UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the transition period from                    to                    

Commission File No. 1-9328

ECOLAB INC.

(Exact name of registrant as specified in its charter)

370 Wabasha Street N., St. Paul, Minnesota  55102

 (Address of principal executive offices) (Zip Code)

651-293-2233

(Registrant’s telephone number, including area code)

(Not Applicable)

(Former name, former address and former fiscal year,

if changed since last report)

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 ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ý      Accelerated Filer   o  Non-Accelerated Filer o

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

Yes o    No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 31, 2006.

251,626,948 shares of common stock, par value $1.00 per share.

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, 2006 and 2005, reflect, in the opinion of management, all adjustments necessary for a fair statement 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, 2005 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, 2005.

With respect to the unaudited financial information of the company for the second quarters and six months ended June 30, 2006 and 2005 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, 2006 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.               Share-Based Compensation

Effective October 1, 2005, the company early-adopted Statement of Financial Accounting Standards No.123 (Revised 2004) Share-Based Payment, (SFAS No.123R) under the modified retrospective application method. SFAS No.123R requires the company to measure compensation expense for share-based awards at fair value at the date of grant and recognize compensation expense over the service period for awards expected to vest. As part of the transition to the new standard, all prior period financial statements were restated to recognize share-based compensation expense historically reported in the notes to the consolidated financial statements.

Total compensation expense related to share-based compensation plans was $8.5 million ($5.4 million net of tax benefit) and $8.2 million ($5.2 million net of tax benefit) for the second quarters ended June 30, 2006 and 2005, respectively. Total compensation expense related to share-based compensation plans was $16.5 million ($10.5 million net of tax benefit) and $16.7 million ($10.5 million net of tax benefit) for the six months ended June 30, 2006 and 2005, respectively.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.               Share-Based Compensation (continued)

Effective with the company’s adoption of SFAS No.123R, new stock option grants to retirement eligible recipients are attributed to expense using the non-substantive vesting method and are fully expensed by the time recipients attain at least age 55 with at least 5 years of service. If the company had used the non-substantive vesting method during all periods, net income would have been increased by $0.7 million and $0.6 million for the quarters ended June 30, 2006 and 2005, respectively, and $1.4 million and $0.9 million during the six months ended June 30, 2006 and 2005, respectively. During the second quarter and six months ended June 30, 2006, approximately 0.8 million and 2.2 million shares, respectively, were issued for stock option exercises.

3.               Selected Balance Sheet Information

Accumulated other comprehensive income as of June 30, 2006 consists of $2.6 million of net unrealized losses on financial instruments and $29.4 million of additional minimum pension liabilities as well as $79.2 million of cumulative translation income. Accumulated other comprehensive income as of December 31, 2005 consists of $0.3 million of net unrealized gains on financial instruments and $27.1 million of additional minimum pension

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.               Selected Balance Sheet Information (continued)

liabilities as well as $36.6 million of cumulative translation income. The increase in cumulative translation income since December 31, 2005 is due to the weakening of the U.S. dollar against foreign currencies, primarily the euro. The increase in treasury stock is primarily due to the repurchase of approximately $190 million (5 million shares) of the company’s stock during the first six months of 2006.

Interest expense was $12.5 million for the second quarter of 2006 and $24.6 million for the six months ended June 30, 2006. Interest expense was $13.2 million for the second quarter of 2005 and $25.2 million for the six months ended June 30, 2005. Interest income was $1.5 million for the second quarter of 2006 and $3.3 million for the six months ended June 30, 2006. Interest income was $1.0 million for the second quarter of 2005 and $1.8 million for the six months ended June 30, 2005.

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 euronotes which 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 losses of $26.8 million and gains of $28.2 million for the second quarter of 2006 and 2005, respectively, and losses of $31.2 million and gains of $30.0 million for the first six months of 2006 and 2005, respectively.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.               Comprehensive Income

Comprehensive income was as follows:

6.               Business Acquisitions and Investments

The total cash paid related to acquisition and investment activity was $6.0 million and $6.9 million during the second quarter of 2006 and 2005, respectively. The total cash paid related to acquisition and investment activity was $6.8 million and $27.9 million during the first six months of 2006 and 2005, respectively. The aggregate purchase price of acquisitions and investments in affiliates has been reduced for any cash or cash equivalents acquired with the acquisitions.

Based upon purchase price allocations the components of the aggregate purchase prices of the acquisitions and investments in affiliates made during the second quarter and six months ended June 30, 2006 and 2005, were as follows:

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.               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, 2006 were as follows:

Goodwill acquired in 2006 relates to adjustments to prior year acquisitions, including earnout payments. Goodwill disposed of in 2006 relates to the sale of a small business in Europe.

In June 2006, subsequent to the company’s fiscal quarter end for International operations, the company acquired Shield Medicare Ltd., a Farnham, United Kingdom-based developer, manufacturer and marketer of contamination control products used in pharmaceutical, medical device and hospital clean rooms. Shield Medicare Ltd. has annual sales of approximately $19 million and will become part of the company’s International operations beginning in the third quarter of 2006.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.               Pension and Postretirement Plans

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

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

The company is not required to make any contributions to its U.S. pension plan and postretirement health care benefits plans for 2006. However, in the first quarter of 2006 the company made a $45 million voluntary contribution to the U.S. pension plan. The company made no contributions to

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.               Pension and Postretirement Plans (continued)

the plan during the second quarter of 2006. The maximum tax deductible contribution for 2006 is estimated to be approximately $40 to $50 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 approximately $4.4 million and $8.8 million to its international pension benefit plans during the second quarter and six months ended June 30, 2006, respectively. The company currently estimates that it will contribute approximately $5 to $10 million to the international pension benefit plans during the remainder of 2006.

9.               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 2006.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.         Goodwill and Other Intangible Assets

Under Statement of Financial Accounting Standards (SFAS) No. 142, goodwill must be tested annually for impairment. The company performs its annual goodwill impairment test during the second quarter. If circumstances change significantly within a reporting unit, the company would test for impairment prior to the annual test for impairment. As of June 30, 2006, the company has completed its annual test for goodwill impairment. 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 14 and 13 years as of June 30, 2006 and 2005, 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, 2006 and 2005 was approximately $5.8 million and $6.0 million, respectively. Total amortization expense related to other intangible assets during the six months ended June 30, 2006 and 2005 was approximately $11.1 million and $12.0 million, respectively. As of June 30, 2006, 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)

11.         New Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertain tax positions in accordance with FASB Statement No. 109, Accounting for Income Taxes. The company will be required to recognize, in its financial statements, the largest tax benefit of a tax position that is “more-likely-than-not” to be sustained on audit based solely on the technical merits of the position as of the reporting date. FIN 48 also provides guidance on new disclosure requirements, reporting and accrual of interest and penalties, accounting in interim periods, and transition. FIN 48 is effective for the company beginning January 1, 2007 with the cumulative effect of initially applying FIN 48 recognized as a change in accounting principle recorded as an adjustment to opening retained earnings. The company is currently evaluating the impact of adopting FIN 48 on the financial statements.

No other new accounting pronouncement issued or effective has had or is expected to have a material impact on the company’s consolidated financial statements.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash flows and financial condition. The discussion should be read in conjunction with the unaudited consolidated financial information and related notes included in this Form 10-Q.

The following discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statement entitled “Forward-Looking Statements” located at the end of Part I of this report.

We early-adopted the provisions of Statement of Financial Accounting Standard No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R), the new accounting standard for expensing stock options, in the fourth quarter of 2005. As part of the transition to the new standard, all prior period financial statements were restated to recognize share-based compensation expense historically reported in the notes to our consolidated financial statements. All financial results presented in this Form 10-Q include the impact of expensing stock options.

Overview for the Quarter Ended June 30, 2006

The second quarter of 2006 provided another quarter of strong growth as diluted net income per share rose 16 percent to $0.36 per share. Consolidated net sales reached a record $1.2 billion, led by continued strong sales growth in North America, Latin America and Asia Pacific.

Sales Performance

•                  Sales of our United States Cleaning & Sanitizing operations rose 10 percent to $544 million in the second quarter of 2006, led by double-digit sales growth by Institutional, Kay and Vehicle Care. Food & Beverage also continued to show good sales growth over last year.

•                  Sales of our United States Other Services operations increased 9 percent to $105 million, with 13 percent sales growth by Pest Elimination.

•                  Sales of our International operations rose 5 percent to $562 million in the second quarter when measured in fixed currency rates. Latin America and Canada showed double-digit sales gains in the second quarter, while Asia Pacific reported good sales growth. Europe recorded a moderate sales gain. Foreign currency translation had an unfavorable impact on sales. When measured at public currency rates, International sales increased 2 percent.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Performance

•                  Diluted net income per share was $0.36 for the second quarter of 2006, up 16 percent from $0.31 in the second quarter of 2005.

•                  Currency translation continued to have a negative impact on our net income, decreasing net income by approximately $1 million for the second quarter and $2 million for the first six months of 2006.

•                  Our income tax rate was 35.0 percent in the first six months of 2006 compared to 35.2 percent in 2005. Excluding one-time benefits, the estimated effective income tax rate was 35.7 percent for both 2006 and 2005.

•                  We repurchased 2.9 million shares of our common stock during the second quarter under our share repurchase program.

Results of Operations - Second Quarter and Six Months Ended June 30, 2006

Consolidated net sales for the second quarter ended June 30, 2006 were $1.226 billion, an increase of 6 percent over net sales of $1.159 billion in the second quarter of last year. For the first six months of 2006, net sales increased by 5 percent to $2.346 billion. Sales volume and selling price increases were partially offset by unfavorable foreign currency translation which decreased sales growth by 1 percentage point for the second quarter and 2 percentage points for the six months ended June 30, 2006. Sales rose 7 percent for both the second quarter and six months ended June 30, 2006 when measured in fixed currency rates.

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 50.4 percent and 50.7 percent for the second quarter of 2006 and 2005, respectively. For the six-month periods, the gross profit margins were 50.5 in 2006 and 50.7 in 2005. Selling price increases and our cost savings initiatives more than offset higher delivered product costs. However, new customer installations in the second quarter resulted in lower margins. We expect gross margins to show year over year improvement through the remainder of 2006. We expect raw material costs to increase through 2006 but we anticipate the year over year increase to be lower than we experienced in 2005.

Selling, general and administrative expenses were 37.9 percent of consolidated net sales for the second quarter of 2006, a decrease from 38.8 percent of net sales in the comparable quarter of last year. For the six-month period, selling, general and administrative expenses also decreased as a percentage of net sales to 38.4 in 2006 from 39.2 percent in 2005. Selling, general and administrative expenses as a percent of net sales improved primarily due to pricing, cost savings programs and sales leverage which more than offset investments made in the business.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Position and Liquidity (continued)

Effective June 1, 2006, we amended and restated our $450 million Multi-Currency Credit Agreement which amended the agreement by, among other things, deleting the financial covenant regarding total debt to capitalization, increasing the lien basket from $75 million to $100 million, extending the term of the agreement from August 2009 to June 2011 and changing the pricing grid for fees and interest.

We currently expect to fund all of the requirements which are reasonably foreseeable for the remainder of 2006, including new program investments, share repurchases, scheduled debt repayments, dividend payments, possible acquisitions and pension contributions with cash 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 short and/or long-term borrowing or through the issuance of the company’s stock.

New Accounting Pronouncement

In July 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertain tax positions in accordance with FASB Statement No. 109, Accounting for Income Taxes. We are currently evaluating the impact of applying this interpretation as of January 1, 2007, the effective date of the interpretation for the company. See Footnote 11 for additional information.

Subsequent Events

In June 2006, subsequent to our fiscal quarter end for International operations, we acquired Shield Medicare Ltd., a Farnham, United Kingdom-based developer, manufacturer and marketer of contamination control products used in pharmaceutical, medical device and hospital clean rooms. Shield Medicare Ltd. has annual sales of approximately $19 million and will become part of our International operations beginning in the third quarter of 2006.

In July 2006, we entered into a private placement offering consisting of two senior notes totaling euro 300 million ($384 million as of June 30, 2006). The terms of the senior notes are euro 125 million ($160 million as of June 30, 2006) at 4.355 percent due December 2013 and euro 175 million ($224 million as of June 30, 2006) at 4.585 percent due December 2016. Funding for the private placement is set for December 2006. We intend to use the proceeds to refinance our euro 300 million ($384 million as of June 30, 2006) 5.375 percent Euronotes which become due in February 2007.

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PART II. OTHER INFORMATION

Item 1.                       Legal Proceedings.

The New York State Department of Environmental Conservation issued a Notice of Violation in March 2006 alleging that two products had been sold by us with phosphorous levels exceeding New York State requirements for certain household cleansing products. The State seeks an administrative penalty approximating $500,000. We have provided information to the State resolving allegations relating to one of the products that is not in violation of the relevant statute, have suspended sales of the other product, and have held initial discussions with the State attempting to resolve the matter. We anticipate that this matter will not have a material effect on our consolidated results of operations, financial position or cash flows.

The Berkeley County Public Service Sewer District (“District”) notified us in March 2006 of an enforcement action filed by the West Virginia Department of Environmental Protection against the District. The action relates to environmental violations at several of the District’s wastewater treatment plants, including an industrial pre-treatment plant serving our facility in Martinsburg, West Virginia. The District seeks contribution from us in the amount of $150,000, which we have agreed to pay. The preliminary monetary settlement, as well as the scope of any potential facility improvements for which we may agree to be responsible, would be subject to approval by Berkeley County. We anticipate that this matter will not have a material effect on our consolidated results of operations, financial position or cash flows.

In June 2006, Ecolab received notice from the Connecticut Department of Environmental Protection alleging violations of state regulatory requirements for the business of commercial pesticide applications. This matter relates mainly to supervisory issues relative to application procedures. We have preliminarily agreed with the State to resolve the matter for approximately $580,000, comprised of payment of a financial penalty and performance of supplemental environmental projects. We anticipate that this matter will not have a material effect on our consolidated results of operations, financial position or cash flows.

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Item 1A.    Risk Factors.

In our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2006, we identify under Item 1A important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Form 10-Q. There has been no material change in our risk factors subsequent to the filing of our Form 10-K. However, the risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties that we currently deem to be immaterial or not currently known to us, as well as other risks reported from time to time in our reports to the Securities and Exchange Commission, also could cause our actual results to differ materially from our anticipated results or other expectations.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds.

(c) Issuer Purchases of Equity Securities

(1)   Includes brokerage commissions paid, plus the value of 12,909 shares reacquired from employees and/or directors as swaps for the cost of stock options, or shares surrendered to satisfy minimum statutory tax obligations, under our stock incentive plans.

(2)   On December 9, 2004, our Board of Directors authorized the repurchase of up to 10,000,000 shares of Common Stock, including shares to be repurchased under Rule 10b5-1.  We intend to repurchase all shares under this authorization, for which no expiration date has been established, in open market or privately negotiated transactions, subject to market conditions.

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

Our Annual Meeting of Stockholders was held on May 12, 2006. At the meeting, 91.26% of the outstanding shares of our voting stock were represented in person or by proxy. The first proposal voted upon was the election of four Class II Directors for a term ending at the annual meeting in 2009. The four persons nominated by our Board of Directors received the following votes and were elected:

In addition, the terms of office of the following directors continued after the meeting:  Class III Directors for a term ending in 2007 – Richard U. De Schutter, Joel W. Johnson, Ulrich Lehner, and Beth M. Pritchard; and Class I Directors for a term ending in 2008 – Douglas M. Baker, Jr.,  Stefan Hamelmann, Jerry W. Levin, and Robert L. Lumpkins.

The second proposal voted upon was the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the year ending December 31, 2006.

The proposal received the following votes and was ratified:

Item 6.    Exhibits.

(a) The following documents are filed as exhibits to this report:

(10)                            Multicurrency Credit Agreement, dated as of September 29, 1993, as amended and restated as of June 1, 2006, among Ecolab Inc., the financial institutions party thereto as Banks from time to time, the financial institutions party thereto as Issuing Banks from time to time, Citibank, N.A., as administrative agent for the Banks and Issuing Banks thereunder, Citibank International PLC, as agent for the Banks in connection with certain of the Eurocurrency Advances, and JPMorgan Chase Bank, N.A., as syndication agent – Incorporated by reference to Exhibit (10) of our Form 8-K dated June 1, 2006.

(15)                            Letter regarding unaudited interim financial information.

(31)                            Rule 13a - 14(a) Certifications.

(32)                            Section 1350 Certifications.

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