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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number: 1-3285

3M COMPANY

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Note: The common stock of the Registrant is also traded on the SWX Swiss Exchange.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   Yes [X]   No [  ]   

The aggregate market value of voting stock held by nonaffiliates of the Registrant, computed by reference to the closing price and shares outstanding, was approximately $62.0 billion as of January 31, 2004 (approximately $50.5 billion as of June 30, 2003, the last business day of the Registrant’s most recently completed second quarter).

Shares of common stock outstanding at January 31, 2004: 783,623,609.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Company’s definitive proxy statement (to be filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year end of December 31, 2003) for its annual meeting to be held on May 11, 2004, are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.

This document (excluding exhibits) contains 77 pages.
The table of contents is set forth on page 2.
The exhibit index begins on page 75.

3M COMPANY
ANNUAL REPORT ON FORM 10–K
TABLE OF CONTENTS

PART 1
Item 1. Business.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
Item 6. Selected Financial Data.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
Item 14. Principal Accounting Fees and Services.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Index to Exhibits.

3M COMPANY
FORM 10-K
For the Year Ended December 31, 2003
PART I

Item 1. Business.

3M Company, formerly known as Minnesota Mining and Manufacturing Company, was incorporated in 1929 under the laws of the State of Delaware to continue operations begun in 1902. The Board of Directors of Minnesota Mining and Manufacturing Company approved changing the Company’s name to “3M Company” effective April 8, 2002. The MMM ticker symbol remained the same. As used herein, the term “3M” or “Company” includes 3M Company and its subsidiaries unless the context indicates otherwise.

Available Information

The Company files annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov.

The corporation also makes available free of charge through its website (http://investor.3M.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.

General

3M is a diversified technology company with a global presence in the following markets: health care; industrial; display and graphics; consumer and office; safety, security and protection services; electronics, telecommunications and electrical; and transportation. 3M is a global enterprise characterized by substantial intercompany cooperation in research, manufacturing and marketing of products.

3M is among the leading manufacturers of products for many of the markets it serves. In all cases, 3M products are subject to direct or indirect competition. Most 3M products involve expertise in product development, manufacturing and marketing, and are subject to competition from products manufactured and sold by other technologically oriented companies.

At December 31, 2003, the Company employed 67,072 people, with 33,329 employed in the United States and 33,743 employed internationally.

Business Segments

In September 2002, 3M announced a strategic realignment of its organization to promote faster growth and a closer focus on its markets and customers. This realignment resulted in seven new reportable business segments compared to the previous structure of six reportable business segments. These structural changes were driven by 3M’s strategic planning process and represent an important step toward better access to larger and faster-growing markets. Executive vice president appointments were effective October 1, 2002, but a three-month transition period was provided to realign the previous organization to the new structure. Internal management reporting for the new reportable business segments commenced January 1, 2003. Segment information for all periods presented has been reclassified to reflect the new segment structure.

Financial information and other disclosures relating to 3M’s business segments and operations in major geographic areas are provided in the Notes to Consolidated Financial Statements. 3M’s seven business segments bring together common or related 3M technologies, enhancing the development of innovative products and services and providing for efficient sharing of business resources. These segments have worldwide responsibility for virtually all 3M product lines. Certain small businesses and staff-sponsored products, as well as various corporate assets and expenses, are not allocated to the business segments.

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Health Care Business: The Health Care segment serves markets that include medical, surgical, pharmaceutical, dental and orthodontic, health information systems and personal care. Products provided to these markets include medical and surgical supplies, skin health and infection prevention products, pharmaceuticals, drug delivery systems, dental and orthodontic products, health information systems, microbiology products, and closures for disposable diapers.

In the medical and surgical area, 3M is a supplier of medical tapes, dressings, wound closure products, orthopedic casting materials, electrodes and stethoscopes. In infection prevention, 3M markets a variety of surgical drapes, masks and preps, as well as sterilization assurance equipment. Pharmaceutical products include immune response modifiers, respiratory products and women’s health products. Other products include drug delivery systems, such as metered-dose inhalers, transdermal skin patches and related components. Dental and orthodontic products include restoratives, adhesives, finishing and polishing products, crowns, impression materials, preventive sealants, professional tooth whiteners, prophylaxis and orthodontic appliances. In early 2001, 3M combined its German dental business with ESPE Dental AG, a leading German supplier of crowns, bridges and other dental products. In December 2002, 3M purchased the remaining 43% minority interest of these operations.

In health information systems, 3M develops and markets computer software for hospital coding and data classification, as well as providing related consulting services. 3M provides microbiology products that make it faster and easier for food processors to test the microbiological quality of food. Tape closures for disposable diapers, and reclosable fastening systems and other diaper components help disposable diapers fit better.

Industrial Business: The Industrial segment serves a broad range of industrial markets, from appliance and electronics to paper and packaging and food and beverage. Products include pressure-sensitive tapes, a wide variety of coated and non-woven abrasives, adhesives, specialty materials and supply chain execution software solutions (acquired in early 2004).

Major product lines include vinyl, polyester, foil and specialty industrial tapes and adhesives; Scotch® Masking Tape, Scotch® Filament and Scotch® Packaging Tape; packaging equipment; 3M™ VHB™ Bonding Tapes; conductive, low surface energy, hot melt, spray and structural adhesives; reclosable fasteners; label materials for durable goods; and coated, nonwoven and microstructured surface finishing and grinding abrasives for the industrial market. Other products include fluoroelastomers for seals, tubes and gaskets in engines; engineering fluids; and high-performance fluids used in the manufacture of computer chips, and for electronic cooling and lubricating of computer hard disk drives. In early 2003, 3M acquired 100% of the common shares of Solvay Fluoropolymers, with manufacturing facilities located in Decatur, Alabama. In early 2004, 3M purchased HighJump Software, Inc., a U.S. company that provides supply chain execution software and solutions.

Display and Graphics Business: The Display and Graphics segment serves markets that include electronic display, touch screen, traffic safety and commercial graphics. This segment includes optical film and lens solutions for electronic displays; touch screens and touch monitors; reflective sheeting for transportation safety; and commercial graphics systems.

Optical products include display enhancement films for electronic displays, lens systems for projection televisions, and touch screens and touch monitors. In December 2002, 3M acquired Corning Precision Lens, Inc., a manufacturer of lens systems for projection televisions. This acquisition is part of the optical systems product line. In traffic control materials, 3M provides reflective sheetings used on highway signs, vehicle license plates, construction workzone devices, trucks and other vehicles. Major commercial graphic products include equipment, films, inks and related products used to produce graphics for vehicles and signs.

Consumer and Office Business: The Consumer and Office segment serves markets that include consumer retail, office retail, education, home improvement, building maintenance, food service and other markets. Products in this segment include office supply products, stationery products, construction and home improvement/home care products, protective material products, and visual systems products.

Major consumer and office products include Scotch brand Products like Scotch® Magic™ Tapes, Scotch® Glue Stick and Scotch® Cushioned Mailer; Post-it® Note products, such as Post-it® Flags, Post-it® Memo Pads, Post-it® Labels, and Post-it® Pop-up Notes and Dispensers; home care products, including Scotch-Brite® Scour Pads, Scotch-Brite® Scrub Sponges, Scotch-Brite® Microfiber Cloth products, and O-Cel-O™ Sponges and Scotchgard™ Fabric Protectors; home improvement products, including surface-preparation and wood-finishing materials; Filtrete™ Filters for furnaces and air conditioners; and protective materials for

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furniture and fabrics. Visual communication products serve the world’s office and education markets with overhead projectors and transparency films, plus equipment and materials for electronic and multimedia presentations.

Safety, Security and Protection Services Business: The Safety, Security and Protection Services segment strives to increase the safety, security and productivity of workers, facilities and systems. This includes respiratory protection products, safety and security products, energy control products, cleaning and protection products for commercial establishments, and roofing granules for asphalt shingles.

This segment’s products include maintenance-free and reusable respirators, electronic surveillance products, films that protect against counterfeiting, and reflective materials that are widely used on apparel, footwear and accessories, enhancing visibility in low-light situations. Other products include spill-control sorbents; Thinsulate™ Insulation and Thinsulate™ Lite Loft™ Insulation; energy control products such as window films; nonwoven abrasive materials for floor maintenance and commercial cleaning; floor matting; and natural and color-coated mineral granules for asphalt shingles. In March 2004, 3M completed the acquisition of Hornell International, a global supplier of personal protective equipment.

Electro and Communications Business: The Electro and Communications segment serves manufacturers of electronic and electrical equipment, as well as the construction and maintenance segments of electric utilities, telecommunications and other industries, with products that speed the delivery of information and ideas, while also reducing costs. Products include electronic and interconnect solutions, microinterconnect systems, telecommunications products and electrical products.

Major electronic and electrical products include packaging and interconnection devices; insulating materials, including pressure-sensitive tapes and resins; and related items. 3M™ Flexible Circuits use electronic packaging and interconnection technology, providing more connections in less space, and are used in inkjet print cartridges, cell phones and electronic devices. This segment serves the world’s telecommunications companies with a wide array of products for fiber-optic and copper-based telecommunications systems.

Transportation Business: The Transportation segment serves markets that include automotive, automotive aftermarket, marine, aerospace and specialty vehicle markets. This segment provides components and products that are used in the manufacture, repair and maintenance of automotive, marine, aircraft and other specialty vehicles.

Major product categories include insulation components, including components for catalytic converters; functional and decorative graphics; corrosion and abrasion resistant films; masking tapes; fasteners and tapes for attaching nameplates, trim, moldings, interior panels and carpeting; coated, nonwoven and microstructured finishing and grinding abrasives; structural adhesives; and other specialty materials.

Distribution

3M products are sold through numerous distribution channels. Products are sold directly to users and through numerous wholesalers, retailers, jobbers, distributors and dealers in a wide variety of trades in many countries around the world. Management believes the confidence of wholesalers, retailers, jobbers, distributors and dealers in 3M and its products, developed through long association with skilled marketing and sales representatives, has contributed significantly to 3M’s position in the marketplace and to its growth. 3M has 197 sales offices worldwide, with 12 in the United States and 185 internationally.

Research, Patents and Raw Materials

Research and product development constitute an important part of 3M’s activities. Products resulting from research and development have been a major driver of 3M’s growth. Research, development and related expenses totaled $1.102 billion in 2003, $1.070 billion in 2002 and $1.084 billion in 2001. Research and development, covering basic scientific research and the application of scientific advances to the development of new and improved products and their uses, totaled $749 million in 2003, $738 million in 2002 and $745 million in 2001. Related expenses primarily include technical support provided to customers for existing products by 3M laboratories.

Consistent with 3M’s corporate reorganization, 3M also realigned its research and development efforts in 2003. This realignment was designed to develop technologies needed for the future, to more closely align technical resources with business priorities, and to shorten the distance between research and development and 3M’s customers. 3M established a single global Corporate Research Laboratory, which brings together more than

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600 researchers focused on technology building while also freeing approximately 400 other 3M technical people to directly support the growth of 3M business units.

The Company’s products are sold around the world under various trademarks which are important to the Company. The Company also owns, or holds licenses to use, numerous U.S. and foreign patents. The Company’s research and development activities continuously generate new patents. Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country.

The Company believes that its patents provide an important competitive advantage in many of its businesses. In general, no single patent or group of related patents is in itself essential to the Company as a whole or to any of the Company’s business segments. The importance of patents in the Health Care and Display and Graphics segments is described in “Performance by Business Segment — Health Care Business” and “Display and Graphics Business” in Part II, Item 7, of this Form 10-K.

The Company experienced no significant problems in the purchase of raw materials during 2003, although the Company experienced upward pressure on certain raw material pricing in 2003, which it expects to continue in 2004. It is impossible to predict future shortages of raw materials or the impact any such shortages would have.

Environmental Law Compliance

3M’s manufacturing operations are affected by foreign, national, state and local environmental laws. 3M has made, and plans to continue making, necessary expenditures for compliance with applicable laws. 3M is also involved in remediation actions relating to environmental matters from past operations at certain sites (refer to Part I, Item 3, Legal Proceedings).

Environmental expenditures relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed. Environmental expenditures for capital projects that contribute to current or future operations generally are capitalized and depreciated over their estimated useful lives.

In 2003, 3M expended about $34 million for capital projects related to protecting the environment. The comparable amount in 2002 was about $21 million. These amounts exclude expenditures for remediation actions relating to existing matters caused by past operations. Capital expenditures for environmental purposes have included pollution control devices — such as wastewater treatment plant improvements, scrubbers, containment structures, solvent recovery units and thermal oxidizers — at new and existing facilities constructed or upgraded in the normal course of business. Consistent with the Company’s policies stressing environmental responsibility, average annual capital expenditures (other than for remediation projects) are presently expected to be about $43 million over the next two years for new or expanded programs to build facilities or modify manufacturing processes to minimize waste and reduce emissions.

While we cannot predict with certainty the future costs of such clean-up activities, capital expenditures or operating costs for environmental compliance, we do not believe they will have a material effect on our capital expenditures, earnings or competitive position.

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Executive Officers

Following is a list of the executive officers of 3M, their ages, present positions, the years elected to their present positions and other positions held during the past five years. No family relationships exist among any of the executive officers named, nor is there any arrangement or understanding pursuant to which any person was selected as an officer.

Item 2. Properties.

3M’s general offices, corporate research laboratories, and certain division laboratories are located in St. Paul, Minnesota. In the United States, 3M has 12 sales offices in 10 states and operates 61 manufacturing facilities in 23 states. Internationally, 3M has 185 sales offices. The Company operates 75 manufacturing and converting facilities in 28 countries outside the United States.

3M owns substantially all of its physical properties. 3M’s physical facilities are highly suitable for the purposes for which they were designed. Because 3M is a global enterprise characterized by substantial intersegment cooperation, properties are often used by multiple business segments.

Item 3. 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 describes the liabilities and associated insurance receivables the Company has accrued relating to its significant legal proceedings.

Antitrust Litigation

LePage’s Inc., a transparent tape competitor of 3M, filed a lawsuit against the Company in June 1997 in the United States District Court for the Eastern District of Pennsylvania alleging that certain marketing practices of the Company constituted unlawful monopolization under the antitrust laws. LePage’s obtained a jury verdict of $22.8 million against the Company in 1999 (automatically trebled under the law). In the first quarter of 2003, the United States Court of Appeals for the Third Circuit en banc affirmed the verdict and the Company

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recorded pre-tax charges of $93 million ($58 million after tax) to reflect this judgment with interest through March 31, 2003, and LePage’s estimate of its attorneys’ fees. 3M petitioned the United States Supreme Court to review the Third Circuit’s ruling.

The Supreme Court on October 6, 2003, invited the Solicitor General to express the views of the United States on the Company’s pending request that the Supreme Court agree to hear its appeal from the Third Circuit’s ruling of March 26, 2003, affirming the trial verdict. The Supreme Court is not expected to act on the Company’s petition to review the Third Circuit’s ruling until after the government files its brief with the Court. Notably, on January 13, 2004, the Supreme Court unanimously dismissed a monopolization claim in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP. The Company’s petition to review the Third Circuit’s ruling filed in June 2003 alternatively asked the Supreme Court to consider vacating the LePages’ ruling and remanding it for further proceedings to the Court of Appeals if the Supreme Court rejected the monopoly claim in Verizon on grounds applicable to the LePage’s decision.

Following the LePage’s verdict and appellate ruling, certain direct and indirect tape purchasers filed seven purported class actions against the Company in various state and federal courts in California, Florida, Tennessee, New Jersey and Pennsylvania. Of the seven, two cases have been dismissed, one on a motion to dismiss for failure to state a claim and the other on a motion for summary judgment. The summary judgment award is now on appeal and the plaintiff in the dismissed complaint has filed an amended complaint. Of the remaining five cases, two have the Company’s motions to dismiss pending, one has been stayed pending the outcome of the Supreme Court proceedings in LePage’s, one has the Company’s motion to coordinate with the stayed case pending, and one, pending in the federal court in Philadelphia, is in active discovery proceedings, the court having denied the Company’s dismissal motion. The plaintiff’s motion for class certificati on, which the Company has opposed, is currently under consideration by that court.

Breast Implant Insurance Recovery and Related Litigation

The Company and certain other companies were named as defendants in a number of 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.

The Minnesota Supreme Court ruled primarily in favor of 3M in litigation with its insurers over insurance coverage for breast implant claims on August 21, 2003. The court’s ruling confirms insurance coverage owed to 3M by 29 insurers remaining in the case and holds that these insurers are liable up to the limits of their respective policies. The Minnesota Supreme Court denied the insurers’ petition for rehearing on September 29, 2003. 3M expects to collect approximately $250 million from these insurers as a result of this decision. This event will not affect 3M’s earnings, as the amount received will offset a portion of a previously recorded insurance receivable. Subsequent proceedings to effectuate the ruling are in progress. As part of these proceedings, the insurers filed in February 2004, motions for partial relief from paying portions of the amounts due under the Minnesota Supreme Court decision. The Company believes it unlikely that such relief will be granted.

A hearing was conducted in September 2003, in the arbitration proceeding in London, England, brought by the Company to recover insurance coverage for some of its breast implant liability and costs from certain claims-made insurance carriers. The Company expects a decision on whether coverage exists from the arbitration panel in the first half of 2004. If the panel decides the coverage question in the Company’s favor, it will then determine the amount, if any, of coverage in a subsequent proceeding expected to occur in the fall of 2004.

On September 15, 2003, a three-judge panel of the U.S. Court of Appeals for the Eleventh Circuit reversed, in part, the dismissal of a lawsuit by the United States against the Company and other defendants seeking reimbursement of the cost of medical treatment under Medicare provided to certain women with breast implants from the Company and other breast implant manufacturers, and remanded the case to the District Court for further proceedings. On December 23, 2003, the U.S. Court of Appeals for the Eleventh Circuit denied the petition for rehearing filed by the defendants and the matter will return to the United States District Court for pretrial discovery and other proceedings. Because relatively few breast implant claimants were eligible for Medicare payments, the Company does not expect any judgment or settlement to be material.

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Respirator Mask/Asbestos Litigation

For more than 20 years, the Company has defended and resolved the claims of over 300,000 individual claimants alleging injuries from occupational dust exposures. As of December 31, 2003, the Company is a named defendant, with multiple co-defendants, in numerous lawsuits in various courts that purport to represent approximately 88,700 individual claimants, an increase from the 45,000 individual claimants with actions pending at December 31, 2002. The Company experienced in the first half of 2003 an increase in the number of claims and an increase in the proportion of silica-related claims in contrast to asbestos-related claims (which nonetheless continue to represent the large majority of the total claims). The total number of new claimants filing claims against the Company during the second half of 2003 declined somewhat from the first half, but the proportion of silica-related claims relative to total claims continued at a rate that is higher than the Company’s histo rical experience. The Company believes that much of the increased number of claims filed in 2003 is due to claimants filing claims before recent and anticipated tort reform legislation affecting asbestos-related actions might become effective and that many of these newer claims have been asserted on behalf of asymptomatic claimants.

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 work-place exposures to asbestos, silica or other occupational dusts, found in products manufactured by other defendants or generally in the workplace. The remaining claimants generally allege personal injury from occupational exposure to asbestos from products previously manufactured by the Company, which are often unspecified, and 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 involved 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: (i) dismissals of many lawsuits without any payment by the Company; (ii) an average settlement value of less than $1,000 per claimant for all of the claims and lawsuits that the Company has resolved including those dismissed without payment; and (iii) jury verdicts for the Company in four of the five cases tried to verdict.

Of the five cases the Company has taken to trial, two were tried in 2003 and both resulted in the juries exonerating the Company of any liability. One jury verdict involving a single plaintiff was returned on October 24, 2003, in Orange County, Texas, and the other, involving two plaintiffs was returned on December 10, 2003, in Jefferson County, Texas. All three plaintiffs had sought to recover damages from the Company arising from their alleged silicosis, which they claimed to have contracted from occupational exposure to silica despite their purported use of the Company’s respirator mask equipment at various times.

The single jury verdict adverse to the Company was returned in Holmes County, Mississippi in 2001. The plaintiffs in that case claimed that a 3M respirator and mask did not protect them against contracting certain asbestos-related diseases allegedly caused by exposure to asbestos-containing products manufactured by other defendants. Based on the jury’s findings of percentage of fault attributable to each defendant, the Company’s share of the verdict was $22.5 million. The verdict is the subject of an appeal now pending in that state’s Supreme Court.

Plaintiffs have asserted specific dollar claims for damages in approximately 60% of the 9,315 lawsuits that were pending against the Company at the end of 2003 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 an average of 88 different defendants, the damages alleged are not attributed to individual defendants, and a defendant’s share of liability may tu rn 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

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damages initially claimed. Of the 5,569 pending cases in which purported damage amounts are specified in the complaints, 4,344 cases involve claims of $100,000 or less, 143 cases involve claims between $100,000 and $3 million (8 of these cases also allege punitive damages of $250,000, 1 of them also alleges punitive damages of $1 million, 4 of them also allege punitive damages of $1.5 million, and 57 of them also allege punitive damages of $2.5 million), 69 cases involve claims of $7.5 million, 1,007 cases involve claims of $10 million (1 of these cases also alleges punitive damages of $350,000, 1 of them also alleges punitive damages of $3 million, and 909 of them also allege an equal amount in punitive damages), and 6 cases involve claims of $50 million (all of which also allege punitive damages of $50 million). Some complaints allege that the compensatory and punitive damages are at least the amounts specified. As previously stated, the Company has more than 20 yea rs of experience in defending litigations of this type, has resolved the claims of over 300,000 individuals with a cumulative average settlement amount of less than $1,000 per claimant, and based on this experience and for the other reasons cited, believes that the damage amounts specified in complaints are not a meaningful factor in any assessment of the Company’s potential liability.

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. The 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 more than 20,000 current or former miners allegedly suffering from silicosis and/or coal miner’s pneumoconiosis (“Black Lung disease”). The complaint also seeks unquantified punitive damages. The Company removed the case to federal court and the State of West Virginia is seeking to remand the case to state court. The Company and the co-defendants have filed a motion to dismiss the case. The Company believes the allegations have no merit and is vigorously defending this lawsuit.

Commercial Matter

The Company has notified Corning Incorporated that the Company seeks compensation for breach of certain representations and warranties contained in the Stock Purchase Agreement between 3M and Corning Incorporated for the acquisition of Corning Precision Lens, Inc. Efforts to resolve the issues under the dispute resolution provisions of the Stock Purchase Agreement are in progress with a current focus on the extent to which the portion of the purchase price held in escrow since the acquisition (about $50 million) should be released to Corning, and the extent of continuing future indemnity obligations of Corning.

Environmental Matters

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

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

Regulatory Activities: The Company has been voluntarily cooperating with ongoing reviews by the U.S. Environmental Protection Agency (EPA) and international agencies of possible environmental and health effects of perfluorooctanyl chemistry. The previously disclosed EPA consent order negotiating process to obtain additional information to enable the EPA to further develop a human health risk assessment and identify routes of exposure concerning one perfluorooctanyl compound is in progress. The EPA is developing a draft risk assessment on that compound that will express the EPA’s assessment in terms of the margin of exposure between the levels of that compound that it believes may cause possible adverse health effects in laboratory

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animals and the levels found in human blood sera in the worldwide population and subgroups. The Company expects that the EPA’s Science Advisory Board will review the draft risk assessment in 2004. As a result of its phase-out decision in May 2000, the Company no longer manufactures perfluorooctanyl compounds except that a subsidiary produces limited quantities of one compound for its own industrial use, and utilizes recycling technology that reduces the demand for new production of that compound on behalf of one customer and is offering to license it to others.

The EPA is also considering the addition of this perfluorooctanyl compound and possibly a second encompassed in the Company’s phase-out decision to its Integrated Risk Information System, an EPA database that reports the EPA’s assessment of the possible human health effects that may result from exposure to certain compounds. The Centers for Disease Control and Prevention recently identified several perfluorooctanyl compounds and other fluorinated substances, certain of which have been or are produced by the Company, that it plans to include in a future National Report(s) on Human Exposure to Environmental Chemicals.

The Company markets its newly reformulated Scotchgard™ replacement products pursuant to a consent agreement with the EPA that requires extensive health and environmental effects testing of the base chemistry underlying such products, most of which has been completed. The EPA has indicated that it plans to prepare a hazard assessment of that health and environmental effects testing in 2004.

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

Litigation: The Company continues to vigorously defend a purported class action lawsuit involving perfluorooctanyl chemistry that was originally filed in 2002 against the Company by a former employee in the Circuit Court of Morgan County, Alabama. The lawsuit seeks unstated compensatory and punitive damages and alleges that the plaintiffs suffered fear, increased risk, and sub clinical injuries from exposure to perfluorooctanyl chemistry at or near the Company’s Decatur, Alabama, manufacturing facility. The complaint also alleges that the Company acted improperly with respect to disclosures to workers concerning such chemistry. The Company is awaiting a decision from the court on the Company’s motion to dismiss the complaint that was heard on December 10, 2003. The Company has pending its motion to dismiss the class action allegations.

In the third quarter of 2003, several hundred plaintiffs who claim to have lived in the vicinity of the ACME Barrel Company’s storage drum reconditioning facility in Chicago filed a lawsuit in the Circuit Court of Cook County, Illinois, against 3M and a number of other companies that allegedly were customers of ACME Barrel. The complaint seeks unspecified damages for personal injuries and death allegedly caused by the plaintiffs’ exposure to chemicals migrating from ACME Barrel’s drum reconditioning operations. The plaintiffs also assert that a class should be certified on behalf of all persons similarly situated. A separate wrongful death lawsuit was filed in the Circuit Court of Cook County, Illinois, against 3M and a number of other companies on behalf of the estate and family of a person who worked at the Cook County Juvenile Detention Center in the vicinity of the ACME Barrel facility. The lawsuit alleges unspecified damages from personal injuries and death alleg edly caused by exposure to chemicals migrating from ACME Barrel’s drum reconditioning operations. The Company is vigorously defending these lawsuits.

Accrued Liabilities and Insurance Receivables Related to Legal Proceedings

The Company complies with the requirements of Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”, and related guidance, and records liabilities for legal proceedings in those instances where it can reasonably estimate the amount of the loss and where liability is probable. Where the reasonable estimate of the probable loss is a range, the Company records the most likely estimate of the loss, or the low end of the range if there is no one best estimate. The Company either discloses the amount of a possible loss or range of loss in excess of established reserves if estimable, or states that such an estimate cannot be made. For those insured matters where the Company has taken a reserve, the Company also records receivables for the probable amount of insurance that it expects to recover under the Company’s insurance program. For those insured matters where the Company has not taken a reserve because the liability is not probable or t he amount of the liability is not estimable, or both, but where the Company has incurred an expense in defending itself, the Company records receivables for the probable amount of insurance that it expects to recover for the expense incurred. The Company discloses significant legal proceedings even where liability is not probable or the amount of the liability is not estimable, or both, if the Company believes there is at least a reasonable possibility that a loss may be incurred.

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Because litigation is subject to inherent uncertainties, and unfavorable rulings or developments could occur, there can be no certainty that the Company may not ultimately incur charges in excess of presently recorded liabilities. A future adverse ruling or unfavorable development could result in future charges that could have a material adverse effect on the Company’s results of operations or cash flows in the period in which they are recorded. The Company currently believes that such future charges, if any, would not have a material adverse effect on the consolidated financial position of the Company, taking into account the significant available insurance coverage for products liability claims. Based on experience and developments in the litigation, the Company periodically reexamines its estimates of probable liabilities and associated expenses and receivables, and whether it is able to estimate a liability previously determined to be not estimable and/or not probable. Wher e appropriate, the Company makes additions to or adjustments of its estimated liabilities. As a result, the current estimates of the potential impact on the Company’s consolidated financial position, results of operations and cash flows for the legal proceedings and claims pending against the Company could change in the future.

The following table shows the major categories of claims for which the Company has been able to estimate its probable liability and for which the Company has taken reserves and the related insurance receivables (if any):

For those significant pending legal proceedings that do not appear in the table, the Company has determined that liability is not probable or the amount of the liability is not estimable, or both, and the Company is unable to estimate the possible loss or range of loss at this time. The amounts in the preceding table with respect to breast implant, the LePage’s verdict, and environmental remediation represent the Company’s best estimate of the respective liabilities.

Breast Implant Insurance Receivables — As of December 31, 2003, the Company had receivables for insurance recoveries related to the breast implant matter of $338 million, representing amounts covered by the Minnesota ruling against the insurers but yet to be received (approximately $250 million), amounts sought from insurance carriers in the London arbitration, and other amounts that have been claimed from various re-insurers, the Minnesota Insurance Guaranty Association, and the estates of certain insolvent insurance carriers. Various factors could affect the timing and amount of proceeds to be received under the Company’s various insurance policies, including (i) additional delays in or avoidance of payment by insurers; (ii) the extent to which insurers may become insolvent in the future, and (iii) the outcome of the pending legal proceedings involving the insurers. There can be no absolute assurance that the Company will collect all amounts recorded as being probable of recovery fr om its insurers.

Respirator Mask/Asbestos Liabilities and Insurance Receivables — The Company estimates its respirator mask/asbestos liabilities, both the cost to resolve the claim and defense costs, by examining: (i) the Company’s experience in resolving claims, (ii) apparent trends, (iii) the apparent quality of newly-filed claims (e.g., the Company believes many of the recently filed claims have been asserted on behalf of asymptomatic claimants), (iv) changes in the nature and mix of claims (e.g., the proportion of claims asserting usage of the Company’s mask or respirator products and alleging exposure to each of asbestos, silica or other occupational dusts, and claims pleading use of asbestos-containing products allegedly manufactured by the Company), (v) the number of current claims and an assumption for projection of the number of future asbestos and other claims that may be filed against the Company, (vi) the cost to resolve recently settled claims, and (vii) an estimate of the cost to resolve and defend against current and future claims. Because of the inherent difficulty in projecting claims that have not yet been asserted, particularly with respect to the Company’s respiratory products that themselves did not contain any harmful materials (which makes the various published studies that purport to project future asbestos claims substantially removed from the Company’s principal experience and which themselves vary widely) the Company does not believe that there is any single best estimate of this liability, nor that it can reliably estimate the amount or range of amounts by which the liability may exceed the reserve the Company has established.

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The Company’s current estimate of its liabilities and associated expenses for respirator mask/asbestos litigation is based on facts and circumstances existing at this time. Additional developments may occur that could affect the Company’s estimate of its liabilities and associated expenses. These developments include, but are not limited to significant changes in (i) the number of future claims, (ii) the average cost of resolving claims, (iii) the legal costs of defending these claims and in maintaining trial readiness, (iv) changes in the mix and nature of claims received, (v) changes in the law and procedure applicable to these claims, (vi) the financial viability of other co-defendants and insurers, and (vii) other unknown variables. The Company cannot determine the impact of these potential developments on the current estimate of its liabilities and associated expenses. Congress is currently considering legislation that would terminate essentially all litigation relate d to asbestos (but not other occupational dusts) in exchange for substantial annual payments by the defendant companies and their insurers and accordingly such legislation if enacted would bring considerable certainty to the assessment of the Company’s future asbestos-related liability; the Company supports such legislation in principle, although the proposed legislation could cause the Company to record substantial additional liabilities.

As a result of the larger caseload and the costs of aggressively defending itself, the Company made payments of $103 million and increased its reserves in 2003 for the respirator mask/asbestos liabilities by $231 million to $289 million at December 31, 2003. No liability has been recorded for the one respirator mask adverse trial verdict now on appeal to the Mississippi Supreme Court because the Company believes that judgment will be overturned, nor for the pending action brought by the West Virginia Attorney General previously described.

As of December 31, 2003, the Company had receivables for insurance recoveries related to the respirator mask/asbestos litigation of $448 million. The Company increased its receivables in 2003 for insurance recoveries related to respirator mask/asbestos litigation by $205 million and received payments from insurers of $21 million. While the Company has substantial remaining claims-made and occurrence (pre-1986) insurance coverage, future estimates of additional insurance receivables are likely to represent a lower percentage, than in the past, of future estimates of additional liabilities, if any, due to lesser though still significant remaining coverage in the higher layers of the Company’s occurrence (pre-1986) insurance coverage. Various factors could affect the timing and amount of proceeds to be received under the Company’s various insurance policies, including (i) delays in or avoidance of payment by insurers; (ii) the extent to which insurers may become insolven t in the future, and (iii) the outcome of the currently ongoing negotiations and possible future legal proceedings with respect to respirator mask/asbestos liability insurance coverage. There can be no absolute assurance that the Company will collect all amounts recorded as being probable of recovery from its insurers.

The difference between the accrued liability and insurance receivable represents the time delay between payment of claims and receipt of insurance reimbursements. Because of the lag time between settlement and payment of a claim, no meaningful conclusions may be drawn from quarterly changes in the amount of receivables for expected insurance recoveries and the quarterly changes in the number of claimants at the end of each quarter.

Environmental Remediation Liabilities and Insurance Receivables — As of December 31, 2003, the Company had recorded liabilities of $41 million for estimated environmental remediation costs based upon an evaluation of currently available facts with respect to each individual site and also recorded related insurance receivables of $16 million. The Company records liabilities for remediation costs 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. Liabilities for estimated costs of environmental remediation are, depending on the site, based primarily upon internal or third-party environmental studies, and estimates as to the number, participation level and financial viability of any other potentially responsible parties, the extent of the contamination and the nature of required remedial actions. The Company adjusts recorded liabilities as further informat ion develops or circumstances change. The Company expects that it will pay the amounts recorded over the periods of remediation for the applicable sites, currently ranging up to 30 years. Amounts expensed for environmental remediation activities were not material at these locations, nor have there been material changes in the recorded liabilities for environmental matters.

It is difficult to estimate the cost of environmental compliance and remediation given the uncertainties regarding the interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination and the existence of alternate cleanup methods. The Company’s current assessment of the probable liabilities and associated expenses related to such environmental matters is based on the facts and circumstances known at this time. Developments may occur that could affect the Company’s assessment, including, but not limited to: (i) changes in the information available regarding the environmental

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impact of the Company’s operations and products; (ii) changes in environmental regulations or enforcement policies, including efforts to recover natural resource damages; (iii) new and evolving analytical and remediation techniques; (iv) success in allocating liability to other potentially responsible parties; and (v) the financial viability of other potentially responsible parties and third-party indemnitors. The Company cannot determine the impact of these potential developments on the current estimate of its probable liabilities and associated expenses.

Item 4. Submission of Matters to a Vote of Security Holders.

None in the quarter ended December 31, 2003.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

Equity compensation plans information is incorporated by reference from Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management, of this document, and should be considered an integral part of Item 5. At January 31, 2004, there were approximately 125,636 shareholders of record. 3M’s stock is listed on the New York Stock Exchange, Inc. (NYSE), Pacific Exchange, Inc., Chicago Stock Exchange, Inc. and SWX Swiss Exchange. Cash dividends declared and paid totaled $.33 per share for each quarter of 2003, and $.31 per share for each quarter of 2002. All share and per share data has been adjusted to reflect the two-for-one stock split effective with third quarter 2003 reporting. Stock price comparisons follow:

Stock price comparisons (NYSE composite transactions)

Item 6. Selected Financial Data.

All share data has been adjusted to reflect the two-for-one stock split effective with third quarter 2003 reporting. The above income and earnings per share information exclude the cumulative effect of accounting change in 2000 ($75 million, or 9 cents per diluted share) related to a change in the Company’s revenue recognition policies. These policies were consistent with the guidance contained in SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”.

As discussed in the Notes to Consolidated Financial Statements, 2003 special items reduced operating income by $93 million ($58 million after tax), or 7 cents per diluted share, related to an adverse ruling in a lawsuit filed against 3M in 1997 by LePage’s Inc. 2002 special items reduced operating income by $202 million ($108 million after tax and minority interest), or 13 cents per diluted share, related to charges in connection with 3M’s restructuring plan. 2001 special items reduced operating income by $504 million ($312 million after tax and

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minority interest), or 39 cents per diluted share, principally related to charges in connection with 3M’s restructuring plan, acquisition-related charges, a reversal of a 1999 litigation accrual, and a net gain related to the sale of available-for-sale equity securities, partially offset by the write-down of available-for-sale equity securities.

2000 special items reduced operating income by $23 million ($15 million after tax), or 2 cents per diluted share, related to charges recorded for the Company’s phase-out of its perfluorooctanyl-based chemistry products, a write-down of certain corporate and unallocated assets, gains related to corporate and unallocated asset dispositions, a gain from the termination of a product distribution agreement in the Health Care segment, and other special items. 1999 includes a net gain of $100 million ($52 million after tax), or 7 cents per diluted share, related to gains on divestitures, litigation expense, an investment valuation adjustment, and a change in estimate that reduced 1998 restructuring charges.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products. 3M manages its operations in seven operating business segments: Health Care; Industrial; Display and Graphics; Consumer and Office; Safety, Security and Protection Services; Electro and Communications; and Transportation. Despite continued challenging global economic conditions in 2003, particularly in the United States and Europe, 3M made significant progress toward its objective of driving long-term, sustainable improvements in sales, profitability and cash flow. In 2003, 3M reported record net sales of $18.232 billion and record net income of $2.403 billion, or $3.02 per diluted share, compared with net sales of $16.332 billion and net income of $1.974 billion, or $2.50 per diluted share, in 2002. The combination of an 11.6% increase in net sales, including core volume sales growth of 4.7%, and declining operating expenses as a percent of sales, resulted in a 20.4% operating income profit margin. The following table summarizes sales and operating income results in millions by business segment for the years ended December 31.

Sales growth in 2003 was strongest in the Display and Graphics segment and the Safety, Security and Protection Services segment, helped by sales of display enhancement films used in flat panel devices and sales of respirator masks, which benefited from concerns related to Severe Acute Respiratory Syndrome. Sales were also helped by broad-based growth in most of the Health Care segment and growth related to construction and home improvement/home care in the Consumer and Office segment. Electro and Communications was the only segment to report a decrease in sales revenues as the telecommunications industry remained weak in 2003. Refer to the Performance by Business Segment section for a more detailed discussion of the results for the respective segments.

Asia Pacific local currency sales increased 19.8%, with the strongest growth in China and Korea. All seven business segments contributed to this increase. U.S. sales revenue improved 2.1%, with growth in five of the seven segments, but overall growth was held back by the continued softness in the Industrial and Electro and Communications segments. Foreign currency translation positively impacted European sales by 15.3% and

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Asia Pacific sales by 6.5%, as the U.S. dollar weakened against these currencies. Refer to the Performance by Geographic Area section for a more detailed discussion of the results for the respective regions.

Operating income in 2003 increased by 21.9% versus 2002, as six of seven business segments posted increases. The combination of solid sales growth, positive benefits from 3M’s corporate initiatives and savings from the last piece of the 2001/2002 corporate restructuring program drove the operating income increase. These initiatives — Six Sigma, Global Sourcing Effectiveness, 3M Acceleration, eProductivity and Indirect Cost Control — contributed over $400 million in aggregate operating income benefits in 2003. Currency impacts, related primarily to the weaker U.S. dollar, boosted 2003 operating income by an estimated $111 million, although the Company absorbed a similar amount of expenses via a series of productivity actions.

3M generated $3.773 billion of operating cash flows in 2003, a $781 million increase over 2002, and ended the year with $1.836 billion of cash and cash equivalents. Cash flow in 2003 was driven by improved net income, working capital improvements and tax timing differences. In 2003, the Company utilized $1.719 billion of cash to repurchase 3M common stock and pay dividends, and contributed $749 million to its pension plans. 3M’s debt to total capital ratio (total capital defined as debt plus equity) as of December 31, 2003, was approximately 27%. 3M has an AA credit rating from Standard & Poor’s and an Aa1 credit rating from Moody’s Investors Service.

In 2004, 3M will continue to focus on improving its top-line growth rate, with primary emphasis on driving higher organic, or core, growth. 3M is looking for broader-based product performance to contribute to its growth, in addition to expected continued growth in optical film products, and will also continue to assess potential acquisitions. Stronger core growth will require both faster growth of existing products/services and successful introduction of new products, including sales of 3M’s immune response modifier pharmaceutical to treat two new indications (superficial basal cell carcinoma and actinic keratosis) once anticipated regulatory approval has been obtained. The Company also is focused on its corporate initiatives to improve productivity and reduce costs. 3M’s corporate initiatives are expected to contribute an additional $400 million to operating income in 2004. Increased pension expense is expected to reduce operating income by approximately $165 million. As in 2003 and 2002, the Company will consider the need for additional contributions to its pension plans. Fluctuations in foreign currency exchange rates may also impact results, although the Company expects to hedge about half of this impact. 3M will also continue, as it has for many years, to incur expenses (insured and uninsured) in managing its litigation and environmental contingencies. By improving organic sales volume growth, driving its costs and productivity initiatives, and making appropriate disciplined acquisitions, 3M expects to achieve solid growth in sales and income for 2004. These forward-looking statements involve risks and uncertainties that could cause results to differ materially from those projected (refer to the forward-looking statements discussion later in Item 7 for discussion of these risks and uncertainties).

INDEX TO MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPEATIONS:

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Stock Split:

On August 11, 2003, 3M’s Board of Directors declared a two-for-one split of the Company’s common stock. The stock split was in the form of a stock dividend of one additional share for each share owned by stockholders of record and each share held in treasury as of the close of business on September 22, 2003, and was distributed on September 29, 2003. All share and per share information has been adjusted in the accompanying financial statements and related notes to reflect this split.

Special Items:

Special items represent significant charges or credits that are important to understanding the Company’s ongoing operating results. Special items are not measures recognized under U.S. generally accepted accounting principles. The determination of special items may not be comparable to similarly titled measures used by other companies.

In 2003, 3M recorded pre-tax charges of $93 million ($58 million after-tax, or 7 cents per diluted share) related to an adverse ruling in a lawsuit filed against 3M in 1997 by LePage’s Inc. The pre-tax charge of $93 million has been classified as “Other expense” within operating income. For more detail, refer to the discussion of “Legal Proceedings” in Part I, Item 3 of this document.

In 2002, special items reduced operating income by $202 million and net income by $108 million, or 13 cents per diluted share. These charges principally related to employee severance and benefit costs, accelerated depreciation charges, and other associated exit costs under the Company’s restructuring plan announced in June 2001. These charges are included in cost of sales ($121 million); selling, general and administrative expenses ($77 million); and research, development and related expenses ($4 million). For more detail, refer to the discussion in Note 4 to the Consolidated Financial Statements (2001/2002 Corporate Restructuring Program).

In 2001, special items reduced operating income by $504 million and net income by $312 million, or 39 cents per diluted share. Special items of $569 million, principally related to the Company’s restructuring plan approved in June 2001, were included in cost of sales ($249 million); selling, general and administrative expenses ($300 million); and research, development and related expenses ($20 million). In addition, cost of sales included other special items of $23 million related to acquisition costs. Special items included in the other expense (income) line within operating income in 2001 included $73 million of income due to the reversal of a 1999 litigation accrual related to 3M’s successful appeal in January 2002 in an antitrust case brought by LePage’s Inc. On February 25, 2002, the Third Circuit Court of Appeals vacated its prior ruling and ordered a re-hearing by the full court. For the latest developments, refer to the discussion of “Legal Proceedin gs” in Part I, Item 3 of this document. Also included within the other expense (income) line within operating income is a net gain of $15 million related to the sale of available-for-sale equity securities, partially offset by the write-down of permanently impaired available-for-sale equity securities.

Corporate Initiatives:

In 2003, the Company continued to drive its five corporate initiatives (Six Sigma, Global Sourcing Effectiveness, 3M Acceleration, eProductivity and Indirect Cost Control) aimed at accelerating long-term top-line growth, improving cash flow and lowering its total cost structure. Six Sigma focuses on higher growth, productivity and cash flow. Global Sourcing Effectiveness generates savings by leveraging purchasing economies of scale, aggressively enforcing supply agreements, geographic broadening and e-applications. Through its 3M Acceleration initiative, the Company is driving towards more and better new product ideas and faster, more impactful new product introductions, along with reallocating research and development resources to larger, more global projects. In eProductivity, 3M believes it has a significant opportunity to improve productivity for its customers, suppliers and for 3M itself. Indirect Cost Control focuses on reducing costs not directly associated with products or s ervices. In 2004, the Company estimates its corporate initiatives could contribute an additional $400 million to operating income. There can be no assurance that all of the estimated cost savings from such activities will be realized. Numerous factors may create offsets to these savings, such as the potential for weakness in sales volumes, normal increases in compensation and benefits, and other inflationary pressures. The Company estimates that these initiatives provided a combined benefit to operating income of more than $400 million in 2003, after contributing more than $500 million to operating income in 2002.

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2001/2002 Corporate Restructuring Program:

The 2001/2002 corporate restructuring program actions were substantially completed by June 30, 2002. The Company estimates incremental savings under this plan of approximately $100 million on a pre-tax basis in 2003, primarily in the first half of the year. The Company estimates incremental savings of $300 million on a pre-tax basis in 2002, in addition to the $80 million saved in 2001. The majority of these savings were from reduced employee costs. Information regarding the restructuring is included in Note 4 to the Consolidated Financial Statements.

Currency Effects:

3M estimates that currency effects, net of hedging impacts, increased net income by $73 million in 2003, reduced net income by $35 million in 2002 and reduced net income by $94 million in 2001. 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.

ANALYSIS OF CHANGES IN INCOME STATEMENT LINES

Net Sales:

In 2003, core volume growth (which excludes the impact of businesses acquired or divested in the last 12 months) was led by display enhancement films, broad-based growth in most of the Health Care businesses, respirator masks, and growth in products related to construction and home improvement/home care. Acquisitions increased 2003 sales by nearly 2%, driven primarily by the December 2002 acquisition of Corning Precision Lens, Inc. On a geographic basis, 2003 core volume growth was strongest in the Asia Pacific area. Refer to both the “Performance by Business Segment” and “Performance by Geographic Area” sections for additional discussion of sales change.

In 2002, the Asia Pacific area led core volume growth, driven by the Display and Graphics, Health Care, Industrial and Transportation segments. Core volume declined in the United States, with weak overall sales in Electro and Communications, and Industrial segments partially offset by good growth in the Health Care and Transportation segments. Core volume in Europe also declined, hurt by the continuing downturn in the telecom industry, partially offset by higher growth in the Health Care segment.

Operating Expenses:

Cost of sales in 2003 benefited from Six Sigma and other projects aimed at improving manufacturing throughput, yield and productivity. 3M’s global sourcing initiative has helped mitigate the impact of raw material price increases. Raw material costs were essentially flat versus 2002. In 2002, gross margins were positively

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impacted by improved plant efficiencies and lower raw material costs, again helped by 3M’s global sourcing initiative. Special items, as a percent of sales, negatively impacted cost of sales by 0.7 percentage points in 2002 and 1.7 percentage points in 2001. Cost of sales includes manufacturing, engineering and freight costs.

Selling, general and administrative (SG&A) expenses as a percent of net sales has improved in each of the past two years. SG&A expenses in U.S. dollars were higher in 2003 due to currency translation, as well as increased advertising and merchandising spending. The improvement in 2002 SG&A costs was the result of implementing Six Sigma, indirect cost control programs, and employment reductions under the restructuring plan approved in June 2001. SG&A also benefited by $67 million in 2002 due to the cessation of goodwill amortization and other indefinite-lived asset amortization effective January 1, 2002. Special items negatively impacted SG&A in 2002 and 2001 ($77 million, or 0.5% of sales in 2002; $300 million, or 1.8% of sales in 2001). Excluding these 2002 special items, SG&A for 2003 was relatively flat as a percent of sales compared with 2002.

Other expense (income) includes items previously discussed under special items. For 2003, this reflects the $93 million pre-tax charge related to an adverse ruling in a lawsuit filed against 3M in 1997 by LePage’s Inc. For 2001, this includes a reversal of a 1999 litigation accrual of $73 million, and a gain of $15 million related to the net impact of the sale and write-down of available-for-sale equity securities.

Operating Income:

3M uses operating income as one of its primary business segment performance measurement tools. Operating income has steadily improved the last two years, and in 2003 was 20.4% of sales. Although the Company faced continued economic weakness, operating income grew by $667 million in 2003, or 21.9%. In 2002, operating income grew by $773 million, or 34%, from 2001. Special items negatively impacted operating income in all years presented ($93 million, or 0.5% of sales in 2003; $202 million, or 1.2% of sales in 2002; and $504 million, or 3.1% of sales in 2001).

Interest Expense and Income:

Interest Expense: The slight increase in 2003 interest expense was primarily due to a reduced benefit for capitalized interest (related to lower capital spending) and higher average debt balances being largely offset by lower interest rates. Declining interest rates on floating-rate debt drove the reduction in expense in 2002.

Interest Income: While average cash balances were higher in 2003, interest income decreased due to lower interest rates. The increase in 2002 was primarily related to larger average cash balances.

Provision for Income Taxes:

Income taxes associated with repatriating certain cash from outside the United States negatively impacted the 2003 income tax rate.

Minority Interest:

Minority interest represents the elimination of the non-3M ownership interests, primarily in Sumitomo 3M Limited and 3M Inter-Unitek GmbH (in 2002 and 2001 only). The decrease in 2003 relates to 3M’s purchase of the minority interest shares of 3M Inter-Unitek GmbH in December 2002 and the purchase of an additional 25% ownership in Sumitomo 3M in early 2003. Refer to Note 2 to the Consolidated Financial Statements for additional information on these acquisitions. The increase in 2002 related primarily to higher profits in

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Sumitomo 3M and 3M Inter-Unitek GmbH. Minority interest was positively impacted by special items in 2002 ($18 million) and 2001 ($8 million).

PERFORMANCE BY BUSINESS SEGMENT

Disclosures relating to 3M’s business segments are provided in Item 1, Business Segments. Financial information and other disclosures are provided in the Notes to the Consolidated Financial Statements. There were no special items recorded in the Company’s business segments for 2003 and 2002. Special items in 2001 (that were not recorded in Corporate and Unallocated) included acquisition-related costs totaling $23 million ($10 million recorded in Health Care; $7 million in Display and Graphics; and $6 million in Electro and Communications).

As discussed in Note 16 to the Consolidated Financial Statements, 3M realigned its business segments and began reporting under this new structure effective January 1, 2003. Internal management reporting for the new reportable business segments commenced January 1, 2003. Segment information for all periods presented has been reclassified to reflect this segment structure. The reportable segments are Health Care; Industrial; Display and Graphics; Consumer and Office; Safety, Security and Protection Services; Electro and Communications; and Transportation. Information related to 3M’s business segments is presented in the tables that follow. Local currency sales (which includes both core and acquisition volume impacts plus price impacts) are provided for each segment. The translation impact and total sales change are also provided for each segment.

Performance by Business Segment

Health Care Business (21.9% of consolidated sales):

The Health Care segment serves markets that include medical, surgical, pharmaceutical, dental and orthodontic, health information systems and personal care. Products provided to these markets include medical and surgical supplies, skin health and infection prevention products, pharmaceuticals, drug delivery systems, dental and orthodontic products, health information systems, microbiology products, and closures for disposable diapers.

In 2003, local currency growth and total sales growth in the Health Care segment was broad based. Geographic area local currency growth was led by the Asia Pacific area and the Latin America, Africa and Canada area, with the United States and Europe showing moderate growth. Operating income improvement was also broad based.

In the pharmaceuticals business, an agreement was reached with Eli Lilly and Company in September of 2001 to collaborate on resiquimod, an investigational compound for the treatment of genital herpes. 3M received $100 million in the fourth quarter of 2001 from Lilly in consideration for research and development efforts. Revenue was recognized on a pro-rata basis over the service period. 3M recognized $44 million of revenue relating to this agreement in 2003, $43 million in 2002 and $7 million in 2001. In the third quarter of 2003, 3M and Eli Lilly reached a final agreement to return control of resiquimod to 3M. Upon termination of the agreement, 3M recognized the remaining revenue (with deferral of some immaterial remaining obligations). 3M continues to evaluate its strategic options with respect to this potential treatment.

The broader family of immune response modifiers continues to progress and 3M expects approval of two new indications for Aldara™ (imiquimod) Cream, 5%, in 2004. These new indications are for actinic keratosis and superficial basal cell carcinoma, potentially serious skin conditions that are a direct result of cumulative sun exposure. The patent and related rights for the imiquimod molecule are important to the Health Care Business. If approved by the FDA, the Company expects significant sales beginning in 2004 for Aldara™ (imiquimod)

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Cream, 5%, for the treatment of actinic keratosis and superficial basal cell carcinoma. The original patent on the imiquimod molecule expires in August 2004, but the patent term extension runs through August 2009.

In October 2003, IVAX Corporation agreed to assume exclusive rights to 3M’s branded health care respiratory products, together with related marketing and sales personnel, in nine European countries. The agreement covers QVAR® (beclomethasone dipropionate HFA) Inhalation Aerosol, a “maintenance” medication used to prevent asthma attacks, and also covers Airomir™ (albuterol sulfate) Inhaler, a “rescue” medication used to relieve acute asthma symptoms. 3M will continue to manufacture and supply these products to IVAX. The total consideration due under the agreement, including minimum annual royalty payments, was $77 million, of which $26 million was paid in 2003. 3M expects to receive $24 million in both 2004 and 2005, and $3 million in 2006. 3M may also receive additional royalty payments (up to a maximum of approximately $7 million in total) if IVAX achieves certain annual sales levels.

In 2003, the combined benefit from both the Eli Lilly agreement and the IVAX Corporation agreement was partially offset by separation costs in Health Care, resulting in a net benefit to operating income of approximately $20 million.

In 2002, sales and operating income growth was led by medical, dental and pharmaceutical products. Local currency growth was negatively impacted by generic competition for 3M’s Tambocor™ (flecainide acetate) pharmaceutical product. In December 2002, 3M acquired the remaining 43% of outstanding shares of 3M Inter-Unitek GmbH (parent company of 3M ESPE Dental AG). Because these results have been consolidated since 2001 (when 3M acquired 57% of this business), this additional acquisition of the remaining shares had no impact on 2002 sales or operating income of the Health Care segment.

Industrial Business (18.4% of consolidated sales):

The Industrial segment serves a broad range of industrial markets, from appliance and electronics to paper and packaging and food and beverage. Products include tapes, a wide variety of coated and non-woven abrasives, adhesives, specialty materials and supply chain execution software solutions (acquired in early 2004).

In 2003, industrial tape and electronic materials drove local currency sales growth. Geographic area local currency growth was led by the Asia Pacific area, with the United States and Europe showing declines. Acquisitions benefited sales by 1.5%. Driven by local currency sales growth, industrial tape and electronic materials also posted operating income growth. Employment reduction actions taken to improve competitiveness and lower the Industrial segment’s cost structure negatively impacted operating income by $27 million.

In 2002, economic weakness in most areas of the manufacturing economy was the leading cause of the slight decrease in sales compared to 2001. Despite this weakness, effective cost control and increased efficiency led to an increase in operating income. Electronic materials, Dyneon brand materials and industrial tape products contributed to the operating income growth. During the third quarter of 2002, 3M finalized the acquisition of certain assets and liabilities of Polymer Manufacturing, Inc., Emtech Emulsion Technologies, Inc. and Emtech Manufacturing Corporation. Acquisitions benefited sales by 0.7%.

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Display and Graphics Business (16.2% of consolidated sales):

The Display and Graphics segment serves markets that include electronic display, touch screen, traffic safety and commercial graphics. This segment includes optical film and lens solutions for electronic displays, touch screens and touch monitors, reflective sheeting for transportation safety and commercial graphics systems. The optical business includes a number of different products that are protected by various patents and groups of patents. The remaining lifetimes of such patents range from one to greater than 15 years. These patents provide varying measures of exclusivity to 3M for a number of such products, but 3M’s proprietary manufacturing technology and know-how also provide a competitive advantage to 3M independent of such patents.

The strong 2003 local currency sales growth in the Display and Graphics segment was primarily due to optical systems growth, including the Corning Precision Lens acquisition that benefited sales by approximately 11%. Optical systems growth was led by sales of display enhancement films used in flat panel devices. Geographic area local currency sales growth was led by the Asia Pacific area and the Latin America, Africa and Canada area. Local currency growth was moderate in the United States and Europe. Optical systems also led Display and Graphics operating income growth, driven primarily by local currency sales growth and its production facilities running at high utilization levels.

Sales volumes and operating income growth in 2002 were driven primarily by display enhancement films. In December 2002, 3M completed the acquisition of Corning Precision Lens, Inc., a manufacturer of lens systems for projection televisions. This acquisition added to the optical product offerings and operates under the name 3M Precision Optics, Inc. This business had 2002 net sales of approximately $270 million. Because this business was not acquired by 3M until December 2002, there was minimal impact on 2002 sales and operating income of the Display and Graphics Business.

Consumer and Office Business (14.3% of consolidated sales):

The Consumer and Office segment serves markets that include consumer retail, office retail, education, home improvement, building maintenance, food service and other markets. Products in this segment include office supply products, stationery products, construction and home improvement/home care products, protective material products, and visual systems products.

2003 local currency growth was led by the construction and home improvement, home care, and stationery products businesses, partially offset by lower local currency sales in the visual systems business. Geographic area local currency growth was moderate in all areas except Europe, which showed a decline. The modest increase in operating income resulted from strong gains in construction and home improvement and home care, partially offset by a decrease in visual systems operating income.

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The decrease in 2002 local currency growth reflected continued office worker layoffs and inventory contraction in the retail channel affecting office supplies. Construction and home improvement products posted good sales growth and operating income improvement, while 3M’s home care and office supply products posted strong operating income improvement. Six Sigma and costs savings from other 3M initiatives drove the operating income improvement.

Safety, Security and Protection Services Business (10.6% of consolidated sales):

The Safety, Security and Protection Services segment strives to increase the safety, security and productivity of workers, facilities and systems. This includes respiratory protection products, safety and security products, energy control products, cleaning and protection products for commercial establishments, and roofing granules for asphalt shingles.

2003 local currency sales and operating income increases were primarily driven by the occupational health and environmental safety business, which experienced higher demand for respiratory masks, primarily resulting from concerns related to Severe Acute Respiratory Syndrome (SARS). Security systems, commercial care, consumer safety and light management, and industrial mineral products also posted local currency growth and operating income improvements. All geographic areas showed local currency growth, with growth strongest in the Asia Pacific and Latin America, Africa and Canada areas.

In 2002, the occupational health, industrial mineral and corrosion protection businesses led the sales and operating income improvement.

Electro and Communications Business (10.0% of consolidated sales):

The Electro and Communications segment serves manufacturers of electronic and electrical equipment, as well as the construction and maintenance segments of electric utilities, telecommunications and other industries, with products that speed the delivery of information and ideas, while also reducing costs. Products include electronic and interconnect solutions, microinterconnect systems, telecommunications products and electrical products.

The decrease in local currency sales in 2003 resulted from continued weakness in the global telecommunications industry. Local currency sales in 3M’s telecom business were down over 10% from 2002. Geographic area local currency growth was good in the Latin America, Africa and Canada area and the Asia Pacific area, but both the United States and Europe experienced local currency declines of more than 10%. Despite a difficult economic and market environment, benefits from 3M’s corporate initiatives helped this business slightly improve its 2003 operating income. Operating income was negatively impacted by $26 million due to additional employee reductions and actions to realign this segment to its current structure. These actions were taken to provide better alignment with the market environment while maintaining focus on key customers.

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The decrease in 2002 volumes reflected overall softness in the telecom markets. Operating income growth was broad-based, except for weakness in telecom markets.

Transportation Business (8.4% of consolidated sales):

The Transportation segment serves markets that include automotive, automotive aftermarket, marine, aerospace and specialty vehicle markets. This segment provides components and products that are used in the manufacture, repair and maintenance of automotive, marine, aircraft and other specialty vehicles.

In 2003, the automotive OEM and automotive aftermarket businesses led local currency sales and operating income growth. The aerospace and aircraft maintenance business also posted local currency and operating income growth. All geographic areas showed local currency growth, led by the Asia Pacific and Latin America, Africa and Canada areas. 2002 sales and operating income growth was led by the automotive OEM business.

PERFORMANCE BY GEOGRAPHIC AREA

Financial information related to 3M operations in various geographic areas is provided in Note 17 to the Consolidated Financial Statements. A summary of key information and discussion related to 3M’s geographic areas follows:

Net Sales and Operating Income:

Geographic Area

While 3M manages its businesses globally and believes its business segment results are the most relevant measure of performance, the Company also utilizes geographic area data as a secondary performance measure. A portion of the products or components sold by 3M’s international operations to third parties are exported to the United States and other parts of the world. Thus, net sales in a particular geography may not be indicative of end-user consumption in that geography. In 2003, 3M continued its rapid expansion in emerging economies like China, Korea and Eastern Europe, complementing 3M’s growth in more mature markets. 3M’s largest international subsidiary, Sumitomo 3M, posted strong sales growth and outperformed the sluggish Japanese economy. For 2003, international operations represented 58.4% of 3M’s sales, with that percentage expected to increase in the years ahead.

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Geographic Area Supplemental Information

Employment:

Employment decreased by approximately 1,700 people from year-end 2002. Since March 31, 2001, employment has declined by nearly 10,600 people, with 6,900 of the decline related to the 2001/2002 corporate restructuring plan, and additional declines due to the integration of acquisitions, additional employment reduction actions and attrition. The Corning Precision Lens, Inc. acquisition in the fourth quarter of 2002 added approximately 1,500 employees. The Company continues to increase headcount in faster-growing areas of the world, such as Asia Pacific, primarily to support increasing local sales. Sales per employee in local currencies increased approximately 8.5% in 2003, increased approximately 9% in 2002 and decreased approximately 3% in 2001.

Capital Spending/Net Property, Plant and Equipment:

The bulk of 3M capital spending has historically been in the United States, resulting in higher net property, plant and equipment balances in the U.S. The Company is increasingly striving to more closely align its manufacturing and sourcing with geographic market sales, which will move costs outside the United States and help mitigate the effects from currency fluctuations. For 2004, the Company expects to spend approximately $900 million on purchases of property, plant and equipment.

CRITICAL ACCOUNTING ESTIMATES

Information regarding significant accounting policies is included in Note 1 to the Consolidated Financial Statements. As stated in Note 1, the preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company believes its most critical accounting estimates relate to legal proceedings, the Company’s pension and postretirement obligations, and potential asset impairment issues. Senior management has discussed the development, selection and disclosure of its critical accounting estimates with the Audit Committee of our Board of Directors.

Legal Proceedings:

Please refer to the section entitled “Accrued Liabilities and Insurance Receivables Related to Legal Proceedings” (contained in Part I, Item 3, Legal Proceedings, of this Annual Report on Form 10-K) for a description of the process the Company follows under Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies”, and related guidance, for the accrual and disclosure of loss contingencies, and the categories of claims for which the Company has been able to estimate its probable liability (and where applicable, related insurance receivables), and factors affecting such estimates.

Pension and Postretirement Obligations:

3M has various company-sponsored retirement plans covering substantially all U.S. employees and many employees outside the United States. The Company accounts for its defined benefit pension plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”, which requires that amounts recognized in financial statements be determined on an actuarial basis. Benefits associated with these plans are based

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primarily on years of service and, in some cases, employee compensation. See Note 11 to the Consolidated Financial Statements for additional discussion of actuarial assumptions used in determining pension liability and expense.

A significant element in determining the Company’s pension expense in accordance with SFAS No. 87 is the expected return on plan assets, which is based on historical results for similar allocations among asset classes. The difference between the expected return and the actual return on plan assets is deferred and, under certain circumstances, amortized over future years of service. Therefore, the net deferral of past asset gains (losses) ultimately affects future pension expense. For the U.S. pension plan, the Company’s assumption for the expected return on plan assets is 9.0%, which is unchanged. Refer to Note 11 to the Consolidated Financial Statements for information on how this rate is determined.

The Company determines the discount rate used to measure plan liabilities as of the September 30, 2003, measurement date for the U.S. plan. The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on fixed-income investments of similar duration to the liabilities in the plan that receive high, investment grade ratings by recognized ratings agencies. By applying this methodology, the Company determined a discount rate of 6.00% to be appropriate as of September 30, 2003, which is a reduction of 0.75 percentage points from the rate used as of September 30, 2002.

For the year ended December 31, 2003, the change in the minimum pension liability within accumulated other comprehensive income decreased stockholders’ equity by $173 million (after-tax). For the U.S. pension plan, holding all other factors constant, a change in the discount rate used to measure plan liabilities by 0.25 percentage points would result in an after-tax increase/decrease of approximately $145 million in accumulated other comprehensive income.

For the year ended December 31, 2003, the Company recognized total consolidated pre-tax pension expense (after settlements, curtailments and special termination benefits) of $168 million, up from $141 million in 2002. Pension expense (before settlements, curtailments and special termination benefits) is anticipated to increase to approximately $310 million in 2004, up approximately $165 million from the comparable number in 2003. For the U.S. pension plans, holding all other factors constant, an increase/decrease in the expected long-term rate of return on plan assets by 0.25 percentage points would decrease/increase U.S. pension expense by approximately $17 million in 2004. For the U.S. pension plans, holding all other factors constant, an increase/decrease in the discount rate used to measure plan liabilities by 0.25 percentage points would decrease/increase U.S. pension expense by approximately $23 million in 2004.

Potential Asset Impairment Issues:

Management makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business, including assets of acquired businesses. These estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or an impairment recorded based on a change in the expected use of the asset or performance of the related business reporting unit. Although there is greater risk with respect to the accuracy of these long-term estimates and assumptions because of the long period over which actual results will emerge, such risk is mitigated by management’s ability to make changes in these estimates and assumptions over the same long period. 3M has approximately $2.4 billion of goodwill that, based on impairment testing, is not impaired. A portion of th is goodwill (approximately $300 million) is in 3M’s telecommunications business, which the Company believes will maintain its value. However, if unanticipated events impact this sector for an extended period of time, it could create future impairment losses.

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FINANCIAL CONDITION AND LIQUIDITY

The Company generates significant ongoing cash flow as evidenced by the reduction in net debt during 2003 as follows:

3M believes its ongoing cash flows provide ample cash to fund expected investments and capital expenditures. The Company has an AA credit rating from Standard & Poor’s and an Aa1 credit rating from Moody’s Investors Service. The Company has sufficient access to capital markets to meet currently anticipated growth and acquisition investment funding needs. The Company does not utilize derivative instruments linked to the Company’s stock.

The Company’s financial condition and liquidity at December 31, 2003, remain strong. Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month-to-month depending on short-term liquidity needs. Working capital (defined as current assets minus current liabilities) totaled $2.638 billion at December 31, 2003, increasing $1.036 billion from year-end 2002. This increase was largely related to an increase in cash ($1.218 billion). The cash balance benefited from higher net income and certain working capital improvements (accounts receivable, inventory, accounts payable). The increase in other current assets was offset by an increase in accrued income taxes. The increase in other current assets was primarily due to the reclassification of certain insurance receivables from long-term to current, and increases in various prepaid items and deferred taxes. The increase in accrued income taxes primarily relates to higher net i ncome, a higher effective tax rate, and the timing of tax payments.

The Company uses various working capital measures that place emphasis and focus on certain working capital assets and liabilities (e.g. accounts receivable, inventory). These measures may not be computed the same as similarly titled measures used by other companies. The accounts receivable turnover index (defined as quarterly net sales — fourth quarter at year-end – multiplied by four, divided by ending net accounts receivable) totaled 6.95 at December 31, 2003, an improvement from 6.55 at year-end 2002. Receivables increased $187 million compared with year-end 2002, with currency translation increasing the accounts receivable balance by $222 million (due to the weaker U.S. dollar). The inventory turnover index (defined as quarterly factory cost – fourth quarter at year-end — multiplied by four, divided by ending inventory) was 5.12 at December 31, 2003, an improvement from 4.17 at year-end 2002. Inventories declined $115 million compared with year-end 2002, despite currency translation increasing the inventory balance by $143 million compared with December 31, 2002.

Cash Flows from Operating Activities:

Cash flows from operating activities can fluctuate significantly from period to period, as pension funding decisions, tax timing differences and other items can significantly impact cash flows. In both 2003 and 2002, cash flows were primarily driven by improved net income, certain working capital improvements (i.e. accounts receivables, inventories, accounts payable) and tax timing differences. In 2003 and 2002, significant Company

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pension contributions negatively impacted cash flow. In all years, with larger amounts in 2003 and 2002, a portion of the tax timing benefit relates to the tax benefit received from Company pension contributions. In 2003, 3M made $46 million of payments under the corporate restructuring plan, compared with $306 million in 2002 and $159 million in 2001.

3M’s pension plan assets were below 3M’s accumulated benefit obligation (ABO) at its most recent plan measurement dates for certain plans. In the third quarter of 2003, 3M made a voluntary, special contribution of $600 million to its U.S. qualified pension plan compared with a voluntary, special contribution of $789 million in the third quarter of 2002. Future contributions will depend on market conditions, interest rates and other factors. 3M believes its strong cash flow and balance sheet will allow it to fund future pension needs without compromising growth opportunities.

The Company recorded the LePage’s verdict liability of $93 million pre-tax in the first quarter of 2003. The Company increased its estimate of liabilities for the breast implant and respirator mask/asbestos claims and litigation in 2003. For a more detailed discussion of these and other legal proceedings, refer to Part I, Item 3, Legal Proceedings, of this Annual Report on Form 10-K. Because of the time delay between payment of claims and receipt of insurance reimbursements, the December 31, 2003, amounts for both breast implant and respirator mask/asbestos liabilities are less than expected insurance recoveries. Thus, the expected net inflow of cash will increase future cash flows. The following table shows liability and receivable activity for breast implant and respirator masks/asbestos for 2003 and 2002. This table shows the increase in liabilities and associated insurance receivables, cash received for insurance, cash fees and payments made, and the pre-tax expense by year.

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Cash Flows from Investing Activities:

Investments in property, plant and equipment are helping to meet product demand and increase manufacturing efficiency. In 2003, cash used for acquisitions of businesses included $377 million related to the purchase of an additional 25% ownership in Sumitomo 3M Limited. Additional cash used totaling $62 million included six additional business combinations and finalization of the purchase of Corning Precision Lens, Inc. Refer to Note 2 to the Consolidated Financial Statements for additional information on business combinations.

3M completed two significant transactions in 2002. First, 3M purchased Corning Precision Lens, Inc. for approximately $850 million, or approximately $680 million after considering the net present value of the joint election tax benefit under Section 338(h)(10), which allows goodwill to be fully deductible for tax purposes over a period of 15 years. Second, 3M purchased the 43% minority shares of 3M Inter-Unitek GmbH for approximately $304 million. The Company also entered into seven other business combinations in 2002 for a total of $104 million in cash (net of cash acquired) and $35 million of 3M common stock.

There were three significant business combinations in 2001. 3M acquired MicroTouch Systems Inc., a touch screen manufacturer, for $158 million in cash, net of cash acquired. 3M also acquired Robinson Nugent, Inc., a telecommunications supplier, in exchange for $127 million of 3M common stock. The Company also combined its German dental business (3M Inter-Unitek GmbH, an existing 3M subsidiary) with ESPE Dental AG, a dental products manufacturer. 3M Inter-Unitek GmbH acquired 100% of the outstanding shares of ESPE Dental AG in exchange for 43% ownership in 3M Inter-Unitek GmbH and $25 million, net of cash acquired. Upon completion of this transaction, and as of December 31, 2001, 3M held a 57% controlling interest in 3M Inter-Unitek GmbH. As previously stated, 3M purchased the remaining minority interest shares of 3M Inter-Unitek GmbH in 2002. Acquisition activity in 2001 also included the purchase, for less than $50 million, of five smaller companies that had combined annual sales of less than $50 million in total.

The Company is actively considering additional acquisitions. In the first quarter of 2004, 3M entered into two business combination agreements, neither of which impacted 2003 operating results or the balance sheet as of December 31, 2003. 3M announced in February 2004 that it had completed the acquisition of HighJump Software, Inc., a U.S. company with annual sales of approximately $36 million that provides supply chain execution software and solutions. The total purchase price of approximately $67 million included $24 million in cash (net of cash acquired) plus 541,581 shares of 3M common stock. The common stock had a market value of approximately $43 million at the acquisition measurement date and was previously held as 3M treasury stock. In March 2004, 3M completed the acquisition of Hornell International, a Swedish company, for approximately $100 million in cash, including assumption of debt. Hornell is a global supplier of personal protective equipment with annual sales of approximately $50 million. The purchase price allocations of the aforementioned business combinations have not been finalized.

Proceeds from the sale of investments in 2003 include $26 million of cash received related to the sale of 3M’s 50% ownership in Durel Corporation to Rogers Corporation. Purchases of investments totaled $16 million in 2003, $7 million in 2002 and $12 million in 2001. These purchases include additional survivor benefit insurance and equity investments.

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Cash Flows from Financing Activities:

Total debt at December 31, 2003, was $2.937 billion, down from $3.377 billion at year-end 2002, due to the strong cash flow generated during 2003. There were no new long-term debt issuances in 2003, but the Company’s $350 million of dealer remarketable securities (classified as short-term borrowings) were remarketed for one year in December 2003. 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. Total debt was 27% of total capital (total capital is defined as debt plus equity), compared with 36% at year-end 2002.

In 2003, the cash flow decrease in net short-term debt of $215 million includes the portion of short-term debt with original maturities of 90 days or less. The repayment of debt of $719 million included repayment of $366 million related to commercial paper having original maturities greater than 90 days and repayment of $353 million related to other debt with maturities greater than 90 days. Proceeds from debt of $494 million primarily related to commercial paper having original maturities greater than 90 days. In 2002, repayment of debt primarily related to commercial paper, while proceeds from debt included $550 million from the issuance of convertible debt.

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. 3M plans to use the net proceeds from future issuances of debt securities under this registration for general corporate purposes, including the repayment of debt, investments in or extensions of credit to 3M subsidiaries, or the financing of possible acquisitions or business expansion. As of December 31, 2003, there had been no issuances against the shelf.

On November 15, 2002, 3M sold $639 million in aggregate face amount of 30-year zero coupon senior notes (the “Convertible Notes”) that 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). The book value at December 31, 2003, was $553 million. On February 14, 2003, 3M registered these Convertible Notes in a registration statement filed with the Securities and Exchange Commission. The terms of the 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 certain thresholds 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. 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 6.0 million shares of 3M common stock. 3M may redeem the 30-year zero-coupon senior notes at any time in whole or in part, after five years at the greater of the accreted conversion price or the current market price. Holders of the 30-year zero-coupon senior notes have the option to require 3M to purchase their notes at accreted value in years three, five, 10, 15, 20 and 25. 3M may choose to pay the redemption purchase price in cash and/or common stock. Debt issuance costs are amortized on a straight-line basis over a three-year period beginning in November 2002. The conditions for conversion were not met for any of the quarters of 2003; accordingly, there was no impact on 3M’s diluted earnings per share.

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Repurchases of common stock are made to support the Company’s stock-based employee compensation plans and for other corporate purposes. In November 2001, the Board of Directors authorized the repurchase of up to $2.5 billion of the Company’s common stock. This share repurchase authorization was effective from January 1, 2002, through December 31, 2003. Under this authorization, the Company purchased approximately 9.7 million shares for $685 million in 2003, compared with approximately 15.8 million shares for $942 million in 2002. On November 10, 2003, the Board of Directors authorized the purchase of up to $1.5 billion of the Company’s common stock between January 1, 2004 and December 31, 2004.

The change in annual weighted average diluted shares outstanding (including the effects of repurchases, issuances and dilution) resulted in a penalty of 2 cents per diluted share in 2003 and a benefit of 3 cents per diluted share in 2002. There was no impact in 2001.

Cash dividends paid to stockholders in 2003 totaled $1.034 billion ($1.32 per share), $968 million ($1.24 per share) in 2002 and $948 million ($1.20 per share) in 2001. 3M has paid dividends since 1916. In February 2004, the Board of Directors increased the quarterly dividend on 3M common stock to 36 cents per share, equivalent to an annual dividend of $1.44 per share. This marks the 46th consecutive year of dividend increases.

Other cash flows from financing activities include distributions to minority interests, changes in cash overdraft balances, and principal payments for capital leases.

Liquidity:

The Company’s liquidity remains strong. Primary short-term liquidity needs are provided through U.S. commercial paper and euro commercial paper issuances. As of December 31, 2003, outstanding total commercial paper issued totaled $444 million and averaged approximately $474 million during 2003. Medium-term note shelf borrowing capacity totaled $1.5 billion as of December 31, 2003. Credit support for outstanding commercial paper is provided by a $565 million, 364-day credit agreement among a group of primary relationship banks. The facility provides up to $90 million in letters of credit ($89 million of which was outstanding at December 31, 2003). Committed credit facilities of $42 million are in place across several international subsidiary locations. The Company also has uncommitted lines of credit totaling $617 million. The Company expects to renew the committed lines of credit facilities in 2004. The Company believes it is unlikely that its access to the commercial paper market will be restricted. Cash and cash equivalents and certain other current assets could provide additional liquidity to meet near term obligations, if necessary. At year-end 2003, certain debt agreements ($565 million of short-term lines of credit, $350 million of dealer remarketable securities, and the $238 million of ESOP debt) had ratings triggers (BBB-/Baa3 or lower) that would require repayment of debt. The Company currently has AA/Aa1 debt ratings.

Off-Balance Sheet Arrangements and Contractual Obligations:

As of December 31, 2003, the Company had not utilized special purpose entities to facilitate off-balance sheet financing arrangements. 3M’s guarantees of loans with third parties and other guarantee arrangements are estimated at approximately $18 million. 3M’s accrued product warranty liabilities are estimated at approximately $20 million. 3M does not consider these amounts to be material.

In addition to guarantees, 3M, in the normal course of business, periodically enters into agreements that require 3M to indemnify either major customers or suppliers for specific risks, such as claims for injury or property damage arising out of 3M products or the negligence of 3M personnel, or claims alleging that 3M products infringe third party patents or other intellectual property. While 3M’s maximum exposure under these indemnification provisions cannot be estimated, these indemnifications are not expected to have a material impact on the Company’s consolidated financial position or results of operations.

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A summary of the Company’s significant contractual obligations as of December 31, 2003, follows:

Contractual Obligations

Unconditional purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding on the Company. Included in the unconditional purchase obligations category above are certain obligations related to take or pay contracts, capital commitments, service agreements and utilities. These estimates include both unconditional purchase obligations with terms in excess of one year and normal ongoing purchase obligations with terms of less than one year. Many of these commitments relate to take or pay contracts, in which 3M guarantees payment to ensure availability of products or services that are sold to customers. The Company expects to receive consideration (products or services) for these unconditional purchase obligations. The purchase obligation amounts do not represent the entire anticipated purchases in the future, but represent only those items for which the Company is contractually obligated. The majority of 3M’s products and se rvices are purchased as needed, with no unconditional commitment. For this reason, these numbers will not provide a reliable indicator of the Company’s expected future cash outflows on a stand-alone basis.

As discussed in Note 11 to the Consolidated Financial Statements, the Company does not have a required minimum pension contribution obligation for its U.S. plans in 2004. Thus, Company contributions to its U.S. and international pension plans are expected to be largely discretionary in 2004 and future years. Contractual capital commitments are also included in the preceding table, but these commitments represent a small part of the Company’s expected capital spending in 2004 and beyond. For 2004, the Company expects to spend approximately $900 million on purchases of property, plant and equipment.

FINANCIAL INSTRUMENTS

The Company enters into contractual derivative arrangements in the ordinary course of business to manage foreign currency exposure, interest rate risks and commodity price risks. A financial risk management committee, composed of senior management, provides oversight for risk management and derivative activities. This committee determines the Company’s financial risk policies and objectives, and provides guidelines for derivative instrument utilization. This committee also establishes procedures for control and valuation, risk analysis, counterparty credit approval, and ongoing monitoring and reporting.

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. The Company manages interest rate risks 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. The Company manages commodity price risks through negotiated supply contracts, price protection swaps and forward physical contracts.

A variance/co-variance statistical modeling technique was used to test the Company’s exposure to changes in currency and interest rates and assess the risk of loss in after-tax earnings of financial instruments, derivatives and underlying exposures outstanding at December 31, 2003. The model (third-party bank dataset) used a 95% confidence level over a 12-month time horizon. Based on this analysis of the Company’s interest rate risks, possible changes in interest rates would not have a material adverse effect on after-tax earnings ($6 million at December 31, 2003 and $7 million at December 31, 2002). Based on this analysis of the primary foreign exchange risks, possible changes in foreign exchange rates could adversely impact after-tax earnings

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by $67 million ($69 million at December 31, 2002). When including certain commodity risks, possible changes in commodity rates could adversely impact after-tax earnings by an additional $3 million (an additional $11 million at December 31, 2002). The model used analyzed over 20 different currencies and five commodities, but does not purport to represent what actually will be experienced by the Company. This model does not include certain hedge transactions, because the Company believes their inclusion would not materially impact the results.

The Company is increasingly striving to more closely align its manufacturing and sourcing with geographic market sales, which will move costs outside the United States. This will also help mitigate the effects from currency fluctuations. In 2001, the Company increased the amount and duration of its foreign currency hedges to help lessen year-over-year impacts and to improve the predictability of future earnings. However, this hedging program will not make 3M immune to currency impacts.

The global exposures related to purchased components and materials are such that a one percent price change would result in a pre-tax cost or savings of approximately $40 million per year. The global energy exposure is such that a 10% price change would result in a pre-tax cost or savings of approximately $28 million per year. Derivative instruments are used to hedge less than one percent of the purchased components and materials exposure and are used to partially hedge about 18% of this energy exposure.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words like “plan,” “expect,” “aim,” “believe,” “project,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and similar expressions in connection with any discussion, expectation, or projection of future operating or financial performance, events or trends. In particular, these include statements about the Company’s strategy for growth, product development, market position, future performance or results of current or anticipated products, interest rates, foreign exchange rates, and the outcome of contingencies, such as legal proceedings.

Factors That Could Affect Future Results — Forward-looking statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors, including, but not limited to, the following:

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

In the context of Item 7A, market risk refers to the risk of loss arising from adverse changes in financial and derivative instrument market rates and prices, such as fluctuations in interest rates and foreign currency exchange rates. The Company discusses risk management in various places throughout this document, including discussions in Item 7 concerning Financial Condition and Liquidity, and Financial Instruments, and in the Notes to Consolidated Financial Statements (Debt, Derivatives and Other Financial Instruments, and the Derivatives and Hedging Activities accounting policy). All derivative activity is governed by written policies, and a value-at-risk analysis is provided for these derivatives. The Company does not have leveraged derivative positions.

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Item 8. Financial Statements and Supplementary Data.

Index to Financial Statements

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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 judgment.

Management has established and maintains a system of internal accounting and other controls for the Company and its subsidiaries. Management believes that established accounting procedures and related systems of internal control provide reasonable assurance that assets are safeguarded, that the books and records properly reflect all transactions, and that policies and procedures are implemented by qualified personnel. The Company’s system of internal controls 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 systems.

The Audit Committee, composed entirely of outside members of the Board of Directors, meets regularly with representatives of management, the independent accountants and the Company’s internal auditors to monitor the functioning of the accounting control systems and to review the results of the auditing activities. The Audit Committee selects the independent accountants for appointment, subject to shareholder ratification. The independent accountants have full and free access to the Audit Committee. The independent accountants conduct an objective, independent audit of the financial statements.

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REPORT OF INDEPENDENT AUDITORS

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 consolidated financial position of 3M Company and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 and Note 3 to the Consolidated Financial Statements, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Minneapolis, Minnesota
February 9, 2004

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3M Company and Subsidiaries
Consolidated Statement of Income

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
All share data has been adjusted to reflect the two-for-one stock split effective with third quarter 2003 reporting.

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3M Company and Subsidiaries
Consolidated Balance Sheet

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
All share data has been adjusted to reflect the two-for-one stock split effective with third quarter 2003 reporting.

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3M Company and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income