UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2008

OR

For the transition period from                to

Commission File No. 1-9328

ECOLAB INC.

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices)(Zip Code)

1-800-232-6522

(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  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 30, 2008.

247,155,483 shares of common stock, par value $1.00 per share.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements.

ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME

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

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ECOLAB INC.
CONSOLIDATED BALANCE SHEET

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

(Continued)

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ECOLAB INC.
CONSOLIDATED BALANCE SHEET (Continued)

(a)                      Common stock, 400 million shares authorized, $1.00 par value per share, 247.1 million shares outstanding at March 31, 2008, 246.8 million shares outstanding at December 31, 2007.

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

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ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

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

(Continued)

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ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.             Consolidated Financial Information

The unaudited consolidated financial information for the first quarters ended March 31, 2008 and 2007, reflect, in the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations and cash flows of Ecolab Inc. (“the company”) for the interim periods presented. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2007 was derived from the audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.  The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the company’s Annual Report on Form 10-K for the year ended December 31, 2007.

With respect to the unaudited financial information of the company for the first quarters ended March 31, 2008 and 2007 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 April 24, 2008 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied.  PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the “Act”) for their report on the unaudited financial information because that report is not a report or a part of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

2.             Special Gains and Charges

Special gains and charges include a net charge of $1.9 million for the first quarter of 2008.  It includes non-recurring costs to optimize the company’s business structure including the establishment of a European headquarters in Zurich, Switzerland. These costs were partially offset by a $1.7 million gain related to the sale of a business in the U.K.  For segment reporting purposes, these items have been included in the company’s corporate segment, which is consistent with the company’s internal management reporting.

3.             Share-Based Compensation

Statement of Financial Accounting Standards (SFAS) No.123 (Revised 2004), Share-Based Payment, (“SFAS 123R”) requires the company to measure compensation expense for share-based awards at fair value at the date of grant and recognize compensation expense over the service period for awards expected to vest. Total compensation expense related to share-based compensation plans was $7.7 million ($5.0 million net of tax benefit) and $7.6 million ($4.8 million net of tax benefit) for the first quarter of 2008 and 2007, respectively.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.             Selected Balance Sheet Information

5.             Interest

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.             Financial Instruments

In December 2006, the company issued euro 300 million ($455 million as of March 31, 2008) aggregate principal amount of the company’s senior notes in two series: 4.355% Series A Senior Notes due 2013 in the aggregate principal amount of euro 125 million and 4.585% Series B Senior Notes due 2016 in the aggregate principal amount of euro 175 million. The company designated this 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 all euronotes which are designated and are effective as hedges of the company’s net investments have been included as a component of the cumulative translation account.  The company recorded a transaction loss related to the euronotes charged to shareholders’ equity of $10.2 million, net of tax, and a transaction gain of $0.4 million, net of tax, for the first quarter of 2008 and 2007, respectively.

7.             Comprehensive Income

Comprehensive income was as follows:

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.             Business Acquisitions and Investments

In December 2007, subsequent to the company’s year end for International operations, the company purchased the Irish dairy hygiene business from Novartis Animal Health Ireland Ltd. The business, which has annual sales of approximately $3 million, became part of the company’s International operations during the first quarter of 2008.

In February 2008, the company acquired Ecovation, Inc., a Rochester, N.Y. area-based provider of renewable energy solutions and effluent management systems primarily for the food and beverage manufacturing industry in the U.S., including dairy, beverage, and meat and poultry producers. Ecovation is growing rapidly; 2007 sales were approximately $50 million, having grown tenfold since 2005.  The total purchase price was approximately $210 million, of which $21 million remains payable and was placed in escrow for indemnification purposes.  Ecovation became part of the company’s U.S. Cleaning & Sanitizing operations during the first quarter of 2008.

Acquisitions in 2008 and 2007 are not material to the company’s consolidated financial statements; therefore pro forma financial information is not presented.  The aggregate purchase price of acquisitions and investments in affiliates has been reduced for any cash or cash equivalents acquired with the acquisitions.

Based upon preliminary purchase price allocations the components of the aggregate purchase prices of the acquisitions and investments in affiliates made were as follows:

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.             Business Acquisitions and Investments (continued)

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter ended March 31, 2008 were as follows:

Goodwill acquired in 2008 includes immaterial adjustments to prior year acquisitions.

9.             Net Income Per Common Share

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

Stock options to purchase approximately 5.3 million shares and 2.6 million shares for the first quarter ended March 31, 2008 and 2007, respectively, were non-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.             Net Income Per Common Share (continued)

Restricted stock awards of 84,845 shares and 28,693 shares for the first quarter ended March 31, 2008 and 2007, respectively, were excluded from the computation of basic weighted-average shares outstanding because such shares were not yet vested at these dates.

10.           Pension and Postretirement Plans

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

The company is not required to make any contributions to its U.S. pension plan and postretirement health care benefits plans for 2008 based on plan asset values as of March 31, 2008.  Certain international pension benefit plans are required to be funded in accordance with local government requirements.  The company contributed approximately $6 million to its international pension benefit plans during the first quarter of 2008. The company currently estimates that it will contribute approximately $20 million to the international pension benefit plans during the remainder of 2008.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.           Operating Segments

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

The International amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2008.

Consistent with the company’s internal management reporting, the corporate segment includes special gains and charges reported on the Consolidated Statement of Income.  The corporate segment also includes investments in the development of business systems and other corporate investments the company is making as part of ongoing efforts to improve efficiency and returns. The company began reporting these items in the corporate segment in the second quarter of 2007.  First quarter 2007 corporate segment includes items which were previously reported in the International segment but have been reclassified to the corporate segment to provide accurate year over year comparison, consistent with internal management reporting.

Total service revenue for the U.S. Other Services segment was $90.4 million and $82.4 million for the first quarter ended March 31, 2008 and 2007, respectively.  Total service revenue for the International segment was $44.7 million and $42.7 million at public currency rates for the first quarter ended March 31, 2008 and 2007, respectively.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.           Goodwill and Other Intangible Assets

Under SFAS 142, goodwill must be tested annually for impairment.  The company performs its annual goodwill impairment test during the second quarter. If circumstances change significantly within a reporting unit, the company would also test a reporting unit for impairment prior to the annual test.  No adjustments to the carrying value of goodwill were necessary during the first quarter of 2008.

Goodwill and other intangible assets arise principally from business acquisitions.  Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired.  Other intangible assets include primarily customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives.  The weighted-average useful life of other intangible assets was 13 years as of March 31, 2008 and 2007.

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 first quarter ended March 31, 2008 and 2007 was $14.8 million and $7.0 million, respectively. As of March 31, 2008, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.           New Accounting Pronouncements

In September 2006, the FASB issued SFAS 157, Fair Value Measurement (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurement. Additionally, in February 2008, the FASB announced it will defer for one year the effective date of SFAS 157 for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The FASB also amended SFAS 157 to add a scope for exception for leasing transactions subject to SFAS 13 Accounting for Leases from its application. The company adopted SFAS 157 effective January 1, 2008. The adoption did not have a material impact on the company’s consolidated results of operations and financial condition.  The company’s financial assets as of March 31, 2008 include foreign exchange contracts with fair market value of approximately $1 million, which are valued using foreign currency exchange rates as of the balance sheet date (level 2 — significant other observable inputs). In addition, the company has concluded that it does not have material amounts of assets and liabilities measured using the company’s own assumptions of fair market value (level 3 — unobservable inputs).

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115 (“SFAS 159”).  SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value, which can be elected on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The company adopted SFAS 159 effective January 1, 2008. The adoption did not have a material impact on the company’s consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008, and will be adopted by the company in the first quarter of 2009. The company is currently evaluating the potential impact of the adoption of SFAS 141R on its consolidated results of operations and financial condition including the impact on future acquisitions.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.           New Accounting Pronouncements (continued)

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by the company in the first quarter of 2009.  The company is currently evaluating the potential impact of the adoption of SFAS 160 on its consolidated results of operations and financial condition.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment to FASB Statement 133 (“SFAS 161”).  SFAS 161 requires companies to provide greater transparency through disclosures about how and why the company uses derivative instruments.  This includes how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, the level of derivative activity entered into by the company and how derivative instruments and related hedged items affect the company’s financial position, results of operations, and cash flows.  SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008.  The company is currently evaluating the impact of the adoption of SFAS 161 on its consolidated financial statement disclosures.

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.           Accounting for Uncertain Tax Positions

The company files income tax returns in the U.S. federal jurisdiction and various U.S. state and international jurisdictions. With few exceptions, the company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2002. The Internal Revenue Service (IRS) has completed examinations of the company’s U.S. income tax returns for the years 1999 through 2004. It is reasonably possible for specific open positions within these examinations to be settled in the next 12 months. The IRS is currently examining the 2005 and 2006 tax years and is expected to complete its field examination in 2009. The company believes these events could result in a decrease in the company’s gross liability for unrecognized tax benefits of up to $43 million during the next 12 months. Decreases in the company’s gross liability could result in offsets to other balance sheet accounts, cash payments, and/or adjustments to the annual effective tax rate. The occurrence of these events and/or other events not included above within the next 12 months could change depending on a variety of factors and result in amounts different from above.

During the first quarter of 2008, the company recognized a discrete $5.2 million reduction in income tax expense resulting from a new tax treaty between the U.S. and Germany that went into effect after ratification by the U.S. Senate.  The treaty provides for binding arbitration in disputes on the treatment of transactions impacting the two countries.  As a result of the treaty ratification, the company has greater assurance of favorable resolution on potential disputes between these two countries.

As of March 31, 2008, the company’s gross liability for unrecognized tax benefits was $104 million compared to $99 million as of December 31, 2007.  Included in the March 31, 2008 balance are $50 million of tax positions that would affect the annual effective tax rate if such benefits were recognized.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Directors

Ecolab Inc.

We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. and its subsidiaries as of March 31, 2008 and the related consolidated statements of income for each of the three-month periods ended March 31, 2008 and 2007 and the consolidated statement of cash flows for the three-month periods ended March 31, 2008 and 2007.  These interim financial statements are the responsibility of Ecolab’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company 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 review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements 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, 2007, and the related consolidated statements of income, of comprehensive income and changes in shareholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 22, 2008, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2007, 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

April 24, 2008

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash flows and financial condition.  The discussion should be read in conjunction with the unaudited consolidated financial information and related notes included in this Form 10-Q. The discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statement entitled “Forward-Looking Statements” located at the end of Part I of this report.

Overview of the first quarter ended March 31, 2008

Strong growth from our Latin America and Asia Pacific operations along with solid gains from our U.S. business led results for the first quarter of 2008. Consolidated net sales increased 16% to $1.5 billion including 5% growth due to acquisitions. Net income increased 15% to $103 million and diluted net income per share rose 17% to $0.41 per share. Results for the first quarter of 2008 benefited from discrete tax benefits, offset partially by special gains and charges. These items increased reported 2008 first quarter diluted net income per share by $0.02.

Sales Performance

·                                          U.S. Cleaning & Sanitizing sales increased 15% to $653 million. Excluding acquisitions, sales rose 5% with good growth from Institutional, Food & Beverage and Healthcare.

·                                          U.S. Other Services sales increased 8% to $110 million, benefiting from good gains by both Pest Elimination and GCS.

·                                          International sales, when measured in fixed currency rates, rose 8% to $683 million in the first quarter. Latin America and Asia Pacific reported strong sales increases.  Europe/Middle East/Africa (“EMEA”) recorded moderate sales growth.  When measured at public currency rates, International sales increased 19%.

Financial Performance

·                                          Operating income increased 8% in the first quarter of 2008 compared to the first quarter of 2007.  Special gains and charges had a 1% negative impact.

·                                          Net income increased 15% in the first quarter of 2008 compared to the first quarter of 2007.  Discrete tax benefits and special gains and charges had a 4% favorable impact.

·                                          Diluted net income per share increased 17% to $0.41 for the first quarter of 2008, including $0.02 benefit from discrete tax benefits and special gains and charges.

·                                          Our income tax rate was 29.4% for the first quarter of 2008 compared to 34.5% for the first quarter of 2007. Discrete tax benefits decreased our effective income tax rate by 3.4% for the first quarter of 2008.

·                                          We repurchased 0.4 million shares of our common stock during the first quarter of 2008 under our share repurchase program.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations — First Quarter Ended March 31, 2008

Consolidated net sales for the first quarter ended March 31, 2008 were $1.5 billion, an increase of 16% compared to last year. When measured in fixed currency rates, sales rose 11%. The components of the quarter to date sales growth are shown below.

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 49.4% and 50.9% for the first quarter of 2008 and 2007, respectively. Our gross profit margin declined 1.1 percentage points due to the negative impact of the recent Microtek and Ecovation acquisitions which, by their business model, operate at lower gross profit margins than our historical business. Our gross profit margin was also negatively impacted by higher delivered product costs and an unfavorable business mix, which more than offset sales leverage, pricing and cost savings initiatives.

Selling, general and administrative expenses were 38.2% of consolidated net sales for the first quarter of 2008 compared to 39.1% in 2007. The decrease in the ratio reflected leverage from our sales growth and the impact of Microtek and Ecovation acquisitions, which operate at lower ratios, that more than offset investments in business systems and efficiency, R&D and information technology.

Special gains and charges includes a net charge of $1.9 million for the first quarter of 2008.  It includes non-recurring costs to optimize our business structure including the establishment of a European headquarters in Zurich, Switzerland.  These costs were partially offset by a $1.7 million gain related to the sale of a business in the U.K.

Net income increased 15% to $103 million in the first quarter of 2008. On a per share basis, diluted net income per share increased 17% to $0.41 per share compared to $0.35 per share in 2007. Net income in the first quarter of 2008 includes $1.1 million, net of tax, of special gains and charges and $4.8 million of net discrete tax benefits. These items increased diluted net income per share in the first quarter of 2008 by $0.02. Currency translation favorably impacted net income by $3.9 million and net income also benefited from a lower overall tax rate in 2008. First quarter 2008 results included approximately $0.01 per share of dilution from acquisitions.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations — First Quarter Ended March 31, 2008 (continued)

Sales for each of our reportable segments are as follows:

U.S. Cleaning & Sanitizing sales increased 15% in the first quarter. Microtek and Ecovation acquisitions added 10% to the year over year sales growth rate. Institutional sales grew 6% in the first quarter of 2008. We saw strong demand for our new APEX warewashing line in both new accounts as well as with existing customers. Sales growth was good into the various end-market segments including travel, contract management and healthcare. Beginning in the first quarter of 2008, following the Ecovation acquisition, we have combined our Food & Beverage and Water Care divisions.  Food & Beverage customers are the primary targets for our Water Care sales and there are potential synergies and efficiencies available between Water Care and Ecovation.  Combined Food & Beverage sales, including Water Care, increased 28% in the first quarter primarily due to the acquisition of Ecovation which added 21%.  Sales growth was led by strong performances in the dairy, meat & poultry, beverage and agri market segments. Kay sales grew 2% in the first quarter, primarily reflecting the timing of distributor shipments.  Kay’s business remains healthy with good ongoing demand from major new and existing accounts.  New products and programs, along with customer wins, continue to favorably impact Kay’s results.  Reported first quarter sales for our Healthcare division increased significantly, reflecting the impact of the Microtek acquisition.  Excluding the impact of the acquisition, sales rose 17% reflecting continued solid end market demand for our infection control and skin care products.  Microtek also reported strong sales growth during the quarter.

U.S. Other Services sales increased 8% in the first quarter of 2008. Pest Elimination sales continued to show good growth, rising 9%. Pest added new corporate accounts and experienced good growth in both contract and non-contract services.  GCS sales increased 6% led by continued strong service sales offset partially by soft direct parts sales.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations — First Quarter Ended March 31, 2008 (continued)

We evaluate the performance of our International operations based on fixed management rates of currency exchange. Management rate sales for our International operations grew 8% for the first quarter of 2008. The net impact of acquisitions and divestitures did not have a significant impact on first quarter International sales growth. EMEA sales grew 4% due to improved sales growth in France and Germany and moderate growth in the U.K. and Italy. The net impact of acquisitions and divestitures reduced EMEA sales growth by 2% compared to the prior year, primarily due to the divestiture of a business in the U.K.  Asia Pacific sales increased 10% in the first quarter led by growth in China, Hong Kong, Australia and New Zealand. Acquisitions added 2% to Asia Pacific sales growth for the quarter. Latin America reported strong sales growth of 18%. Sales continued to be strong throughout the region, led by double-digit growth in Brazil, Chile, Mexico and Venezuela.  Latin America sales were not impacted by acquisitions and divestitures.  Sales in Canada increased 3% in the first quarter, led by Institutional growth due to new products and good account retention.

Operating income for each of our reportable segments is as follows:

U.S. Cleaning & Sanitizing operating income increased 6% for the first quarter of 2008 compared to the first quarter of 2007. Acquisitions did not have a significant impact on the operating income growth rate for the quarter. Operating income increased due to higher sales volume and improved cost efficiencies and the resulting strong operating leverage, which more than offset higher delivered product costs and investments in the business.

U.S. Other Services operating income decreased $2.3 million compared to the first quarter of 2007. Continued operating income growth at Pest Elimination was more than offset by systems deployment, stabilization and optimization costs at GCS.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations — First Quarter Ended March 31, 2008 (continued)

International segment operating income increased 13% for the first quarter of 2008 at fixed currency rates. Acquisitions and divestitures did not have a significant impact on the operating income growth rate for the quarter. International sales gains more than offset higher delivered product costs and unfavorable business mix. When measured at public currency rates, operating income increased 30%.

Consistent with our internal management reporting, the corporate segment includes special gains and charges reported on the Consolidated Statement of Income. The corporate segment also includes investments in the development of business systems and other corporate investments we are making as part of our ongoing efforts to improve efficiency and returns.

Net interest expense totaled $14.8 million in the first quarter of 2008, compared with $11.7 million in 2007.  The increase in our net interest expense during 2008 is due primarily to higher debt levels during the current year compared to last year.

The following table provides a summary of our reported tax rate:

The provision for income taxes for the first quarter of 2008 includes discrete tax benefits of $4.8 million as well as $0.8 million of tax benefit on special gains and charges reported in the first quarter of 2008.

The decrease in the 2008 rate over the 2007 rate, excluding discrete tax items, is due primarily to tax planning strategies, international rate reductions and U.S. tax legislation. We expect the effective income tax rate, excluding discrete tax items, will approximate 31% to 32% for the full year 2008.

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ECOLAB INC.