TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

The accompanying notes are an integral part of the consolidated financial information.

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ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

The accompanying notes are an integral part of the consolidated financial information.

3

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

The accompanying notes are an integral part of the consolidated financial information.

(Continued)

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ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

The accompanying notes are an integral part of the consolidated financial information.

5

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

The accompanying notes are an integral part of the consolidated financial information.

(Continued)

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ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

The accompanying notes are an integral part of the consolidated financial information.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Consolidated Financial Information

The unaudited consolidated financial information for the second quarter and six-month periods ended June 30, 2005 and 2004, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of Ecolab Inc. (“the company”) for the interim periods presented. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2004 were derived from the audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the company’s Annual Report on Form 10-K for the year ended December 31, 2004.

With respect to the unaudited financial information of the company for the second quarters and six months ended June 30, 2005 and 2004 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards, which do not require an audit, for a review of such information. Therefore, their separate report dated July 25, 2005 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the “Act”) for their report on the unaudited financial information because that report is not a report or a part of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

2. Stock-Based Compensation

The company measures compensation cost for its stock incentive and option plans using the intrinsic value-based method of accounting.

Had the company used the fair value-based method of accounting to measure compensation expense for its stock incentive and option plans and charged compensation cost against income over the vesting periods, based on the fair value of options at the date of grant, net income and the related basic and diluted per common share amounts for the second quarter and six-month periods ended June 30, 2005 and 2004 would have been reduced to the pro forma amounts in the following table:

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Stock-Based Compensation (continued)

Stock options fully vest upon an employee’s retirement if the service criteria have been met. The company uses the nominal vesting period approach to recognize compensation relating to these stock options. Under the nominal vesting period approach, compensation cost is recognized over the options’ stated vesting period. If the employee retires before the end of the stated vesting period and has met the required service criteria, any remaining unrecognized compensation cost is recognized at that date. If the company had recognized compensation expense at the time the award is no longer contingent on providing subsequent service (the “non-substantive vesting period approach”), pro forma net income would have been increased by $0.6 million and $1.5 million during the quarters ended June 30, 2005 and 2004, respectively, and $0.9 million and $1.1 million during the six months ended June 30, 2005 and 2004, respectively. In Ecolab’s case, employees become “retirement eligible” at age 55 with 5 years of service.

3. Selected Balance Sheet Information

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Selected Balance Sheet Information (continued)

Accumulated other comprehensive income as of June 30, 2005 consists of $11.8 million of net unrealized losses on financial instruments and additional minimum pension liabilities as well as $38.8 million of cumulative translation income. Accumulated other comprehensive income as of December 31, 2004 consists of $14.9 million of net unrealized losses on financial instruments and additional minimum pension liabilities as well as $87.1 million of cumulative translation income. The decrease in cumulative translation income since December 31, 2004 is due to the strengthening of the U.S. dollar against foreign currencies, primarily the euro. The increase in treasury stock is due to the repurchase of approximately $119 million of the company’s stock.

4. Financial Instruments

In February 2002, the company issued euro 300 million of 5.375 percent euronotes, due February 2007. The company has designated this euronote debt as a hedge of existing foreign currency exposures related to net investments the company has in certain European subsidiaries. Accordingly, the transaction gains and losses on the portion of the euronotes that are designated and are effective as hedges of the company’s net investments have been included as a component of the cumulative translation account. Total transaction gains and losses related to the euronotes charged to shareholders’ equity were gains of approximately $28.2 million and $8.7 million for the second quarter of 2005 and 2004, respectively, and gains of approximately $30.0 million and losses of approximately $5.9 million for the first six months of 2005 and 2004, respectively.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Comprehensive Income

Comprehensive income was as follows:

6. Special Charges

In the first quarter of 2002, management approved plans to undertake restructuring and cost saving actions during 2002, including costs related to the integration of the company’s European operations. These actions included global workforce reductions, facility closings, and product line discontinuations. These actions were substantially completed by December 31, 2003. Remaining amounts accrued at December 31, 2003 and through December 31, 2004 primarily represented contractual periodic payments to be made over time. At December 31, 2004, the accrued restructuring liabilities were satisfied.

The second quarter and six months ended June 30, 2004 includes the reversal of $270,000 and $495,000, respectively of previously accrued estimated severance and lease termination costs. Of the $270,000 reversed in the second quarter of 2004, $16,000 is included as a component of cost of sales. Of the $495,000 reversed in the first six months, $66,000 is included as a component of cost of sales.

Also included in “Special Charges” in the first six months of 2004 is a loss related to the disposal of the grease management product line of the Institutional division of the U.S. Cleaning & Sanitizing segment of $4.0 million ($2.4 million after tax).

Remaining restructuring liabilities of approximately $2,910,000 at June 30, 2004 are classified as a component of other current liabilities.

For segment reporting purposes, each of these items have been included in the company’s corporate segment, which is consistent with the company’s internal management reporting.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Business Acquisitions and Investments

In January 2005, the company acquired Associated Chemicals & Services, Inc. (aka Midland Research), a water treatment business. Midland had annual sales of approximately $16 million and their operations became part of the company’s United States Cleaning & Sanitizing and International operations.

In February 2005, the company acquired YSC Chemical Company (YSC) based in Bangkok, Thailand. YSC provides floor cleaning and finishing products in East Asia. YSC had annual sales of approximately $3 million and their operations became part of the company’s International operations.

In April 2005, the company purchased certain operations of Kilco Chemicals Ltd. Based near Belfast, Northern Ireland, Kilco offers products, systems and services for the food and beverage processing industry. Kilco had sales of approximately $5 million annually, and these operations became part of the company’s International operations.

The total cash paid for acquisitions and investments in affiliates was $6.9 million and $10.7 million during the second quarter of 2005 and 2004, respectively. Total cash paid for acquisitions and investments in affiliates was $27.9 million and $128.9 million during the first six months of 2005 and 2004, respectively. Cash paid for acquisitions in 2004 included payments of restructuring costs related to the integration of the former Henkel-Ecolab European joint venture that were accrued in 2002. The aggregate purchase price of acquisitions and investments in affiliates has been reduced for any cash or cash equivalents acquired with the acquisitions. The allocation of the purchase price contains adjustments to preliminary allocations from prior periods, if any.

Based upon purchase price allocations, some of which may have components representing preliminary allocations with respect to recent acquisitions, the components of the aggregate purchase prices of the acquisitions made during the second quarter and six months ended June 30, 2005 and 2004, and the allocation of the purchase prices, were as follows:

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Business Acquisitions and Investments (continued)

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter and six months ended June 30, 2005 were as follows:

Goodwill acquired in 2005 also includes adjustments to prior year acquisitions. Goodwill disposed of in 2005 relates to the sale of a small business in Europe.

Operations of the acquired companies have been included in the operations of the company since the date of the respective acquisition. The purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. These acquisitions individually and in the aggregate are not material to the company’s operations.

8. Net Income Per Common Share

The computations of the basic and diluted net income per share amounts were as follows:

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Net Income Per Common Share (continued)

Stock options to purchase approximately 4.2 million and 4.1 million shares for the second quarter and six months ended June 30, 2005, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding. Stock options to purchase approximately 0.2 million shares for the six months ended June 30, 2004 were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

9. Pension and Postretirement Plans

The components of net periodic pension and postretirement healthcare benefit costs for the second quarter are as follows:

The components of net periodic pension and postretirement healthcare benefit costs for the six months ended June 30 are as follows:

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Pension and Postretirement Plans (continued)

The company previously disclosed in its financial statements for the year ended December 31, 2004, that it was not required to make any contributions to the U.S. pension plan and postretirement healthcare benefit plans in 2005. During the second quarter and six months ended June 30, 2005, no contributions were made to those plans. The company is not required to make any contributions to the U.S. pension plan and postretirement healthcare benefit plans for the remainder of 2005. The maximum tax deductible contribution for 2005 is $38 million for the U.S. pension plan.

Certain international pension benefit plans are required to be funded in accordance with local government requirements. The company contributed $4.2 million and $8.4 million to its international pension benefit plans during the second quarter and six months ended June 30, 2005, respectively. The company currently estimates that it will contribute approximately $8 million to the international pension benefit plans during the remainder of 2005.

10. Operating Segments

Financial information for each of the company’s reportable segments is as follows:

The International amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2005.

Corporate operating expense includes income from reductions in restructuring accruals of $0.3 million and $0.5 million for the second quarter and six months ended June 30, 2004, respectively. Corporate expense for the six months ended June 30, 2004 also includes a charge of $4.0 million related to the disposal of the grease management product line.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Goodwill and Other Intangible Assets

Under Statement of Financial Accounting Standards (SFAS) No. 142, goodwill must be tested annually for impairment. As of June 30, 2005, the company has completed its annual test for goodwill impairment, including businesses reporting losses such as GCS. Based on this testing, no adjustment to the carrying value of goodwill is necessary.

Goodwill and other intangible assets arise principally from business acquisitions. Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. Other intangible assets include primarily customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. The weighted-average useful life of other intangible assets was 13 and 14 years as of June 30, 2005 and 2004, respectively.

The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the company in each reporting period. Total amortization expense related to other intangible assets during the second quarter ended June 30, 2005 and 2004 was approximately $6.0 million and $5.8 million, respectively. Total amortization expense related to other intangible assets during the six months ended June 30, 2005 and 2004 was approximately $12.0 million and $11.2 million, respectively. As of June 30, 2005, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share-BasedPayments (“SFAS No. 123R”). The Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 107 (SAB 107) in March 2005 to assist preparers by simplifying some of the implementation challenges of FAS 123R while enhancing the information investors receive. SFAS No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R will require the company to expense share-based payment awards with compensation cost measured at the fair value of the award. Based on recent guidance issued by the SEC, SFAS No. 123R requires the company to adopt the new accounting provisions no later than the beginning of the first quarter of 2006. The company expects to restate prior period results as part of its transition to the new standard in line with the pro forma amounts historically shown in the notes to consolidated financial statements.

In December 2004, the FASB issued an FSP titled “Application of FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109), the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (the “Act”) (FSP 109-1). Under the guidance in FSP 109-1, the deduction received under the provisions of the Act will be treated as a “special deduction” as described in SFAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the company’s tax return. The company began including the benefits from this deduction in tax expense beginning in 2005.

In December 2004, the FASB issued an FSP titled “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (FSP 109-2). FSP 109-2 allows the company time beyond the fourth quarter of 2004, the period of enactment, to evaluate the effect of the Act on its plans for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Act includes a deduction for 85 percent of certain foreign earnings that are repatriated, as defined in the Act, at an effective tax cost of 5.25 percent on any such repatriated foreign earnings. Companies may elect to apply this provision to qualifying earnings repatriations in 2005. The company is evaluating the reinvestment of foreign earnings in the United States pursuant to the provisions of American Jobs Creation Act of 2004. This Act provides the company the opportunity to tax efficiently repatriate foreign earnings for U.S. qualifying investments specified in a domestic reinvestment plan.

In July 2005, the FASB issued a proposed interpretation titled “Accounting for Uncertain Tax Positions, an interpretation of FASB Statement No. 109.”  This proposed interpretation would clarify the accounting for uncertain tax positions in accordance with FASB Statement No. 109,Accounting for Income Taxes. The company would be required to recognize, in its financial statements, the best estimate of the impact of a tax position only if that position is probable of being sustained on audit based solely on the technical merits of the position. The proposed interpretation also would provide guidance on disclosure, accrual of interest and penalties, accounting in interim periods, and transition. The effective date of the proposed interpretation is as of the end of the first fiscal year ending after December 15, 2005. Only tax positions that meet the probable recognition threshold at that date may be recognized. The cumulative effect of initially applying this proposed interpretation would be recognized as a change in accounting principle as of the end of the period in which this proposed interpretation is adopted.

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REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Directors

Ecolab Inc.

We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. and its subsidiaries as of June 30, 2005, and the related consolidated statements of income for each of the three and six-month periods ended June 30, 2005 and 2004 and of cash flows for the six-month periods ended June 30, 2005 and 2004. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the interim consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, of comprehensive income and changes in shareholders’ equity, and of cash flows for the year then ended, management’s assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2004 and the effectiveness of the company’s internal control over financial reporting as of December 31, 2004; and in our report dated February 24, 2005, we expressed unqualified opinions thereon (our opinion contained an explanatory paragraph stating the company changed the manner in which it accounts for goodwill and other intangible assets as of January 1, 2002). The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Second Quarter and Six Months Ended June 30, 2005 (continued)

Net income totaled $87 million, for the second quarter of 2005 and $78 million for the comparable period of 2004. On a per share basis, diluted net income per common share was $0.33 for the second quarter of 2005 and increased 10 percent over diluted net income per share of $0.30 in the second quarter of 2004. For the first six months of 2005, net income was $161 million as compared to net income of $144 million in the comparable period of last year. Diluted net income per share increased 13 percent to $0.62 for the six months ended June 30, 2005 from $0.55 for the first six months of last year. Net income for the first six months of 2004 included an after-tax charge of $2.4 million related to the disposal of a grease management product line. Currency translation positively impacted net income growth by approximately $2.8 million for the second quarter of 2005 and $4.3 million for the first six months of 2005. The comparison of net income also benefited from a lower effective income tax rate in 2005.

Sales for each of our reportable segments are as follows:

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Second Quarter and Six Months Ended June 30, 2005 (continued)

The following table shows the increase or growth in sales for the second quarter ended June 30, 2005 over the second quarter of 2004 and for the six months ended June 30, 2005 over the six months ended June 30, 2005 by operating segment:

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Second Quarter and Six Months Ended June 30, 2005 (continued)

Sales of our United States Cleaning & Sanitizing operations were $497 million, an increase of 10 percent compared with sales of $451 million in the second quarter of last year. United States Cleaning & Sanitizing sales were $964 million for the first six months of 2005, up 9 percent over net sales of $881 million in the comparable period of last year. Excluding acquisitions and divestitures, sales increased 8 percent for both the quarter and six months ended June 30, 2005. Sales in the second quarter benefited from double-digit growth in Institutional, Food & Beverage, Vehicle Care and Healthcare as well as good growth in Kay and Textile Care. The increase in sales of our Institutional division reflects good growth in end market segments and the successful introduction of new program initiatives. Kay’s sales growth moderated in the second quarter as results were negatively impacted by the promotional activity in the first quarter of 2005 and the comparison against a strong second quarter of 2004 that included the initial sales to a major new customer. Kay’s performance reflects solid growth for the quarter in food retail service and warehouse club sales as well as new account gains, more effective field sales coverage and new products and programs. Textile Care sales increased in the second quarter of 2005 due to growth in sales to existing customers, new customer gains and better account retention. Sales of our Professional Products operations grew modestly during the second quarter as new product introductions and growth in corporate account sales were offset by slower distributor sales. Excluding acquisitions, Professional Product sales decreased 2 percent for the second quarter of 2005 and increased 2 percent for the six months ended June 30, 2005. Our Healthcare division reported a strong sales increase versus last year due primarily to good sales of new instrument care solids and waterless skincare products. Our Food & Beverage operations reported a sales increase due to gains in the dairy, food, meat and poultry, soft drink and brewery markets reflecting better penetration of accounts with existing and new products as well as new business. Excluding acquisitions, Food & Beverage sales increased 5 percent and 4 percent for the second quarter and six months ended June 30, 2005, respectively. Water Care Services had strong sales growth driven by the acquisition of Midland Research Laboratories. Excluding the acquisition of Midland, Water Care Services sales were flat for the second quarter and rose 3 percent for the six months ended June 30, 2005. Vehicle Care sales increased due to improved market share in the street business as a result of an upgraded sales force and strong gains in the detail market.

Sales of our United States Other Services operations totaled $96 million for the second quarter of 2005, an increase of 12 percent over net sales of $86 million in the second quarter of last year. United State Other Services sales were $182 million for the first six months of 2005, an increase of 11 percent over net sales of $164 million in the comparable period of last year. Pest Elimination had double-digit sales increases in both the core pest elimination contract services and in non-contract services, driven by increases in new contracts, one-shot services, termite work, bird work and in its food safety audit business. GCS Service reported a strong increase over last year as service and installed parts sales increased significantly over last year. This sales increase was primarily from its existing client base as GCS continues to improve customer service satisfaction and increase technician productivity.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Second Quarter and Six Months Ended June 30, 2005 (continued)

Management rate sales for our International operations were $560 million for the second quarter of 2005, an increase of 5 percent over sales of $535 million in the comparable quarter of last year. For the first six months of 2005, sales increased 5 percent to $1.065 billion from $1.019 billion during the comparable period last year. Excluding the effects of acquisitions and divestitures, sales in our International operations increased 4 percent at management rates for both the quarter and six months ended June 30, 2005. Sales in Europe, excluding acquisitions and divestitures, increased 3 percent and 2 percent for the second quarter and six months ended June 30, 2005, respectively. Solid sales gains in eastern and northern Europe from new customers and new products were offset by consumption declines in major European countries. Sales for Asia Pacific increased as East Asia continues to experience double-digit sales growth due to new account gains. Excluding acquisitions, Latin America sales increased 14 percent for both the quarter and six month period. Sales were strong throughout the region with double-digit increases in Mexico, Argentina, Chile and Central America due to new customers and additional sales to existing customers. Sales in Canada increased 4 percent and 6 percent excluding acquisitions for the quarter and six months ended June 30, 2005, respectively, due to a moderate sales increase for Institutional and good results in most of the other divisions.

Operating income for each of our reportable segments for the quarters and six months ended June 30, 2005 and 2004 are as follows:

Operating income of our United States Cleaning & Sanitizing operations increased 3 percent and 1 percent from operating income in the second quarter and first six months of 2004, respectively. Excluding acquisitions and divestitures, operating income increased 3 percent for the second quarter and was flat in the first six months. The increase in operating income in the second quarter reflects the benefits of the higher sales, cost efficiencies and increased pricing being partially offset by higher delivered product costs. The operating income margin for the U.S. Cleaning & Sanitizing segment decreased to 15.6 percent of net sales from 16.7 percent in the second quarter of last year. The operating income margin decreased to 16.0 percent of sales from 17.3 percent of net sales for the six-month period. Excluding acquisitions and divestitures, the operating income margin for 2005 was 15.9 percent of net sales as compared to 16.7 percent in the second quarter of last year. For the six month period, the operating income margin for 2005 was 16.3 percent of net sales compared to 17.5 percent of net sales for 2004 excluding acquisitions and divestitures. Operating income margins declined because the negative impact of higher delivered product costs and acquisitions more than offset pricing, cost savings and sales leverage.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Second Quarter and Six Months Ended June 30, 2005 (continued)

Second quarter 2005 operating income of our United States Other Services operations increased 38 percent over the second quarter of 2004. For the six-month period, operating income increased 48 percent from the comparable period last year. The operating income margin for United States Other Services increased to 11.6 percent of net sales from 9.5 percent for the second quarter of last year. For the six-month period, the operating income margin was 10.8 percent, an increase from 8.1 percent for the same period last year. Other Services benefited from a $0.6 million patent settlement in the second quarter of 2004. For the six-month period, Other Services benefited from a $0.5 million patent settlement in 2005 and $2.1 million in 2004. The improvement in operating income reflects the benefits of the higher sales volume and improved operational efficiencies.

Operating income of our International operations increased 2 percent for the second quarter of 2005 at management rates. For the first six months of 2005, operating income increased 3 percent from the comparable period of last year. Excluding acquisitions and divestitures, operating income increased 2 percent for both the second quarter and six-month period. International operating income was favorably impacted by sales growth, pricing initiatives and cost efficiencies which were partially offset by higher delivered product costs. The reported operating income margin was 10.2 percent and 10.4 percent for the second quarter ended June 30, 2005 and 2004, respectively. For the six-month period ended June 30, 2005, the operating income margin decreased to 9.1 percent of net sales from 9.2 percent in the comparable period of last year. Acquisitions and divestitures had no impact on operating income margins for International in the second quarter or six-month period. Operating income margins declined because the impact of higher delivered product costs, investments and acquisitions more than offset pricing, cost savings and sales leverage.

Corporate operating income (expense) was $0.3 million and ($3.5) million for the second quarter and six months ended June 30, 2004. Corporate operating expense for the first six months of 2004 includes a charge of $4.0 million related to the disposal of a grease management product line offset by a reduction in restructuring accruals of $0.5 million.

Net interest expense totaled $12.2 million in the second quarter of 2005, an increase of 9 percent from net interest expense of $11.2 million in the second quarter of 2004. For the six-month period, net interest expense was $23.4 million and $22.4 million in 2005 and 2004, respectively. An increase in our U.S. interest expense due to higher commercial paper borrowings was partially offset by an increase in our international interest income due to higher European cash balances during 2005.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Second Quarter and Six Months Ended June 30, 2005 (continued)

The provision for income taxes for the second quarter of 2005 reflected an income tax rate of 35.5 percent as compared to an income tax rate of 37.2 percent for 2004. For the first six months, the provision for income taxes reflected an income tax rate of 35.3 percent for 2005 as compared to 37.2 percent for 2004. Excluding one-time benefits, the estimated effective income tax rate for the first six months of 2005 is 35.8 percent. The reduction in the 2005 effective tax rate is due to geographic mix, tax savings efforts, expected benefits provided for production activities under the American Jobs Creation Act and lower international rates.

Information regarding accounting pronouncements is included in Note 12 of the Condensed Notes to Consolidated Financial Statements.

Financial Position and Liquidity

Total assets were $3.730 billion at June 30, 2005, an increase of $14 million over total assets at year-end 2004. A portion of this increase is due to trade accounts receivable being up from year-end 2004 primarily due to an increase in sales volumes. This increase was offset by a decrease in the value of non U.S. assets on the balance sheet due to currency translation as the U.S. dollar strengthened against the euro relative to December 31, 2004.

Total debt was $768 million at June 30, 2005, up from total debt of $702 million at year-end 2004, primarily related to the repurchase of 3.6 million shares ($119 million) under our authorized share repurchase program and the financing of acquisitions. The ratio of total debt to capitalization was 33 percent at June 30, 2005 compared to 31 percent at December 31, 2004 due to an increase in total debt outstanding. We are in compliance with all of our debt covenants and believe we have ample borrowing capacity to meet our reasonably foreseeable operating needs.

Cash provided by operating activities totaled $233 million for both the first six months of 2005 and 2004. Operating cash flows for 2005 were flat when compared to 2004 as the increase in sales was offset by an increase in accounts receivable in the first six months of 2005.

At December 31, 2004, the schedule of contractual obligations included in the Liquidity and Capital Resources section of the 2004 10-K listed total notes payable and amount due within one year as $50,980,000. As of June 30, 2005, the total notes payable and amount due within one year is $150,640,000. These additional borrowings were used primarily to fund the repurchase of approximately 3.6 million ($119 million) shares of the company’s stock in the first quarter of 2005.

We currently expect to fund all of the requirements which are reasonably foreseeable for the remainder of 2005, including new program investments, scheduled debt repayments, dividend payments, possible acquisitions and share repurchases from operating activities, cash reserves and short-term borrowings. In the event of a significant acquisition or other significant funding need, funding may occur through additional long-term borrowing or through the issuance of the company’s stock.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We primarily use interest rate swaps and foreign currency forward contracts and foreign currency debt to manage risks generally associated with interest rate and foreign exchange rate volatility and net investments in our foreign operations. To the extent applicable, all derivative instruments are designated and effective as hedges, in accordance with accounting principles generally accepted in the United States of America. We do not hold derivative financial instruments of a speculative nature. For a more detailed discussion of derivative instruments, refer to the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2004.

Item 4. Controls and Procedures.

As of June 30, 2005, we carried out an evaluation, under the supervision and with the participation of our management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

During the period April 1 through June 30, 2005, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Forward-Looking Statements and Risk Factors

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In this report on Form 10-Q, management discusses expectations regarding future performance of the company which include contributions to our international benefit plans, future accounting for repatriations, borrowing capacity, favorable liquidity, and similar business and financial matters. Without limiting the foregoing, words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “we believe,” “estimate,” “project” (including the negative or variations thereof) or similar terminology, generally identify forward-looking statements. Additionally, the company may refer to this section of the Form 10-Q to identify risk factors related to other forward looking statements made in oral presentations including telephone conferences and/or webcasts available to the public.

Forward-looking statements represent challenging goals for the company. As such, they are based on certain assumptions and estimates and are subject to certain risks and uncertainties. The company cautions that undo reliance should not be placed on such forward-looking statements, which speak only as of the date made. In order to comply with the terms of the safe harbor, the company hereby identifies important factors, which could affect the company’s financial performance and could cause the company’s actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. These factors should be considered, together with any similar risk factors or other cautionary language, which may be made in the section of this report containing the forward-looking statement.

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