UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the transition period from                    to                    

Commission File No. 1-9328

ECOLAB INC.

(Exact name of registrant as specified in its charter)

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

 (Address of principal executive offices) (Zip Code)

651-293-2233

(Registrant’s telephone number, including area code)

(Not Applicable)

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

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

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

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

Yes o    No ý

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

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

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.

2

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

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

3

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

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

 (Continued)

4

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

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

5

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

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

(Continued)

6

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 second quarter and six-month periods ended June 30, 2006 and 2005, reflect, in the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations and cash flows of Ecolab Inc. (“the company”) for the interim periods presented. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2005 were derived from the audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the company’s Annual Report on Form 10-K for the year ended December 31, 2005.

With respect to the unaudited financial information of the company for the second quarters and six months ended June 30, 2006 and 2005 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards, which do not require an audit, for a review of such information. Therefore, their separate report dated July 25, 2006 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the “Act”) for their report on the unaudited financial information because that report is not a report or a part of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

2.               Share-Based Compensation

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

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.               Share-Based Compensation (continued)

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

3.               Selected Balance Sheet Information

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.               Selected Balance Sheet Information (continued)

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

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

4.     Financial Instruments

In February 2002, the company issued euro 300 million of 5.375 percent euronotes, due February 2007. The company has designated this euronote debt as a hedge of existing foreign currency exposures related to net investments the company has in certain European subsidiaries. Accordingly, the transaction gains and losses on the euronotes which are designated and are effective as hedges of the company’s net investments have been included as a component of the cumulative translation account. Total transaction gains and losses related to the euronotes charged to shareholders’ equity were losses of $26.8 million and gains of $28.2 million for the second quarter of 2006 and 2005, respectively, and losses of $31.2 million and gains of $30.0 million for the first six months of 2006 and 2005, respectively.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.               Comprehensive Income

Comprehensive income was as follows:

6.               Business Acquisitions and Investments

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

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.               Business Acquisitions and Investments (continued)

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter and six months ended June 30, 2006 were as follows:

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

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.     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 3.4 million and 6.7 million shares for the second quarter and six months ended June 30, 2006, respectively, and 4.4 million and 4.4 million shares for the second quarter and six months ended June 30, 2005, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

Restricted stock awards of 13,957 shares and 17,904 shares for the second quarter and six months ended June 30, 2006, respectively, and 20,603 shares and 34,818 shares for the second quarter and six months ended June 30, 2005, respectively, were excluded from the computation of basic weighted-average shares outstanding because such shares were not yet vested at these dates.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.               Pension and Postretirement Plans

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

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