax rates or, in some cases, is exempt from tax for years through 2014.
The income tax benefits attributable to the tax status of these subsidiaries are
estimated to be $47 million (6 cents per diluted share) in 2007, $20 million (3
cents per diluted share) in 2006, and $23 million (3 cents per diluted share) in
2005.



The Company has not provided deferred taxes on unremitted earnings attributable
to international companies that have been considered to be reinvested
indefinitely. These earnings relate to ongoing operations and were approximately
$5.7 billion as of December 31, 2007. Because of the availability of U.S.
foreign tax credits, it is not practicable to determine the income tax liability
that would be payable if such earnings were not indefinitely reinvested.



NOTE 9.  Marketable Securities



The Company invests in asset-backed securities, agency securities, corporate
medium-term note securities, auction rate 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 December 31, 2007.


(Millions)                                                                   Dec. 31, 2007
Agency securities                                                           $           260
Asset-backed securities                                                                 186
Other securities                                                                        133

Current marketable securities                                                           579

Asset-backed securities                                                                 267
Corporate medium-term notes securities                                                  112
Agency securities                                                                        56
Auction rate securities                                                                  16
Other securities                                                                         29

Non-current marketable securities                                                       480

Total marketable securities                                                 $         1,059



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. The fair value of marketable securities
approximates cost, except for certain auction rate securities discussed in the
next paragraph. Gross unrealized gains and losses for marketable securities were
not material as of December 31, 2007 and 2006; however, in 2007 the Company did
have both realized and unrealized losses associated with auction rate securities
as discussed below. Gross realized gains and losses on sales of marketable
securities were not material for 2007, 2006 or 2005, but in 2007 pre-tax gains
totaled approximately $7 million. 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 (as discussed below).



3M has a diversified marketable securities portfolio of $1.059 billion as of
December 31, 2007. Within this portfolio, current and long-term asset-backed
securities (estimated fair value of $453 million) are primarily comprised of
interests in automobile loans and credit cards, with only $27 million invested
in interests in mortgage-backed securities or home equity loans. 3M's marketable
securities portfolio also includes auction rate securities (estimated fair value
of $16 million) that represent interests in collateralized debt obligations,
which are collateralized by pools of residential and commercial mortgages, and
interests in investment grade credit default swaps. During the second half of
2007, 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,



                                       61
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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 on broker-dealer valuation models and an
analysis of 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. This write-down
resulted in an 'other-than-temporary' impairment charge of approximately $8
million (pre-tax) included in net income and a temporary impairment charge of
$10 million (pre-tax) reflected as an unrealized loss within other comprehensive
income for 2007. As of December 31, 2007, these investments in auction rate
securities have been in a loss position for less than six months. These auction
rate securities are classified as non-current marketable securities as of
December 31, 2007 as indicated in the preceding table.



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 balance at December 31, 2007 for marketable securities and short-term
investments 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.


(Millions)                                                                   Dec. 31, 2007
Due in one year or less                                                     $           231
Due after one year through three years                                                  545
Due after three years through five years                                                221
Due after five years                                                                     62

Total marketable securities                                                 $         1,059



                                       62
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NOTE 10.  Long-Term Debt and Short-Term Borrowings



Long-term debt and short-term borrowings as of December 31 consisted of the
following (with interest rates as of December 31, 2007):


Long-Term Debt                                  Currency/      Effective
(Millions)                                      Fixed vs.       Interest      Maturity
Description / Principal Amount                  Floating*        Rate*          Date          2007         2006
Eurobond (625 million Euros)                     Euro Fixed          4.98 %        2014           919            -
30-year bond ($750 million)                       USD Fixed          5.73 %        2037           747            -
Eurobond (400 million Euros)                           Euro          4.45 %        2014           591            -
                                                   Floating
Medium-term note ($500 million)                   USD Fixed          4.67 %        2012           500            -
Medium-term note ($400 million)                USD Floating          4.84 %        2009           408          400
Dealer remarketable securities ($350              USD Fixed          5.83 %        2010           350          350
million)
30-year debenture ($330 million)                  USD Fixed          5.75 %        2028           350          354
Convertible notes ($252 million)                  USD Fixed          0.50 %        2032           222          542
Floating rate note ($100 million)              USD Floating          4.56 %        2041           100          100
ESOP debt guarantee ($87 million)                 USD Fixed          5.62 %   2008-2009            87          127
Floating rate note ($62 million)               USD Floating          4.64 %        2044            62           62
Other borrowings                                    Various          4.27 %   2008-2040           223          226
Total long-term debt                                                                       $    4,559    $   2,161
Less: current portion of long-term debt                                                           540        1,114
Long-term debt (excluding current portion)                                                 $    4,019    $   1,047


Short-Term Borrowings and
Current Portion of Long-Term Debt                                Effective
(Millions)                                                        Interest           2007             2006
                                                                   Rate*
Current portion of long-term debt                                       5.37 %   $        540     $      1,114
Non-U.S. dollar commercial paper                                        4.60 %            349              314
U.S. dollar commercial paper                                                                -            1,035
Other borrowings                                                        7.57 %             12               43
Total short-term borrowings and current portion of                               $        901     $      2,506
long-term debt



Weighted-Average Effective Interest Rate*


                                               Total                                 Excluding ESOP Debt
At December 31                      2007                  2006                   2007                  2006
Short-term                          5.10 %                4.65 %                 5.07 %                4.63 %
Long-term                           4.48 %                3.67 %                 4.47 %                3.49 %


--------------------

* Debt tables reflect the effects of interest rate swaps at December 31;
weighted-average effective interest rate table reflects the combined effects of
interest rate and currency swaps at December 31.



Maturities of long-term debt for the five years subsequent to December 31, 2007
are as follows (in millions):


  2008       2009       2010       2011       2012      Thereafter     Total
 $   540    $   477    $    24    $     -    $   500    $    3,018    $ 4,559



Long-term debt payments due in 2008 include $350 million of dealer remarketable
securities (final maturity 2010) and $62 million of floating rate notes (final
maturity 2044). These securities are classified as current portion of long-term
debt as the result of put provisions associated with these debt instruments.



The ESOP debt is serviced by dividends on stock held by the ESOP and by Company
contributions. These contributions are not reported as interest expense, but are
reported as an employee benefit expense in the Consolidated Statement of Income.
Other borrowings includes debt held by 3M's international companies and floating





                                       63
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rate notes in the United States, with the long-term portion of this debt
primarily composed of U.S. dollar floating rate debt.



At December 31, 2007, certain debt agreements ($350 million of dealer
remarketable securities and $87 million of ESOP debt) had ratings triggers (BBB-
/Baa3 or lower) that would require repayment of debt. The Company has an AA
credit rating from Standard & Poor's, with a stable outlook, and an Aa1 credit
rating from Moody's Investors Service, with a negative outlook. On April 30,
2007, the Company replaced its $565 million credit facility with a new $1.5
billion five-year credit facility, which has provisions for the Company to
request an increase of the facility up to $2 billion (at the lenders'
discretion), and providing for up to $150 million in letters of credit. As of
December 31, 2007, there are $110 million in letters of credit drawn against the
facility. Under the new credit agreement, 3M is required to maintain its EBITDA
to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to
1. This is calculated (as defined in the agreement) as the ratio of consolidated
total EBITDA for the four consecutive quarters then ended to total interest
expense on all funded debt for the same period. At December 31, 2007, this ratio
was approximately 35 to 1. At December 31, 2007, available short-term committed
lines of credit internationally totaled approximately $67 million, of which
approximately $13 million was utilized. Debt covenants do not restrict the
payment of dividends.



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. On June 15, 2007, the Company registered
150,718 shares of the Company's common stock under this shelf on behalf of and
for the sole benefit of the selling stockholders in connection with the
Company's acquisition of assets of Diamond Productions, Inc. 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. This program has a remaining capacity of $2.5 billion as of
December 31, 2007.



In September 2003, the Company filed a shelf registration statement with the
Securities and Exchange Commission relating to the potential offering of debt
securities of up to $1.5 billion. This shelf registration became effective in
October 2003. In December 2003, the Company established under the shelf a
medium-term notes program through which up to $1.5 billion of medium-term notes
may be offered. In March 2007, the Company issued a 30-year, $750 million, fixed
rate note with a coupon rate of 5.70%. In November 2006, 3M issued a three-year,
$400 million, fixed rate note. The Company entered into an interest rate swap to
convert this to a rate based on a floating LIBOR index. In December 2004, 3M
issued a 40-year, $62 million, floating rate note, with the rate based on a
floating LIBOR index. This $1.5 billion medium term notes program was replaced
by the $3 billion program established in June 2007.



In July 2007, 3M issued a seven year 5.0% fixed rate Eurobond for an amount of
750 million Euros (approximately $1.102 billion in U.S. Dollars at December 31,
2007). Upon debt issuance in July 2007, 3M completed a fixed-to-floating
interest rate swap on a notional amount of 400 million Euros as a fair value
hedge of a portion of the fixed interest rate Eurobond obligation. In December
2007, 3M reopened the existing seven year 5.0% fixed rate Eurobond for an
additional amount of 275 million Euros (approximately $404 million in U.S.
Dollars at December 31, 2007). This security was issued at a premium and was
subsequently consolidated with the original security on January 15, 2008.



3M may redeem its 30-year zero-coupon senior notes (the 'Convertible Notes') at
any time in whole or in part, beginning November 21, 2007, at the accreted
conversion price; however, bondholders may convert upon notification of
redemption each of the notes into 9.4602 shares of 3M common stock. Holders of
the 30-year zero-coupon senior notes have the option to require 3M to purchase
their notes at accreted value on November 21 in the years 2005, 2007, 2012,
2017, 2022 and 2027. In November 2005, 22,506 of the 639,000 in outstanding
bonds were redeemed, resulting in a payout from 3M of approximately $20 million.
In November 2007, an additional 364,598 outstanding bonds were redeemed
resulting in a payout from 3M of approximately $322 million. These payouts
reduced the Convertible Notes' face value at maturity to $252 million, which
equates to a book value of approximately $222 million at December 31, 2007. As
disclosed in a Form 8-K in November 2005, 3M amended the terms of these
securities to pay cash at a rate of 2.40% per annum of the principal amount at
maturity of the Company's Convertible Notes, which equates to 2.75% per annum of
the notes' accreted value on November 21, 2005. The cash interest payments were
made semiannually in arrears on May 22, 2006, November 22, 2006, May 22, 2007
and November 22, 2007 to holders of record on the 15th calendar day preceding
each such interest payment date. Effective November 22, 2007, the effective
interest rate reverted back to the original yield of 0.50%.



3M originally sold $639 million in aggregate face amount of these 'Convertible
Notes' on November 15, 2002, which are convertible into shares of 3M common
stock. The gross proceeds from the offering, to be used for general corporate
purposes, were $550 million ($540 million net of issuance costs). Debt issuance
costs were amortized on a straight-line basis over a three-year period beginning
in November 2002. On February 14, 2003, 3M registered these Convertible Notes in
a registration statement filed with the Securities and Exchange Commission. The
terms of the





                                       64
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Convertible Notes include a yield to maturity of .50% and an initial conversion
premium of 40% over the $65.00 (split-adjusted) closing price of 3M common stock
on November 14, 2002. If certain conditions for conversion (relating to the
closing common stock prices of 3M exceeding the conversion trigger price for
specified periods) are met, holders may convert each of the 30-year zero-coupon
senior notes into 9.4602 shares of 3M common stock in any calendar quarter
commencing after March 31, 2003. The conversion trigger price for the fourth
quarter of 2007 was $121.21 per share. If the conditions for conversion are met,
and 3M elects not to settle in cash, the 30-year zero-coupon senior notes will
be convertible in the aggregate into approximately 2.4 million shares of 3M
common stock. The conditions for conversion related to the Company's Convertible
Notes have never been met. 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.



In December 2007, the Company's $350 million of dealer remarketable securities
were remarketed for one year. They were reissued with a fixed coupon rate of
5.83%. These securities, which are classified as current portion of long-term
debt, were issued in December 2000. The remarketable securities can be
remarketed annually, at the option of the dealer, for a year each time, with a
final maturity date of December 2010. In the second quarter of 2007, 3M
repurchased $42 million in floating rate notes due in 2037 at par as the
bondholder exercised put provisions associated with this debt instrument.



NOTE 11.  Pension and Postretirement Benefit Plans



3M has various company-sponsored retirement plans covering substantially all
U.S. employees and many employees outside the United States. Pension benefits
associated with these plans generally are based on each participant's years of
service, compensation, and age at retirement or termination. In addition to
providing pension benefits, the Company provides certain postretirement health
care and life insurance benefits for substantially all of its U.S. employees who
reach retirement age while employed by the Company. Most international employees
and retirees are covered by government health care programs. The cost of
company-provided postretirement health care plans for international employees is
not material and is combined with U.S. amounts.



The Company's pension funding policy is to deposit with independent trustees
amounts allowable by law. Trust funds and deposits with insurance companies are
maintained to provide pension benefits to plan participants and their
beneficiaries. There are no plan assets in the non-qualified plan due to its
nature. For its U.S. postretirement health care and life insurance benefit
plans, the Company has set aside amounts at least equal to annual benefit
payments with an independent trustee.



In August 2006, the Pension Protection Act (PPA) was signed into law in the U.S.
The PPA increases the funding target for defined benefit pension plans to 100%
of the target liability. The PPA transition rules require a funding liability
target of 92% in 2008, reaching 100% by 2011. 3M's U.S. qualified defined
benefit plans are funded in excess of the applicable transition funding
liability target for 2008; therefore, the Company expects that the plans will
not be subject to the minimum required contribution of the PPA and its
transition rules will not have a material impact on expected future
contributions.



In September 2006, the FASB issued SFAS No. 158, 'Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R).' This standard requires employers to
recognize the underfunded or overfunded status of defined benefit pension and
postretirement plans as an asset or liability in its statement of financial
position, and recognize changes in the funded status in the year in which the
changes occur through accumulated other comprehensive income, which is a
component of stockholders' equity. This standard also eliminates the requirement
for Additional Minimum Pension Liability (AML) required under SFAS No. 87. As a
result of the application of SFAS No. 158 as of December 31, 2006, 3M reversed
assets of $2.515 billion and increased liabilities by $703 million. These
liabilities were offset to accumulated other comprehensive income and deferred
taxes. In 2006, as a result of the implementation of SFAS No. 158, the Company
recognized an after-tax decrease in accumulated other comprehensive income of
$1.187 billion and $513 million for the U.S. and International pension benefit
plans, respectively, and $218 million for the postretirement health care and
life insurance benefit plan.





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The following illustrates the adjustments to the Balance Sheet to record the
initial adoption of the SFAS No. 158 funded status as of December 31, 2006:


                                                                       Pre-SFAS          SFAS            Post
                                                                        No. 158         No.158
                                       With AML           AML          with AML        adoption          SFAS
(Millions)                             from 2005      adjustment      adjustments     adjustments       No. 158
Prepaid Pension/(accrued pension     $       2,111   $          15   $       2,126   $      (3,199 ) $      (1,073 )
liability)
Intangible asset                                24              (5 )            19             (19 )             -
Deferred tax asset                              98              (3 )            95           1,300           1,395
Accumulated other comprehensive                156              (7 )           149           1,918           2,067
income, net of tax
Accumulated other comprehensive                254             (10 )           244           3,218           3,462
income, pre-tax



Following is a reconciliation of the beginning and ending balances of the
benefit obligation and the fair value of plan assets as of December 31:


                                                 Qualified and Non-qualified                     Postretirement
                                                       Pension Benefits                             Benefits
                                          United States               International
(Millions)                              2007          2006          2007          2006         2007          2006
Change in benefit obligation
Benefit obligation at beginning of       10,149    $   10,052    $    4,450    $    3,884   $    1,841    $    1,918
year
Acquisitions                                  -             -             3            22            -             -
Service cost                                192           196           125           124           57            58
Interest cost                               568           539           228           183          104           104
Participant contributions                     -             -             4             4           47            41
Foreign exchange rate changes                 -             -           337           365           14             -
Plan amendments                              18             2            17            (1 )        (98 )        (157 )
Actuarial (gain) loss                      (154 )        (142 )        (114 )          26          (16 )          35
Medicare Part D Reimbursement                 -             -             -             -           10            10
Benefit payments                           (565 )        (530 )        (175 )        (146 )       (159 )        (168 )
Settlements, curtailments, special            7            32           (19 )         (11 )          9             -
termination benefits and other
Benefit obligation at end of year    $   10,215    $   10,149    $    4,856    $    4,450   $    1,809    $    1,841
Change in plan assets
Fair value of plan assets at             10,060         9,285    $    3,970         3,340   $    1,337         1,239
beginning of year
Acquisitions                                  -             -             1            21            -             -
Actual return on plan assets              1,376         1,072           188           325          127           188
Company contributions                       225           233           151           115            3            37
Participant contributions                     -             -             4             4           47            41
Foreign exchange rate changes                 -             -           300           316            -             -
Benefit payments                           (565 )        (530 )        (175 )        (146 )       (159 )        (168 )
Settlements, curtailments, special            -             -           (15 )          (5 )          -             -
termination benefits and other
Fair value of plan assets at end     $   11,096    $   10,060    $    4,424    $    3,970   $    1,355    $    1,337
of year
Funded status at end of year         $      881    $      (89 )  $     (432 )  $     (480 ) $     (454 )  $     (504 )





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                                                         Qualified and Non-qualified               Postretirement
                                                               Pension Benefits                       Benefits
                                                    United States           International
(Millions)                                         2007        2006        2007        2006        2007       2006
Amounts recognized in the Consolidated
Balance Sheet as of Dec. 31,
Non-current assets                               $  1,246    $    269    $    132    $    126    $      -   $      -
Accrued benefit cost
Current liabilities                                   (27 )       (26 )        (6 )        (5 )        (2 )        -
Non-current liabilities                              (338 )      (332 )      (558 )      (601 )      (452 )     (504 )
Ending balance                                   $    881    $    (89 )  $   (432 )  $   (480 )  $   (454 ) $   (504 )
Amounts recognized in accumulated other
comprehensive income as of Dec. 31,
Net transition obligation (asset)                $      -    $      -    $      1    $      3    $      -   $      -
Net actuarial loss (gain)                           1,210       2,027         884         899         768        874
Prior service cost (credit)                            68          64         (45 )       (65 )      (365 )     (339 )
Ending balance                                   $  1,278    $  2,091    $    840    $    837    $    403   $    535



The accumulated benefit obligation of the U.S. pension plans was $9.643 billion
and $9.560 billion at December 31, 2007 and 2006, respectively. The accumulated
benefit obligation of the international pension plans was $4.421 billion and
$3.756 billion at December 2007 and 2006, respectively.



The U.S. nonqualified pension plan had a projected benefit obligation of $360
million and $354 million, respectively, as of December 31, 2007 and 2006, and
has no plan assets due to the nature of the plan. The accumulated benefit
obligation of the nonqualified pension plan is equal to the projected benefit
obligation.



The following amounts relate to international pension plans with projected
benefit obligations in excess of plan assets as of December 31:


    (Millions)                                     2007            2006
    Projected benefit obligation            $     4,346     $     3,680
    Accumulated benefit obligation                3,989           3,049
    Fair value of plan assets                     3,782           3,073



The following amounts relate to international pension plans with accumulated
benefit obligations in excess of plan assets as of December 31:


    (Millions)                                     2007            2006
    Projected benefit obligation            $     3,497     $     1,020
    Accumulated benefit obligation                3,271             854
    Fair value of plan assets                     2,984             578





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Components of net periodic benefit cost and other supplemental information for
the years ended December 31 follow:


Components of net periodic                      Qualified and Non-qualified                       Postretirement
benefit
cost and other amounts                                Pension Benefits                               Benefits
recognizedin other
comprehensive income                   United States                 International
(Millions)                         2007     2006     2005     2007       2006       2005      2007     2006     2005

Net periodic benefit cost
Service cost                      $  192   $  196   $  177   $   125    $   124    $   102   $   57   $   58   $   53
Interest cost                        568      539      502       228        183        177      104      104      101
Expected return on plan assets      (840 )   (764 )   (665 )    (290 )     (245 )     (217 )   (107 )   (103 )    (93 )
Amortization of transition             -        -        -         3          3          4        -        -        -
(asset) obligation
Amortization of prior service         14       13       13        (2 )       (3 )       (3 )    (72 )    (50 )    (39 )
cost (benefit)
Amortization of net actuarial        126      202      179        55         63         58       74       84       84
(gain) loss
Net periodic benefit cost         $   60   $  186   $  206   $   119    $   125    $   121   $   56   $   93   $  106
Settlements, curtailments,             7       32        6         4          4         (2 )      9        -        -
special termination benefits
and other
Net periodic benefit cost after   $   67   $  218   $  212   $   123    $   129    $   119   $   65   $   93   $  106
settlements, curtailments,
special termination benefits
and other



The estimated amortization from accumulated other comprehensive income into net
periodic benefit cost in 2008 follows:


Amounts expected to be amortized from        Qualified and Non-qualified       Postretirement
accumulated other comprehensive income            Pension Benefits                Benefits
into net periodic benefit costs over
next fiscal year
(Millions)
                                           United States     International
Amortization of transition (asset)         $           -     $           3     $            -
obligation
Amortization of prior service cost                    15                (2 )              (85 )
(benefit)
Amortization of net actuarial (gain)                  58                40                 59
loss
                                           $          73     $          41     $          (26 )



Other supplemental information for the years ended December 31 follows:


                                                Qualified and Non-qualified                     Postretirement
                                                      Pension Benefits                             Benefits
Weighted-average assumptions used        United States               International
to determine benefit obligations     2007     2006     2005      2007     2006     2005     2007     2006     2005

Discount rate                         6.00 %   5.75 %   5.50 %    5.39 %   4.88 %   4.50 %   6.00 %   5.75 %   5.50 %
Compensation rate increase            4.30 %   4.30 %   4.30 %    3.82 %   3.67 %   3.52 %    N/A      N/A      N/A


Weighted-average assumptions
used
to determine net cost for years     2007     2006     2005     2007     2006     2005     2007     2006     2005
ended

Discount rate                        5.75 %   5.50 %   5.75 %   4.88 %   4.50 %   4.88 %   5.75 %   5.50 %   5.75 %
Expected return on assets            8.75 %   8.75 %   8.75 %   7.19 %   7.20 %   7.08 %   8.60 %   8.60 %   8.60 %
Compensation rate increase           4.30 %   4.30 %   4.30 %   3.67 %   3.52 %   3.55 %    N/A      N/A      N/A



As of December 31, 2005, the Company converted to the RP (Retirement Plans) 2000
Mortality Table for calculating the year-end 2005 U.S. pension and
postretirement obligations and 2006 expense. The impact of this change increased
the year-end 2005 U.S. Projected Benefit Obligations for pension by $385
million, the year-end 2005 U.S. Accumulated Benefit Obligations for pension by
$349 million and the 2005 U.S. Accumulated Postretirement Benefit Obligation by
$93 million. This change also increased pension expenses for 2006 by $64 million
and postretirement expenses by $17 million.



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The Company reviews external data and its own historical trends for health care
costs to determine the health care trend rates for the postretirement medical
plans. As of December 31, 2006, the Company modified its health care trend rates
assumption by raising the rate and separating the trend rates used for plan
participants less than 65 years of age and plan participants 65 years of age or
older. The separation of the trend rates reflects the higher costs associated
with prescription drugs in the 65 or older age group. The assumed health care
trend rates as of December 31 are as follows:


                                                     2007                        2006
Assumed health care trend rates              Pre-65       Post-65        Pre-65       Post-65

Health care cost trend rate used to           8.50 %        9.75 %        9.00 %       10.25 %
determine benefit obligations
Rate that the cost trend rate is              5.00 %        5.00 %        5.00 %        5.00 %
assumed to decline to (ultimate
trend rate)
Years to Ultimate Trend Rate                     8             8             9             9



The assumed health care trend rates shown above reflect 3M's expected medical
and drug claims experience. The Company has developed certain long-term
strategies to help offset trend rates through care management, strategic
sourcing activities and plan design. A one percentage point change in assumed
health cost trend rates would have the following effects:


Health Care Cost                              One Percentage     One Percentage
(Millions)                                    Point Increase     Point Decrease
Effect on total of service and interest       $           23     $          (19 )
cost
Effect on postretirement benefit                         195               (165 )
obligation



3M's investment strategy for its pension and postretirement plans is to manage
the plans on a going-concern basis. The primary goal of the funds is to meet the
obligations as required. The secondary goal is to earn the highest rate of
return possible, without jeopardizing its primary goal, and without subjecting
the Company to an undue amount of contribution rate volatility. Fund returns are
used to help finance present and future obligations to the extent possible
within actuarially determined funding limits and tax-determined asset limits,
thus reducing the level of contributions 3M must make.



3M does not buy or sell any of its own stock as a direct investment for its
pension and other postretirement benefit funds. However, due to external
investment management of the funds, the plans may indirectly buy, sell or hold
3M stock. The aggregate amount of the shares would not be considered to be
material relative to the aggregate fund percentages.



For the U.S. pension plan, the Company's assumption for the expected return on
plan assets was 8.75% in 2007. The Company is lowering the 2008 expected return
on plan assets for its U.S. pension plan by 0.25 percentage points to 8.50%.
This will reduce 2008 expected pension income by approximately $26 million.
Projected returns are based primarily on broad, publicly traded equity and
fixed-income indices and forward-looking estimates of active portfolio and
investment management. As of December 31, 2007, the Company's 2008 expected
long-term rate of return on U.S. plan assets is based on an asset allocation
assumption of 46% global equities, with an expected long-term rate of return of
7.75%, 13% private equities with an expected long-term rate of return of 12.75%;
24% fixed-income securities with an expected long-term rate of return of 5.0%;
12% absolute return investments independent of traditional performance
benchmarks, with an expected long term return of 7%, 5% commodities with an
expected long-term rate of return of 6.5%. The company expects additional
positive return from active investment management. These assumptions result in
an 8.50% expected rate of return on an annualized basis. The plan assets earned
a rate of return in excess of 14%, 12% and 10% in 2007, 2006 and 2005,
respectively. The average annual actual return on the plan assets over the past
10 and 25 years has been 9.1% and 12.2%, respectively.



During 2006, certain absolute return and commodity investments were included in
equity and fixed income allocations. The 2006 presentation in the table that
follows has been reclassified to conform to the 2007 presentation.

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The U.S. plan's asset allocation by asset category as of plan measurement dates
follows:


                                                                                    Percentage
                                                                   Target         of Plan Assets
Asset Category                                                   Allocation       2007      2006
U.S. qualified pension plan
Global equity                                                            46 %         45 %      57 %
Fixed income                                                             24           23        19
Private equity                                                           13           16        12
Absolute return                                                          12           11         9
Commodities                                                               5            4         2
Cash                                                                      -            1         1
Total                                                                   100 %        100 %     100 %
Postretirement benefits
Global equity                                                            69 %         75 %      79 %
Fixed income                                                             10            9        10
Private equity                                                           18           13        10
Absolute return                                                           2            2         -
Commodities                                                               1            1         -
Cash                                                                      -            -         1
Total                                                                   100 %        100 %     100 %



While the target asset allocations do not have a percentage allocated to cash,
the plans will always have some cash due to cash flows. The postretirement
allocation shown above represents a weighted-average allocation for U.S. plans.



The international plans' weighted-average asset allocation as of plan
measurement dates follows:


                                                Percentage of
                                                 Plan Assets
          Asset Category                      2007         2006
          International pension plans
          Global equity                            46 %         35 %
          Domestic equity                           8           11
          Foreign equity                            4           11
          Real estate                               3            3
          Domestic fixed income                    19           19
          Foreign fixed income                     11            5
          Insurance                                 9           15
          Cash                                      -            1
          Total                                   100 %        100 %



The preceding asset allocations for international plans represent the top six
countries by projected benefit obligation. These countries represent
approximately 90% of the total international plan assets. The other countries'
asset allocations would not have a significant impact on the information
presented.



In the third quarter of 2007, the Company made discretionary contributions
totaling $200 million to its U.S. qualified pension plan. In 2008, the Company
expects to contribute an amount in the range of $100 million 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. Therefore,
the amount of the anticipated discretionary contribution could vary
significantly depending on the U.S. plans' funding status as of the 2008
measurement date and the anticipated tax deductibility of the contribution.



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The following estimated benefit payments are payable from the plans to
participants:


                                                    Qualified and          Postretirement     Medicare
                                                    Non-qualified                             Subsidy
                                                  Pension Benefits            Benefits        Receipts
(Millions)                                     United     International
                                               States

2008 Benefit Payments                         $     574   $         188    $          117    $       13
2009 Benefit Payments                               588             192               124            15
2010 Benefit Payments                               607             197               130            17
2011 Benefit Payments                               628             209               138            18
2012 Benefit Payments                               665             222               143            20
Following five years                              3,626           1,259               799           128



NOTE 12.  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. The information that follows
explains the various types of derivatives and financial instruments, and
includes a table that recaps cash flow hedging amounts.



Cash Flow Hedging - Foreign Currency Forward and Option Contracts: 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. At December 31, 2007, the
Company had various open foreign exchange forward and option contracts, the
majority of which had maturities of one year or less. The settlement or
extension of these derivatives will result in reclassifications to earnings in
the period during which the hedged transactions affect earnings (from other
comprehensive income). The maximum length of time over which 3M is hedging its
exposure to the variability in future cash flows for a majority of the
forecasted transactions is 12 months. Hedge ineffectiveness was not material for
the years 2007, 2006 and 2005.



Cash Flow Hedging - Commodity Price Management: The Company manages commodity
price risks through negotiated supply contracts, price protection agreements and
forward physical contracts. The Company uses commodity price swaps as cash flow
hedges of forecasted transactions to manage price volatility. The related
mark-to-market gain or loss on qualifying hedges is included in other
comprehensive income to the extent effective, and reclassified into cost of
sales in the period during which the hedged transaction affects earnings. 3M has
hedged its exposure to the variability of future cash flows for certain
forecasted transactions through 2008. No significant commodity cash flow hedges
were discontinued and hedge ineffectiveness was not material during the years
2007, 2006 and 2005.



Cash Flow Hedging - Forecasted Debt Issuance:  In June 2007, the Company
executed a pre-issuance cash flow hedge by entering into a floating-to-fixed
interest rate swap on a notional amount of 350 million Euros related to the
anticipated July 2007 Eurobond issuance of 750 million Euros. Upon debt issuance
in July 2007, 3M terminated the floating-to-fixed swap. The termination of the
swap resulted in an immaterial gain, which is being amortized over the seven
year life of the Eurobond.



Amounts recorded in accumulated other comprehensive income (loss) related to
cash flow hedging instruments follow.


Cash Flow Hedging Instruments                                    Twelve months ended
Net of Tax                                                           December 31
(Millions)                                                   2007        2006        2005

Beginning balance                                          $    (18 )  $     38    $    (42 )

Changes in fair value of derivatives                            (17 )       (53 )        70
Reclassifications to earnings from equity                         7          (3 )        10
Total activity                                                  (10 )       (56 )        80

Ending balance                                             $    (28 )  $    (18 )  $     38



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At December 31, 2007, the Company expects to reclassify to earnings over the
next 12 months a majority of the cash flow hedging instruments after-tax loss of
$28 million (with the impact offset by cash flows from underlying hedged items).



Fair Value Hedging - Interest Rate Swaps: The Company manages interest expense
using a mix of fixed and floating rate debt. To help manage borrowing costs, the
Company may enter into interest rate swaps. Under these arrangements, the
Company agrees to exchange, at specified intervals, the difference between fixed
and floating interest amounts calculated by reference to an agreed-upon notional
principal amount.



At December 31, 2007, the Company had interest rate swaps designated as fair
value hedges of underlying fixed rate obligations. In June 2006, the Company
entered into a $330 million fixed-to-floating interest rate swap to hedge the
30-year bond due in 2028. The Company terminated the swap in March 2007 and the
resulting gain will be recognized over the remaining life of the underlying
debt. Accordingly, the termination of the swap did not have a material impact on
3M's consolidated results of operations or financial condition. As indicated in
Note 10, in November 2006, the Company entered into a $400 million
fixed-to-floating interest rate swap concurrent with the issuance of the
three-year medium-term note due in 2009. Also as indicated in Note 10, in July
2007, in connection with the issuance of a seven-year Eurobond for an amount of
750 million Euros, the Company completed a fixed-to-floating interest rate swap
on a notional amount of 400 million Euros as a fair value hedge of a portion of
the fixed interest rate Eurobond obligation. The mark-to-market of these fair
value hedges is recorded as gains or losses in interest expense and is offset by
the gain or loss on the underlying debt instrument, which also is recorded in
interest expense. The fair value of these interest rate swaps were $36 million
and $26 million as of December 31, 2007 and 2006, respectively. These fair value
hedges are 100% effective and, thus, there is no impact on earnings due to hedge
ineffectiveness.



Net Investment Hedging: As circumstances warrant, the Company uses cross
currency swaps, forwards and foreign currency denominated debt to hedge portions
of the Company's net investments in foreign operations. For hedges that meet the
effectiveness requirements, the net gains or losses attributable to changes in
spot exchange rates are recorded in cumulative translation within other
comprehensive income. The remainder of the change in value of such instruments
is recorded in earnings.



In September 2006, the Company entered into a three-year floating-to-floating
cross currency swap with a notional amount of $300 million. This transaction is
a partial hedge of the Company's net investment in its Japanese subsidiaries.
This swap converts U.S. dollar-based variable interest payments to yen-based
variable interest payments associated with the notional amount.



In November 2006, the Company entered into a three-year floating-to-floating
cross currency swap with a notional amount of $200 million. This transaction is
a partial hedge of the Company's net investment in its European subsidiaries.
This swap converts U.S. dollar-based variable interest payments to Euro-based
variable interest payments associated with the notional amount.



In December 2006, the Company entered into foreign currency forward contracts
with a notional amount of $556 million relative to the Company's net investment
in its European subsidiaries and with a notional amount of $209 million relative
to the Company's net investment in its Japanese subsidiaries. These forwards
matured in December 2007.



In July and December 2007, as discussed in Note 10, the Company issued
seven-year fixed rate Eurobond securities for amounts of 750 million Euros and
275 million Euros, respectively. 3M designated each of these Eurobond issuances
as hedging instruments of the Company's net investment in its European
subsidiaries.



In November and December 2007, the Company entered into foreign currency forward
contracts with a notional amount of $200 million that were designated as a
partial hedge of the Company's net investment in its Chinese subsidiaries. These
forwards mature in December 2008.



The unrealized loss recorded in cumulative translation related to net investment
hedging at December 31, 2007 was $28 million and the unrealized loss at December
 31, 2006 was $18 million.



Currency Effects: 3M estimates that year-on-year currency effects, including
hedging impacts, increased net income by approximately $150 million in 2007, $20
million in 2006, and $115 million in 2005. This estimate includes the effect of
translating profits from local currencies into U.S. dollars; the impact of
currency fluctuations on the transfer of goods between 3M operations in the
United States and abroad; and transaction gains and losses, including derivative
instruments designed to reduce foreign currency exchange rate risks. 3M
estimates that year-on-year derivative and other transaction gains and losses
increased net income by approximately $10 million in 2007, had an immaterial
impact on net income in 2006, and increased net income by approximately $50
million in 2005.



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Credit risk: The Company is exposed to credit loss in the event of
nonperformance by counterparties in interest rate swaps, currency swaps, and
option and foreign exchange contracts. However, the Company's risk is limited to
the fair value of the instruments. The Company actively monitors its exposure to
credit risk through the use of credit approvals and credit limits, and by
selecting major international banks and financial institutions as
counterparties. The Company does not anticipate nonperformance by any of these
counterparties. During the second quarter of 2006, the Company entered into a
credit support agreement with one of its primary derivatives counterparties.
Under this agreement either party is required to post eligible collateral when
the market value of transactions covered by the agreement exceeds specified
thresholds, thus limiting credit exposure for both parties.



Fair value of financial instruments: At December 31, 2007 and 2006, the
Company's financial instruments included cash and cash equivalents, marketable
securities, accounts receivable, investments, accounts payable, borrowings, and
derivative contracts. The fair values of cash and cash equivalents, accounts
receivable, accounts payable, and short-term borrowings and current portion of
long-term debt (except the $350 million dealer remarketable security)
approximated carrying values because of the short-term nature of these
instruments. Available-for-sale marketable securities, investments and
derivative contracts are reported at fair values. Fair values for investments
held at cost are not readily available, but are estimated to approximate fair
value. The carrying amounts and estimated fair values of other financial
instruments based on third-party quotes as of December 31 follow:



Financial Instruments' Carrying Amounts and Estimated Fair Values


                                                               2007                       2006
                                                      Carrying        Fair       Carrying        Fair
(Millions)                                             Amount        Value        Amount        Value
Dealer remarketable securities                        $     350    $      368    $     350    $      358
Convertible note (long-term in 2007 and short-term          222           212          542           568
in 2006)
Long-term debt                                            3,797         3,796        1,047         1,054



NOTE 13.  Commitments and Contingencies



Capital and Operating Leases:

Rental expense under operating leases was $226 million in 2007, $211 million in
2006, and $195 million in 2005. It is 3M's practice to secure renewal rights for
leases, thereby giving 3M the right, but not the obligation, to maintain a
presence in a leased facility. 3M's primary capital lease, which became
effective in April 2003, involves a building in the United Kingdom (with a lease
term of 22 years). During the second quarter of 2003, 3M recorded a capital
lease asset and obligation of approximately 33.5 million United Kingdom pounds
(approximately $67 million at December 31, 2007 exchange rates). Minimum lease
payments under capital and operating leases with non-cancelable terms in excess
of one year as of December 31, 2007, were as follows:


                                                   Capital       Operating
 (Millions)                                        Leases         Leases
 2008                                            $         7    $        98
 2009                                                      6             79
 2010                                                      6             58
 2011                                                      6             35
 2012                                                      5             30
 After 2012                                               54            141
 Total                                                    84    $       441
 Less: Amounts representing interest                      13
 Present value of future minimum lease                    71
 payments
 Less: Current obligations under capital                   2
 leases
 Long-term obligations under capital leases      $        69



Warranties/Guarantees:

3M's accrued product warranty liabilities, recorded on the Consolidated Balance
Sheet as part of current and long-term liabilities, are estimated at
approximately $21 million as of December 31, 2007. 3M does not consider this
amount to be material. The fair value of 3M guarantees of loans with third
parties and other guarantee arrangements are not material.



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Related Party Activity:



Purchases from related parties (largely related to companies in which 3M has an
equity interest) totaled approximately $144 million in 2007 ($160 million in
2006 and $141 million in 2005). Receivables due from related parties (largely
related to receivables from employees for relocation and other ordinary business
expense advances) totaled approximately $40 million in 2007 ($36 million in
2006, and $37 million in 2005). 3M sales to related parties totaled
approximately $6 million in 2007 ($4 million in 2006, and $5 million in 2005).
Indebtedness to 3M from related parties was not material in 2007, 2006 and 2005.



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, 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.



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. Plaintiff filed a motion for summary judgment, and the
defendants filed a motion to dismiss all claims on the grounds that plaintiff
had failed to make a demand on the Board and had otherwise failed to state a
proper claim under the Private Securities Litigation Reform Act. The defendants
also moved to transfer the case from the District of Delaware to the District of
Minnesota. In February 2008, the Court denied without prejudice the plaintiff's
motion for summary judgment.



Breast Implant Litigation



The Company and certain other companies were named as defendants in past years
in numerous claims and lawsuits alleging damages for personal injuries of
various types resulting from breast implants formerly manufactured by the
Company or a related company. The vast majority of claims against the Company
have been resolved. The Company does not consider its remaining probable
liability to be material. Information concerning the associated insurance
receivable and legal proceedings related to it follows in the paragraph entitled
Breast Implant Insurance Receivables.



Respirator Mask/Asbestos Litigation



For more than 25 years the Company has defended and resolved the claims of
hundreds of thousands of individual claimants alleging injuries from
occupational dust exposures. As of December 31, 2007, the Company is a named
defendant, with multiple co-defendants, in numerous lawsuits in various courts
that purport to represent approximately 8,750 individual claimants, a decrease
from the approximately 17,700 individual claimants with actions pending at
December 31, 2006.



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, coal 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.



In many of these lawsuits and claims, the Company is named as a defendant with
multiple co-defendants where no product the Company manufactured is identified
or where the Company is ultimately determined not to have manufactured the
products identified by the plaintiffs. The Company's vigorous defense of this
litigation has resulted in dismissals of many claims without any payment by the
Company, and jury verdicts for the Company in seven of the eight cases tried to
verdict (such trials occurred in 1999, 2000, 2003, 2004 and 2007), and an
appellate reversal in 2005 of the one jury verdict adverse to the Company.



As previously reported, the Company won a defense verdict in July 2007 from a
jury in the federal court in Eastern District of Missouri.  The jury found the
Company had no liability whatever to a plaintiff who claimed he had silicosis
and a related cancer and sought to recover damages from the Company arising from
his alleged illness, which he claimed to have contracted from occupational
exposure to silica despite his purported use of the Company's respirator mask
equipment at various times. The jury rejected each of the plaintiff's theories
of liability against the Company.





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Many of the resolved lawsuits and claims involved unimpaired claimants who were
recruited by plaintiffs' lawyers through mass chest x-ray screenings. The
Company experienced a significant decline in the number of claims filed in 2007
from prior years 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 claimants. 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 such claims 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.



Plaintiffs have asserted specific dollar claims for damages in approximately 66%
of the 3,979 lawsuits that were pending against the Company at the end of 2007
in all jurisdictions. A majority of states restrict or prohibit specifying
damages in tort cases such as these, and most of the remaining jurisdictions do
not require such specification. In those cases in which plaintiffs choose to
assert specific dollar amounts in their complaints, brought in states that
permit such pleading, the amounts claimed are typically not meaningful as an
indicator of the Company's potential liability. This is because (a) the amounts
claimed typically bear no relation to the extent of the plaintiff's injury, if
any; (b) the complaints nearly always assert claims against multiple defendants
with the typical complaint asserting claims against as few as a dozen different
defendants to upwards of 275 different defendants, the damages alleged are not
attributed to individual defendants, and a defendant's share of liability may
turn on the law of joint and several liability, which can vary by state, and by
the amount of fault a jury allocates to each defendant if a case is ultimately
tried before a jury; (c) many cases are filed against the Company even though
the plaintiffs did not use any of the Company's products and, ultimately, are
withdrawn or dismissed without any payment; and (d) many cases are brought on
behalf of plaintiffs who have not suffered any medical injury, and, ultimately,
are resolved without any payment or a payment that is a small fraction of the
damages initially claimed. Of the 2,629 pending cases in which purported damage
amounts are specified in the complaints, 860 cases involve claims of $100,000 or
less, (one (1) of them also alleges punitive damages of $15,000, nine (9) of
them also allege punitive damages of $30,000, and three (3) of them also allege
punitive damages of $1,000,000); 186 cases involve claims between $100,000 and
$3 million (thirty-three (33) of them also allege punitive damages of $250,000,
one (1) of them also alleges punitive damages of $1 million, forty-three (43) of
them also allege punitive damages of $1.5 million, and 106 of them also allege
punitive damages of $2 million); two (2) cases involve claims of $3 million to
$7.5 million (one (1) also alleges punitive damages of $350,000 and one (1) of
them also alleges punitive damages of $5 million); 21 cases involve claims of
$7.5 million; four (4) cases involve claims of $7.5 million to $10 million (four
(4) of them also allege damages of $21 million); 1,540 cases involve claims of
$10 million (two (2) of them also allege punitive damages of $350,000, 1,531 of
them also allege punitive damages of $10 million, and one (1) of them also
alleges punitive damages of $15 million); 13 cases involve claims of $10 million
to $50 million (one (1) of them also allege punitive damages of $15 million,
five (5) of them also allege punitive damages of $15.5 million, and three (3) of
them also allege punitive damages of $20 million); and three (3) cases involve
claims of $50 million (two (2) of them also alleges punitive damages of $50
million). Some complaints allege that the compensatory and punitive damages are
at least the amounts specified. As stated, the Company's experience and the
other reasons cited indicate that the damage amounts specified in complaints are
not a meaningful factor in any assessment of the Company's potential liability.



As previously reported, the State of West Virginia, through its Attorney
General, filed a complaint in 2003 against the Company and two other
manufacturers of respiratory protection products in the Circuit Court of Lincoln
County, West Virginia and amended it in 2005. The amended complaint seeks
substantial, but unspecified, compensatory damages primarily for reimbursement
of the costs allegedly incurred by the State for worker's compensation and
healthcare benefits provided to all workers with occupational pneumoconiosis and
unspecified punitive damages.





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