UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


ý	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2004

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~For the transition period from to~~

For the transition period from to

Commission File No. 1-9328

ECOLAB INC.
(Exact name of registrant as specified in its charter)

Delaware		41-0231510
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of ~~June 30,~~October 31, 2004.

~~257,440,930~~257,706,764 shares of common stock, par value $1.00 per share.

Table of Contents

PART I	FINANCIAL INFORMATION
			Item 1. Financial Statements.
			•	Consolidated Statement of Income
			•	Consolidated Balance Sheet
			•	Consolidated Statement of Cash Flows
			Notes to Consolidated Financial Statements
			•	1.		Consolidated Financial Information
			•	2.		Stock-Based Compensation
			•	3.		Selected Balance Sheet Information
			•	4.		Financial Instruments
			•	5.		Comprehensive Income
			•	6.		Special Charges
			•	7.		Business Acquisitions and Investments
			•	8.		Net Income Per Common Share
			•	9.		Pension and Postretirement Plans
			•	10.		Operating Segments
			•	11.		Goodwill and Other Intangible Assets
			•	12.		New Accounting Pronouncements
			•	13.		Subsequent Events
			Report of Independent Accountants
			Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
			•		Overview
			•		Results of Operations - Third Quarter and Nine Months Ended September 30, 2004
			•		Financial Position and Liquidity
			•		Subsequent Events
			Item 3. Quantitative and Qualitative Disclosures About Market Risk.
			Item 4. Controls and Procedures.
			Forward-Looking Statements and Risk Factors

PART II		OTHER INFORMATION
			Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
			Item 6. Exhibits.

PART I - - FINANCIAL INFORMATION

Item 1.1. Financial Statements.

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

	Second Quarter Ended June 30						Third Quarter Ended September 30
(amounts in thousands, except per share)	2004			2003			2004		2003
	(unaudited)						(unaudited)

Net sales	$	1,042,711		$	946,735		$	1,090,316	$	982,766

Cost of sales	504,609			466,734			519,669		478,163

Selling, general and administrative expenses	402,487			358,783			410,360		357,923

Special charges (income)	(254		)	(147		)
Special charges							1,345		1,224

Operating income	135,869			121,365			158,942		145,456

Gain on sale of equity investment							—		10,877

Interest expense, net	11,217			11,752			11,566		12,051

Income before income taxes	124,652			109,613			147,376		144,282

Provision for income taxes	46,359			42,458			52,429		56,843

Net income	$	78,293		$	67,155		$	94,947	$	87,439

Basic net income per common share	$	0.30		$	0.26		$	0.37	$	0.34

Diluted net income per common share	$	0.30		$	0.25		$	0.36	$	0.33

Dividends declared per common share	$	0.0800		$	0.0725		$	0.0800	$	0.0725

Weighted-average common shares outstanding
Basic	257,135			261,246			258,368		258,694
Diluted	260,905			264,553			262,252		261,609

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

~~ECOLAB INC.~~

~~CONSOLIDATED STATEMENT OF INCOME~~

	Six Months Ended June 30					Nine Months Ended September 30
(amounts in thousands, except per share)	2004		2003			2004		2003
	(unaudited)					(unaudited)

Net sales	$	2,022,082	$	1,822,587		$	3,112,398	$	2,805,353

Cost of sales	978,703		897,216			1,498,372		1,375,379

Selling, general and administrative expenses	787,820		702,816			1,198,180		1,060,739

Special charges (income)	3,551		(344		)
Special charges						4,896		880

Operating income	252,008		222,899			410,950		368,355

Gain on sale of equity investment						—		10,877

Interest expense, net	22,390		22,455			33,956		34,506

Income before income taxes	229,618		200,444			376,994		344,726

Provision for income taxes	85,319		77,971			137,748		134,814

Net income	$	144,299	$	122,473		$	239,246	$	209,912

Basic net income per common share	$	0.56	$	0.47		$	0.93	$	0.81

Diluted net income per common share	$	0.55	$	0.46		$	0.92	$	0.80

Dividends declared per common share	$	0.1600	$	0.145		$	0.2400	$	0.2175

Weighted-average common shares outstanding
Basic	257,080		260,847			257,509		260,129
Diluted	260,645		264,236			261,240		263,378

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

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

(amounts in thousands)	June 30 2004		December 31 2003		September 30 2004		December 31 2003
	(unaudited)				(unaudited)

ASSETS

Current assets

Cash and cash equivalents	$	41,246	$	85,626	$	72,097	$	85,626

Accounts receivable (net of allowance of $45,014 at June 30, 2004 and $44,011 at December 31, 2003)	676,158		626,002
Accounts receivable (net of allowance of $44,753 at September 30, 2004 and $44,011 at December 31, 2003)					739,057		626,002

Inventories	322,453		309,959		325,951		309,959

Deferred income taxes	76,359		75,820		75,984		75,820

Other current assets	64,390		52,933		53,456		52,933

Total current assets	1,180,606		1,150,340		1,266,545		1,150,340

Property, plant and equipment, net	771,963		736,797		783,210		736,797

Goodwill, net	890,937		797,211		934,671		797,211

Other intangible assets, net	228,264		203,859		221,875		203,859

Other assets, net	341,062		340,711		343,111		340,711

Total assets	$	3,412,832	$	3,228,918	$	3,549,412	$	3,228,918

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

~~ECOLAB INC.~~

~~CONSOLIDATED BALANCE SHEET (Continued)~~

(amounts in thousands, except per share)	June 30 2004		December 31 2003		September 30 2004		December 31 2003
	(unaudited)				(unaudited)

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Short-term debt	$	100,976	$	70,203	$	83,312	$	70,203

Accounts payable	226,164		212,287		251,921		212,287

Compensation and benefits	191,496		190,386		214,342		190,386

Income taxes	48,561		59,829		68,043		59,829

Other current liabilities	342,233		319,237		350,370		319,237

Total current liabilities	909,430		851,942		967,988		851,942

Long-term debt	611,385		604,441		611,378		604,441

Postretirement health care and pension benefits	250,899		249,906		254,199		249,906

Other liabilities	246,396		227,203		245,321		227,203

Shareholders’ equity (common stock, par value $1.00 per share; shares outstanding: June 30, 2004 - 257,441; December 31, 2003 - 257,417)	1,394,722		1,295,426
Shareholders’ equity (common stock, par value $1.00 per share; shares outstanding: September 30, 2004 - 257,512; December 31, 2003 – 257,417)					1,470,526		1,295,426

Total liabilities and shareholders’ equity	$	3,412,832	$	3,228,918	$	3,549,412	$	3,228,918

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

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

	Six Months Ended June 30						Nine Months Ended September 30
(amounts in thousands)	2004			2003			2004			2003
	(unaudited)						(unaudited)

OPERATING ACTIVITIES

Net income	$	144,299		$	122,473		$	239,246		$	209,912

Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	106,310			100,484			159,981			152,116
Amortization	16,379			13,285			25,218			21,391
Deferred income taxes	(70		)	(525		)	(140		)	2,054
Gain on sale of equity investment							—			(10,877		)
Disposal loss	3,980			—			3,980			—
Charge for in-process research and development							1,600			—
Special charges - asset disposals	—			(7		)	—			1,665
Other, net	(39		)	1,003			(717		)	1,063
Changes in operating assets and liabilities:
Accounts receivable	(29,524		)	(34,798		)	(89,146		)	(59,315		)
Inventories	(4,411		)	(13,372		)	(9,104		)	(8,681		)
Other assets	(5,513		)	1,812			(628		)	18,020
Accounts payable	2,316			2,044			27,331			(5,922		)
Other liabilities	(597		)	28,070			59,156			77,456

Cash provided by operating activities	$	233,130		$	220,469		$	416,777		$	398,882

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

~~ECOLAB INC.~~

~~CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)~~

	Six Months Ended June 30						Nine Months Ended September 30
(amounts in thousands)	2004			2003			2004			2003
	(unaudited)						(unaudited)

INVESTING ACTIVITIES

Capital expenditures	$	(129,165	)	$	(97,604	)	$	(188,579	)	$	(148,649	)
Property disposals	6,190			3,849			12,184			5,731
Capitalized software expenditures	(2,111		)	(1,725		)	(3,501		)	(5,912		)
Businesses acquired and investments in affiliates	(128,931		)	(27,893		)
Businesses acquired and investments in affiliates, net of cash acquired							(130,517		)	(28,881		)
Sale of businesses and assets	3,292			7,334			3,292			24,832

Cash used for investing activities	(250,725		)	(116,039		)	(307,121		)	(152,879		)

FINANCING ACTIVITIES

Net issuances (repayments) of notes payable	31,713			(62,719		)	14,232			(83,246		)
Long-term debt borrowings	2,273			16			3,641			16
Long-term debt repayments	(1,492		)	(9,964		)	(2,400		)	(10,065		)
Reacquired shares	(41,336		)	(129,532		)	(104,291		)	(198,947		)
Cash dividends on common stock	(41,184		)	(37,740		)	(61,775		)	(56,643		)
Exercise of employee stock options	23,081			114,454			27,982			119,525
Other, net	206			(80		)	(564		)	(129		)

Cash used for financing activities	(26,739		)	(125,565		)	(123,175		)	(229,489		)

Effect of exchange rate changes on cash	(46		)	2,502			(10		)	1,243

DECREASE IN CASH AND CASH EQUIVALENTS	(44,380		)	(18,633		)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS							(13,529		)	17,757

Cash and cash equivalents, beginning of period	85,626			49,205			85,626			49,205

Cash and cash equivalents, end of period	$	41,246		$	30,572		$	72,097		$	66,962

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

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Consolidated Financial Information

The unaudited consolidated financial information as of ~~June~~September 30, 2004 and for the three and ~~six-month~~nine-month periods ended ~~June~~September 30, 2004 and 2003, 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, 2003 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 statements 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, 2003.

With respect to the unaudited financial information of the company as of ~~June~~September 30, 2004 and for the three and ~~six-month~~nine-month periods ended ~~June~~September 30, 2004 and 2003, 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 22,~~October 21, 2004 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 (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~~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 three and ~~six-month~~nine-month periods ended ~~June~~September 30, 2004 and 2003 would have been reduced to the pro forma amounts in the following table.

~~ECOLAB INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

2.~~Stock-Based Compensation (continued)~~

	Second Quarter Ended June 30						Six Months Ended June 30						Third Quarter Ended September 30						Nine Months Ended September 30
	2004			2003			2004			2003			2004			2003			2004			2003
	(unaudited)						(unaudited)						(unaudited)						(unaudited)

Net income, as reported	$	78,293		$	67,155		$	144,299		$	122,473		$	94,947		$	87,439		$	239,246		$	209,912

Add: Stock-based employee compensation expense included in reported net income, net of tax	58			428			114			713			61			171			175			884

Deduct: Total stock-based employee compensation expense under fair value-based method, net of tax	(4,705		)	(4,700		)	(9,496		)	(9,233		)	(4,728		)	(4,395		)	(14,224		)	(13,628		)

Pro forma net income	$	73,646		$	62,883		$	134,917		$	113,953		$	90,280		$	83,215		$	225,197		$	197,168

Basic net income per common share
As reported	$	0.30		$	0.26		$	0.56		$	0.47		$	0.37		$	0.34		$	0.93		$	0.81
Pro forma	0.29			0.24			0.52			0.44			0.35			0.32			0.87			0.76

Diluted net income per common share
As reported	0.30			0.25			0.55			0.46			0.36			0.33			0.92			0.80
Pro forma	$	0.28		$	0.24		$	0.52		$	0.43		$	0.34		$	0.32		$	0.86		$	0.75

3. Selected Balance Sheet Information

(amounts in thousands)	June 30 2004			December 31 2003			September 30 2004			December 31 2003
	(unaudited)
							(unaudited)
Inventories
Finished goods	$	161,958		$	159,633		$	156,035		$	159,633
Raw materials and parts	163,886			152,127			173,289			152,127
Excess of fifo cost over lifo cost	(3,391		)	(1,801		)	(3,373		)	(1,801		)
Total	$	322,453		$	309,959		$	325,951		$	309,959

Other intangible assets, net
Customer relationships	$	181,413		$	153,479		$	175,591		$	153,479
Intellectual property	34,396			77,793			37,306			77,793
Trademarks	59,490			52,283			61,814			52,283
Other intangibles	17,506			16,012			16,871			16,012
Total	292,805			299,567			291,582			299,567

Accumulated amortization
Customer relationships	(33,353		)	(27,565		)	(36,743		)	(27,565		)
Intellectual property	(6,769		)	(45,809		)	(7,272		)	(45,809		)
Trademarks	(10,779		)	(9,313		)	(11,756		)	(9,313		)
Other intangibles	(13,640		)	(13,021		)	(13,936		)	(13,021		)
Other intangible assets, net	$	228,264		$	203,859		$	221,875		$	203,859

~~ECOLAB INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

3.~~Selected Balance Sheet Information (continued)~~

(amounts in thousands)	June 30 2004			December 31 2003			September 30 2004			December 31 2003
	(unaudited)
							(unaudited)
Shareholders’ equity
Common stock	$	311,805		$	310,284		$	313,940		$	310,284
Additional paid-in capital	398,262			369,015			459,553			369,015
Retained earnings	1,463,000			1,359,879			1,537,303			1,359,879
Deferred compensation, net	(224		)	(410		)	(301		)	(410		)
Accumulated other comprehensive income	10,604			4,098			11,684			4,098
Treasury stock	(788,725		)	(747,440		)	(851,653		)	(747,440		)
Total	$	1,394,722		$	1,295,426		$	1,470,526		$	1,295,426

Accumulated other comprehensive income as of ~~June~~September 30, 2004 consists of ~~$11.4~~$11.8 million of net unrealized losses primarily on financial instruments and additional minimum pension liabilities and ~~$22.0~~$23.5 million of cumulative translation income. Accumulated other comprehensive income as of December 31, 2003 consists of $12.0 million of net unrealized losses primarily on financial instruments and additional minimum pension liabilities and $16.1 million of cumulative translation income.

4. Financial Instruments

In February 2002, the company issued euro 300 million of 5.375 percent Euronotes, due February 2007. The company has designated ~~a portion~~this Euronote debt (euro 300 million as of the end of the ~~second~~third quarter 2004) ~~of 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 or credited to the foreign currency translation account that is a component of shareholders’ equity were gains of ~~$8.7~~$0.4 million and ~~losses of $26.9~~$24.2 million for the ~~second~~third quarter of 2004 and 2003, respectively, and losses of ~~$5.9~~$5.5 million and ~~$44.0~~$22.3 million for the first ~~six~~nine months of 2004 and 2003, respectively.

~~ECOLAB INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

5. Comprehensive Income

Comprehensive income was as follows:

	Second Quarter Ended June 30						Six Months Ended June 30					Third Quarter Ended September 30						Nine Months Ended September 30
(amounts in thousands)	2004			2003			2004		2003			2004			2003			2004		2003
	(unaudited)						(unaudited)					(unaudited)						(unaudited)

Net income	$	78,293		$	67,155		$	144,299	$	122,473		$	94,947		$	87,439		$	239,246	$	209,912

Foreign currency translation	(18,082		)	37,996			5,926		72,283			1,506			(27,146		)	7,432		45,137

Derivative instruments, net of tax	326			(760		)	580		(1,782		)	(426		)	980			154		(802		)

Comprehensive income	$	60,537		$	104,391		$	150,805	$	192,974		$	96,027		$	61,273		$	246,832	$	254,247

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 primarily represent contractual periodic payments to be made over time.

The ~~second~~third quarter and ~~six~~nine months ended ~~June~~September 30, 2004 ~~includes~~include the reversal of ~~$270,000~~$255,000 and ~~$495,000,~~$750,000, respectively, of previously accrued estimated severance and lease termination costs. Of the ~~$270,000~~$750,000 reversed in the ~~second quarter of 2004, $16,000~~first nine months, $66,000 is included as a component of cost of sales. The three- and nine-month periods ended September 30, 2003 include the reversal of $448,000 and $837,000, respectively, of previously accrued severance cost. Of the ~~$495,000~~$837,000 reversed infor the ~~first six months, $66,000~~nine-month period ended September 30, 2003, $45,000 is included as a component of cost of sales.

Also included in “Special Charges” for the third quarter and nine months ended September 30, 2004 is $1.6 million of in-process research and development charges related to the Alcide acquisition. These charges include the portion of the purchase price assigned to research and development projects not yet completed at the date of acquisition and which have no alternative future use. For the first ~~six~~nine months of 2004 is“Special Charges” also includes a loss related to the disposal of a grease management product line of the Institutional division of the U.S. Cleaning & Sanitizing segment of $4.0 million ($2.4 million after tax). For the three- and nine month periods ended September 30, 2003, “Special Charges” also includes $1.7 million of expense related to a change in the amount of goodwill allocated to the Darenas business sold in 2003.

Restructuring liabilities are classified as a component of other current liabilities.

~~ECOLAB INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

6.~~Special Charges (continued)~~

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.

Changes to the restructuring liability accounts include the following:

(unaudited) (amounts in thousands)	Employee Termination Benefits			Asset Disposals			Other			Total
													Employee Termination Benefits			Asset Disposals			Other			Total
(unaudited)
(amounts in thousands)
Initial expense and accrual	$	36,366		$	6,180		$	5,221		$	47,767				$	36,366		$	6,180		$	5,221		$	47,767
Cash payments	(16,033		)				(1,711		)	(17,744		)			(16,033		)				(1,711		)	(17,744		)
Non-cash charges				(6,180		)				(6,180		)				(6,180		)				(6,180		)

Restructuring liability, December 31, 2002	$	20,333		$	—		$	3,510		$	23,843		$	20,333		$	—		$	3,510		$	23,843
Cash payments	(16,770		)				(2,471		)	(19,241		)	(16,770		)				(2,471		)	(19,241		)
Non-cash credits				7						7						7						7
Revisions to prior estimates	(1,352		)	(7		)				(1,359		)	(1,352		)	(7		)				(1,359		)
Effect of foreign currency translation	1,222						670			1,892			1,222						670			1,892

Restructuring liability, December 31, 2003	$	3,433		$	—		$	1,709		$	5,142		$	3,433		$	—		$	1,709		$	5,142
Cash payments	(1,451		)				(88		)	(1,539		)	(1,451		)				(88		)	(1,539		)
Revisions to prior estimates	(127		)				(98		)	(225		)	(127		)				(98		)	(225		)
Effect of foreign currency translation	211						116			327			211						116			327

Restructuring liability, March 31, 2004	$	2,066		$	—		$	1,639		$	3,705		$	2,066		$	—		$	1,639		$	3,705
Cash payments	(327		)				(144		)	(471		)	(327		)				(144		)	(471		)
Revisions to prior estimates	(270		)							(270		)	(270		)							(270		)
Effect of foreign currency translation	(36		)				(18		)	(54		)	(36		)				(18		)	(54		)

Restructuring liability, June 30, 2004	$	1,433		$	—		$	1,477		$	2,910		$	1,433		$	—		$	1,477		$	2,910
Cash payments													(146		)				(44		)	(190		)
Revisions to prior estimates													—						(255		)	(255		)
Effect of foreign currency translation													(4		)				(3		)	(7		)
Restructuring liability, September 30, 2004													$	1,283		$	—		$	1,175		$	2,458

~~ECOLAB INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

7. Business Acquisitions and Investments

In January 2004, the company acquired Nigiko, a Paris-based provider of commercial pest elimination services throughout France. Nigiko pest elimination has annual sales of approximately $55 million. These operations became part of ~~our~~the company’s International Cleaning & Sanitizing operations.

In February 2004, the company acquired Daydots International, a Texas-based provider of food safety products. Daydots has annual sales of approximately $22 million. These operations became part of ~~our~~the company’s U.S. Cleaning & Sanitizing operations.

In May 2004, the company acquired Elimco, a Cape Town, South Africa-based provider of commercial pest elimination services. Elimco has annual sales of approximately $4 million. These operations became part of ~~our~~the company’s International Cleaning & Sanitizing operations.

In June 2004, the company acquired the Restoration and Maintenance business unit of VIC International located in Knoxville, Tennessee. This business unit has sales of approximately $5 million and ~~will become~~became part of ~~our~~the company’s U.S. Cleaning & Sanitizing operations and ~~our~~the company’s International Cleaning & Sanitizing operations.

In July 2004, the company acquired Alcide Corporation, a Redmond, Washington-based producer of biocidal and sanitation products that are primarily used in the dairy, meat and poultry industries. Alcide has annual sales of approximately $22 million. These operations became part of the company’s U.S. Cleaning & Sanitizing operations.

The total cash paid for acquisitions and investments in affiliates was ~~$10.7 million and $2.3~~$1.6 million during the ~~second~~third quarter of ~~2004 and 2003, respectively.~~2004. In addition, 1,834,759 shares of common stock were issued with a market value of $57.1 million in the Alcide acquisition plus $23,000 of cash in-lieu of fractional shares during the third quarter of 2004. Total cash paid for acquisitions and investments in affiliates was ~~$128.9~~$1.0 million during the third quarter of 2003. During the first nine months of 2004, total cash paid for acquisitions and ~~$27.9~~investments in affiliates, net of cash acquired, was $130.5 million plus common stock issued with a market value of approximately $57.1 million. Total cash paid for acquisitions and investments in affiliates was $28.9 million during the first ~~six~~nine months of ~~2004 and 2003, respectively.~~2003. This included payments of restructuring costs related to Henkel-Ecolab that were accrued in 2002. The aggregate purchase price has been reduced for any cash or cash equivalents acquired with the acquisitions.

Based upon purchase price allocations, which may have components representing preliminary allocations with respect to recent acquisitions, the components of the aggregate purchase prices of the acquisitions made, and the allocation of the purchase prices, were as follows:

(unaudited)	Second Quarter Ended June 30				Six Months Ended June 30					Third Quarter Ended September 30					Nine Months Ended September 30
(amounts in millions)	2004		2003		2004			2003		2004			2003		2004		2003
Net tangible assets acquired	$	3	$	1	$	(3	)	$	17	$	14		$	1	$	11	$	18
Identifiable intangible assets	4		—		46			10		(2		)	—		44		10
In-process research & development										2			—		2		—
Goodwill	4		1		86			1		45			—		131		1
Purchase price	$	11	$	2	$	129		$	28	$	59		$	1	$	188	$	29

The allocation of the purchase price ~~contains~~includes adjustments to preliminary allocations from prior periods, if any. In the third quarter 2004 the company finalized its purchase accounting valuation of identifiable intangibles in the Nigiko acquisition which resulted in a decrease in identifiable intangible assets of $7.9 million and a corresponding increase

~~ECOLAB INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

7.~~Business Acquisitions and Investments (continued)~~in goodwill. In the third quarter of 2004, the company recorded a charge of $1.6 million for in-process research & development as part of the allocation of purchase price in the Alcide acquisition.

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter and ~~six~~nine months ended ~~June~~September 30, 2004 were as follows:

	United States														United States								International
(unaudited) (amounts in thousands)	Cleaning & Sanitizing			Other Services		Total			International Cleaning & Sanitizing			Consolidated			Cleaning & Sanitizing			Other Services		Total			Cleaning & Sanitizing			Consolidated
Balance as of December 31, 2003	$	122,346		$	48,929	$	171,275		$	625,936		$	797,211		$	122,346		$	48,929	$	171,275		$	625,936		$	797,211
Goodwill acquired during quarter	18,629			—		18,629			63,799			82,428			18,629			—		18,629			63,799			82,428
Goodwill related to dispositions	(69		)	—		(69		)	—			(69		)	(69		)	—		(69		)	—			(69		)
Foreign currency translation	—			—		—			27,672			27,672			—			—		—			27,672			27,672
Balance as of March 31, 2004	$	140,906		$	48,929	$	189,835		$	717,407		$	907,242		$	140,906		$	48,929	$	189,835		$	717,407		$	907,242
Goodwill acquired during quarter	2,098			—		2,098			1,780			3,878			2,098			—		2,098			1,780			3,878
Foreign currency translation	—			—		—			(20,183		)	(20,183		)	—			—		—			(20,183		)	(20,183		)
Balance as of June 30, 2004	$	143,004		$	48,929	$	191,933		$	699,004		$	890,937		$	143,004		$	48,929	$	191,933		$	699,004		$	890,937
Goodwill acquired during quarter															34,075			—		34,075			10,776			44,851
Foreign currency translation															—			—		—			(1,117		)	(1,117		)
Balance as of September 30, 2004															$	177,079		$	48,929	$	226,008		$	708,663		$	934,671

Goodwill acquired in 2004 also includes adjustments to prior year acquisitions.

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.

In April 2004, the company sold its grease management product line to National Fire Services of Gurnee, Illinois effective March 31, 2004. Sales of the grease management product line totaled approximately $20 million in 2003 and were included in the company’s U.S. Cleaning & Sanitizing operations.

~~ECOLAB INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

8. Income Per Common Share

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

	Second Quarter Ended June 30				Six Months Ended June 30
(amounts in thousands, except per share)	2004		2003		2004		2003
(amounts in thousands,									Third Quarter Ended September 30				Nine Months Ended September 30
except per share)									2004		2003		2004			2003
	(unaudited)				(unaudited)				(unaudited)				(unaudited)

Net income	$	78,293	$	67,155	$	144,299	$	122,473	$	94,947	$	87,439		$	239,246	$	209,912

Weighted-average common shares outstanding
Basic	257,135		261,246		257,080		260,847		258,368		258,694			257,509		260,129
Effect of dilutive stock options and awards	3,770		3,307		3,565		3,389		3,884		2,915			3,731		3,249
Diluted	260,905		264,553		260,645		264,236		262,252		261,609			261,240		263,378

Net income per common share
Basic	$	0.30	$	0.26	$	0.56	$	0.47	$	0.37	$	0.34		$	0.93	$	0.81
Diluted	$	0.30	$	0.25	$	0.55	$	0.46	$	0.36	$	0.33		$	0.92	$	0.80

Stock options to purchase approximately ~~200,000~~84,000 shares and 330,000 shares for the ~~six~~quarter and nine months ended ~~June~~September 30, 2004, respectively, were not dilutive and, therefore, were not included in the computations of diluted common shares outstanding. Stock options to purchase approximately 185,000 shares for both the third quarter and nine months ended September 30, 2003 were not dilutive and, therefore, were not included in the computations of diluted common shares outstanding.

~~ECOLAB INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

9. Pension and Postretirement Plans

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

(unaudited)	U.S. Pension Benefits						International Pension Benefits						U.S. Postretirement Health Care Benefits						U.S. Pension Benefits						International Pension Benefits						U.S. Postretirement Health Care Benefits
(amounts in thousands)	2004			2003			2004			2003			2004			2003			2004			2003			2004			2003			2004			2003
Service cost	$	7,863		$	6,611		$	3,263		$	2,899		$	799		$	736		$	7,863		$	6,611		$	3,258		$	2,989		$	795		$	736
Interest cost on benefit obligation	8,548			8,052			4,358			3,642			2,368			2,149			8,548			8,052			4,405			3,755			2,152			2,149
Expected return on plan assets	(12,540		)	(10,603		)	(2,741		)	(2,428		)	(465		)	(395		)	(12,540		)	(10,603		)	(2,852		)	(2,512		)	(457		)	(395		)
Amortization of prior service cost (benefit)	434			482			29			26			(1,424		)	(1,325		)	434			482			29			29			(1,424		)	(1,325		)
Amortization of unrecognized transition (asset)/obligation	(351		)	(351		)	81			119			—			—			(351		)	(351		)	86			127			—			—
Recognition of net actuarial loss	1,380			863			430			217			1,737			1,573			1,380			863			449			206			1,117			1,573
Settlements and curtailments	—			—			—			164			—			—

Total expense	$	5,334		$	5,054		$	5,420		$	4,639		$	3,015		$	2,738		$	5,334		$	5,054		$	5,375		$	4,594		$	2,183		$	2,738

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

(unaudited)	U.S. Pension Benefits						International Pension Benefits						U.S. Postretirement Health Care Benefits						U.S. Pension Benefits						International Pension Benefits						U.S. Postretirement Health Care Benefits
(amounts in thousands)	2004			2003			2004			2003			2004			2003			2004			2003			2004			2003			2004			2003
Service cost	$	15,726		$	13,222		$	6,618		$	5,652		$	1,598		$	1,472		$	23,589		$	19,833		$	9,876		$	8,641		$	2,393		$	2,208
Interest cost on benefit obligation	17,096			16,104			8,850			7,094			4,736			4,298			25,644			24,156			13,255			10,849			6,888			6,447
Expected return on plan assets	(25,080		)	(21,206		)	(5,524		)	(4,725		)	(930		)	(790		)	(37,620		)	(31,809		)	(8,376		)	(7,237		)	(1,387		)	(1,185		)
Amortization of prior service cost (benefit)	868			964			60			50			(2,848		)	(2,650		)	1,302			1,446			89			79			(4,272		)	(3,975		)
Amortization of unrecognized transition (asset)/obligation	(702		)	(702		)	166			233			—			—			(1,053		)	(1,053		)	252			360			—			—
Recognition of net actuarial loss	2,760			1,726			875			423			3,474			3,146			4,140			2,589			1,324			629			4,591			4,719
Settlements and curtailments	—			—			—			103			—			—			—			—			—			103			—			—

Total expense	$	10,668		$	10,108		$	11,045		$	8,830		$	6,030		$	5,476		$	16,002		$	15,162		$	16,420		$	13,424		$	8,213		$	8,214

The company previously disclosed in its financial statements for the year ended December 31, 2003, that it was not required to make any contributions to the U.S. pension plan and postretirement healthcare benefit plans in 2004. As of ~~June~~September 30, 2004, no contributions have been made to those plans. ~~The~~Subsequent to September 30, 2004, the company ~~is not required to make any contributions~~made a contribution to the U.S. pension plan of $25 million. The company is considering making an additional contribution to the U.S. pension plan in the fourth quarter of 2004 depending on business and ~~postretirement healthcare benefit plans for the remainder of 2004.~~market conditions.

Certain international pension benefit plans are required to be funded in accordance with local government requirements. The company contributed ~~$10.7~~$2.0 million and ~~$13.1~~$15.1 million to its international pension benefit plans during the ~~second~~third quarter and ~~six~~nine months ended ~~June~~September 30, 2004, ~~respectively.~~respectively, a portion of which was discretionary. Currently, the company expects that it will contribute ~~$4.7~~$2.7 million to the international pension benefit plans during the remainder of 2004.

~~ECOLAB INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

10.Operating Segments

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

	Second Quarter Ended June 30					Six Months Ended June 30						Third Quarter Ended September 30						Nine Months Ended September 30
(amounts in thousands)	2004		2003			2004			2003			2004			2003			2004			2003
	(unaudited)					(unaudited)
												(unaudited)						(unaudited)
Net Sales
United States
Cleaning & Sanitizing	$	450,625	$	430,901		$	881,359		$	848,200		$	478,464		$	444,791		$	1,359,823		$	1,292,991
Other Services	85,875		82,963			163,650			156,292			89,157			83,497			252,807			239,789
Total	536,500		513,864			1,045,009			1,004,492			567,621			528,288			1,612,630			1,532,780
International Cleaning & Sanitizing	485,819		448,744			924,993			864,467			497,717			460,371			1,422,710			1,324,838
Effect of foreign currency translation	20,392		(15,873		)	52,080			(46,372		)	24,978			(5,893		)	77,058			(52,265		)
Consolidated	$	1,042,711	$	946,735		$	2,022,082		$	1,822,587		$	1,090,316		$	982,766		$	3,112,398		$	2,805,353

Operating Income
United States
Cleaning & Sanitizing	$	75,297	$	71,943		$	152,587		$	141,849		$	86,443		$	82,472		$	239,030		$	224,321
Other Services	8,123		6,785			13,321			10,432			6,697			8,755			20,018			19,187
Total	83,420		78,728			165,908			152,281			93,140			91,227			259,048			243,508
International Cleaning & Sanitizing	50,049		44,524			84,998			75,104			64,020			56,772			149,018			131,876
Corporate (expense) income	270		106			(3,485		)	348			(1,345		)	(1,184		)	(4,830		)	(836		)
Effect of foreign currency translation	2,130		(1,993		)	4,587			(4,834		)	3,127			(1,359		)	7,714			(6,193		)
Consolidated	$	135,869	$	121,365		$	252,008		$	222,899		$	158,942		$	145,456		$	410,950		$	368,355

The International Cleaning & Sanitizing amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2004.

Consistent with the company’s internal management reporting, corporate operating income includes income from reductions in restructuring accruals of approximately $0.3 million and ~~$0.1~~$0.5 million for ~~second~~third quarter 2004 and 2003, respectively and approximately ~~$0.5 million and $0.3~~$0.8 million for both the ~~six~~nine months ended ~~June~~September 30, 2004 and ~~2003, respectively.~~2003. Corporate expense for the ~~first six~~third quarter and nine months ended ~~June~~September 30, 2004 also includes a charge of $1.6 million for in-process research and development recorded as part of the allocation of purchase price in the Alcide acquisition. For the first nine months ended September 30, 2004 corporate expense also includes a charge of $4.0 million related to the disposal of a grease management product

~~line~~. line. For the third quarter and nine months ended September 30, 2003, corporate expense includes a charge of $1.7 million related to a change in the amount of goodwill allocated to a business sold in 2003.

~~ECOLAB INC.~~

~~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, 2004, the~~The company has completed its annual 2004 test for goodwill impairment, including businesses reporting losses such as GCS Service. 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 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 that results in a weighted average useful life of 1413 and 12 years as of ~~June~~September 30, 2004 and 2003, 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~~third quarter ended ~~June~~September 30, 2004 and 2003 was approximately ~~$5.8~~$5.1 million and ~~$4.4~~$6.5 million, respectively. Total amortization expense related to other intangible assets during the ~~six~~nine months ended ~~June~~September 30, 2004 and 2003 was approximately ~~$11.2~~$16.3 million and ~~$9.4~~$15.9 million, respectively. As of ~~June~~September 30, 2004, future estimated amortization expense related to amortizable other identifiable intangible assets will be (amounts in thousands):

Fiscal Year
Remainder 2004 (six-month period)	$	11,700
Remainder 2004 (three-month period)			$	5,775
2005	22,644		23,646
2006	21,919		22,113
2007	21,620		22,032
2008	21,464		21,992

~~ECOLAB INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

12. New Accounting Pronouncements

~~On December 17, 2003, the SEC staff released Staff Accounting Bulletin (SAB) No. 104,~~ ~~Revenue Recognition.~~ ~~The staff updated and revised the existing revenue recognition in Topic 13,~~ ~~Revenue Recognition~~, to make its interpretive guidance consistent with current accounting guidance, principally EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Also, SAB 104 incorporates portions of the ~~Revenue Recognition in Financial Statements – Frequently Asked Questions and Answers~~ document that the SEC staff considered relevant and rescinds the remainder. The company’s revenue recognition policies are consistent with this guidance; therefore, this guidance did not have an immediate impact on the company’s consolidated financial statements.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans. The company’s U.S. Postretirement Health Care Benefits plan offers prescription drug benefits and the company ~~expects to~~will benefit from this legislation. The company does not anticipate that its plan will need to be amended to obtain the benefits provided under the Act. In accordance with the FASB’s original guidance on the accounting for the Act, the company elected to defer recognition of the effects of the Act and any measures of benefit cost or benefit obligation in the financial statements or accompanying notes. In April 2004, the FASB issued FASB Staff Position No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 which provided additional accounting guidance. The company ~~expects to begin~~began recording the favorable benefits provided by the Act in the third quarter of 2004 using the prospective transition method consistent with this ~~guidance and is currently considering whether to adopt the Act prospectively or retroactively to the date of this Act’s enactment.~~guidance. The ~~company has estimated an~~ annual after-tax benefit for 2004 is approximately $1.0 million. The company recorded approximately $0.5 million of this amount in the ~~range~~third quarter of ~~$1.5~~2004 and expects to ~~$2.0~~record the remaining $0.5 million ~~related to~~in the fourth quarter of 2004. The impact of the Act ~~in 2004.~~is estimated to be a reduction on the postretirement benefit obligation of approximately $15 million.

13. Subsequent ~~Event~~Events

~~On July 30,~~The company believes it will benefit from the recently signed tax legislation, American Jobs Creation Act of 2004. The company expects to benefit from the special deduction for qualified domestic production activities with a modest benefit beginning in 2005. The company ~~closed on~~is currently studying the purchase of Alcide Corporation (NASDQ: ALCD). Alcide is a Redmond, Washington-based producer of biocidal and sanitation products that are primarily used in the dairy, meat and poultry industries. Pursuant to the merger agreement, a wholly-owned acquisition subsidiaryimpact of the ~~company was merged with~~one-time foreign dividend provisions and ~~into Alcide. Based on an exchange ratio~~currently has no expectations of ~~0.6744, we will issue approximately 1,830,000 shares~~the benefits of Ecolab common stock plus additional cash-in-lieu of fractional shares to the former shareholders of Alcide, in exchange for 2,721,683 shares of Alcide Corporation common stock outstanding as of July 30, 2004. In addition, Ecolab assumed certain outstanding options granted by Alcide; after adjustment for the merger, the Alcide stock options entitle 16 holders to purchase an aggregate of approximately 20,100 shares of Ecolab common stock, at adjusted prices ranging from $17.79 to $93.42. The options expire at various times through April 30, 2011.these provisions.

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. as of ~~June~~September 30, 2004, and the related consolidated statements of income for each of the three and ~~six-month~~nine-month periods ended ~~June~~September 30, 2004 and 2003, and of cash flows for the ~~six-month~~nine-month periods ended ~~June~~September 30, 2004 and 2003. These interim 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 to financial data 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 Accounting 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 accompanying consolidated interim 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2003, and the related consolidated statements of income, of comprehensive income and shareholders’ equity, and of cash flows for the year then ended (not presented herein); and in our report dated February 26, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP


~~Minneapolis, Minnesota~~
~~July 22,~~

Minneapolis, Minnesota

October 21, 2004

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2.2. Mangement’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis provides information that management believes is useful in understanding the company’s operating results, cash flows and financial condition. The discussion should be read in conjunction with the consolidated financial statements 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 company’s statement entitled “Forward-Looking Statements and Risk Factors” located at the end of Part I of this report. Additional risk factors may be described from time to time in Ecolab’s filings with the Securities and Exchange Commission.

Overview for the Quarter Ended JuneSeptember 30, 2004

The ~~second quarter~~three months ending September 30, 2004 showed another quarter of ~~earnings gains, improved~~ sales growth and operational improvement ascausing diluted net income per share ~~rose 20%~~ to ~~30 cents~~rise 9 percent to $0.36 per share. The strong earnings performance leveraged ~~our improving market conditions during the second quarter. These better trends and~~ continued ~~margin strength from our U.S.~~growth in domestic and international businesses ~~were bolstered by~~as well as favorable currency translation and ~~lower~~income tax ~~rate, and enabled us to outperform the industry and to gain market share.~~rates.

Operating Performance

• ~~Second~~Third quarter sales for our United States Cleaning & Sanitizing operations rose 5%8 percent to ~~$451~~$478 million, showing improving sales trends for almost every division. Kay sales were up ~~16%,~~20 percent, led by strong gains in quick-service restaurants and food retail. Institutional also showed improving sales trends ~~are improving as economic indicators~~ in ~~the hospitality and foodservice industries are showing a recovery is underway. Food & Beverage sales growth accelerated in the second quarter, increasing 6%.~~most customer end markets.

• Our United States Other Services sales increased 4%7 percent to ~~$86~~$89 million in the ~~second~~third quarter. Pest Elimination had sales growth of ~~8% was offset by a~~9 percent while sales ~~decrease~~increased 2 percent at GCS Service.

• Sales of our International Cleaning & Sanitizing operations rose 8%8 percent in the ~~second~~third quarter when measured at fixed currency rates to ~~$486~~$498 million. ~~Strong sales in~~ Latin America and ~~Canada were offset by slower~~Asia Pacific showed strong sales growth while sales in Europe ~~and Asia Pacific.~~grew modestly. At public currency rates, International Cleaning ~~and~~& Sanitizing sales increased ~~17%.~~15 percent.

• We continued to invest in future growth during the ~~second~~third quarter of 2004. This included investing in our sales-and-service force, research and development, information technology, as well as acquiring ~~Elimco (pest elimination business~~Alcide Corporation (a producer of biocidal and sanitation products that are primarily used in ~~South Africa)~~the dairy, meat and ~~the Restoration and Maintenance business unit of VIC International.~~poultry industries).

~~ECOLAB INC.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Financial Performance

• Cash provided by operating activities for the ~~second~~third quarter continued to be strong and helped us to repurchase approximately 2 million shares, make acquisitions and finance other cash requirements.

• Currency translation had a positive impact on our financial results during the ~~second~~third quarter, adding approximately ~~$2.5~~$2.8 million to net income. For the first ~~six~~nine months of 2004, currency translation added ~~$5.1~~$7.9 million to net income.

• ~~An improvement~~Improvement in our annual effective income tax rate ~~from 38.9 percent for the first six months of 2003 to 37.2 in 2004~~ added approximately ~~$2.1~~$2.8 million to net income for the ~~second~~third quarter and ~~$4.0~~$7.3 million for the first ~~six~~nine months of 2004.

• Diluted net income per share was ~~$0.30~~$0.36 for the ~~second~~third quarter of 2004, up 209 percent from ~~$0.25~~$0.33 in the comparable period of 2003. For the first ~~six~~nine months, net income per share was ~~$0.55~~$0.92 in 2004 compared to ~~$0.46~~$0.80 in 2003. Earnings for the third quarter of 2004 include a favorable tax benefit of $1.9 million related to prior periods and a charge of $1.6 million for in-process research and development related to our acquisition of Alcide Corp. Earnings for the first ~~six~~nine months of 2004 also include an after-tax charge of $2.4 million related to the disposal of a grease management product line in the first quarter of 2004. The third quarter and first nine months of 2003 include a charge of $1.7 million related to a change in the amount of goodwill allocated to a business sold in 2003 and a gain on the sale of an equity investment of $6.2 million after tax.

Results of Operations - ~~Second~~Third Quarter and ~~Six~~Nine Months Ended ~~June~~September 30, 2004

Consolidated net sales for the ~~second~~third quarter ended ~~June~~September 30, 2004 were ~~$1.043~~$1.090 billion, an increase of 1011 percent over net sales of ~~$0.947~~$0.983 billion in the ~~second~~third quarter of last year. For the first ~~six~~nine months of 2004, net sales increased 11 percent to ~~$2.022~~$3.112 billion from ~~$1.823~~$2.805 billion in the comparable period of 2003. Excluding acquisitions and divestitures, consolidated net sales increased ~~8 percent in the second quarter and~~ 9 percent for both the third quarter and the first ~~six~~nine months of 2004. Changes in currency translation positively impacted sales growth by approximately 43 percentage points for the ~~second~~third quarter and approximately 5 percentage points for the ~~six~~nine months ended ~~June~~September 30, 2004.

The gross profit ~~margin (defined as the~~margins (the difference between net sales less cost of sales divided by net sales) ~~was 51.6~~were 52.3 percent and ~~50.7~~51.3 percent of net sales for the ~~quarter~~quarters ended ~~June~~September 30, 2004 and 2003, respectively. For the ~~six-month~~nine-month periods, the gross profit margins were ~~51.6~~51.9 percent in 2004 and ~~50.8~~51.0 percent in 2003. The increase in the gross margins for the ~~second~~third quarter and year-to-date periods compared with the 2003 gross profit margins is principally due to the benefits of cost savings initiatives, improved business and product mix ~~as well as cost savings initiatives.~~and favorable raw material prices.

Selling, general and administrative expenses were ~~38.6~~37.6 percent of consolidated net sales for the ~~second~~third quarter of 2004, an increase from ~~37.9~~36.4 percent of net sales in the comparable quarter of last year. For the ~~six-month~~nine-month period, selling, general and administrative expenses also increased as a percentage of net sales to ~~39.0~~38.5 percent in 2004 from ~~38.6~~37.8 percent in 2003. This increase for the quarter and year-to-date periods is principally due to ~~an increase~~investments in the sales and service force ~~investments,~~ as well as, research and development, information technology, acquisitions and higher sales commissions and incentives.

~~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, 2004 (continued)~~

Net income totaled ~~$78~~$95 million for the ~~second~~third quarter of 2004 and ~~$67~~$87 million for the comparable period of 2003. On a per share basis, diluted net income per common share was ~~$0.30~~$0.36 for the ~~second~~third quarter of 2004 and increased 209 percent over diluted net income per share of ~~$0.25~~$0.33 in the ~~second~~third quarter of last year. For the first ~~six~~nine months of 2004, net income was ~~$144~~$239 million as compared to net income of ~~$122~~$210 million in the comparable period of last year. Diluted net income per share increased 2015 percent to ~~$0.55~~$0.92 for the ~~six~~nine months ended ~~June~~September 30, 2004 from ~~$0.46~~$0.80 for the first ~~six~~nine months of last year. Net income for third quarter 2004 includes a favorable tax benefit of $1.9 million related to prior periods and a charge of $1.6 million for in-process research and development related to the Alcide acquisition. Net income for the first ~~six~~nine months of 2004 also includes aan after-tax charge of $2.4 million related to the disposal of a grease management product line in the first quarter of 2004. For the third quarter and nine months ended September 30, 2004, net income included $0.3 million and $0.5 million, respectively, of reductions in previously recorded restructuring expenses (after tax) recorded as special charges. The financial results for the third quarter and first nine months of 2003 included a gain on the sale of an equity investment of $6.2 million after tax in special charges. Net income also included approximately $1.7 million of expense related to a change in the amount of goodwill allocated to a business sold in 2003. For the third quarter and nine months ended September 30, 2003, net income also included $0.3 million and $0.5 million, respectively, of reductions in previously recorded restructuring expenses (after tax) recorded as special charges. Currency translation benefited net income by approximately ~~$2.5~~$2.8 million for the ~~second~~third quarter and ~~$5.1~~$7.9 million for the first ~~six~~nine months of 2004. The comparison of net income also benefited from a lower effective tax rate in 2004.

Sales for each of our reportable segments isare as follows:

Second Quarter Ended
June 30

Six Months Ended
June 30

(amounts in thousands)

2004

2003

2004

2003

(unaudited)

(unaudited)

Net Sales

United States

Cleaning & Sanitizing

$
450,625

$
430,901

$
881,359

$
848,200

Other Services

85,875

82,963

163,650

156,292

Total

536,500

513,864

1,045,009

1,004,492

International Cleaning & Sanitizing

485,819

448,744

924,993

864,467

Effect of foreign currency translation

20,392

(15,873
)
52,080

(46,372
)
Consolidated

$
1,042,711

$
946,735

$
2,022,082

$
1,822,587

~~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, 2004 (continued)~~

	Third Quarter Ended September 30					Nine Months Ended September 30
(amounts in thousands)	2004		2003			2004		2003
	(unaudited)					(unaudited)
Net Sales
United States
Cleaning & Sanitizing	$	478,464	$	444,791		$	1,359,823	$	1,292,991
Other Services	89,157		83,497			252,807		239,789
Total	567,621		528,288			1,612,630		1,532,780
International Cleaning & Sanitizing	497,717		460,371			1,422,710		1,324,838
Effect of foreign currency translation	24,978		(5,893		)	77,058		(52,265		)
Consolidated	$	1,090,316	$	982,766		$	3,112,398	$	2,805,353

The following table shows the increase or growth in sales by operating segment for the ~~second~~third quarter ended ~~June~~September 30, 2004 over the ~~second~~third quarter of 2003 and for the ~~six~~nine months ended ~~June~~September 30, 2004 over the first ~~six~~nine months of 2003:

	Percent Change				Percent Change
	Second Quarter		Six Months		Third Quarter		Nine Months
Net Sales
United States Cleaning & Sanitizing
Institutional	4	%	4	%	6	%	5	%
Kay	16		14		20		16
Textile Care	3		(1	)	12	��	3
Professional Products	(16	)	(21	)	(18	)	(20	)
Healthcare	—		(2	)	13		3
Water Care Services	13		12		6		10
Vehicle Care	(1	)	(3	)	(3	)	(3	)
Food & Beverage	6		5		12		7
Total United States Cleaning & Sanitizing	5	%	4	%	8	%	5	%
United States Other Services
Pest Elimination	8	%	9	%	9	%	9	%
GCS Service	(4	)	(3	)	2		(1	)
Total United States Other Services	4	%	5	%	7	%	5	%
Total United States	4	%	4	%	7	%	5	%
International Cleaning & Sanitizing
Europe	8	%	7	%	8	%	7	%
Asia Pacific	5		3		9		5
Latin America	13		13		12		12
Canada	7		4		6		4
Total International Cleaning & Sanitizing	8	%	7	%	8	%	7	%
Consolidated (management rates)	6	%	5	%	8	%	6	%
Consolidated (public rates)	10	%	11	%	11	%	11	%

~~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, 2004 (continued)~~

Sales of our United States Cleaning & Sanitizing operations for the third quarter were ~~$451~~$478 million, an increase of 58 percent compared with sales of ~~$431~~$445 million in the ~~second~~third quarter of last year. United States Cleaning & Sanitizing sales were ~~$881 million~~$1.360 billion for the first ~~six~~nine months of 2004, up 45 percent over net sales of ~~$848 million~~$1.293 billion in the comparable period of last year. Excluding acquisitions and dispositions, sales increased 46 percent and 34 percent for the quarter and ~~six~~nine months ended ~~June~~September 30, 2004, respectively. Sales benefited from double-digit growth in Kay, Healthcare and ~~Water~~Textile Care ~~Services~~ and good growth in Institutional and Food & Beverage, which were partially offset by lower sales in Professional Products due to the exit of a non-strategic business line. The increase in sales in our Institutional division reflects ~~an increase in~~increased account retention through enhanced service, new ~~accounts, the successful introduction of~~product and program initiatives and aggressive new ~~products and the benefits of our improved service initiatives.~~account sales efforts. Institutional’s results include sales increases in ~~most market segments, particularly~~all end markets, including restaurant, hospitality, healthcare, travel and ~~casual dining. Improving trends in the hospitality, foodservice and healthcare markets are also expected to help sales growth in the remainder of 2004.~~government markets. Excluding the acquisition of Daydots and the disposition of a grease management product line, sales growth for Institutional was 6 percent for the third quarter and 4 percent for ~~both~~ the ~~quarter and six~~nine months ended ~~June~~September 30, 2004. Kay’s sales ~~growth~~results reflects strong growth in its food retail services business and to its core quickservice customers. New customers, better account penetration and new products and programs ~~such as those sold to our specialty retail customers, are also showing~~drove Kay’s good results. Textile Care sales ~~increased during the second quarter~~continue to increase due to new corporate accounts gained earlier in the year and improved customer retention. ~~For the first six months of 2004, Textile Care sales growth is slightly negative as the division begins to recover from account losses in the second half of 2003.~~ Sales growth in corporate accounts in our Professional Products operations was more than offset by the planned phase down of the janitorial equipment distribution ~~business. The~~business and weak distributor sales. Our Healthcare division had a double-digit sales increase during the third quarter driven by strong growth in ~~our Healthcare division was flat for the second quarter and slightly negative for the~~surgical instrument care sales. The first ~~six~~nine months of 2004 showed a small positive increase for Healthcare due to good sales of instrument care solids and skincare products being partially offset by the exit of a private label product line. ~~Adjusting for this, our Healthcare division achieved good growth in both skin care and surgical instrument care revenues.~~ Our Food & Beverage operations reported an increase in sales due to improved sales to the agri, dairy, soft drink ~~meat and poultry~~ and food markets. Excluding the acquisition of Alcide, sales growth for Food & Beverage was 5 percent for both the third quarter and nine months ended September 30, 2004. Water Care Services had strong sales growth in ~~our major~~the food processing, healthcare, laundry and cruise ship markets, especially the food and beverage market. Our “Circle the Customer” strategy ~~has produced~~continues to produce new account gains as our Water Care division works with our Food & Beverage, Healthcare and Textile Care divisions to drive its sales growth. Vehicle Care sales declined for both the quarter and year-to-date ~~periods. The second~~periods due to poor weather conditions and higher gasoline prices during much of the third quarter ~~sales were hurt by~~and first nine months of the ~~very wet weather in May and June and the year-to-date sales were also impacted by the severe U.S. winter weather in January.~~year.

Sales of our United States Other Services operations totaled ~~$86~~$89 million for the ~~second~~third quarter of 2004, an increase of 47 percent over net sales of $83 million in the ~~second~~third quarter of last year. United States Other Services sales were ~~$164~~$253 million for the first ~~six~~nine months of 2004, an increase of 5 percent over net sales of ~~$156~~$240 million in the comparable period of last year. Pest Elimination sales increased with good growth in core pest elimination contract services and continuing growth in non-contract services such as one-shot services, bird work, the Stealth fly program and its food safety audit

~~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, 2004 (continued)~~

~~business~~. business. GCS Service sales increased for the third quarter due to good growth in direct part sales. Sales decreased slightly for ~~both~~GCS Service during the ~~second quarter and six~~first nine months of 2004 as an increase in direct part sales was ~~more than~~ offset by a decrease in service sales.

Management rate sales for our International Cleaning & Sanitizing operations were ~~$486~~$498 million for the ~~second~~third quarter of 2004, an increase of 8 percent over sales of ~~$449~~$460 million in the comparable quarter of last year. For the first ~~six~~nine months of 2004, sales increased 7 percent to ~~$925 million~~$1.423 billion from ~~$864 million~~$1.325 billion during the comparable period last year. Excluding the effects of acquisitions and divestitures, sales increased 5 percent for the third quarter and 4 percent for ~~both~~ the ~~second quarter and for the six-month periods~~nine-month period ended ~~June~~September 30, 2004. Sales in Europe, excluding acquisitions and divestitures, increased 3 percent for both the ~~second~~third quarter and first ~~six~~nine months of 2004, primarily due to successful new product launches, ~~being~~aggressive marketing and added headcount that was partially offset by the effects of a weak European economy. Sales growth for Asia Pacific was positive, ~~led by~~with improving sales trends in Japan during the third quarter in addition to the double-digit sales growth in New Zealand and East Asia for the quarter. For the first nine months of 2004, East Asia experienced strong sales growth ~~in East Asia being offset by flat~~while sales growth in Japan and ~~Australia.~~Australia was flat. For both the third quarter and year-to-date periods, Latin America had double-digit sales increases in ~~almost all countries~~Mexico and ~~benefited from increased~~the Caribbean driven by the strong tourism ~~as well as~~market and improved growth in Brazil due to continued success with food retail programs. Sales in Canada for the nine-month period increased as trends in the hospitality industry ~~improve~~improved and the third quarter also benefited as the market recovers from the impact of last year’s SARS outbreak.

Operating income for each of our reportable segments is:

	Second Quarter Ended June 30					Six Months Ended June 30						Third Quarter Ended September 30						Nine Months Ended September 30
(amounts in thousands)	2004		2003			2004			2003			2004			2003			2004			2003
	(unaudited)
												(unaudited)
Operating Income
United States
Cleaning & Sanitizing	$	75,297	$	71,943		$	152,587		$	141,849		$	86,443		$	82,472		$	239,030		$	224,321
Other Services	8,123		6,785			13,321			10,432			6,697			8,755			20,018			19,187
Total	83,420		78,728			165,908			152,281			93,140			91,227			259,048			243,508
International Cleaning & Sanitizing	50,049		44,524			84,998			75,104			64,020			56,772			149,018			131,876
Corporate (expense) income	270		106			(3,485		)	348			(1,345		)	(1,184		)	(4,830		)	(836		)
Effect of foreign currency translation	2,130		(1,993		)	4,587			(4,834		)	3,127			(1,359		)	7,714			(6,193		)
Consolidated	$	135,869	$	121,365		$	252,008		$	222,899		$	158,942		$	145,456		$	410,950		$	368,355

~~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, 2004 (continued)~~

Operating income of our United States Cleaning & Sanitizing operations increased 5 percent and 87 percent over operating income in the ~~second~~third quarter and first ~~six~~nine months of 2003, respectively. Excluding acquisitions and divestitures, operating income increased 32 percent and 65 percent over operating income in the ~~second~~third quarter and first ~~six~~nine months of 2003, respectively. The operating income margin for the U.S. Cleaning & Sanitizing segment was ~~16.7~~18.1 percent of net sales in ~~both~~ the ~~second~~third quarter of 2004, down from 18.5 percent in the comparable quarter last year. Excluding acquisition and ~~2003 and increased~~divestitures, the operating income margin decreased to ~~17.3 percent of sales from 16.7~~18.2 percent of net sales from 19.0 percent in the third quarter of 2003. The decrease in operating margin for the ~~six-month period. Operating income margin comparisons reflect a~~quarter is due to investments in the sales force, research and development, information technology, higher sales commissions and incentives and freight expense offsetting favorable business mix and cost efficiency improvements in several ~~divisions~~divisions. The operating income margin for the nine-month period increased to 17.6 percent of net sales in 2004 from 17.3 percent of net sales in 2003. Excluding acquisitions and divestitures, the operating income margin increased to 17.7 percent of net sales from 17.6 percent in the first nine months of 2003. Operating income margin year-to-date comparisons reflect cost efficiency improvements and a favorable business and product mix partially offset by sales force and other investments.

~~Second~~Third quarter 2004 operating income of our United States Other Services operations ~~increased 20 percent~~decreased to $7 million from $9 million in the ~~second quarter of last year.~~comparable period for 2003. For the ~~six-month~~nine-month period, operating income increased 284 percent from the comparable period last year. The operating income margin for United States Other Services ~~increased~~decreased to ~~9.5~~7.5 percent from ~~8.2~~10.5 percent in the ~~second~~third quarter of ~~last year.~~2003. For the ~~six-month~~nine month period, the operating income margin was ~~8.1~~7.9 percent, ~~an increase~~a decrease from ~~6.7~~8.0 percent for the same period last year. Operating income for U.S. Other Services declined as Pest Elimination gains were offset by higher costs in GCS Service. Third quarter 2004 results included a charge related to the GCS transition to a centralized business model. Nine month results for Other Services benefited from a ~~$0.6~~$2.1 million patent settlement in the ~~second quarter~~first half of ~~2004 and $2.1 million in the first six months of~~ 2004. ~~In addition, Pest Elimination showed profit gains while GCS Service showed comparatively larger operating losses for the quarter and year-to-date periods.~~

Operating income of our International Cleaning & Sanitizing operations increased 1213 percent ~~from~~for both the ~~second~~third quarter ~~of last year. For the~~and first ~~six~~nine months of 2004 ~~operating income increased 13 percent from the comparable period of last year.~~over 2003. Excluding acquisitions and divestitures, operating income increased 910 percent over the comparable quarter of last year and 89 percent for the ~~six-month~~nine-month period. The operating income margin increased to ~~10.3~~12.9 percent of net sales in the ~~second~~third quarter of 2004 from ~~9.9~~12.3 percent in the comparable period of last year. For the ~~six-month~~nine-month period ended ~~June~~September 30, 2004, the operating income margin increased to ~~9.2~~10.5 percent of net sales from ~~8.7~~10.0 percent in the comparable period of last year. Excluding acquisitions and divestitures, the operating income margin for International increased to ~~10.2~~12.8 percent of net sales from ~~9.7~~12.2 percent in the ~~second~~third quarter of last year and increased to ~~9.1~~10.4 percent of net sales from ~~8.7~~9.9 percent for the ~~six-month~~nine-month period. Profits were up across all regions and were achieved through higher sales and careful cost management.

~~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, 2004 (continued)~~

Corporate operating ~~income~~expense was ~~$0.3~~$1.3 million for the ~~second~~third quarter of 2004 as compared to ~~$0.1~~$1.2 million for the comparable quarter last year. For the ~~six-month~~nine-month period, corporate operating ~~income (expense)~~expense was ~~($3.5)~~$4.8 million as compared to ~~$0.3~~$0.8 million for the comparable period last year. Corporate operating

expense includes income from reductions in restructuring accruals of $0.3 million and $0.5 million for the third quarter ended September 30, 2004 and 2003, respectively and $0.8 million for both the nine-month periods ended September 30, 2004 and 2003. Corporate operating expense for the third quarter and first ~~six~~nine months of 2004 includes a charge of $1.6 million for in-process research and development recorded as part of the allocation of purchase price in the Alcide acquisition in July. The first nine months of 2004 also includes a charge of $4.0 million related to the disposal of a grease management product line in the first quarter ~~offset by a reduction in restructuring accruals~~ of ~~$0.5 million.~~2004. Corporate operating ~~income in~~expense for the third quarter and first ~~six~~nine months of 2003 ~~is income from~~includes expense of $1.7 million related to a change in the ~~reduction~~amount of goodwill allocated to a business sold in ~~restructuring accruals.~~2003.

Net interest expense totaled ~~$11.2~~$11.6 million in the ~~second~~third quarter of 2004, a decrease of 54 percent from net interest expense of ~~$11.8~~$12.1 million in the ~~second~~third quarter of 2003. For the ~~six-month period,~~nine-month periods, net interest expense was ~~$22.4~~$34.0 million and ~~$22.5~~$34.5 million in 2004 and 2003, respectively. Net interest expense decreased due to an increase in interest income and a shift in the mix of external debt balances in the company’s foreign subsidiary locations towards countries with lower interest rates.

The provision for income taxes for the first ~~six~~nine months of 2004 reflected an effective income tax rate of ~~37.2~~36.5 percent as compared to an effective income tax rate of ~~38.9~~39.1 percent for the first ~~six~~nine months of 2003. The reduction in the 2004 effective tax rate is primarily due to a lower international rates, ~~and~~ tax savings ~~efforts.~~efforts and the favorable tax benefit recorded in the third quarter of 2004.

Financial Position and Liquidity

Total assets were ~~$3.413~~$3.549 billion at ~~June~~September 30, 2004, an increase of ~~$184~~$320 million, or 610 percent, over total assets at year-end 2003. Approximately ~~$15~~$16 million of the increase in assets was related to the strengthening of foreign ~~currencies.~~currencies against the U.S. dollar. In addition, the net increase in assets (excluding cash and cash equivalents) acquired and disposed of was approximately ~~$170~~$226 million for the first ~~six~~nine months of 2004.

Total debt was ~~$712~~$695 million at ~~June~~September 30, 2004, up from total debt of $675 million at year-end 2003. The ratio of total debt to capitalization was 32 percent at September 30, 2004, down from 34 percent at ~~June 30, 2004, unchanged from~~ December 31, 2003 due to an increase in ~~debt~~shareholders equity being only partially offset by an increase in ~~shareholders’ equity.~~debt. We are in compliance with all of our debt covenants and we believe we have ample borrowing capacity to meet reasonably foreseeable business needs.

Cash provided by operating activities totaled ~~$233~~$417 million and ~~$220~~$399 million, for the first ~~six~~nine months of 2004 and 2003, respectively. Operating cash flows for 2004 increased over 2003 primarily due to higher sales in the first ~~six~~nine months compared to the prior year which were partially offset by an increase in accounts receivable driven by the increase in sales. Operating cash flow was also higher in 2004 due to increased federal tax payments in 2004 compared to 2003. Cash used for investing activities in 2004 has increased significantly over 2003 resulting from the increased acquisition activity for the company. The increase in cash-funded acquisitions was offset by a reduction in net repayments on notes payable.

We currently expect to fund all of the cash requirements which are reasonably foreseeable for the remainder of 2004, including new program investments, scheduled debt repayments, dividend payments, possible acquisitions and planned share repurchases from operating activities, cash reserves and short-term borrowings. In the event of a significant acquisition or other significant funding need, ~~funding~~financing may occur through additional long-term borrowing.

~~ECOLAB INC.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Subsequent ~~Event~~Events

~~On July 30,~~We believe that we will benefit from the recently signed tax law, American Jobs Creation Act of 2004. We expect to benefit from the special deduction for qualified domestic production activities with a modest benefit beginning in 2005. We are currently studying the impact of the one-time favorable foreign dividend provisions and currently have no expectations of the benefits of these provisions.

In December 2003, Henkel KG&A reported that it may sell a portion or all of its holdings of Ecolab common stock and/or its holdings of common stock of The Clorox Company, or a combination of both, in connection with refinancing its acquisition of The Dial Corporation. In October 2004, ~~we closed on~~Henkel announced it had entered into a share exchange agreement with Clorox. If the ~~purchase of Alcide Corporation (NASDQ: ALCD). Alcide~~share exchange transaction is ~~a Redmond, Washington-based producer of biocidal and sanitation products~~finalized, Henkel has reported that ~~are primarily used~~it currently believes that it will have taken sufficient steps to refinance the debt incurred in the ~~dairy, meat~~acquisition of Dial, and ~~poultry industries. Pursuant~~expects that it would not sell any shares of Ecolab common stock. In that event, Henkel would continue to ~~the merger agreement, a wholly-owned acquisition subsidiary of the company was merged with and into Alcide. Based on an exchange ratio of 0.6744, we will issue approximately 1,830,000~~hold its shares of Ecolab common stock ~~plus additional cash-in-lieu of fractional shares~~as a long-term minority investor. However, Henkel would intend to ~~the former shareholders of Alcide,~~continue to review its investment in ~~exchange for 2,721,683 shares of Alcide Corporation~~Ecolab common stock ~~outstanding~~from time to time and, depending on certain factors, such as the financial performance of ~~July 30, 2004. In addition,~~ Ecolab ~~assumed certain outstanding options granted by Alcide; after adjustment for~~as well as the ~~merger, the Alcide stock options entitle 16 holders to purchase an aggregate~~availability and price of ~~20,100~~ shares of Ecolab common stock ~~at adjusted prices ranging from $17.79~~on the open market, Henkel may determine to ~~$93.42. The options expire at various times through April 30, 2011.~~acquire additional shares or sell shares of Ecolab common stock.

Item 3.3. Quantitative and Qualitative Disclosures about Market Risk.

We primarily use interest rate swaps, foreign currency forward contracts and foreign currency debt to manage risks generally associated with interest rate volatility, foreign exchange risk 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, 2003.

Item 4.4. Controls and ~~Procedures.~~Procedures

As of ~~June~~September 30, 2004, 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, the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective, among other things, in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our reports filed under the Securities Exchange Act of 1934, as amended.

During the period ~~April~~July 1 through ~~June~~September 30, 2004, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

~~ECOLAB INC.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~Forward-Looking~~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, we discuss expectations regarding future performance of the company which include improving business trends, sales growth, expected strategic investments in the business, favorable liquidity, impact of recent tax legislation, the intent of significant shareholders 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, we 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 open to the public.

Forward-looking statements represent challenging goals for us. As such, they are based on certain assumptions and estimates and are subject to certain risks and uncertainties. We caution 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, we hereby identify 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 expressed in our 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.

Risks and uncertainties that may affect operating results and business performance include: the vitality of the foodservice, hospitality and travel industries; restraints on pricing flexibility due to competitive factors, customer or vendor consolidations, and ~~customer and vendor consolidations;~~existing contractual obligations; changes in oil or raw material prices or unavailability of adequate and reasonably priced raw ~~materials;~~materials or substitutes therefor; the occurrence of capacity constraints or the loss of a key ~~supplier;~~supplier or the inability to obtain or renew supply agreements on favorable terms; the effect of future acquisitions or divestitures or other corporate transactions; the company’s ability to achieve plans for past acquisitions; the costs and effects of complying ~~with~~with: (i) laws and regulations relating to the environment and to the manufacture, storage, distribution, efficacy and labeling of our products and (ii) changes in tax, fiscal, governmental and other regulatory policies; economic factors such as the worldwide economy, interest rates and currency movements, including, in particular, our exposure to foreign currency risk; the occurrence of (a) litigation or claims, (b) the loss or insolvency of a major customer or distributor, (c) war, (d) natural or manmade disasters (including acts of terrorism or other hostilities which impact our markets) and, (e) severe weather conditions or public health epidemics affecting the foodservice, hospitality, and travel industries; loss of, or changes in, executive management; our ability to continue product introductions or reformulations and technological innovations; and other uncertainties or risks reported from time-to-time in our reports to the Securities and Exchange Commission. In addition, we note that our stock price can be affected by fluctuations in quarterly earnings. There can be no assurances that our earnings levels will meet investors’ expectations.

PART ~~II.~~II. OTHER INFORMATION

Item 2.~~Changes in~~Unregistered Sales of Equity Securities and Use of Proceeds.

~~(e)~~(c) Issuer Purchases of Equity Securities

Period

(a)
Total
number of
shares
purchased

(b) Average
price paid
per share (1)

(c)
Number of
shares
purchased
as part of
publicly
announced
plans or
programs(2)

(d)
Maximum number
of shares that
may yet be
purchased
under the
plans or
programs

April 1-30, 2004

206,555

$
28.5954

180,000

8,907,900

May 1-31, 2004

13,740

$
29.4764

0

8,907,900

June 1-30, 2004

4,706

$
30.5931

0

8,907,900

Total

225,001

$
28.6910

180,000

8,907,900

Period	(a) Total number of shares purchased	(b) Average price paid per share (1)		(c) Number of shares purchased as part of publicly announced plans or programs (2)	(d) Maximum number of shares that may yet be purchased under the plans or programs
July 1 - 31, 2004	0	$	0	0	8,907,900
August 1 - 31, 2004	1,025,658	$	29.8572	1,024,600	7,883,300
September 1 - 30, 2004	1,045,000	$	30.9398	1,045,000	6,838,300
Total	2,070,658	$	30.4036	2,069,600	6,838,300

(1) Includes brokerage commissions paid, plus the value of ~~45,001~~1,058 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 the Company’s Stock Incentive Plans.

(2) On October 17, 2003, we announced that 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 such authorization, for which no expiration date has been established, subject to market conditions.

Item 4.6. ~~Submission of Matters to a Vote of Security Holders~~Exhibit.

Our Annual Meeting of Stockholders was held on May 7, 2004. At the meeting, 85.5% of the outstanding shares of our voting stock were represented in person or by proxy. The first proposal voted upon was the election of five Class III Directors for a term ending at the annual meeting in 2007. The five persons nominated by our Board of Directors received the following votes and were elected:

Name

For

Withheld

Richard U. De Schutter

216,309,569

3,861,427

William L. Jews

215,773,787

4,397,209

Joel W. Johnson

215,512,412

4,658,584

Ulrich Lehner

214,426,056

5,744,940

Beth M. Pritchard

217,471,263

2,699,733

In addition, the terms of office of the following directors continued after the meeting: Class I Directors for a term ending in 2005 – Douglas M. Baker, Jr., Stefan Hamelmann, James J. Howard, Jerry W. Levin and Robert L. Lumpkins; Class II Directors for a term ending in 2006 – Les S. Biller, Jerry A. Grundhofer, Jochen Krautter and Allan L. Schuman.

~~The second proposal voted upon was to re-approve the Ecolab Inc. Management Performance Incentive Plan. The proposal received the following votes and was approved:~~

For

Against

Abstain

Broker Non-Votes

213,552,001

5,473,136

1,145,859

0

~~The third proposal voted upon was to approve the Ecolab Stock Purchase Plan. The proposal received the following votes and was approved:~~

For

Against

Abstain

Broker Non-Votes

185,567,077

15,561,897

683,423

18,358,599

~~The fourth proposal voted upon was the ratification of the appointment of PricewaterhouseCoopers LLP as our registered public accounting firm for the year ending December 31, 2004.~~s.

The ~~proposal received the~~ following ~~votes and was ratified:~~documents are filed as exhibits to this report:

For

Against

Abstain

Broker Non-Votes

216,377,417

3,311,460

482,119

0

~~Item 6.~~(10)A	(i)	~~Exhibits~~Multicurrency Credit Agreement, dated as of September 29, 1993, as amended and ~~Reports on Form 8-K.~~restated as of August 13, 2004, by and among Ecolab Inc., Ecolab PTY Limited, Ecolab Finance PTY Limited, the financial institutions party thereto as Banks from time to time, the financial institutions party thereto as Issuing Banks from time to time, Citicorp USA, Inc., 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, JPMorgan Chase Bank, as syndication agent, and Credit Suisse First Boston, as documentation agent.

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

	(ii)	Amendment No. 2 dated as of August 13, 2004 to Australian Dollar Local Currency Addendum dated as of October 17, 1997, among Ecolab Pty Limited, Ecolab Inc., the Local Currency Banks named therein, Citicorp USA, Inc., as Administrative Agent, and Citisecurities Limited, as Local Currency Agent.

	~~(10) A.~~(iii)	~~Sample forms~~Amendment No. 1 dated as of ~~agreement under~~August 13, 2004 to Australian Dollar Local Currency Addendum dated as of June 23, 1998 among among Ecolab Pty Limited, Ecolab Inc., the ~~Ecolab~~Local Currency Banks named therein, Citicorp USA, Inc. ~~2002 Stock Incentive Plan.~~, as Administrative Agent, and Citisecurities Limited, as Local Currency Agent.

(15)
				~~(i)~~ ~~Non-Statutory Stock Option Agreement as in effect for grants beginning May 11, 2002 through August 12, 2003.~~

				~~(ii)~~ ~~Non-Statutory Stock Option Agreement as in effect for grants beginning August 13, 2003.~~

			~~(10) B.~~	~~Sample forms of agreement under the Ecolab Inc. 1997 Stock Incentive Plan, as Amended and Restated as of August 18, 2000.~~

				~~(i)~~ ~~Non-Statutory Stock Option Agreement as in effect for grants through May 12, 2000.~~

				~~(ii)~~ ~~Non-Statutory Stock Option Agreement as in effect for grants beginning May 13, 2000 through May 10, 2002.~~


		~~(10) C.~~	~~Sample form of Non-Statutory Stock Option Agreement under the Ecolab Inc. 1993 Stock Incentive Plan, as in effect for grants beginning May 14, 1993 through May 8, 1997.~~

		~~(10) D.~~	~~Sample forms of agreement under the Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan.~~

			~~(i)~~ ~~Master Agreement Relating to Options (as in effect through May 7, 2004).~~

			~~(ii)~~ ~~Master Agreement Relating to Periodic Options, as amended effective as of May 1, 2004.~~

		~~(15)~~	Letter regarding unaudited interim financial information.


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


(32)	~~(32)~~	Section 1350 Certifications.

	~~(b)~~	~~Reports on Form 8-K:~~

		During the quarter ended June 30, 2004 we furnished a Current Report dated April 22, 2004 to the SEC under Item 12 of Form 8-K to disseminate our earnings for the first quarter ended March 31, 2004. On May 5, 2004, we filed an amendment to Form 8-K under Item 12 to report a $7,698,000 adjustment to the Consolidated Balance Sheet that accompanied our April 22, 2004 earnings release.

3332

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	ECOLAB INC.


Date: ~~August 6,~~November 4, 2004	By:	/s/ Daniel J. Schmechel
		Daniel J. Schmechel
		Vice President and Controller (duly authorized Officer and Chief Accounting Officer)

3433

EXHIBIT INDEX

Exhibit No.		Document	Method of Filing

(10) A.	~~Sample forms of agreement under the Ecolab Inc. 2002 Stock Incentive Plan.~~(i)

	~~(i)~~ ~~Non-Statutory Stock Option~~Multicurrency Credit Agreement, dated as of September 29, 1993, as amended and restated as of August 13, 2004, by and among Ecolab Inc., Ecolab PTY Limited, Ecolab Finance PTY Limited, the financial institutions party thereto as Banks from time to time, the financial institutions party thereto as Issuing Banks from time to time, Citicorp USA, Inc., as administrative agent for the Banks and Issuing Banks thereunder, Citibank International PLC, as agent for the Banks in ~~effect for grants beginning May 11, 2002 through August 12, 2003.~~connection with certain of the Eurocurrency Advances, JPMorgan Chase Bank, as syndication agent, and Credit Suisse First Boston, as documentation agent.	Filed herewith electronically

	(ii) ~~Non-Statutory Stock Option Agreement~~	Amendment No. 2 dated as ~~in effect for grants beginning~~of August 13, ~~2003.~~2004 to Australian Dollar Local Currency Addendum dated as of October 17, 1997, among Ecolab Pty Limited, Ecolab Inc., the Local Currency Banks named therein, Citicorp USA, Inc., as Administrative Agent, and Citisecurities Limited, as Local Currency Agent.	Filed herewith electronically

~~(10) B.~~	~~Sample forms of agreement under the Ecolab Inc. 1997 Stock Incentive Plan, as Amended and Restated as of August 18, 2000.~~
	(iii)
	~~(i)~~ ~~Non-Statutory Stock Option Agreement~~Amendment No. 1 dated as ~~in effect for grants through May 12, 2000.~~of August 13, 2004 to Australian Dollar Local Currency Addendum dated as of June 23, 1998 among Ecolab Pty Limited, Ecolab Inc., the Local Currency Banks named therein, Citicorp USA, Inc., as Administrative Agent, and Citisecurities Limited, as Local Currency Agent.	Filed herewith electronically

	~~(ii)~~ ~~Non-Statutory Stock Option Agreement as in effect for grants beginning May 13, 2000 through May 10, 2002.~~	~~Filed herewith electronically~~

~~(10) C.~~	~~Sample form of Non-Statutory Stock Option Agreement under the Ecolab Inc. 1993 Stock Incentive Plan, as in effect for grants beginning May 14, 1993 through May 8, 1997.~~	~~Filed herewith electronically~~

~~(10) D.~~	~~Sample forms of agreement under the Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan.~~

	~~(i)~~ ~~Master Agreement Relating to Options (as in effect through May 7, 2004).~~	~~Filed herewith electronically~~

	~~(ii)~~ ~~Master Agreement Relating to Periodic Options, as amended effective as of May 1, 2004.~~	~~Filed herewith electronically~~

(15)		Letter regarding unaudited interim financial information.	Filed herewith electronically

(31)		Rule 13a - 14(a) Certifications.	Filed herewith electronically

(32)		Section 1350 Certifications.	Filed herewith electronically

3534

Period	(a) Total number of shares purchased	(b) Average price paid per share (1)		(c) Number of shares purchased as part of publicly announced plans or programs(2)	(d) Maximum number of shares that may yet be purchased under the plans or programs
April 1-30, 2004	206,555	$	28.5954	180,000	8,907,900
May 1-31, 2004	13,740	$	29.4764	0	8,907,900
June 1-30, 2004	4,706	$	30.5931	0	8,907,900
Total	225,001	$	28.6910	180,000	8,907,900

Name	For	Withheld
Richard U. De Schutter	216,309,569	3,861,427
William L. Jews	215,773,787	4,397,209
Joel W. Johnson	215,512,412	4,658,584
Ulrich Lehner	214,426,056	5,744,940
Beth M. Pritchard	217,471,263	2,699,733

For		Against		Abstain		Broker Non-Votes
213,552,001		5,473,136		1,145,859		0