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, 2008. 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 second quarter ended June 30, 2009

Strong new account gains, pricing and cost savings actions offset the effects of the global recession, higher delivered product costs and unfavorable foreign currency. Our U.S. Kay and Healthcare businesses, along with our Canadian operations, led growth for the quarter as they experienced double-digit gains.

Both 2009 and 2008 results of operations included significant special gains and charges, as well as discrete tax items which impact the year over year comparisons. Results for the second quarter of 2009 include restructuring charges of $24 million, which negatively impacted the reported results. Results for the second quarter of 2008 included a $24 million gain on the sale of a plant which favorably impacted the reported results for the second quarter of 2008.

Sales Performance

† Consolidated net sales decreased 8% to $1.4 billion. Net sales were negatively impacted by unfavorable foreign currency exchange during the quarter. When measured at fixed rates of exchange, sales were level with the prior year.

† U.S. Cleaning & Sanitizing sales increased 1% to $671 million. Kay and Healthcare led results, both reporting a 13% increase. Food & Beverage reported 3% growth while Institutional reported a 3% sales decline.

† U.S. Other Services sales declined 5% to $115 million. Sales growth was flat at Pest Elimination and GCS reported a 15% decrease in sales.

† International sales, when measured in fixed currency rates, declined 1% to $656 million in the second quarter. Canada and Latin America enjoyed strong sales growth of 10% and 8%, respectively, while Asia Pacific reported 4% sales growth. Europe/Middle East/Africa ("EMEA") sales declined 4% in the quarter. When measured at public currency rates, International sales declined 17%.

Financial Performance

† Operating income declined 22% to $165 million. Excluding the impact of special gains and charges, operating income was flat compared to the second quarter of 2008.

† Net income attributable to Ecolab declined 29% to $99 million. Excluding the impact of special gains and charges, and discrete tax items, net income attributable to Ecolab increased 1%.

† Diluted net income attributable to Ecolab per share decreased 25% to $0.41 for the second quarter of 2009 compared to $0.55 in the second quarter of 2008. Second quarter 2009 results were reduced by $0.09 per share of special gains and charges and discrete tax items. Second quarter 2008 results were increased by $0.08 per share of special gains and charges.

† Our reported effective income tax rate was 33.6% for the second quarter of 2009 compared to 28.8% for the second quarter of 2008. Excluding the tax rate impact of special gains and charges, and discrete tax items, our adjusted effective income tax rate was 31.3% and 32.8% for the second quarter of 2009 and 2008, respectively.

Results of Operations - Second Quarter and Six Months Ended June 30, 2009

Net Sales

Consolidated net sales for the second quarter ended June 30, 2009 were $1.4 billion, a decrease of 8% compared to last year. For the first six months of 2009, net sales also decreased 8% to $2.8 billion. When measured in fixed currency rates, sales were flat for the second quarter and declined 1% for the first six months of 2009. The components of the quarter and year-to-date sales decline are shown below.

                              Second Quarter Ended    Six Months Ended
(percent)                         June 30, 2009         June 30, 2009
Volume                                (4 )%                 (5 )%
Price changes                          4                     4
Foreign currency exchange             (8 )                  (7 )
Acquisitions & divestitures            -                     -
Total sales decrease                  (8 )%                 (8 )%

Results of Operations - Second Quarter and Six Months Ended June 30, 2009
(Continued)

Gross Profit Margin

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 49.7% and 49.1% for the second quarter of 2009 and 2008, respectively. Our gross profit margin increase for the second quarter was driven by strong pricing which more than offset higher delivered product costs. For the six month period, the gross profit margin was 48.6% in 2009 and 49.2% in 2008. The 2009 year to date gross profit margin reflected restructuring special charges included in cost of sales of $8.1 million which reduced our reported gross profit margin by 0.3 percentage points. Our year to date gross profit margin decline was driven by higher delivered product costs, especially in Europe, and lower sales volume which more than offset pricing and cost savings initiatives.

Selling, General and Administrative Expense

Selling, general and administrative expenses as a percentage of consolidated net sales were 36.5% for the second quarter of 2009 compared to 36.9% in 2008. For the six month periods, selling, general, and administrative expenses were 37.4% of sales in 2009 and 37.6% of sales in 2008. The decrease in ratios reflected savings from our recent restructuring, price leverage, and closely-managed spending, which more than offset key investments and other cost increases in the business. We continue to make key business investments that drive sales growth, innovation and efficiency.

Results of Operations - Second Quarter and Six Months Ended June 30, 2009
(Continued)

Special Gains and Charges



Special gains and charges reported on the Consolidated Statement of Income
included the following items:



                                         Second Quarter Ended        Six Months Ended
                                               June 30                   June 30
(millions)                               2009           2008         2009        2008
                                             (unaudited)               (unaudited)
Cost of sales
Restructuring charges                 $      0.1    $          -   $     8.1    $     -
Special gains and charges
Restructuring charges                       23.9               -        48.6          -
Business structure and optimization          0.6             3.9         1.6        5.7
Gain on sale of plant                          -           (24.0 )         -      (24.0 )
Gain on sale of business                       -               -           -       (1.7 )
Other non-recurring items                    0.5             0.8         1.3        2.6
Total                                       25.0           (19.3 )      51.5      (17.4 )

Total special gains and charges       $     25.1    $      (19.3 ) $    59.6    $ (17.4 )

In the first quarter of 2009, we announced plans to undertake restructuring and other cost-saving actions during 2009 in order to streamline operations and improve efficiency and effectiveness. As a result of these actions, we recorded restructuring expense of $24 million ($19 million after tax) or $0.08 per diluted share and $57 million ($40 million after tax) or $0.17 per diluted share, during the second quarter and six months ended June 30, 2009, respectively. Restructuring expense on the Consolidated Statement of Income has been included both as a component of cost of sales and as a component of special gains and charges, as shown in the table above.

We anticipate additional restructuring expenses during the remainder of 2009, which are expected to result in total pretax charges of $65 million to $75 million ($45 million to $52 million after tax) for the full year 2009. These actions are expected to provide annualized pretax savings of approximately $70 million to $80 million ($42 million to $49 million after tax), with pretax savings of $50 million to be realized in 2009. We anticipate that approximately $60 million to $70 million of the total restructuring charges represent cash expenditures, of which $23 million has been paid as of June 30, 2009 and the majority of the remainder is expected to be paid during 2009. Further details related to these restructuring expenses are included in Note 2.

Results of Operations - Second Quarter and Six Months Ended June 30, 2009
(Continued)

Operating Income

Reported operating income declined 22% and 29% for the second quarter and first six months of 2009. The operating income decline was driven by special gains and charges as well as unfavorable foreign currency exchange. Excluding the impact of special gains and charges and unfavorable foreign currency exchange, fixed currency operating income increased 8% in the second quarter as strong pricing, cost savings from our recent restructuring, and well-managed spending more than offset higher delivered product and other costs in the quarter. Excluding the impact of special gains and charges and unfavorable foreign currency exchange, fixed currency operating income for the first six months of 2009 fell 2% as pricing and cost savings efforts did not fully offset the delivered product and other cost increases.

Net Income Attributable to Ecolab

Net income attributable to Ecolab decreased 29% to $99 million in the second quarter of 2009. On a per share basis, diluted net income attributable to Ecolab per share decreased 25% to $0.41 per share compared to $0.55 per share in 2008. The second quarter of 2009 includes $19.8 million, net of tax, of special gains and charges, and a discrete tax charge of $0.9 million, which together reduced the reported per share amount by $0.09. Currency translation had an unfavorable impact of approximately $12 million, net of tax, or $0.05 per share for the second quarter of 2009 compared to 2008. The second quarter of 2008 included $20.8 million, net of tax, of net gains reported in special gains and charges, which increased the reported per share amount by $0.08.

Net income attributable to Ecolab for the first six months of 2009 decreased 35% to $157 million. On a per share basis, diluted net income attributable to Ecolab per share decreased 32% to $0.65, compared to $0.96 per share in 2008. Amounts for the first six months of 2009 include $42.1 million, net of tax, of special gains and charges and net discrete tax charges of $0.7 million. These items together reduced the reported per share amount by $0.18. Currency translation had an unfavorable impact of approximately $20 million, net of tax, or $0.08 per share for the first six months of 2009 compared to 2008. The first six months of 2008 included $19.8 million, net of tax, of net gains reported in special gains and charges and $4.8 million of discrete tax benefits. These items increased reported diluted net income attributable to Ecolab per share by $0.10.

Results of Operations - Second Quarter and Six Months Ended June 30, 2009
(Continued)



Sales for each of our reportable segments are as follows:



                                           Second Quarter Ended       Six Months Ended
                                                 June 30                   June 30
(millions)                                   2009         2008        2009        2008
                                               (unaudited)               (unaudited)
Net Sales
United States
Cleaning & Sanitizing                    $      671.1   $   663.7   $ 1,294.0   $ 1,317.1
Other Services                                  115.3       120.9       222.4       231.3
Total                                           786.4       784.6     1,516.4     1,548.4
International                                   656.4       660.2     1,281.4     1,269.2
Effect of foreign currency translation           (1.3 )     125.2        (8.1 )     210.3
Consolidated                             $    1,441.5   $ 1,570.0   $ 2,789.7   $ 3,027.9

U.S. Cleaning & Sanitizing sales increased 1% in the second quarter and decreased 2% for the first six months of 2009 compared to the prior year periods. Sales for our large U.S. Cleaning & Sanitizing businesses were as follows:

† Institutional - Sales declined 3% and 5% for the second quarter and first six months of 2009, respectively. New account gains, success with new products and pricing were more than offset by continued lower demand from our lodging and foodservice customers. We have not seen improvement in Institutional's major end markets and do not expect to see improvement this year. We continue to see strong results for our Apex solids warewashing line due to customer demand for energy and cost savings solutions. Sales for the first six months of 2009 were negatively impacted by the change in our distributor incentive programs that was implemented in the first quarter, which reduced year-to-date sales growth by 2%.

† Food & Beverage - Sales increased 3% in the second quarter as strong results for our core Food & Beverage business were partially offset by lower Ecovation sales. Food & Beverage enjoyed good gains in the dairy, beverage, agri and food markets as pricing, corporate account wins and new products drove sales growth, in spite of difficult market conditions. Sales for the year to date period declined 3% compared to the prior year. Year to date sales were negatively impacted by the timing of a large Ecovation project sale in the first quarter of 2008, which negatively impacted year over year sales growth comparison. Excluding the impact of Ecovation, Food & Beverage continues to perform well as sales grew 5% and 6% for the second quarter and first six months of 2009, respectively.

Results of Operations - Second Quarter and Six Months Ended June 30, 2009
(Continued)

† Kay - Sales grew 13% in the second quarter of 2009 compared to the prior year period. For the first six months of 2009, sales grew 10%. Kay's strong sales growth benefited from new products and programs as well as new account gains. Business trends remain attractive in the quick service restaurant and food retail markets with continued ongoing demand from new and existing customers.

† Healthcare - Sales increased 13% and 10% for the second quarter and first six months of 2009, respectively, compared to the prior year periods. Business acquisitions contributed 2% and 1% to the second quarter and year-to-date sales growth, respectively. Continued solid growth from our surgical draping business and flu-related hand sanitizer sales led results.

U.S. Other Services sales decreased 5% in the second quarter and 4% for the first six months of 2009 compared to the prior year periods. Sales for our U.S. Other Services businesses were as follows:

† Pest Elimination - Sales were flat for the second quarter and first six months of 2009. Gains in the quick service restaurant and food & beverage plant market continued to offset ongoing weak conditions in restaurants and lodging. Contract services were slightly lower in the second quarter and were flat for the first six months of 2009 while non-contract sales were lower in both periods. New account gains are being offset by customer cancellations as our customers are focusing on reducing their spending due to the current economic recession.

† GCS Service - Sales declined 15% and 14% for the second quarter and first six months of 2009, compared to the prior year periods. Both service and direct parts sales continued to be soft as existing customers defer repairs and prospective customers delay their decision to buy contract services due to the uncertain economy.

Results of Operations - Second Quarter and Six Months Ended June 30, 2009
(Continued)

We evaluate the performance of our International operations based on fixed management rates of currency exchange. Fixed currency rate sales for our International operations declined 1% for the second quarter and increased 1% for the first six months of 2009. When measured at public currency rates, International sales decreased 17% and 14% for the second quarter and first six months of 2009, respectively. Fixed currency sales changes for our International regions were as follows:

† EMEA - Sales declined 4% and 2% for the second quarter and first six months of 2009, respectively. Growth in South Africa and the U.K. was offset by lower sales in Germany, France and Italy. The EMEA region continues to be negatively impacted by the current economic recession in Europe. From a divisional perspective, our Healthcare business continued to show solid growth in the region. We continue to see unfavorable end market trends in the region, negatively impacting our Institutional, Food & Beverage, Textile Care and Pest Elimination sales.

† Asia Pacific - Sales increased 4% in the second quarter and are up 3% for the first six months of 2009, compared to the prior year. Sales growth was led by growth in China, Australia and New Zealand, partially offset by flat sales in Japan. Sales growth in the region continued to be led by growth in Food & Beverage due to increased product penetration and account gains.

† Latin America - Sales increased 8% and 9% for the second quarter and first six months of 2009, respectively. Sales growth was led by strong growth in Venezuela, Brazil and Mexico. Our Institutional, Food & Beverage and Pest Elimination businesses all showed strong gains in the region against weak economic conditions.

† Canada - Sales increased 10% and 9% for the second quarter and first six months of 2009, respectively, compared to the prior year periods. Food & Beverage and Institutional sales were strong, driven by new account gains, product price increases and by Institutional's good growth with distributor partners.

Results of Operations - Second Quarter and Six Months Ended June 30, 2009
(Continued)



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



                                            Second Quarter Ended        Six Months Ended
                                                  June 30                   June 30
(millions)                                  2009           2008          2009       2008
                                                (unaudited)               (unaudited)
Operating Income
United States
Cleaning & Sanitizing                    $     126.3    $     107.2   $    228.9   $ 212.4
Other Services                                  18.3           13.0         31.5      20.0
Total                                          144.6          120.2        260.4     232.4
International                                   51.9           62.8         73.5     108.0
Effect of foreign currency translation           0.2           17.6         (0.6 )    27.7
Corporate                                      (31.7 )          9.9        (70.8 )     3.1
Consolidated                             $     165.0    $     210.5   $    262.5   $ 371.2

U.S. Cleaning & Sanitizing operating income increased 18% and 8% for the second quarter and first six months of 2009, respectively. Strong pricing gains and cost savings more than offset slowing delivered product cost increases to drive the significant operating income gain.

U.S. Other Services operating income increased 40% and 57% for the second quarter and first six months of 2009, respectively. Operating income growth was driven by pricing, productivity and efficiency gains and cost reductions.

International segment operating income decreased 17% and 32% for the second quarter and first six months of 2009, respectively, at fixed currency rates. The lag of higher delivered product cost increases internationally, especially in Europe, continued to impact our second quarter and year to date International operating income. Pricing gains and cost savings efforts were unable to fully offset lower sales volume, delivered product and other cost increases and continued investment in the business. When measured at public currency rates, International operating income decreased 34% and 46% for the second quarter and first six months of 2009, respectively, compared to prior year periods.

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.

Results of Operations - Second Quarter and Six Months Ended June 30, 2009
(Continued)

Net interest expense totaled $15.2 million in the second quarter of 2009, compared with $15.3 million in the second quarter of 2008. Net interest expense was $31.0 million and $30.1 million for the first six months of 2009 and 2008, respectively. The decrease in our second quarter net interest expense was primarily due to lower average interest rates and lower borrowing on our U.S. commercial paper. The increase in our net interest expense for the first six months of 2009 compared to the prior year period is due to higher net interest expense in the first quarter which included higher debt levels and lower interest income due to lower cash on hand compared to the first quarter of 2008.

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

                                     Second Quarter Ended         Six Months Ended
                                            June 30                   June 30
(percent)                             2009          2008         2009         2008
                                          (unaudited)               (unaudited)
Reported tax rate                        33.6 %        28.8 %       32.1 %       29.0 %
Tax rate impact of special gains
and charges and discrete tax
items                                    (2.3 )         4.0         (0.8 )        3.8
Non-GAAP nominal tax rate*               31.3 %        32.8 %       31.3 %       32.8 %

*Non-GAAP nominal tax rate is defined as the reported tax rate, excluding the tax rate impact of special gains and charges and discrete tax items. We believe that disclosing this non-GAAP financial measure helps investors understand the underlying tax rate because it facilitates the comparison of current and prior period tax rates by eliminating the effect of non-recurring items. This non-GAAP measure should not be regarded as a substitute for the corresponding GAAP measure but instead should be utilized as a supplemental measure in evaluating our business.

The decrease in the non-GAAP nominal tax rate for 2009 over the 2008 rate, which excludes the tax rate impact of special gains and charges and discrete tax items, is due primarily to tax planning efforts and global rate reductions.

Our reported tax rate for 2009 was higher than our non-GAAP nominal tax rate due to the tax rate impact on special gains and charges which were at a lower average tax rate primarily due to lower tax rates on charges incurred in Europe. The reported tax rate for the second quarter and first six months of 2009 also includes the tax rate impact of discrete tax charges of $0.9 million and $0.7 million, respectively.

Our reported tax rate in 2008 was lower than our non-GAAP nominal tax rate due to the tax rate impact of the $4.8 million discrete tax benefits recorded in the first quarter of 2008, as well as the tax rate impact of a $24 million tax free gain on the sale of a plant, included in special gains and charges, recorded in the second quarter of 2008. There were no discrete tax events in the second quarter of 2008.

Financial Position and Liquidity

Total assets were $4.9 billion as of June 30, 2009, compared to total assets of . . .