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 both the unaudited consolidated financial information and related notes included in this Form 10-Q, and the Management's Discussion and Analysis of Financial Condition and Result of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2007. 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 third quarter ended September 30, 2008

Steady gains from our U.S. business along with double-digit growth from our Latin America and Asia Pacific operations led results for the third quarter of 2008. We achieved a strong financial performance against challenging market conditions and higher delivered product costs. We remain focused on our sales efforts, cost savings initiatives and in securing appropriate pricing to reflect the significant increases in our input costs. We saw these combined actions pay off in the third quarter, and expect them to help deliver continued growth in the future.

Sales Performance

† Consolidated net sales increased 15% to $1.6 billion including 3% growth due to acquisitions.

† U.S. Cleaning & Sanitizing sales increased 15% to $696 million. Excluding acquisitions, sales rose 8% with double-digit growth from Kay and strong growth from Institutional and Food & Beverage.

† U.S. Other Services sales increased 5% to $125 million benefiting from good Pest Elimination gains.

† International sales, when measured in fixed currency rates, rose 6% to $767 million. Latin America and Asia Pacific reported double-digit sales gains and Canada reported good sales growth. Europe/Middle East/Africa ("EMEA") recorded moderate sales growth. When measured at public currency rates, International sales increased 17%.

Financial Performance

† Operating income increased 18% to $202 million in the third quarter of 2008. Excluding special charges, operating income increased 7%.

† Net income increased 11% to $126 million in the third quarter of 2008. Excluding special charges and discrete tax items, net income increased 12%.

† Diluted net income per share increased 9% to $0.50 for the third quarter of 2008 compared to $0.46 in the third quarter of 2007. Third quarter 2008 results were reduced by $0.05 per share of special charges and discrete tax items. Third quarter 2007 results were reduced by $0.03 per share of special charges and discrete tax items.

† Our reported effective income tax rate was 32.0% for the third quarter of 2008 compared to 28.2% for the third quarter of 2007. Excluding the tax rate impact of special charges and discrete tax items, our adjusted effective income tax rate was 30.4% and 34.4% for the third quarter of 2008 and 2007, respectively.

Results of Operations - Third Quarter and Nine Months Ended September 30, 2008

Consolidated net sales for the third quarter ended September 30, 2008 were $1.6 billion, an increase of 15% compared to last year. For the first nine months of 2008, net sales increased 15% to $4.7 billion. When measured in fixed currency rates, sales rose 10% for both the third quarter and first nine months of 2008, respectively, compared to last year. The components of the quarter and year-to-date sales growth are shown below.

                              Third Quarter Ended   Nine Months Ended
(percent)                     September 30, 2008    September 30, 2008

Volume growth                          4%                    4%
Price changes                          3                    2
Foreign currency exchange              5                    5
Acquisitions & divestitures            3                    4
Total sales growth                    15%                  15%

Results of Operations - Third Quarter and Nine Months Ended September 30, 2008
(Continued)

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 48.7% and 51.2% for the third quarter of 2008 and 2007, respectively. For the nine month periods, the gross profit margin was 49.0% in 2008 and 51.0% in 2007. Our gross profit margin decline for the third quarter and year-to-date has been driven in part by 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, which more than offset sales volume and pricing and cost savings initiatives.

Selling, general and administrative expenses were 35.6% of consolidated net sales for the third quarter of 2008 compared to 37.1% in 2007. For the nine month periods, selling, general and administrative expenses were 36.9% in 2008 and 38.1% in 2007. The decrease in the ratios reflected leverage from our sales volume and pricing growth, cost controls and the impact of recent acquisitions, which operate at lower ratios. This leverage more than offset investments in business systems and efficiency, R&D and information technology.

Special charges for the third quarter of 2008 were $11.8 million, pre-tax, resulting from costs to optimize our business structure including costs related to the establishment of our European headquarters in Zurich, Switzerland. For the nine months ended September 30, 2008, we reported a net pre-tax gain in special gains and charges of $5.6 million, which included a gain of $24.0 million recorded in the second quarter from the sale of a plant in Denmark, a $1.7 million gain recorded in the first quarter of 2008 related to the sale of a business in the U.K., partially offset by costs to optimize our business structure, including costs related to our new European headquarters, during the first nine months of 2008.

Special charges for the third quarter and nine months ended September 30, 2007 include a $27.4 million pre-tax charge for an arbitration settlement as well as costs related to the establishment of our European headquarters.

Results of Operations - Third Quarter and Nine Months Ended September 30, 2008
(Continued)

Net income increased 11% to $126 million in the third quarter of 2008. On a per share basis, diluted net income per share increased 9% to $0.50 per share compared to $0.46 per share in 2007. Net income in the third quarter of 2008 includes $9.2 million, net of tax, of special charges, and $2.1 million of discrete tax expense which together reduced diluted net income per share by $0.05. Net income in the third quarter of 2007 included $17.0 million, net of tax, of special charges, and $8.6 million of discrete tax benefits which together reduced reported diluted net income per share by $0.03. The third quarter of 2008 results also included $0.02 per share of dilution from acquisitions and benefited from a lower overall tax rate. Currency translation increased net income by $6 million for the third quarter of 2008 compared to 2007.

Net income for the first nine months of 2008 increased 17% to $368 million. On a per share basis, diluted net income increased 17% to $1.46 compared to $1.25 last year. Net income in the first nine months of 2008 includes a net gain of $10.5 million, net of tax, of special gains and charges and net discrete tax benefits of $2.7 million. These items together increased reported diluted net income per share by $0.05. Net income for the first nine months of 2007 includes a net charge of $17.0 million, net of tax, of special gains and charges and $14.0 million of discrete tax benefits. These items together reduced reported diluted net income per share by $0.01. The first nine months of 2008 results also included $0.05 per share of dilution from acquisitions and benefited from a lower overall tax rate. Currency translation increased net income by $18 million for the first nine months of 2008 compared to 2007.

Results of Operations - Third Quarter and Nine Months Ended September 30, 2008
(Continued)



Sales for each of our reportable segments are as follows:



                                           Third Quarter Ended       Nine Months Ended
                                              September 30             September 30
(millions)                                  2008         2007        2008        2007
                                               (unaudited)              (unaudited)
Net Sales
United States
Cleaning & Sanitizing                    $     695.5   $   604.5   $ 2,012.6   $ 1,762.0
Other Services                                 124.7       119.3       356.0       335.1
Total                                          820.2       723.8     2,368.6     2,097.1
International                                  767.3       720.7     2,191.4     2,057.2
Effect of foreign currency translation          38.8       (31.3 )      94.2      (124.5 )
Consolidated                             $   1,626.3   $ 1,413.2   $ 4,654.2   $ 4,029.8

U.S. Cleaning & Sanitizing sales increased 15% in the third quarter and 14% for the first nine months of 2008 compared to the prior year periods. Acquisitions added 7% and 8% to quarter over quarter and year over year sales growth, respectively. Sales for our significant U.S. Cleaning & Sanitizing businesses were as follows:

† Institutional - Sales grew 6% in the third quarter of 2008 compared to the third quarter of 2007. We continue to see strong demand for our new Apex warewashing line due to customer demand for energy and cost savings solutions. New business gains also continued to be solid. These gains were partially offset by lower consumption among our foodservice and lodging customers as they experience a softening of their traffic trends due to the current economic environment.

† Food & Beverage - Beginning in the first quarter of 2008, following the Ecovation acquisition, we combined our Food & Beverage, Water Care and Ecovation 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 and Ecovation increased 14% in the third quarter compared to the third quarter of 2007. The acquisition of Ecovation added 5% to the sales growth. Sales were led by strong growth in the agri, meat & poultry and dairy market segments. New business gains, growth at existing accounts and customer retention continue to fuel strong organic growth in spite of more difficult market conditions.

Results of Operations - Third Quarter and Nine Months Ended September 30, 2008
(Continued)

† Kay - Sales grew 21% in the third quarter of 2008 compared to the prior year period. Kay's strong sales growth reflected new account gains and success with new products and programs. Business trends remain strong with very good ongoing demand from new and existing quick-service restaurant customers. Third quarter 2008 sales growth also benefited slightly from favorable timing of distributor shipments.

† Healthcare - Third quarter sales for Healthcare increased significantly, reflecting the impact of the Microtek acquisition. Excluding the impact of the acquisition, sales rose 7% for the quarter reflecting continued solid end-market demand for our infection control and skin care products. Microtek also reported strong sales growth during the quarter led by sales of their infection barrier products.

U.S. Other Services sales increased 5% and 6% for the third quarter and first nine months of 2008, respectively, compared to the third quarter and first nine months of 2007. Sales for our U.S. Other Services businesses were as follows:

† Pest Elimination - Sales increased 8% for the third quarter of 2008 led by continued growth in contract services due to the addition of new customer locations and new programs. Non-contract service growth slowed in the quarter as we are seeing reduced discretionary spending by our customers due the current economic environment.

† GCS Service - Sales decreased 3% in the third quarter but have increased 2% for the first nine months of 2008. Moderate service sales growth was more than offset by a decline in direct parts sales during the third quarter due to softness in the foodservice market because of the current economic environment.

Results of Operations - Third Quarter and Nine Months Ended September 30, 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 6% and 7% for the third quarter and first nine months of 2008, respectively, compared to the third quarter and first nine months of 2007. The net impact of acquisitions and divestitures did not have a significant impact on third quarter or year to date International sales growth. Sales for our International regions were as follows:

† EMEA - Sales grew 2% in the third quarter of 2008 led by good sales growth in Germany, U.K., Turkey and South Africa, partially offset by weakness in France 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 third quarter led by growth in China, Australia and New Zealand. Sales in China benefited from increased business due to the Olympics during the quarter. Acquisitions did not have a significant impact on Asia Pacific sales growth for the quarter.

† Latin America - Sales continued to grow at double-digit rates, rising 15% in the third quarter. Sales were very strong throughout the region, led by double-digit growth in Brazil, Chile and the Caribbean as well as strong growth in Mexico.

† Canada - Sales in Canada increased 8% in the third quarter. Sales growth in Canada continued to be led by Institutional growth due to new products and good account retention.

Results of Operations - Third Quarter and Nine Months Ended September 30, 2008
(Continued)



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



                                           Third Quarter Ended       Nine Months Ended
                                              September 30             September 30
(millions)                                  2008          2007        2008        2007
                                               (unaudited)              (unaudited)
Operating Income
United States
Cleaning & Sanitizing                    $     121.2    $  111.5   $    334.2    $ 310.5
Other Services                                  17.9        12.9         37.9       33.2
Total                                          139.1       124.4        372.1      343.7
International                                   78.5        86.2        206.1      206.4
Corporate                                      (19.4 )     (34.2 )      (16.3 )    (40.7 )
Effect of foreign currency translation           3.5        (4.8 )       10.8      (16.4 )
Consolidated                             $     201.7    $  171.6   $    572.7    $ 493.0

U.S. Cleaning & Sanitizing operating income increased 9% and 8% for the third quarter and first nine months of 2008, respectively. Acquisitions reduced operating income by 3% and 2% for the third quarter and first nine months of 2008, respectively. Operating income increased as sales volume, pricing and improved cost efficiencies more than offset higher delivered product costs and investments in the business.

U.S. Other Services operating income increased 38% and 14% for the third quarter and first nine months of 2008, respectively. The third quarter and year-to-date growth was driven by continued operating income growth at Pest Elimination and improving profitability at GCS.

International segment operating income decreased 9% for the third quarter and was flat for the first nine months of 2008 at fixed currency rates. Higher delivered product costs and investments in the business more than offset sales gains, driving the decline in operating income. When measured at public currency rates, operating income increased 2% and 14% for the third quarter and first nine months of 2008, respectively, compared to the prior year periods.

Results of Operations - Third Quarter and Nine Months Ended September 30, 2008
(Continued)

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 $16.0 million in the third quarter of 2008, compared with $12.8 million in 2007. Net interest expense was $46.1 and $37.9 million for the first nine months of 2008 and 2007, respectively. The increase in our net interest expense during 2008 is due primarily to higher debt levels during the current period compared to last year primarily related to funding for our Microtek and Ecovation acquisitions.

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

                                           Third Quarter Ended           Nine Months Ended
                                               September 30                 September 30
(percent)                                  2008           2007            2008         2007
                                               (unaudited)                  (unaudited)
Reported tax rate                         32.0%           28.2%          30.1%        31.0%
Impact of special gains and charges
and discrete tax items - increase
(decrease)                                 1.6%          (6.2)%         (1.8)%       (3.4)%

The provision for income taxes for the third quarter and first nine months of 2008 and 2007 include tax impacts from special gains and charges and discrete tax events.

Discrete tax items in 2008 included $4.8 million of discrete tax benefits recorded in the first quarter due to enacted tax legislation and an international rate change. 2008 also included $2.1 million of discrete tax expense recorded in the third quarter related to recognizing adjustments from filing our 2007 federal income tax return. Discrete tax items in 2007 included $5.4 million of discrete tax benefits recorded in the second quarter for tax audit settlements and $8.6 million of discrete benefits recorded in the third quarter for reductions in net deferred tax liabilities related to international tax rate changes.

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

Financial Position and Liquidity

Total assets were $5.1 billion as of September 30, 2008, compared to total assets of $4.7 billion at December 31, 2007. The increase is due to acquisitions which added approximately $0.2 billion to total assets, as well as a $0.1 billion increase in accounts receivable due to higher sales in 2008.

Total debt was $1.0 billion at September 30, 2008 and December 31, 2007. In February 2008, we issued and sold $250 million aggregate principal amount of 4.875% senior unsecured notes that mature in 2015. The proceeds were used to refinance outstanding commercial paper related to acquisitions and for general corporate purposes. The ratio of total debt to capitalization (shareholders' equity plus total debt) decreased to 32% at September 30, 2008 compared to 34% at December 31, 2007 due to the increase in equity from current year earnings during the first nine months of 2008. We are in compliance with all of our debt covenants and believe we have sufficient borrowing capacity to meet our reasonably foreseeable operating needs.

Cash provided by operating activities totaled $496 million for the first nine months of 2008 compared to $544 million in 2007. Operating cash flow in 2008 was impacted by a $75 million voluntary contribution to our U.S. pension plan in the third quarter of 2008, offset partially by $30 million of proceeds from the sale of Ecovation lease receivables in the third quarter of 2008. Cash provided by operations in 2008 was also negatively impacted by higher income tax payments compared to last year.

Cash used for investing activities increased in 2008 primarily due to acquisition activity as well as increased capital and software investments as we continue to invest in our business to support our long-term growth. Cash used for investing activities also includes a $21 million deposit into an indemnification escrow from our purchase price for the Ecovation acquisition.

Cash used for financing activities in 2008 includes proceeds from new debt issued in 2008 and lower share repurchase activity compared to last year. 2007 financing cash flow activities included the repayment of our euro 300 million 5.375% euronotes in February 2007 as well as significant share repurchase activity.

Financial Position and Liquidity (Continued)

At December 31, 2007, the schedule of contractual obligations included in the Financial Position and Liquidity section of our Form 10-K for the year ended December 31, 2007 disclosed total notes payable and long-term debt due within one year of $403 million. As of September 30, 2008, the total notes payable and long-term debt due within one year is $179 million. The decrease from year-end is primarily due to the repayment of commercial paper during 2008. As of September 30, 2008, our gross liability for uncertain tax positions under FIN 48 was $114 million (refer to Note 14). We are not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, we do not expect significant payments related to these obligations within the next year. No other significant changes to our contractual obligations occurred during the first nine months of 2008.

In February 2008, Henkel AG & Co. KGaA ("Henkel") announced its intention to sell some or all of the Ecolab shares held by Henkel. We have a stockholder's agreement with Henkel which ensures an orderly process in the event of any disposition by Henkel of our shares, including our right of first refusal. We are prepared to work with Henkel on a transaction, which may include the repurchase of some shares from Henkel. Henkel held 72.7 million Ecolab shares at September 30, 2008.

We currently expect to fund all of the requirements which are reasonably foreseeable for the remainder of 2008, including scheduled debt repayments, new investments in the business, share repurchases, dividend payments, possible business acquisitions and pension contributions with cash from operating activities, cash reserves and short-term or long-term borrowings. In the event of a significant acquisition or other significant funding need, funding may occur through additional short and/or long-term borrowing or through the issuance of the company's stock.

Global credit markets, including the commercial paper markets, have recently experienced adverse conditions, and volatility within these markets has increased the costs associated with issuing debt due to increased spreads over relevant interest rate benchmarks. Despite this volatility and disruption, we have continued to have access to the commercial paper market. We are well . . .