Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of 3M's financial statements with a narrative from the perspective of management. 3M's MD&A is presented in five sections:

†          Overview

†          Results of Operations

†          Performance by Business Segment

†          Financial Condition and Liquidity

†          Forward-Looking Statements

OVERVIEW

3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. 3M manages its operations in six operating business segments: Industrial and Transportation, Health Care, Display and Graphics, Consumer and Office, Safety, Security and Protection Services, and Electro and Communications. As discussed in Note 14 to the Consolidated Financial Statements, effective in the first quarter of 2008, 3M made certain changes to its business segments. The financial information presented herein reflects the impact of these business segment changes for all periods presented.

For the three months ended September 30, 2008, sales increased 6.2 percent compared to the same period last year, even in an increasingly challenging and more uncertain global economy. Five of 3M's six business segments posted positive sales growth, led by strong growth in Safety, Security and Protection Services, Health Care and Industrial and Transportation. On a local-currency basis, sales were up 4.4 percent over the same period last year. Operating income margins were maintained at 23.1 percent in the third quarter, an excellent result in the current business climate. 3M's third quarter performance reinforced the strength of its customer focused diversified business and technology platforms, unparalled geographic reach, and 3M's relentless attention to operational excellence. These foundational pillars, along with 3M's balance sheet strength, provide stability and consistency in an uncertain global economy.

Third-quarter 2008 included a $41 million pre-tax gain related to a sale-leaseback arrangement for an existing outdated office building in Italy, which was more than offset by charges of $49 million pre-tax for severance and exit activities in several business segments as 3M aggressively balanced its business structure to a slower growth environment. Combined, these third quarter 2008 activities penalized earnings by $0.01 per diluted share, while third quarter 2007 items on a net basis benefited earnings by $0.03 per diluted share. Refer to "2008 and 2007 Items" at the end of this overview section for more detail on these items that impacted results. Including these items, 3M reported net sales of $6.558 billion and net income of $991 million, or $1.41 per diluted share, for the three months ended September 30, 2008, compared to reported net sales of $6.177 billion and net income of $960 million, or $1.32 per diluted share, for the three months ended September 30, 2007.

For the first nine months of 2008, sales increased 8.2 percent to $19.8 billion, driven by a 3.9 percent increase in local-currency sales, including acquisitions. Operating income margins were in excess of 20 percent for all six business segments, resulting in a total 3M operating income margin of 22.6 percent. In addition to the third quarter items noted in the preceding paragraph, refer to the "2008 and 2007 Items" summary at the end of this overview section for discussion of other items impacting results. The largest 2007 item was the gain on sale of businesses, primarily the global branded pharmaceuticals business in Europe, which combined with other items, benefited 2007 net income by $460 million, or $0.63 per diluted share. First nine months 2008 items resulted in a net income penalty of $54 million, or $0.08 per diluted share. Including these items, 3M reported net income of $2.924 billion, or $4.11 per diluted share for the nine months ended September 30, 2008, compared to net income of $3.245 billion, or $4.42 per diluted share, for the nine months ended September 30, 2007.

3M's product and geographical diversification enabled the Company to post good third-quarter and first nine months 2008 results, despite the weak U.S. economy, challenges in the Optical Systems business within the Display and Graphics business segment, and high commodity prices. The third-quarter and first nine months of 2008 were impacted by three principal factors:

† Strong sales and operating income performance in five of its six business segments (all except Display and Graphics)

† Ongoing tough U.S. economy, particularly in retail, automotive OEM and residential housing

† Strong international performance, except for continued slowing of, and margin compression in the Optical Systems business when compared to 2007, with international representing nearly two-thirds of 3M's worldwide sales

The following table summarizes sales and operating income results by business segment.

                             Three months ended September 30
                               2008                     2007                  % change
                        Net          Oper.         Net        Oper.       Net        Oper.
(Millions)             Sales         Income       Sales      Income      Sales       Income

Industrial and
Transportation       $    1,986    $      396   $   1,805   $     377       10.0 %       5.2 %
Health Care               1,064           294         961         259       10.7 %      13.4 %
Display and
Graphics                    853           161       1,017         283      (16.1 )%    (43.1 )%
Consumer and
Office                      946           217         899         193        5.2 %      12.7 %
Safety, Security
and Protection
Services                    974           219         766         157       27.1 %      39.6 %
Electro and
Communications              728           155         709         119        2.6 %      30.7 %
Corporate and
Unallocated                   7            71          20          37
Total Company        $    6,558    $    1,513   $   6,177   $   1,425        6.2 %       6.2 %

Worldwide total sales growth was 6.2 percent. Local-currency sales growth (which includes volume, selling price and acquisition impacts, but excludes divestiture and translation impacts) was 4.4 percent for the third quarter of 2008, including 4.0 percentage points from acquisitions. Local-currency sales increased 27.7 percent in Safety, Security and Protection Services (including 18.7 percentage points from acquisitions), 9.2 percent in Health Care (including 2.7 percentage points from acquisitions), 7.1 percent in Industrial and Transportation (including 4.2 percentage points from acquisitions), 3.7 percent in Consumer and Office (including 0.5 percentage points from acquisitions) and 0.2 percent in Electro and Communications. Local-currency sales declined 17.7 percent in Display and Graphics.

Worldwide sales growth was broad-based, with five of six segments experiencing strong sales and operating income growth in the third quarter. Security and Protection Services sales growth was led by acquisitions, primarily Aearo, along with organic growth in personal protection solutions, protective window films and cleaning solutions for commercial buildings, with geographic area sales growth led by the U.S. and Asia Pacific. Health Care sales growth was strongest in orthodontics, dental and medical, with positive sales growth in all major geographies, led by Asia Pacific and Latin America. Industrial and Transportation had broad-based sales growth across the portfolio, with strong sales growth in industrial adhesives and tapes, automotive aftermarket, abrasives, and closure systems for personal hygiene products, with strong geographic sales growth in Asia Pacific and Latin America. Sales in Consumer and Office were led by home care and the do-it-yourself markets, with sales growth geographically led by Latin America and Asia Pacific. Consumer and Office delivered U.S. sales growth of 2 percent, overcoming weakness in U.S. office mass retail channels. Electro and Communications sales growth was led by electrical markets and electronic markets materials, with geographic sales growth strongest in Asia Pacific and Latin America. The communications markets and electronics solutions businesses remain soft. 3M also continued to experience declines in the flexible circuits business where a number of product solutions are going end-of-life. Within Display and Graphics, positive sales growth in Traffic Safety Systems and Commercial Graphics was more than offset by lower sales in Optical Systems. Optical Systems sales were down 34 percent when compared to the third quarter last year, resulting in a sales decline for total Display and Graphics of 16.1 percent. However, sequential sales for Optical Systems (compared to second quarter 2008) increased 5 percent. The year-over-year challenging comparisons in Optical Systems are likely to persist through the end of 2008 or early 2009 as price and attachment rate pressure remain intense in segments of the LCD market and OEMs aggressively pursue cost reductions from their component suppliers, including 3M. Refer to the Performance by Business Segment section for a more detailed discussion of the results of the respective segments.

Geographically, Latin America and Canada led local-currency sales growth (including acquisitions) in the third quarter of 2008, with a combined increase of 15.7 percent, followed by the United States with a 7.2 percent increase and Europe, Middle East and Africa (hereafter referred to as Europe) with a 3.7 percent increase. Local-currency sales in Asia Pacific declined 2.7 percent. Asia Pacific was negatively impacted by Optical Systems sales, which were down 34 percent in that region. Excluding Optical Systems, Asia Pacific sales increased more than 10 percent on a local-currency basis. Of the local-currency sales growth, acquisitions contributed 3.9 percent to the combined Latin America and Canada, 6.8 percent to the United States, 3.3 percent to Europe, and 1.0 percent to Asia Pacific. Foreign currency translation positively impacted international sales by 3.4 percent, as the U.S. dollar weakened in aggregate against many currencies in these geographic areas. Foreign currency translation positively impacted Latin America and Canada by 5.5 percent, Europe by 4.4 percent and Asia Pacific by 1.6 percent. The combined foreign currency benefit was less than one-half of the benefit that 3M experienced in the second quarter. While difficult to predict given the current exchange rate volatility, 3M expects the sales impact from foreign currency to be in the range of negative three to negative four percent in the fourth quarter of 2008, a significant change. 3M is not immune to external economic conditions, but believes it is poised to take advantage of market opportunities presented by the current environment.

Apart from the obvious concerns about the U.S. economy, the biggest issues that 3M sees for now is a reversal of currency benefits (as discussed in the preceding paragraph) and slowing economies in Western Europe, Canada and Japan. In addition, as discussed, continued slowing of, and margin compression in the Optical Systems business when compared to 2007, has impacted results. Adjusting for Optical Systems, Asia remains reasonably strong for now, as do Latin America, the Middle East and Eastern Europe. Since cost pressure on commodities has eased somewhat, with varying degrees of success, 3M is clawing back prices that were oil or commodity based. In addition, 3M has been working to get well ahead of the cost curve and has announced eliminations in the neighborhood of 1,000 positions spanning the U.S., Europe and Asia, with Asia reductions being heavily focused on Optical. 3M will continue with similar productivity improvements in the fourth quarter. For now, 3M is in a cash preservation and build mode. Thus, among numerous actions being taken, 3M does not expect to be in the market for its stock in any meaningful way, has slowed capital expenditures, has reduced hiring in the U.S., Canada, Japan and Western Europe and is watching receivables and inventories closely. 3M will continue to invest in research and development expenditures, as 3M continues to use its business and technology platforms to pursue sensible opportunities for growth. 3M will continue to vigorously work with customers and expects to continue to win market share.

Operating income margins for the three months ended September 30, 2008 and 2007 were 23.1 percent. 3M generated $3.408 billion of operating cash flows for the nine months ended September 30, 2008, an increase of $689 million compared to the nine months ended September 30, 2007. Refer to the section entitled "Cash Flows from Operating Activities" later in the MD&A for a discussion of items impacting cash flows. For the nine months ended September 30, 2008, the Company utilized $2.649 billion of cash to repurchase 3M common stock and pay dividends. In February 2007, 3M's Board of Directors authorized a two-year share repurchase of up to $7.0 billion for the period from February 12, 2007 to February 28, 2009. As of September 30, 2008, approximately $2.6 billion remained available for repurchase, which the Company does not expect to fully utilize. In February 2008, 3M's Board also authorized a dividend increase of 4.2 percent for 2008, marking the 50th consecutive year of dividend increases for 3M. 3M's debt to total capital ratio (total capital defined as debt plus equity) as of September 30, 2008 was 37 percent. 3M has an AA credit rating, with a stable outlook, from Standard & Poor's and an Aa1 credit rating, with a negative outlook, from Moody's Investors Service. The Company has sufficient liquidity to meet currently anticipated growth and acquisition investment funding needs. While credit markets remain volatile, 3M's capital structure remains very strong. 3M will continue to manage its capital structure very carefully. Refer to the "Financial Condition and Liquidity" section later in MD&A for additional discussion.

2008 and 2007 Items:

Third quarter 2008 includes a gain on sale of real estate ($41 million pre-tax, $28 million after-tax) related to a sale-leaseback relative to an administrative location in Italy. In addition, during the third quarter of 2008, management approved and committed to undertake certain exit activities, which resulted in charges ($49 million pre-tax, $36 million after-tax) due to employee-related liabilities and fixed asset impairments. Combined, these items penalized both operating income and net income by $8 million, or $0.01 per diluted share, in the third quarter of 2008. These items are discussed in more detail in MD&A (Cash Flows from Investing Activities discussion) and in Note 4 (Restructuring Actions and Exit Activities).

First nine months 2008 also includes the sale of HighJump Software, where 3M recognized a loss ($23 million pre-tax, $32 million after-tax) in the second quarter of 2008. In the second quarter of 2008, the Company also recorded charges ($19 million pre-tax, $14 million after-tax) related to employee reductions at an Industrial and Transportation manufacturing facility located in the United Kingdom. These items are discussed in more detail in Note 2 (Acquisitions and Divestitures) and Note 4 (Restructuring Actions and Exit Activities). Combined, these second-quarter and preceding third-quarter 2008 items penalized first nine months operating income by $50 million and net income by $54 million, or $0.08 per diluted share.

In the third quarter of 2007, the Company recorded a net gain ($52 pre-tax, $37 million after-tax) related to the sale of a Korean laboratory facility. Also during the third quarter of 2007, the Company recorded a pre-tax charge ($26 million pre-tax, $17 million after-tax) related to the consolidation of its global flexible circuit manufacturing operations. This charge related to employee reductions and fixed asset impairments in the Electro and Communications business segment. Combined, these items benefited third-quarter 2007 operating income by $26 million and net income by $20 million, or $0.03 per diluted share.

First nine months 2007 also includes gains related to the sale of businesses ($854 million pre-tax, $553 million after-tax), which included the sale of 3M's Opticom Priority Control Systems and Canoga Traffic Detection businesses in the second quarter and the sale of its global branded pharmaceuticals business in Europe in the first quarter. These gains were partially offset by restructuring expenses ($45 million pre-tax, $30 million after-tax) and increases in environmental liabilities ($134 million pre-tax, $83 million after-tax). Combined, these first-half 2007 and preceding third-quarter 2007 items benefited first nine months 2007 operating income by $701 million and net income by $460 million, or $0.63 per diluted share.

RESULTS OF OPERATIONS

Percent change information compares the third quarter and first nine months of 2008 with the same period last year, unless otherwise indicated.

Net Sales:



                               Three months ended                       Nine months ended
                               September 30, 2008                       September 30, 2008
                        U.S.        Intl.       Worldwide       U.S.         Intl.        Worldwide
Net sales
(millions)            $   2,468    $  4,090    $     6,558    $   7,119    $   12,641    $    19,760
% of worldwide
sales                      37.6 %      62.4 %                      36.0 %        64.0 %
Components of net
sales change:
Volume - organic           (2.5 )%      1.0 %         (0.2 )%      (2.4 )%        2.2 %          0.5 %
Price                       2.9        (0.7 )          0.6          2.2          (1.1 )          0.1
Organic
local-currency
sales                       0.4         0.3            0.4         (0.2 )         1.1            0.6
Volume -
acquisitions                6.8         2.4            4.0          5.5           2.0            3.3
Local-currency
sales                       7.2         2.7            4.4          5.3           3.1            3.9
Divestitures               (0.7 )      (0.1 )         (0.3 )       (0.5 )           -           (0.2 )
Translation                   -         3.4            2.1            -           7.2            4.5
Total sales change          6.5 %       6.0 %          6.2 %        4.8 %        10.3 %          8.2 %

In the third quarter of 2008, worldwide sales grew 6.2 percent in U.S. dollar terms, with the U.S. up 6.5 percent and international up 6.0 percent. Worldwide, local-currency sales growth was 4.4 percent, comprised of acquisitions growth of 4.0 percent, primarily Aearo, selling price increases of 0.6 percent and organic local-currency volume declines of 0.2 percent. Foreign currency translation added 2.1 percent to third-quarter 2008 sales. Excluding the impact of the Optical Systems business, local-currency sales increased 7.8 percent as acquired volume was up 4.4 percent, selling prices increased 1.8 percent, and organic volumes increased 1.6 percent. Worldwide, local currency sales growth was led by Safety, Security and Protection Services, Health Care, and the Industrial and Transportation businesses.

In the United States, local-currency sales improved 7.2 percent when compared to last year's third-quarter. Organic sales volumes declined 2.5 percent due to the slow economic conditions, especially in the retail, housing and automotive OEM markets, while acquisitions added 6.8 percent and selling price increases added 2.9 percent. All businesses delivered U.S. price increases as 3M strived to offset the continued high price of commodities. U.S. sales growth was led by Safety, Security and Protection Services and Health Care.

International sales on a local-currency basis increased 2.7 percent in the third quarter. Organic volumes increased 1.0 percent with five of six businesses (all except Display and Graphics) posting positive organic volume growth. Selling prices declined 0.7 percent, including a 13 percent price decline in optical. Acquisitions added 2.4 percent to international local-currency growth in the quarter. Excluding Optical Systems, international local-currency sales growth was 8.2 percent, including 4.4 percent from organic volume growth, 2.7 percent from acquisitions and 1.1 percent from selling prices. Foreign currency translation increased third-quarter international sales by 3.4 percent. Refer to the "Performance by Business Segment" section for additional discussion of sales change by segment and the preceding "Overview" section for additional discussion of sales growth by geographic area.

For the first nine months of 2008, year-to-date worldwide sales were up 8.2 percent. Excluding Optical Systems, year-to-date worldwide sales increased 11.5 percent. Year-to-date worldwide local-currency sales growth was led by the Safety, Security and Protection Services, Industrial and Transportation, and Health Care businesses. In the United States, local-currency sales improved 5.3 percent. Organic sales volumes declined 2.4 percent due to slow economic conditions, while acquisitions added 5.5 percent and selling price increases added 2.2 percent. International local-currency sales growth was led by the combined Latin America and Canada area at 15 percent and Europe at 4.5 percent. Local-currency sales declined 2 percent in Asia Pacific due to a 30 percent local-currency decline in optical. Excluding optical, Asia Pacific sales in local-currencies increased by more than 9 percent over the same period last year.

Operating Expenses:



                               Three months ended                 Nine months ended
                                  September 30                       September 30
(Percent of net sales)     2008        2007      Change       2008       2007      Change
Cost of sales                52.3 %      52.4 %     (0.1 )%     52.0 %     51.7 %      0.3 %
Selling, general and
administrative
expenses                     19.3        19.0        0.3        19.9       20.5       (0.6 )
Research, development
and related expenses          5.3         5.5       (0.2 )       5.4        5.5       (0.1 )
(Gain)/loss on sale of
businesses                      -           -          -         0.1       (4.7 )      4.8
Operating income             23.1 %      23.1 %        - %      22.6 %     27.0 %     (4.4 )%

Cost of sales as a percent of net sales decreased 0.1 percentage points in the third quarter and increased 0.3 percentage points in the first nine months compared to the same periods in 2007. Cost of sales was negatively impacted in both the third quarter and first nine months due to the decline in Optical Systems sales; however, this impact was lower in the third quarter than for the first nine months as costs have been reduced in this business. The remainder of 3M's broad-based portfolio performed as expected, with benefits from selling price increases, foreign currency translation, and a continuous focus on driving operational excellence, helping to more than offset raw material inflation of nearly 5 percent in the third quarter.

Selling, general and administrative (SG&A) expenses as a percent of net sales increased 0.3 percentage points in the third quarter and decreased 0.6 percentage points in the first nine months compared to the same periods in 2007. The third quarter increase as a percent of net sales is driven by a lower net benefit in 2008 from gains on sales of real estate net of exit activities when compared to 2007 (reference "2008 and 2007 Items" at the end of the preceding overview section). The first nine months of 2008 decreased as a percent of net sales, with this decrease driven by environmental and restructuring expenses in 2007 that did not repeat in 2008.

Research, development and related expenses as a percent of net sales decreased 0.2 percentage points in the third quarter and decreased 0.1 percentage points in the first nine months compared to the same periods in 2007. R&D and related costs in dollars increased approximately 5 percent in the first nine months of 2008 as the Company continued to aggressively invest in future technologies and growth opportunities.

The gain on sale of businesses significantly benefited first nine months 2007 operating income by 4.7 percentage points, while a loss on sale of businesses penalized first nine months 2008 operating income by 0.1 percentage points. In June 2008, 3M completed the sale of HighJump Software and recognized a pre-tax loss of $23 million in the second quarter of 2008. 3M completed and recorded gains from the sale of its Opticom Priority Control Systems and Canoga Traffic Detection businesses (pre-tax gain of $68 million) in the second quarter of 2007 and from the sale of its global branded pharmaceuticals business in Europe (pre-tax gain of $786 million) in the first quarter of 2007.

Operating Income:

3M uses operating income as one of its primary business segment performance measurement tools. Operating income margins were 23.1 percent in both the third quarter of 2008 and 2007. Operating income margins for the first nine months of 2008 were significantly lower than the same period in 2007, primarily due to the benefit from gains on sale of businesses in 2007.

Interest Expense and Income:



                      Three months ended         Nine months ended
                         September 30               September 30
(Millions)            2008           2007        2008         2007
Interest expense   $       52     $       53   $     158    $     139
Interest income           (28 )          (37 )       (76 )        (94 )
Total              $       24     $       16   $      82    $      45

Interest expense increased for the first nine months of 2008 when compared to the same periods in 2007, primarily related to higher average U.S. and international long-term debt balances and higher long-term debt interest rates in the U.S., which were partially offset by lower short-term debt balances and interest rates. Interest income was lower in the third quarter and first nine months of 2008 due to lower interest rates, which were partially offset by higher average cash, cash equivalent and marketable securities balances. First nine months interest income was also lower due to other-than-temporary impairments related to auction rate securities investments (Note 7).

Provision for Income Taxes:

The tax rate for the third quarter of 2008 was higher than the third quarter of 2007, primarily due to the one-time cumulative impact of tax rate changes for several of 3M's European subsidiaries occurring in the third quarter of 2007 and adjustments to income tax reserves, which were partially offset by lower international tax rates. The tax rate for the first nine months of 2008 decreased when compared to the same period in 2007, primarily due to lower international tax rates. Refer to Note 6 for further discussion of income taxes.

. . .