10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002		Commission File No. 1–9328
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to

ECOLAB INC.

(Exact name of registrant as specified in its charter)

Delaware	41-0231510
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
370 Wabasha Street North, St. Paul, Minnesota	55102
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code:  (651) 293-2233
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $1.00 par value	New York Stock Exchange, Inc. Pacific Exchange, Inc.
Preferred Stock Purchase Rights	New York Stock Exchange, Inc. Pacific Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act:  None

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  ý  No  o

Aggregate market value of voting stock held by non–affiliates of Registrant on February 28, 2003:  $6,354,339,896 (see Item 12, under Part III hereof).  The number of shares of Registrant’s Common Stock, par value $1.00 per share, outstanding as of February 28, 2003: 130,143,441 shares.

TABLE OF CONTENTS

COMBINED FINANCIAL STATEMENTS OF HENKEL-ECOLAB

DOCUMENTS INCORPORATED BY REFERENCE

1.Portions of the Registrant’s Annual Report to Stockholders for the year ended December 31, 2002 (hereinafter referred to as “Annual Re­port”) are incorporated by reference into Parts I, II and IV.

2.Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stock­holders to be held May 9, 2003 and to be filed within 120 days after the Registrant’s fiscal year ended December 31, 2002 (herein­after referred to as “Proxy Statement”) are incorporated by reference into Part III.

PART I

Forward-Looking Statements and Risk Factors

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.  In this Report on Form 10-K (including Management’s Discussion and Analysis of Financial Condition and Results of Operations incorporated into Item 7 hereof), Management discusses expectations regarding future performance of the Company which include anticipated business progress and expansion, business acquisitions, debt repayments, susceptibility to changes in technology, global economic conditions and liquidity requirements.  Without limiting the foregoing, words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “we believe,” “estimate,” “project” (including the negative or variations thereof) or similar terminology, generally identify forward-looking statements.  Additionally, the Company may refer to this section of the Form 10-K to identify risk factors related to other forward looking statements made in oral presentations, including telephone conferences and/or webcasts open to the public.

Forward-looking statements represent challenging goals for the Company.  As such, they are based on current expectations and are subject to certain risks and uncertainties.  The Company cautions that undue reliance should not be placed on such forward-looking statements which speak only as of the date made.  In order to comply with the terms of the safe harbor, the Company hereby identifies important factors which could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements.

Risks and uncertainties that may affect operating results and business performance include:  the vitality of the foodservice, hospitality and travel industries; restraints on pricing flexibility due to competitive factors and customer and vendor consolidations; changes in oil or raw material prices or unavailability of adequate and reasonably priced raw materials; the occurrence of capacity constraints or the loss of a key supplier; the effect of future acquisitions or divestitures or other corporate transactions; the Company’s ability to achieve plans for past acquisitions; the costs and effects of complying with: (i) laws and regulations relating to the environment and to the manufacture, storage, distribution, efficacy and labeling of the Company’s products, and (ii) changes in tax, fiscal, governmental and other regulatory policies; economic factors such as the worldwide economy, interest rates, and currency movements including, in particular, the Company’s exposure to foreign currency risk; the occurrence of (a) litigation or claims, (b) the loss or insolvency of a major customer or distributor, (c) war, (d) natural or manmade disasters (including material acts of terrorism or hostilities which impact the Company’s markets) and (e) severe weather conditions

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affecting the foodservice, hospitality and travel industries; loss of, or changes in, executive management; the Company’s ability to continue product introductions and technological innovations; and other uncertainties or risks reported from time to time in the Company’s reports to the Securities and Exchange Commission.  In addition, the Company notes that its stock price can be affected by fluctuations in quarterly earnings.  There can be no assurances that the Company’s earnings levels will meet investors’ expectations.

Item 1.  Business

Item 1(a) General Development of Business

Except where the context otherwise requires, the terms “Company” and “Ecolab,” as used herein, include Ecolab Inc. and its subsidiaries.  Ecolab Inc. was incorporated as a Delaware corporation in 1924.  The Company’s fiscal year is the calendar year ending December 31.

On November 30, 2001, the Company acquired the 50 percent of the Henkel-Ecolab joint venture (“Henkel-Ecolab”) which the Company did not previously own (the “JV Acquisition”), from its joint venture partner, Henkel KGaA, Düsseldorf, Germany (“Henkel”).

Prior to the JV Acquisition, the Company accounted for its interest in Henkel-Ecolab under the equity method of accounting.  As a result of the JV Acquisition, the legal entities constituting Henkel-Ecolab became wholly-owned entities of the Company.  Following the JV Acquisition, the assets, liabilities, revenues, expenses and cash flows of Henkel-Ecolab are reflected in the Company’s consolidated financial statements as a part of the Company’s International Cleaning & Sanitizing reportable segment.

Financial statements of Henkel-Ecolab, in respect of certain periods prior to the November 30, 2001 date of the JV Acquisition as listed under Item 15.I(3) of Part IV hereof, are included as a part of this Report and a review of Henkel-Ecolab financial performance is found under the heading “Henkel-Ecolab” contained in the Financial Discussion which is incorporated from the Annual Report into Item 7 hereof.

During 2002, the Company continued to make business acquisitions which broadened its product and service offerings in line with its “Circle the Customer – Circle the Globe” strategy.

In January 2002, the Company acquired certain operations of Kleencare Hygiene located in the United Kingdom, France, Switzerland and the Netherlands.  These operations provide products, systems and services for the food and beverage industry.  This acquisition represented the Company’s first step following the JV Acquisition to leverage and expand its wholly-owned operations in Europe.

In January 2002, the Company also purchased Audits International, a Chicago, Illinois-based provider of food safety services in the United States.

In April 2002, the Company acquired a 20% interest in Central Ankoff FNZ Holding B.V., located in the Netherlands.  CA FNZ is the Company’s local distributor in the food processing and farm sector marketplace.

In September 2002, the Company expanded its pest elimination business to Europe by purchasing Terminix Limited, a London-based provider of commercial pest elimination and property services throughout the United Kingdom and the Republic of Ireland.

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In November 2002, the Company entered into an exclusive marketing agreement with Intralytix, Inc. to market a technology to control food-borne pathogens in the food and beverage industry.  In addition, the Company made a loan to Intralytix and, if certain milestones are achieved by November 2004, the Company would be obligated to purchase certain Common Stock and Common Stock warrants of Intralytix.

In November 2002, the Company acquired certain assets, including a manufacturing plant of ARAMARK Management Services, which provided specialty chemicals for the foodservice industry.

In December 2002, the Company entered the hospital hygiene market in the United Kingdom by acquiring the Adams Healthcare business of Medical Solutions plc.

In 2002, the Company completed two business divestment transactions.  In August, the Company sold its 50% interest in Dairy Partners LLC, a joint venture that operates a dairy farm distribution business.  The Company sold its interest to its joint venture partner, Dairy Farmers of America.  In December, the Company sold its Darenas janitorial products distribution business based in Birmingham, U.K. to Bunzl plc of London, U.K.

Additional details of certain of these transactions are found under the heading “Other Business Acquisitions and Divestitures” in Note 6, located on pages 38 and 39 of the Annual Report and incorporated into Item 8 hereof.

Item 1(b) Financial Information About Operating Segments

The financial information about reportable segments appearing under the heading “Operating Segments” in Note 16, located on pages 46 and 47 of the Annual Report, is incorporated herein by reference.

Item 1(c) Narrative Description of Business

General:  The Company is engaged in the development and marketing of premium products and services for the hospitality, institutional and industrial markets.  The Company provides cleaning, sanitizing, pest elimination, maintenance and repair products, systems and services primarily to hotels and restaurants, foodservice, healthcare and educational facilities, quick-service (fast food and other convenience store) units, grocery stores, commercial and institutional laundries, light industry, dairy plants and farms, food and beverage processors, pharmaceutical and cosmetics facilities and the vehicle wash industry.  A strong commitment to customer support is a distinguishing characteristic of the Company.  Additional information on the Company’s business philosophy is found below under the heading “Additional Information – Competition” of this Item 1(c).

The following description of business is based upon the Company’s three reportable segments (“segments”) as reported in the Company’s consolidated financial statements.  However, the Company pursues a “Circle the Customer – Circle the Globe” strategy by providing products, systems and services which serve the Company’s customer base, and does so on a global basis to meet the needs of its customer’s various operations around the world.  Therefore, one customer may utilize the services of all three of the segments and there is a degree of interdependence among the operating segments—particularly between the International Cleaning & Sanitizing and the United States Cleaning & Sanitizing businesses.

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United States Cleaning & Sanitizing Segment

The “United States Cleaning & Sanitizing” segment is comprised of seven divisions which provide cleaning and sanitizing services to United States markets.

Institutional:  The Institutional Division is the Company’s largest division and sells specialized cleaners and sanitizers for washing dishes, glassware, flatware, foodservice utensils and kitchen equipment (“warewashing”), for on-premise laundries (typically used by hotel and health care customers) and for general housekeeping functions, as well as dishwasher racks and related kitchen sundries to the foodservice, lodging, educational and healthcare industries and water filters to the foodservice industry.  The Institutional Division also provides pool and spa treatment programs for commercial and hospitality customers and, through its Facilitec business, provides rooftop grease filter products and kitchen exhaust cleaning services for restaurants and other foodservice operations. The Institutional Division also manufactures and markets various chemical dispensing device systems, which are made available to customers, to dispense the Company’s cleaners and sanitizers. In addition, the Institutional Division markets primarily to smaller and mid-size customer units, a program comprised of energy-efficient dishwashing machines, detergents, rinse additives and sanitizers, including full machine maintenance.

The Company believes it is the leading supplier of chemical warewashing products to institutions in the United States.

The Institutional Division sells its products and services primarily through Company-employed field sales-and-service personnel.  However, the Company, to a significant degree, also utilizes independent, third-party foodservice distributors to market and sell its products to smaller accounts or accounts which purchase through food distributors.  The Company provides the same service to accounts served by food distributors as to direct customers.

Kay:  The Kay Division (which consists of certain wholly-owned subsidiaries of the Company) supplies chemical cleaning and sanitizing products primarily to the quick-service restaurant industry. This includes traditional fast food restaurants but also other retail locations where “fast food” is prepared and served, such as convenience stores, airport and shopping center kiosks and other public venues typically serviced by national or regional restaurant chains.  Kay also sells cleaning and sanitizing products, to the food retail (i.e., grocery store) industry.  Kay’s products include specialty and general purpose hard surface cleaners, degreasers, sanitizers, polishes, hand care products and assorted cleaning tools.  Products are sold under the “Kay” brand or the customer’s private label. In addition, Kay supports its product sales with employee training programs and technical support designed to meet the special needs of its customers.  Kay’s customized cleaning and sanitation programs are designed to reduce labor costs and product usage while increasing sanitation levels, cleaning performance, equipment life and safety levels.

Kay employs a direct field sales force which primarily calls upon national and regional quick-service restaurant and food retail chains and franchisees, although the sales are made to distributors who supply the chain or franchisee’s units.

The Company believes that its Kay Division is the leading supplier of chemical cleaning and sanitizing products to the traditional quick-service restaurant industry in the United States.  While Kay’s customer base has been growing, Kay’s business is largely dependent upon a limited number of major quick-service restaurant chains and franchisees.

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Food & Beverage:  The Food & Beverage Division addresses cleaning and sanitation at the start of the food chain to facilitate the production of products for human consumption.  The Division provides detergents, cleaners, sanitizers, lubricants and animal health products, as well as cleaning systems, electronic dispensers and chemical injectors for the application of chemical products, primarily to dairy plants, dairy farms, breweries, soft-drink bottling plants, and meat, poultry and other food processors as well as to pharmaceutical and cosmetic plants. The division also markets food irradiation services through an alliance with Ion Beam Applications (IBA).  The Food & Beverage Division also designs, engineers and installs CIP (“clean-in-place”) process control systems and facility cleaning systems for its customer base.   Farm products are sold through dealers and independent, third-party distributors, while plant products are sold primarily by the Company’s field sales personnel.

The Company believes that it is one of the leading suppliers of cleaning and sanitizing products to the dairy plant, dairy farm, food, meat and poultry, and beverage/brewery processor industries in the United States.

Textile Care: The Textile Care Division provides chemical laundry products and proprietary dispensing systems, as well as related services, to large institutional and commercial laundries.  Typically these customers process a minimum of 1,000,000 pounds of linen each year and include free-standing laundry plants used by institutions such as hotels, restaurants and healthcare facilities as well as industrial and textile rental laundries.  The Division also serves the shirt laundry market, typically comprised of smaller laundry units.  Products and services include laundry cleaning and specialty products and related dispensing equipment, which are marketed primarily through a Company-employed sales force and, to a lesser extent, through independent, third-party distributors. The Division’s programs are designed to meet the customer’s need for exceptional cleaning, while extending the useful life of linen and reducing the customer’s overall operating cost.  Textile Care offerings complement the Institutional Division’s offerings to on-premise laundry facilities.

Professional Products:  The Professional Products Division provides a broad range of janitorial and infection prevention/healthcare offerings to the janitorial and medical markets in the United States. Its proprietary janitorial products (detergents, general purpose cleaners, carpet care, furniture polishes, disinfectants, floor care products, hand soaps and odor counteractants) are sold primarily under the brand name “Airkem,” and proprietary infection prevention/healthcare products (skin care, disinfectants and instrument sterilants) are sold primarily under the “Huntington” brand name.  These products are sold primarily through a network of independent, third-party distributors, supported by a Company-employed sales force.

The Division also sells certain specialty chemical products which are manufactured for third parties. These offerings include the manufacture of a small line of private label products and house brand products for third parties.

Vehicle Care:  The Company’s Vehicle Care Division provides vehicle appearance products which include soaps, polishes, wheel and tire treatments and air fresheners.  Products are sold to vehicle rental, fleet and consumer car wash and detail operations.  Brand names utilized by the Vehicle Care Division include Blue CoralÒ, Black MagicÒ and Rain-XÒ.

Water Care Services:  Water Care Services supplements the Company’s “Circle the Customer - Circle the Globe” strategy by offering water treatment programs that are critical to the Company’s customer base.  Water Care Services provides water and wastewater treatment products, services and systems for commercial/institutional customers (full service hotels, cruise ships, hospitals,

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healthcare, commercial real estate, government, and commercial laundries), food and beverage customers (dairies, meat, poultry, food processing and beverage) and other light industry.  Water Care Services works closely with the Company’s Institutional, Textile Care and Food & Beverage Divisions to offer customized water care strategies to their accounts that have water care needs, primarily to treat water used in heating and cooling systems and manufacturing processes and to treat wastewater.

United States Other Services Segment

The “United States Other Services” segment is comprised of two business units:  Pest Elimination and GCS Service.  In general, these businesses provide service or equipment which can augment or extend the Company’s product offering to its business customers as a part of the “Circle the Customer” approach.

Pest Elimination:  The Pest Elimination Division provides services for the detection, elimination and prevention of pests to restaurants, food and beverage processors, educational and healthcare facilities, hotels, quick-service restaurant and grocery operations and other institutional and commercial customers.  These services are sold and performed by Company-employed sales and service personnel.  In addition, through its EcoSure Food Safety Management business, the Division provides customized on-site evaluations, training and quality assurance services to foodservice operations.

GCS Service:  GCS provides commercial kitchen parts and equipment repair services including parts distribution.  GCS offers these services to restaurant and other foodservice operations, while providing warranty service for equipment manufacturers.  In addition, GCS offers parts at a wholesale level to repair services companies and end users.

International Cleaning & Sanitizing Segment

The Company conducts business in approximately 70 countries outside of the United States through wholly-owned subsidiaries or, in the case of China, Israel and Venezuela, through majority-owned joint ventures with local partners.  In other countries, selected products are sold by the Company’s export operations to distributors, agents or licensees, although the volume of those sales is not significant in terms of the Company’s overall revenues.  The largest International operations are located in Europe, Asia Pacific, Latin America and Canada, with smaller operations in Africa.

In general, the businesses conducted internationally are similar to those conducted in the United States, although the Company customizes its products and services to meet unique local requirements.  The businesses which are similar to the United States’ Institutional and Food & Beverage businesses are the largest businesses in International operations.  They are conducted in virtually all International locations and, compared to the United States, constitute a larger portion of the overall business.  Kay also has sales in a number of International locations.  A significant portion of its International sales are to international units of United States-based quick-service restaurant chains.  Consequently, a substantial portion of Kay’s international sales are made either to domestic or internationally-located third-party distributors who serve these chains. The Company expanded its pest elimination business to the United Kingdom and the Republic of Ireland by acquiring a London-based provider of commercial pest elimination services in September 2002.  In addition, the Company entered the hospital hygiene market in the United Kingdom by acquiring a supplier of hospital hygiene products in December 2002.  The Company’s other businesses are conducted less extensively in International locations.  However, in general, all of the businesses conducted in the United States are operated in Canada.

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International businesses are subject to the usual risks of foreign operations including possible changes in trade and foreign investment laws, tax laws, currency exchange rates and economic and political conditions abroad.  The profitability of International operations has historically been lower than the profitability of businesses in the United States.  This has been due to the smaller scale of International operations where several operating locations are smaller in size as well as the additional cost of operating in numerous and diverse foreign jurisdictions.

Additional Information

Competition:  The Company’s business units have two significant classes of competitors.  First, each business unit competes with a small number of large companies selling directly or through distributors on a national or international scale.  Second, all of the Company’s business units have numerous smaller regional or local competitors which focus on more limited geographies, product lines and/or end-user segments.

The Company’s objective is to achieve a significant presence in each of its business markets.  In general, competition is based on service, product performance and price.  The Company believes it competes principally by providing superior value and differentiated products.  Value is provided by state-of-the-art cleaning, sanitation and maintenance products and systems coupled with high customer support standards and continuing dedication to customer satisfaction.  This is made possible, in part, by the Company’s significant on-going investment in training and technology and by the Company’s standard practice of advising customers on means to lower operating costs and comply with safety, environmental and sanitation regulations. In addition, the Company emphasizes its ability to uniformly provide a variety of related premium cleaning and sanitation services to its customers and to provide that level of service to multiple locations of chain customer organizations worldwide.  This approach is succinctly stated in the Company’s “Circle the Customer - - Circle the Globe” strategy which is discussed above in this Item 1(c) under the heading “General.”

Sales and Service: Products, systems and services are primarily marketed in domestic and international markets by Company-trained sales and service personnel who also advise and assist customers in the proper and efficient use of the products and systems in order to meet a full range of cleaning and sanitation needs.  Independent, third-party distributors are utilized in several markets, as described in the business unit descriptions found under the discussion of the three reportable segments above.

Customers and Classes of Service:  The Company believes that its business is not materially dependent upon a single customer although, as described above in this Item 1(c) under the description of the Kay business, Kay is largely dependent upon a limited number of national and international quick-service chains and franchisees.  Additionally, although the Company has a diverse customer base and no customer or distributor constitutes ten percent or more of the Company’s consolidated revenues, the Company does have customers and independent, third-party distributors (for example, ARAMARK, Sodexho, Sysco and U.S. Foodservice), the loss of which could have a material negative effect on results of operations for the affected earnings periods; however, the Company considers it unlikely that such an event would have a material adverse impact on the financial position of the Company.  No material part of the Company’s business is subject to renegotiation or termination at the election of a governmental unit. The Company sells two classes of products which each constitute 10 percent or more of its sales.  Sales of warewashing products in 2002, 2001 and 2000 approximated 23, 26 and 26 percent, respectively, of the Company’s consolidated net sales.  In addition, the Company, through its Institutional and Textile Care businesses, sells laundry products and services to a broad range of laundry customers.   Sales of

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laundry products and services in 2002, 2001 and 2000 approximated 12, 10 and 11 percent, respectively, of the Company’s consolidated net sales. Sales of the recently acquired Henkel-Ecolab operations are reflected in these percentages beginning in 2002.

Patents and Trademarks:  The Company owns and licenses a number of patents, trademarks and other intellectual property, including a license agreement with Henkel KGaA.  While the Company has an active program to protect its intellectual property by filing for patents or trademarks, and pursuing legal action, when appropriate, to prevent infringement, management does not believe that the Company’s overall business is materially dependent on any individual patent or trademark.

Seasonality:  Overall the Company’s business does not have a significant degree of seasonality.

Working Capital:  The Company has invested in the past, and will continue to invest in the future, in merchandising equipment consisting primarily of systems used by customers to dispense the Company’s cleaning and sanitizing products.  The Company, otherwise, has no unusual working capital requirements.  The investment in merchandising equipment is discussed under the heading “Cash Flows” located on page 28 of the Annual Report and incorporated into Item 7 hereof.

Manufacturing and Distribution: The Company manufactures most of its prod­ucts and related equipment in Company-owned manufacturing facilities.  Some products are also produced for the Company by third-party contract manufacturers, including Henkel KGaA.  Other products and equipment are purchased from third-party suppliers.  Additional information on product/equipment sourcing is found in the segment discussions above and additional information on the Company’s manufacturing facilities is located beginning at page 15 hereof under the heading “Properties.”

Deliveries to customers are made from the Company’s manufacturing plants and a network of distribution centers and public ware­houses.  The Company uses common carriers, its own deliv­ery vehicles and distributors.  Additional information on the Company’s plant and distribution facilities is located beginning at page 15 hereof under the heading “Properties.”

Raw Materials:  Raw materials purchased for use in manufacturing products for the Company are inorganic chemicals, including phosphates, silicates, alkalies, salts and organic chemicals, including surfactants and solvents.  These materials are generally purchased on an annual contract basis from a diverse group of chemical manufacturers.  Pesticides used by the Pest Elimination Division are purchased as finished products under contract or purchase order from the producers or their distributors.  The Company also purchases packaging materials for its manufactured products and components for its specialized cleaning equipment and systems.  Most raw materials, or substitutes for those materials, used by the Company, with the exception of a few specialized chemicals which the Company manufactures, are available from several suppliers.

Research and Development:  The Company’s research and development program consists principally of devising and testing new products, processes, techniques and equipment, improving the efficiency of existing ones, improving service program content, and evaluating the environmental compatibility of products.  Key disciplines include analytical and formulation chemistry, microbiology, process and packaging engineering and product dispensing technology.  Substantially all of the Company’s principal products have been developed by its research, development and engineering personnel. At times, technology has also been licensed from outside the Company to develop offerings.  Note 13, entitled “Research Expenditures” located on page 43 of the Annual Report, is incorporated herein by reference.

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Environmental and Regulatory Considerations:  This discussion of Environmental and Regulatory Considerations should be read in light of the Forward-Looking Statements and Risk Factors discussion found under Part I at the beginning of this Report.  The Company’s businesses are subject to various legislative enactments and regulations relating to the protection of the environment and public health.  While the Company cooperates with governmental authorities and takes commercially practicable measures to meet regulatory requirements and avoid or limit environmental effects, some risks are inherent in the Company’s businesses.  Among the risks are costs associated with managing hazardous substances, waste disposal or plant site clean-up, fines and penalties if the Company were found in violation of law, as well as modifications, disruptions or discontinuation of certain operations or types of operations including product recalls.  Additionally, although the Company is not currently aware of any such circumstances, there can be no assurance that future legislation or enforcement policies will not have a material adverse effect on the Company’s consolidated results of operations, financial condition or liquidity.  Environmental and regulatory matters most significant to the Company are discussed below.

Ingredient Legislation:  Various laws and regulations have been enacted by state, local and foreign jurisdictions pertaining to the sale of products which contain phosphorous, volatile organic compounds, or other ingredients that may impact human health or the environment. Under California Proposition 65, label disclosures are required for certain products containing chemicals listed by California.  To date, the Company generally has been able to comply with such legislative requirements by reformulation or labeling modifications.  Such legislation has not had a material negative effect on the Company’s consolidated results of operations, financial condition or liquidity to date.

Pesticide Legislation:  Various federal and state environmental laws and regulations govern the manufacture and/or use of pesticides.  The Company manufactures and sells certain disinfecting and sanitizing products which kill microorganisms (bacteria, viruses, fungi) on environmental surfaces and on certain food products. Such products constitute “pesticides” or “antimicrobial pesticides” under the current definitions of the Federal Insecticide Fungicide and Rodenticide Act (“FIFRA”), as amended by the Food Quality Protection Act of 1996, the principal federal statute governing the manufacture, labeling, handling and use of pesticides.  The Company maintains approximately 400 product registrations with the United States Environmental Protection Agency (“EPA”).  Registration entails the necessity to meet certain efficacy, toxicity and labeling requirements and to pay on-going registration fees.  In addition, each state in which these products are sold requires registration and payment of a fee. In general, the states impose no substantive requirements different from those required by FIFRA.  However, California and certain other states have adopted additional regulatory programs, and California imposes a tax on total pesticide sales in that State.  While the cost of complying with rules as to pesticides has not had a material adverse effect on the Company’s financial condition, liquidity or the results of its operations to date, the costs and delays in receiving necessary approvals for these products have increased in recent years.  Total fees paid to the EPA and the states to obtain or maintain pesticide registrations, and for the California tax, were approximately $2,500,000 in 2002 and $2,200,000 in 2001.  Congress is evaluating legislation that would increase these fees.  Absent such a change, anticipated registration costs are not expected to significantly affect the Company’s consolidated results of operations, financial condition or liquidity.

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In addition, the Company’s Pest Elimination Division applies restricted-use pesticides which it generally purchases from third parties.  That Division must comply with certain standards pertaining to the use of such pesticides and to the licensing of employees who apply such pesticides.  Such regulations are enforced primarily by the states or local jurisdictions in conformity with federal regulations.  The Company has not experienced material difficulties in complying with these requirements.

FDA Antimicrobial Product Requirements:  Various laws and regulations have been enacted by federal, state, local and foreign jurisdictions regulating certain products manufactured and sold by the Company for controlling microbial growth on humans, animals, processed foods, and medical devices.  In the United States, these requirements generally are administered by the U.S. Food and Drug Administration (FDA).  The FDA has been expanding requirements applicable to such products, including proposing regulations in a Tentative Final Monograph for Healthcare Antiseptic Drug Products dated June 17, 1994 that may impose additional requirements and associated costs when finalized by the FDA.  To date, such requirements have not had a material negative effect on the Company’s consolidated results of operations, financial condition or liquidity.

Other Environmental Legislation:  The Company’s manufacturing plants are subject to federal, state, local or foreign jurisdiction laws and regulations relating to discharge of hazardous substances into the environment and to the transportation, handling and disposal of such substances.  The primary federal statutes that apply to the Compa­ny’s activities are the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act (“RCRA”).  The Company is also subject to the Superfund Amendments and Reauthorization Act of 1986, which imposes certain reporting requirements as to emissions of toxic substances into the air, land and water.  The Company makes capital investments and expenditures to comply with environmental laws and regulations, to ensure employee safety and to carry out its announced environmental stewardship principles.  To date, such expenditures have not had a significant adverse effect on the Company’s consolidated results of operations, financial condition or liquidity.  The Company’s capital expenditures for environmental control projects were approximately $1,611,000 for 2002, $1,540,000 for 2001and approximately $1,480,000 has been budgeted for 2003.

Environmental Remediation and Proceedings:  Along with numerous other potentially responsible parties (“PRPs”), the Company is currently involved with waste disposal site clean-up activities imposed by the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) or state equivalents at approximately 18 sites in the United States.  Additionally, the Company has similar liability at eight sites outside the United States.  In general, under CERCLA, the Company and each other PRP which actually contributes hazardous substances to a Superfund site are jointly and severally liable for the costs associated with cleaning up the site.  Customarily, the PRPs will work with the EPA to agree and implement a plan for site remediation.

Based on an analysis of the Company’s experience with such environmental proceedings, the Company’s estimated share of all hazardous materials deposited on the sites referred to in the preceding paragraph, and the Company’s estimate of the contribution to be made by other PRPs which the Company believes have the

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financial ability to pay their shares, the Company has accrued its best estimate of the Company’s probable future costs relating to such known sites.  Unasserted claims are not reflected in the accrual.  In establishing accruals, potential insurance reimbursements are not included.  The accrual is not discounted.  It is not feasible to predict when the amounts accrued will be paid due to the uncertainties inherent in the environmental remediation and associated regulatory processes.

The Company’s worldwide net expenditures for contamination remediation were approximately $500,000 in 2002 and $500,000 in 2001.  Including the ChemLawn matters described below, the Company’s worldwide accruals at December 31, 2002 for probable future remediation expenditures totaled approximately $3,800,000.  The Company reviews its exposure for contamination remediation costs periodically and its accruals are adjusted as considered appropriate. While the final resolution of these issues could result in costs below or above current accruals and, therefore, have an impact on the Company’s consolidated financial results in a future reporting period, the Company believes the ultimate resolution of these matters will not have a material effect on the Company’s results of operations, financial position or liquidity.  In connection with the JV Acquisition, Ecolab and Henkel entered into an Environmental Agreement dated December 7, 2000 under which Henkel agreed to indemnify Ecolab for certain environmental liabilities associated with the former JV.  As of December 31, 2002, Henkel’s outstanding reimbursement obligation to Ecolab for such environmental liabilities was 108,319 euro (or approximately $116,000).  In addition, the Company has retained responsibility for certain sites where the Company’s former ChemLawn business is a PRP.  Currently there are five such locations and, at each, ChemLawn is a de minimis party.  Anticipated costs currently accrued for these matters were included in the Company’s loss from its discontinued ChemLawn operations in 1991.  The accrual remaining reflects management’s best estimate of probable future costs.

Number of Employees:  The Company currently has approximately 20,400 employees.

Item 1(d) Financial Information About Geographic Areas

The financial information about geographic areas appearing under the heading “Operating Segments” in Note 16, located on pages 46 and 47 of the Annual Report, is incorporated herein by reference.

Item 1(e) Available Information

The Company’s Internet address is http://www.ecolab.com.  Copies of the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports, are available free of charge on the website at http://www.ecolab.com/investor as soon as reasonably practicable after such material is filed with, or furnished to, the Securities and Exchange Commission.

Executive Officers of the Company

The persons listed in the following table are the current executive officers of the Company.  Officers are elected annually.  There is no family relationship among any of the directors or executive officers, and none of such persons has been involved during the past five years in any legal proceedings described in applicable Securities and Exchange Commission regulations.

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Name	Age	Office	Positions Held Since Jan. 1, 1998
A. L. Schuman	68	Chairman of the Board and Chief Executive Officer	Aug. 2002 – Present
		Chairman of the Board, President and Chief Executive Officer	Mar. 2002 – Jul. 2002
		Chairman of the Board and Chief Executive Officer	Jan. 2001 – Feb. 2002
		Chairman of the Board, President and Chief Executive Officer	Jan. 2000 – Dec. 2000
		President and Chief Executive Officer	Jan. 1998 – Dec. 1999
D. M. Baker, Jr.	44	President and Chief Executive Officer	Aug. 2002 – Present
		President - Institutional Sector	Mar. 2002 – Jul. 2002
		Senior Vice President - Institutional Sector	Jan. 2001 – Feb. 2002
		Vice President and General Manager, Kay Chemical Company	Apr. 1998 – Dec. 2000
		Vice President - Sales and Marketing, Kay Chemical Company	Jan. 1998 – Mar. 1998
L. T. Bell	55	Senior Vice President-Law, General Counsel and Secretary	Jul. 2002 – Present
		Senior Vice President-Law and General Counsel	Jan. 2001 – Jun. 2002
		Vice President-Law and General Counsel	Jan. 1998 – Dec. 2000
S. L. Fritze	48	Senior Vice President and Chief Financial Officer	Mar. 2002 – Present
		Senior Vice President - Finance and Controller	May 2001 – Feb. 2002
		Vice President and Controller	Jul. 1999 – Apr. 2001
		Vice President and Treasurer	Jan. 1998 – Jun. 1999

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Name	Age	Office	Positions Held Since Jan. 1, 1998
D. D. Lewis	56	Senior Vice President - Human Resources	Jan. 2001 – Present
		Vice President - Human Resources	Jan. 1998 – Dec. 2000
J. A. Miller	46	Vice President and General Manager - Institutional	Sept. 2002 – Present
		Institutional Vice President-Marketing North America	Oct. 2001 – Aug. 2002
		Institutional Vice President-Emerging Businesses	Jan. 1998 – May 1998 *
S. K. Nestegard	42	Vice President-Research, Development and Engineering and Chief Technical Officer	Mar. 2003 – Present **
M. Nisita	61	Senior Vice President - Global Operations	Jan. 1998 – Present
D. J. Schmechel	43	Vice President and Controller	Apr. 2002 – Present
		Vice President and Treasurer	Jul. 1999 – Mar. 2002
		Assistant Treasurer	Jan. 1998 – Jun. 1999
J. P. Spooner	56	President - International	Mar. 2002 – Present
		Executive Vice President - International	Dec. 2001 – Feb. 2002
		Chief Executive Officer - Henkel - Ecolab	Jan. 2001 – Nov. 2001
		Executive Vice President - International Group	Jan. 1999 – Dec. 2000
		Senior Vice President - International	Jan. 1998 – Dec. 1998

*From April 1998 to April 2000, Mr. Miller served as Senior Vice President and General Manager, The Minute Maid Co. (a subsidiary of  The Coca Cola Company).  In May 2000, Mr. Miller was hired as President and CEO of Busy Body, Inc., a privately held retailer of home fitness equipment in the western U.S., to remedy operations that were underperforming the owners’ expectations.  Busy Body, Inc. filed for Chapter 11 protection under federal bankruptcy laws in May 2001 and was subsequently liquidated.  Mr. Miller re-joined the Company in October 2001. 

**Prior to joining the Company in March 2003, Ms. Nestegard was employed by 3M Company for 20 years, most recently as Business Director of Optical Components.  Ms. Nestegard’s experience includes product and process development and technical management as Director Engineering Systems Technology Center and as Technical Director of the Electronic Products Division of 3M in Austin, Texas.

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Item 2.  Properties

The Company’s manufacturing facilities produce chemical products or equipment for all the Company’s businesses, although the Pest Elimination Division, GCS and the Facilitec businesses purchase most of their products and equipment from outside suppliers.  The Company’s chemical production process consists primarily of blending and packaging powders and liquids and casting solids.  The Company’s equipment manufacturing operations consist primarily of producing chemical product dispensers and ejectors and other mechanical equipment (South Beloit, Illinois) and dishwasher racks and related sundries (Elk Grove Village, Illinois).  The Company’s philosophy is to manufacture products wherever an economic, process or quality assurance advantage exists or where proprietary manufacturing techniques dictate internal production processes.  Currently, most products sold by the Company are manufactured at Company facilities.

The following chart profiles the Company’s manufacturing facilities which are approximately 50,000 square feet or larger in size with ongoing production activities.

In general, manufacturing facilities located in the United States serve the “United States Cleaning & Sanitizing” segment and facilities located outside of the United States serve the “International Cleaning & Sanitizing” segment.  However, certain of the United States facilities do manufacture products for export and which are used by the International segment.  The facilities having export involvement are marked with an asterisk(*).

ECOLAB OPERATIONS PLANT PROFILES

Location	Size (Sq. Ft.)	Types of Products	Owned/ Leased
UNITED STATES
Joliet, IL*	610,000	Solids, Liquids, Powders	Owned
Garland, TX*	239,000	Solids, Liquids	Owned
Martinsburg, WV	228,000	Liquids	Owned
South Beloit, IL*	219,000	Equipment	Owned
Greensboro, NC*	193,000	Liquids, Powders	Owned
Hebron, OH	192,000	Liquids	Owned
San Jose, CA	175,000	Liquids	Owned
McDonough, GA	141,000	Solids, Liquids	Owned
Eagan, MN (pilot plant)*	133,000	Solids, Liquids, Emulsions, Powders	Owned
City of Industry, CA	125,000	Liquids	Owned
Elk Grove Village, IL*	105,000	Equipment	Leased
Huntington, IN*	90,000	Liquids, Powders	Owned
Carrollton, TX	70,000	Liquids	Owned

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Location	Size (Sq. Ft.)	Types of Products	Owned/ Leased
INTERNATIONAL
Chalons, FRANCE	280,000	Liquids, Powders	Owned
Nieuwegein, NETHERLANDS	168,000	Powders	Owned
Tessenderlo, BELGIUM	153,000	Solids, Liquids, Powders	Owned
Santa Cruz, BRAZIL	142,000	Liquids, Powders	Owned
Melbourne, AUSTRALIA	130,000	Liquids, Powders	Owned
Rozzano, ITALY	126,000	Liquids, Powders	Owned
Johannesburg, SOUTH AFRICA	100,000	Liquids, Powders	Owned
Toronto, CANADA	88,000	Liquids	Leased
Valby, DENMARK	70,000	Liquids, Powders	Owned
Cheadle (Manchester), UK	62,000	Liquids	Leased
Santiago, CHILE	60,000	Liquids, Powders	Leased
Shika, JAPAN	60,000	Liquids	Owned
Hamilton, NEW ZEALAND	58,000	Solids, Liquids, Powders	Owned
Revesby, AUSTRALIA	51,000	Liquids, Powders	Owned

Smaller United States manufacturing facilities operated by the Company are located in Grand Forks, North Dakota (leased) and Baldwin Park, California (leased).  The Company also owns or leases smaller international manufacturing facilities in Argentina, Australia, Costa Rica, Fiji, Greece, Iceland, Indonesia, Japan, Kenya, Mexico, Netherlands, Papua New Guinea, People’s Republic of China, Philippines, Puerto Rico, Singapore, Slovenia, South Korea, Spain, Tanzania and Thailand. During 2002, the Company leased manufacturing operations at its owned facilities located in North Kansas City, Missouri, Woodbridge, New Jersey and Botany, Australia.

The Company believes its manufacturing facilities are in good condition and are adequate to meet existing production needs.

Most of the Company’s manufacturing plants also serve as distribution centers.  In addition, around the world, the Company operates distribution centers, all of which are leased, and utilizes various public warehouses to facilitate the distribution of its products and services.  In the United States, Company sales and service associates are located in approximately 109 leased offices. Additional sales offices are located internationally.

The Company’s corporate headquarters is comprised of three adjacent multi-storied buildings located in downtown St. Paul, Minnesota.  The main 19-story building was constructed to the Company’s specifications and is leased through 2008.  Thereafter, it is subject to multiple renewals at the Company’s option.  The second building is also subject to a long-term lease by the Company and the third building is owned.  The corporate headquarters includes a state-of-the-art training center.  The Company also owns a computer center in St. Paul and a research facility located in a suburb of St. Paul.

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Item 3.  Legal Proceedings

Proceedings arising under laws relating to protection of the environment are discussed at Item 1(c) above, under the heading “Environmental Considerations.”

The Company and certain of its subsidiaries are defendants in various lawsuits and claims arising out of the normal course of business.  Accruals have been established reflecting management’s best estimate of probable future costs relating to such matters.

The estimated effects of the future results of existing litigation is subject to certain estimates, assumptions and uncertainties and should be considered in light of the discussion of Forward-Looking Statements and Risk Factors found under Part I at the beginning of this Report.

Item 4.  Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the security holders, through the solicitation of proxies, or otherwise, during the fourth quarter of 2002.

PART II

Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters

Item 5(a) Market Information

The Company’s Common Stock is listed on the New York Stock Exchange and the Pacific Exchange, Inc. under the symbol “ECL.”  The Common Stock is also traded on an unlisted basis on certain other United States exchanges.  The high and low sales prices of the Company’s Common Stock on the consolidated transaction reporting system during 2002 and 2001 were as follows:

	2002				2001
Quarter	High		Low		High		Low
First	$	47.88	$	38.86	$	44.19	$	37.88
Second	$	47.99	$	42.50	$	43.20	$	36.35
Third	$	49.02	$	36.53	$	42.00	$	28.50
Fourth	$	50.40	$	41.41	$	41.05	$	34.20

The closing stock price on February 28, 2003 was $49.05.

Item 5(b) Holders

On February 28, 2003, the Company had 5,018 holders of Common Stock of record.

Item 5(c) Dividends

The Company has paid common stock dividends for 66 consecutive years.  Quarterly cash dividends of $0.13 per share were declared in February, May and August 2001.  Cash dividends of $0.135 per

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share were declared in December 2001, and February, May and August 2002.  A dividend of $0.145 per share was declared in December 2002.

Item 6.  Selected Financial Data

The comparative data for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 inclusive, which are set forth under the heading entitled “Summary Operating and Financial Data” located on pages 50 and 51 of the Annual Report, are incor­porated herein by reference.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The material appearing under the heading entitled “Financial Discussion,” located on pages 20 through 49 of the Annual Report, is incorporated herein by reference.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

The material appearing under the heading entitled “Market Risk,” located on page 29 of the Annual Report, is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

The financial statements and material which are an integral part of the financial statements listed under Item 15.I(1). below and located on pages 30 through 49 of the Annual Report, are incorporated herein by reference.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

PART III

Item 10.  Directors and Executive Officers of the Company

The biographical material regarding directors and the paragraph relating to understandings concerning the election of directors between Henkel KGaA and the Company located in the Proxy Statement appearing under the heading entitled “Election of Directors,” is incorporated herein by reference.  Information regarding executive officers is presented under the heading “Executive Officers of the Company” in Part I on pages 12 through 14 hereof.

Item 11.  Executive Compensation

The material appearing under the heading entitled “Executive Compensation” located in the Proxy Statement is incorporated herein by reference.  However, pursuant to Securities and Exchange Commission Regulation S-K, Item 402(a)(9), the material appearing under the headings entitled “Report of the Compensation Committee on Executive Compensation” and “Comparison of Five Year Cumulative Total Return” located in the Proxy Statement is not incorporated herein.

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Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table presents, as of December 31, 2002, compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	12,000,250	*	$	38.70	6,152,526
Equity compensation plans not approved by security holders	0		0		0
Total	12,000,250	*	$	38.70	6,152,526

*Includes 67,868 Common Stock equivalents under the Company’s 2001 Non-Employee Director Stock Option and Deferred Compensation Plan.  These Common Stock equivalents represent deferred compensation earned by non-employee directors and are excluded from the calculation of weighted average exercise price of outstanding options, warrants and rights in column (b) of this table.

The material appearing under the headings entitled “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management” located in the Proxy Statement is incorporated herein by reference.  The holdings of Henkel KGaA, Henkel Chemie VmbH and HC Investments, Inc. are subject to certain limitations with respect to the Company’s voting securities as more fully described in the Company’s Proxy Statement under the heading “Stockholder Agreement,” which is incorporated herein by reference.

A total of 595,227 shares of Common Stock held by the Company’s current directors and executive officers, some of whom may be affiliates of the Company, have been excluded from the computation of market value of the Company’s Common Stock on the cover page of this Report.  This total represents that portion of the shares reported as beneficially owned by directors and executive officers of the Company as of February 28, 2003, which are actually issued and outstanding.

Item 13.  Certain Relationships and Related Transactions

The material appearing under the headings entitled “Certain Transactions,” “Stockholder Agreement” and “Company Transactions” located in the Proxy Statement, as well as the paragraph relating to understandings concerning the election of directors between Henkel KGaA and the Company and the biographical material pertaining to Messrs. Stefan Hamelmann, Jochen Krautter and Ulrich Lehner, both located in the Proxy Statement under the heading “Election of Directors,” are incorporated herein by reference.

Item 14.  Controls and Procedures.

a.Within 90 days prior to the date of filing this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the

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Chairman of the Board and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based upon that evaluation, the Company’s Chairman of the Board and Chief Executive Officer and the Senior Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, among other things, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s reports filed under the Securities Exchange Act of 1934, as amended.

b.There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the controls subsequent to the date of their evaluation.

PART IV

Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

I(1).	The following financial statements of the Company, included in the Annual Report, are incorporated into Item 8 hereof.
	(i)	Consolidated Statement of Income for the years ended December 31, 2002, 2001 and 2000, Annual Report page 30.
	(ii)	Consolidated Balance Sheet at December 31, 2002, 2001 and 2000, Annual Report page 31.
	(iii)	Consolidated Statement of Cash Flows for the years ended December 31, 2002, 2001 and 2000, Annual Report page 32.
	(iv)	Consolidated Statement of Comprehensive Income and Shareholders’ Equity for the years ended December 31, 2002, 2001 and 2000, Annual Report page 33.
	(v)	Notes to Consolidated Financial Statements, Annual Report pages 34 through 48.
	(vi)	Report of Independent Accountants, Annual Report page 49.
I(2).	The following financial statement schedule to the Company’s financial statements listed in Item 15.I(1). for the years ended December 31, 2002, 2001 and 2000 located on page 35 hereof, and the Report of Indepen­dent Accountants on Financial Statement Schedule at page 33 hereof, are filed as part of this Report.
	(i)	Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000.

All other schedules, for which provision is made in the applicable regulations of the Securities and Exchange Commission, are not required under the

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related instructions or are inapplicable and therefore have been omitted.  All significant majority-owned subsidiaries are included in the filed consolidated financial statements.

I(3).	The following financial statements of the Henkel-Ecolab Joint Venture located on pages 36 to 59 hereof, are filed as part of this Report.
	(i)		Report of Independent Accountants on the combined financial statements and financial statement schedule (referred to under I(4).(i)) – PricewaterhouseCoopers Gesellschaft mit beschränkter Haftung Wirtschaftsprüfungsgesellschaft.
	(ii)		Combined Statements of Income and Comprehensive Income for the years ended November 30, 2001 and 2000.
	(iii)		Combined Balance Sheets as of November 30, 2001 and 2000.
	(iv)		Combined Statements of Cash Flows for the years ended November 30, 2001 and 2000.
	(v)		Combined Statements of Equity for the years ended November 30, 2001, and 2000.
	(vi)		Notes to Combined Financial Statements.
I(4).	The following financial statement schedule to the Henkel-Ecolab Joint Venture financial statements listed in Item 15.I(3). for the years ended November 30, 2001 and 2000 located on page 60 hereof, and the Report of the Independent Accountants on page 36 hereof are filed as part of this Report.
	(i)			Schedule - Valuation and Qualifying Accounts and Reserves for the years ended November 30, 2001 and 2000.
				All other schedules, for which provision is made in the applicable regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable and therefore have been omitted.  All entities of the Henkel-Ecolab Joint Venture are included in the filed combined financial statements.
II.	The following documents are filed as exhibits to this Report.  The Company will, upon request and payment of a fee not exceeding the rate at which copies are available from the Securities and Exchange Commis­sion, furnish copies of any of the following exhibits to stock­holders.
	(3).	A		Restated Certificate of Incorporation - Incorporated by reference to Exhibit (3) to the Company’s Current Report on Form 8-K dated October 22, 1997.
		B.		By-Laws, as amended through February 18, 1999 - Incorporated by

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reference to Exhibit (3)B of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.

(4).	A	Common Stock - see Exhibits (3)A and (3)B.
	B.	Form of Common Stock Certificate - Incorporated by reference to Exhibit (4)B of the Company’s Form 10-K Annual Report for the year ended December 31, 1995.
	C.	(i)	Rights Agreement dated as of February 24, 1996 - Incorporated by reference to Exhibit (4) of the Company’s Current Report on Form 8-K dated February 24, 1996.
		(ii)	Amendment, dated November 5, 2001 to the Rights Agreement dated as of February 24, 1996 - Incorporated by reference to Exhibit (1) of the Company’s Form 8A/A filed November 6, 2001.
	D.	Second Amended and Restated Stockholder’s Agreement between Henkel KGaA and Ecolab Inc., dated November 30, 2001 - Incorporated by reference to Exhibit (10) of the Company’s Current Report on Form 8-K dated November 30, 2001.
	E.	Amended and Restated Indenture, dated as of January 9, 2001, between Ecolab Inc. and Bank One, NA (formerly known as The First National Bank of Chicago) as Trustee - Incorporated by reference to Exhibit (4)(A) of the Company’s Current Report on Form 8-K dated January 23, 2001.
	F.	Officer’s Certificate establishing terms and conditions of 6.875% Notes due February 1, 2011 - Incorporated by reference to Exhibit 4(B) of the Company’s Current Report on Form 8-K dated January 23, 2001.
	G.	Form of 6.875% Note due February 2, 2011 - Incorporated by reference to Exhibit 4(c) of the Company’s Current Report on Form 8-K dated January 23, 2001.
	H.	(i)	Trust Deed, dated 7 February 2002, constituting €300,000,000 5.375% Notes due 2007 between the Company and JP Morgan Chase Bank, London Branch - Incorporated by reference to Exhibit (4)H(i) of the Company’s Form 10-K Annual Report for the year ended December 31, 2001.
		(ii)	Paying Agency Agreement, dated 7 February 2002, relating to €300,000,000 5.375% Notes due 2007 among the Company, JPMorgan Chase Bank, London Branch, J. P. Morgan Bank Luxembourg S.A. and others - Incorporated by reference to Exhibit (4)H(ii) of the Company’s Form 10-K Annual Report for the year ended December 31, 2001.

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Copies of other constituent instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed herewith, pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K, because the aggregate amount of securities authorized under each of such instruments is less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis.  The Company hereby agrees that it will, upon request by the Securities and Exchange Commission, furnish to the Commission a copy of each such instrument.

(10)	A.	(i)	Multicurrency Credit Agreement (“Credit Agreement”) dated as of September 29, 1993, as Amended and Restated as of December 13, 2000, among the Company, the financial institutions party thereto from time to time, Citicorp USA, Inc. as Administrative Agent, Citibank International Plc, as Euro-Agent and Bank One, NA and Credit Suisse First Boston as Co-Agents - Incorporated by reference to Exhibit (10)A of the Company’s Current Report on Form 8-K dated January 23, 2001.
		(ii)	Australian Dollar Local Currency Addendum to the Credit Agreement, dated October 17, 1997 - Incorporated by reference to Exhibit (4)B of the Company’s Form 10-Q for the quarter ended September 30, 1997.
		(iii)	Australian Dollar Local Currency Addendum dated as of June 23, 1998 among Ecolab Finance PTY Limited, Ecolab Inc., Citibank, N.A., the Local Currency Agent named therein and the Local Currency Banks party thereto - Incorporated by reference to Exhibit (4)B of the Company’s Form 10-Q for the quarter ended June 30, 1998.
	B.	(i)	Credit Agreement (364 Day Facility) dated December 7, 2001, among the Company, the banks parties thereto (the “Banks”) and Citicorp USA, Inc. as Agent for the Banks - Incorporated by reference to Exhibit (99)B of the Company’s Current Report on Form 8-K dated November 30, 2001.
		(ii)	Amendment No. 1 to Credit Agreement (364 Day Facility) dated as of October 31, 2002, among the Company, the bank parties thereto (the “Banks”) and Citicorp USA, Inc. as Agent for the Banks.
	C.	Ecolab Inc. 1977 Stock Incentive Plan, as Amended and Restated through May 12, 2000 - Incorporated by reference to Exhibit (10)A of the Company’s Form 10-Q  for the quarter ended June 30, 2000.
	D.	Ecolab Inc. 1993 Stock Incentive Plan, as Amended and Restated as of May 12, 2000.
	E.	(i)	Ecolab Inc. 1997 Stock Incentive Plan, as Amended and Restated as of August 18, 2000 - Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended September 30, 2000.
		(ii)	Non-Statutory Stock Option Agreement between the Company and Allan L. Schuman with respect to premium-priced option grant effective February 20, 1998 under the Ecolab Inc. 1997 Stock Incentive Plan.  Similar option grants were made to each of the named executive officers of the Company covering

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varying, but smaller number of shares – Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended June 30, 1998.

F.(i)1988 Non-Employee Director Stock Option Plan as amended through February 23, 1991 - Incorporated by reference to Exhibit (10)D of the Company’s Form 10-K Annual Report for the year ended December 31, 1990.

(ii)Amendment to 1988 Non-Employee Director Stock Option Plan effective May 11, 2001.

G.(i)1995 Non-Employee Director Stock Option Plan - Incorporated by reference to Exhibit (10)D of the Company’s Form 10-K Annual Report for the year ended December 31, 1994.

(ii)Amendment No. 1 to 1995 Non-Employee Director Stock Option Plan effective February 25, 2000 - Incorporated by reference to Exhibit (10)E(ii) of the Company’s Form 10-K for the year ended December 31, 1999.

(iii)Amendment No. 2 to 1995 Non-Employee Director Stock Option Plan effective May 11, 2001.

H.Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan.  Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended March 31, 2001.

I.Form of Director Indemnification Agreement dated August 11, 1989 - Incorporated by reference to Exhibit (19)A of the Company’s Form 10-Q for the quarter ended September 30, 1989.  Substantially identical agreements are in effect as to each director of the Company.

J.(i)Ecolab Executive Death Benefits Plan, as amended and restated effective March 1, 1994 - - Incorporated by reference to Exhibit (10)J of the Company’s Form 10-K Annual Report for the year ended December 31, 1994.  See also Exhibit (10)P hereof.

(ii)Amendment No. 1 to Ecolab Executive Death Benefits Plan - Incorporated by reference to Exhibit (10)H(ii) of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.

(iii)Second Declaration of Amendment to Ecolab Executive Death Benefits Plan, effective March 1, 1998 - Incorporated by reference to Exhibit (10)H(iii) of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.

K.Ecolab Executive Long-Term Disability Plan, as amended and restated effective January 1, 1994 - Incorporated by reference to Exhibit (10)K of the Company’s 10-K Annual Report for the year ended December 31, 1994.  See also Exhibit (10)P hereof.

L.Ecolab Executive Financial Counseling Plan - Incorporated by reference to Exhibit (10)K of the Company’s Form 10-K Annual Report for the year ended December 31, 1992.

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M.(i)Ecolab Supplemental Executive Retirement Plan, as amended and restated effective July 1, 1994 - Incorporated by reference to Exhibit (10)M(i) of the Company’s 10-K Annual Report for the year ended December 31, 1994.  See also Exhibit (10)P hereof.

(ii)First Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan effective as of July 1, 1994 - Incorporated by reference to Exhibit (10)M(ii) of the Company’s 10-K Annual Report for the year ended December 31, 1994.

(iii)Second Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan effective as of July 1, 1994 - Incorporated by reference to Exhibit (10)M(iii) of the Company’s Form 10-K Annual Report for the year ended December 31, 1995.

(iv)Third Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan, effective March 1, 1998 - Incorporated by reference to Exhibit (10)K(iv) of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.

(v)Fourth Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan, effective February 22, 2002 - Incorporated by reference to Exhibit (10)M(v) of the Company’s Form 10-K Annual Report for the year ended December 31, 2001.

N.Ecolab Mirror Savings Plan, as amended and restated effective as of March 1, 2002.

O.(i)Ecolab Mirror Pension Plan effective July 1, 1994 - Incorporated by reference to Exhibit (10)O(i) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1994.  See also Exhibit (10)P hereof.

(ii)First Declaration of Amendment to Ecolab Mirror Pension Plan effective as of July 1, 1994 - Incorporated by reference to Exhibit (10)O(ii) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1994.

(iii)Second Declaration to Amendment to Ecolab Mirror Pension Plan effective as of July 1, 1994 - Incorporated by reference to Exhibit (10)O(iii) of the Company’s Form 10-K Annual Report for the year ended December 31, 1995.

(iv)Third Declaration of Amendment to Ecolab Mirror Pension Plan, effective March 1, 1998 - - Incorporated by reference to Exhibit (10)M(iv) of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.

(v)Fourth Declaration of Amendment to Ecolab Mirror Pension Plan, effective February 22, 2002 - Incorporated by reference to Exhibit (10)O(v) of the Company’s Form 10-K Annual

Report for the year ended December 31, 2001.

P.(i)Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans - Incorporated by reference to Exhibit (10)N of the Company’s 10-K Annual

25

Report for the year ended December 31, 1994.

(ii)Amendment No. 1 to the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans effective July 1, 1997 - Incorporated by reference to Exhibit (10)N(ii) of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.

(iii)First Declaration of Amendment to the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans effective November 13, 1997 - Incorporated by reference to Exhibit (10)N(iii) of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.

(iv)Third Declaration of Amendment to the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans effective July 1, 1999 - Incorporated by reference to Exhibit (10)N(iv) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.

(v)Fourth Declaration of Amendment to Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans, effective February 22, 2002 - Incorporated by reference to Exhibit (10)P(v) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

Q.1999 Ecolab Inc. Management Performance Incentive Plan - Incorporated by reference to Exhibit (10)O of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.

R.Ecolab Inc. Change in Control Severance Compensation Policy, effective February 22, 2002 - Incorporated by reference to Exhibit (10)R of the Company’s Form 10-K Annual Report for the year ended December 31, 2001.

S.(i)Master Agreement, dated as of December 7, 2000, between Ecolab Inc. and Henkel KGaA - Incorporated by reference to Exhibit 18 of HC Investments, Inc.’s and Henkel KGaA’s Amendment No. 5 to Schedule 13D dated July 16, 1991.

(ii)Amendment No. 1 to the Master Agreement, dated December 7, 2000, between Ecolab Inc. and Henkel KGaA-Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended September 30, 2001.

(iii)Intellectual Property Agreement dated November 30, 2001, between Ecolab and Henkel KGaA-Incorporated by reference to Exhibit (10) of the Company’s Current Report on Form 8-K dated November 30, 2001.

T.Description of Ecolab Management Incentive Plan - Incorporated by reference to Exhibit (10)R of the Company’s Form 10-K for the year ended December 31, 2000.

26

	U.	(i)	Hiring Letter of Bruno Deschamps - Incorporated by reference to Exhibit (10)T of the Company’s Form 10-K for the year ended December 31, 2000.
		(ii)	Separation Agreement between the Company and Bruno Deschamps effective March 11, 2002 - Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended March 31, 2002.
	V.	Ecolab Inc. 2002 Stock Incentive Plan - Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended June 30, 2002.
(13)		Those portions of the Company’s Annual Report to Stockholders for the year ended December 31, 2002 which are incorporated by reference into Parts I, II and IV hereof.
(21)		List of Subsidiaries as of February 28, 2003.
(23)	A.	Consent of PricewaterhouseCoopers LLP to Incorporation by Reference at page 34 hereof is filed as a part hereof.
	B.	Consent of PricewaterhouseCoopers Gesellschaft mit beschränkter Haftung Wirschaftsprüfungsgesellschaft.
(24)		Powers of Attorney.
(99)		Certifications of Chief Executive Officer and Chief Financial Officer.

EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

Included in the preceding list of exhibits are the following management contracts or compensatory plans or arrangements:

Exhibit No.	Description
(10)C.	Ecolab Inc. 1977 Stock Incentive Plan.
(10)D.	Ecolab Inc. 1993 Stock Incentive Plan.
(10)E.	Amended and Restated Ecolab Inc. 1997 Stock Incentive Plan.
(10)F.	1988 Non-Employee Director Stock Option Plan.
(10)G.	1995 Non-Employee Director Stock Option Plan.
(10)H.	Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan.
(10)J.	Ecolab Executive Death Benefits Plan.
(10)K.	Ecolab Executive Long-Term Disability Plan.
(10)L.	Ecolab Executive Financial Counseling Plan.

27

(10)M.	Ecolab Supplemental Executive Retirement Plan.
(10)N.	Ecolab Mirror Savings Plan.
(10)O.	Ecolab Mirror Pension Plan.
(10)P.	The Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans.
(10)Q.	1999 Ecolab Inc. Management Performance Incentive Plan.
(10)R.	Ecolab Inc. Change in Control Severance Compensation Policy.
(10)T.	Ecolab Management Incentive Plan.
(10)U.	Hiring Letter and Separation Agreement of Bruno Deschamps.
(10)V.	Ecolab Inc. 2002 Stock Incentive Plan.

III.Reports on Form 8-K:

The Company did not file a Current Report on Form 8-K during the quarter ended December 31, 2002.

28

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Ecolab Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 7th day of March, 2003.

ECOLAB INC.
(Registrant)
By	/s/ Allan L. Schuman
	Allan L. Schuman
	Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Ecolab Inc. and in the capacities indicated, on the 7th day of March, 2003.

/s/ Allan L. Schuman	Chairman of the Board and
Allan L. Schuman	Chief Executive Officer
	(Principal Executive Officer and Director)
/s/ Steven L. Fritze	Senior Vice President and
Steven L. Fritze	Chief Financial Officer
	(Principal Financial Officer)
/s/ Daniel J. Schmechel	Vice President and Controller
Daniel J. Schmechel	(Principal Accounting Officer)
/s/ Timothy P. Dordell	Directors
Timothy P. Dordell
as attorney-in-fact for: Les S. Biller, Stefan Hamelmann, Jerry A. Grundhofer, James J. Howard, William L. Jews, Joel W. Johnson, Jochen Krautter, Jerry W. Levin, Ulrich Lehner and Robert L. Lumpkins

29

CERTIFICATIONS

I, Allan L. Schuman, certify that:

1.I have reviewed this annual report on Form 10-K of Ecolab Inc.;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including  its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

30

6.The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  March 7, 2003

/s/ Allan L. Schuman

Allan L. Schuman

Chairman of the Board and
Chief Executive Officer

I, Steven L. Fritze, certify that:

1.I have reviewed this annual report on Form 10-K of Ecolab Inc.;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

31

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 7, 2003

/s/ Steven L. Fritze

Steven L. Fritze

Senior Vice President and Chief Financial Officer

32

REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

To the Shareholders and Directors of Ecolab Inc.:

Our audits of the consolidated financial statements referred to in our report dated February 18, 2003 appearing in the 2002 Annual Report to Shareholders of Ecolab Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15.I(2).(i) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Minneapolis, Minnesota

February 18, 2003

33

CONSENT OF PRICEWATERHOUSECOOPERS LLP
TO INCORPORATION BY REFERENCE

We hereby consent to the incorporation by reference in the Registration Statements of Ecolab Inc. on Form S–8 (Registration Nos. 2–60010; 2–74944; 33–1664; 33-41828; 2–90702; 33–18202; 33–55986; 33-56101; 333-95043; 33–26241; 33–34000; 33-56151; 333-18627; 33–39228; 33-56125; 333-70835; 33–60266; 333-95041; 33-65364; 333-18617; 333-79449; 333-40239; 333-95037; 333-50969; 333-58360; and 333-97927) of our report dated February 18, 2003 relating to the consolidated financial statements of Ecolab Inc. as of December 31, 2002, 2001 and 2000 and for the years then ended, which appears in the 2002 Annual Report to Shareholders of Ecolab Inc., which is incorporated by reference in this Annual Report on Form 10-K of Ecolab Inc. We also consent to the inclusion in this Annual Report on Form 10-K of our report dated February 18, 2003 relating to the financial statement schedule of Ecolab Inc. as of December 31, 2002, 2001 and 2000 and for the years then ended, which also appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Minneapolis, Minnesota

March 7, 2003

34

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

ECOLAB INC.

(In Thousands)

COL. A	COL. B		COL. C					COL. D			COL. E
			Additions
Description	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts(A)			Deductions(B)			Balance at End of Period
Allowance for Doubtful Accounts:
Year Ended December 31, 2002	$	30,297	$	17,220	$	2,232		$	(13,754	)	$	35,995
Year Ended December 31, 2001	$	15,330	$	10,941	$	12,527		$	(8,501	)	$	30,927
Year Ended December 31, 2000	$	20,969	$	8,792	$	(236	)	$	(14,195	)	$	15,330

(A)Included the effects of changes in currency translation and business acquisitions, including Henkel-Ecolab in 2001.

(B)Uncollectible accounts charged off, net of recovery of accounts previously written off.

35

Gesellschaft mit beschränkter Haftung Wirtschaftsprüfungsgesellschaft	Moskauer Straße 19 40227 Düsseldorf Postfach 10 50 53 40041 Düsseldorf
	Tel.: +49 (211) 981-0 Fax: +49 (201) 981-1000
	Ein Unternehmen der Gruppe PwC Deutsche Revision

Report of Independent Accountants

To the Board of Directors and Shareholders

of Henkel-Ecolab:

In our opinion, the accompanying combined balance sheets and the related combined statements of income and comprehensive income, of equity and of cash flows present fairly, in all material respects, the financial position of Henkel-Ecolab at November 30, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the accompanying financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related combined financial statements.  These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.  We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers GmbH

PricewaterhouseCoopers

Gesellschaft mit beschränkter Haftung

Wirtschaftsprüfungsgesellschaft

January 11, 2002

Geschäftsführer: WP RA StB Prof. Rolf Windmöller

Sitz: Frankfurt am Main  ' Amtsgericht: Frankfurt am Main HRB 45604

PwC Deutsche Revision ist Mitglied von PricewaterhouseCoopers International, einer Company limited by guarantee registriert in England und Wales.

36

Henkel-Ecolab

Combined Statements of Income and Comprehensive Income

(Thousands EUR)	Year ended November 30, 2001		Year ended November 30, 2000
Net Sales	970,359		935,230
Cost of Sales	502,017		473,569
Selling, General and Administrative Expenses	384,972		365,867
Royalties to Parents	7,670		7,455
Operating Income	75,700		88,339
Other (Expense) Income, net	(604	)	439
Income before Income Taxes	75,096		88,778
Provision for Income Taxes	30,406		37,587
Net Income	44,690		51,191
Other Comprehensive Income :
Foreign Currency Translation Adjustments	(752	)	6,248
Minimum Pension Liability Adjustments	(5,122	)	(90	)
Income Tax  (Expense) / Benefit Related to Minimum Pension Liability Adjustments	1,538		36
Other Comprehensive Income (Loss) net of Tax	(4,336	)	6,194
Comprehensive Income	40,354		57,385

See accompanying Notes to Combined Financial Statements

37

Henkel-Ecolab

Combined Balance Sheets

(Thousands EUR)	November 30, 2001		November 30, 2000
Assets
Cash and Cash Equivalents	3,866		7,068
Accounts Receivable, net	226,252		224,093
Accounts Receivable from Related Parties	7,733		8,831
Loans to Related Parties	—		6,039
Inventories	119,142		103,162
Prepaid Expenses and Other Current Assets	33,967		28,966
Deferred Taxes	4,853		6,965
Current Assets	395,813		385,124
Property, Plant and Equipment, net	100,086		96,818
Intangible and Other Assets, net	58,378		67,113
Deferred Taxes	12,382		9,359
Total Assets	566,659		558,414
Liabilities and Equity
Accounts Payable	63,916		67,958
Accounts Payable to Related Parties	11,700		10,838
Accrued Liabilities	119,366		117,975
Income Taxes Payable	26,089		35,626
Deferred Taxes	497		498
Current Portion of Long Term Debt	2,015		84
Short Term Debt	28,832		6,845
Current Portion of Employee Benefit Obligations	5,531		5,042
Current Liabilities	257,946		244,866
Contingent Liabilities
Employee Benefit Obligations, less Current Portion	75,804		69,107
Long Term Debt, less Current Maturities	—		2,017
Deferred Taxes	4,252		4,095
Combined Equity
Contributed Capital	86,785		85,906
Retained Earnings	148,347		154,562
Other Accumulated Comprehensive Income	(6,475	)	(2,139	)
	228,657		238,329
Total Liabilities and Equity	566,659		558,414

See accompanying Notes to Combined Financial Statements

38

Henkel-Ecolab

Combined Statements of Cash Flows

(Thousands EUR)	Year ended November 30,  2001		Year ended November 30,  2000
Net Income	44,690		51,191
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities
Depreciation and Amortization	46,442		43,998
Equity in Income of Affiliated Company	(1,213	)	(895	)
Provision for Doubtful Accounts	5,702		4,008
Gain on Sale of Property and Equipment	(173	)	(254	)
Deferred Income Taxes	667		1,594
Changes in Operating Assets and Liabilities
Increase in Accounts Receivable	(8,382	)	(32,413	)
(Increase) Decrease in Accounts Receivable from Related Parties	1,101		(3,102	)
Increase in Inventories	(16,193	)	(483	)
Increase (Decrease) in Accounts Payable and Accrued Liabilities	(3,269	)	16,939
Increase (Decrease) in Accounts Payable to Related Parties	1,037		2,566
Increase in Income Taxes Payable	2,403		4,695
Increase (Decrease) in Prepaid Expenses and Other Current Assets	(2,985	)	(4,797	)
Increase in Employee Benefit Obligations	1,635		1,882
Cash Provided by Operating Activities	71,462		84,929
Investing Activities
Expenditures for Property and Equipment	(42,951	)	(42,023	)
Expenditures for Intangible and Other Assets	(506	)	(6,164	)
Proceeds from Investment in Affiliated Company	774		516
Purchase of Businesses Net of Cash Acquired	—		—
Proceeds from Sale of Property and Equipment	2,524		7,633
Cash Used for Investing Activities	(40,159	)	(40,038	)
Financing Activities
Proceeds (Repayments) from Bank Debt, net	21,901		(17,741	)
Proceeds from Capital Contribution, net	879		382
(Increase) Decrease in Loans to Related Parties	6,211		(1,024	)
Dividends paid	(63,512	)	(32,111	)
Cash Used for Financing Activities	(34,521	)	(50,494	)
Effect of Exchange Rate Changes	16		6,634
Increase (Decrease) in Cash and Cash Equivalents	(3,202	)	1,031
Cash and Cash Equivalents at Beginning of Period	7,068		6,037
Cash and Cash Equivalents at End of Period	3,866		7,068

See accompanying Notes to Combined Financial Statements

39

Henkel-Ecolab

Combined Statements of Equity

(Thousands EUR)

	Contributed Capital	Retained Earnings		Cumulative Foreign Currency Translation Adjustment		Cumulative Minimum Pension Liability Adjustment		Total
Balance November 30, 1999	85,524	129,823		(8,237	)	(96	)	207,014
Net Income		51,191						51,191
Dividends		(26,452	)					(26,452	)
Contributions	382							382
Minimum Pension Liability						(54	)	(54	)
Translation Adjustment				6,248				6,248
Balance November 30, 2000	85,906	154,562		(1,989	)	(150	)	238,329
Net Income		44,690						44,690
Dividends		(50,905	)					(50,905	)
Contributions	879							879
Minimum Pension Liability						(3,584	)	(3,584	)
Translation Adjustment				(752	)			(752	)
Balance November 30, 2001	86,785	148,347		(2,741	)	(3,734	)	228,657

See accompanying Notes to Combined Financial Statements

40

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

1. DESCRIPTION OF BUSINESS

Henkel-Ecolab (the “Company”) is a leading European company providing total cleaning and hygiene systems and service solutions to institutional and industrial companies. See Basis of Presentation within Note 2 of the combined financial statements. The Company’s offerings include detergents, sanitation cleaners, dosing and measuring equipment, cleaning machines, training and service. Customers include hotels and restaurants; food service, healthcare and educational facilities; commercial laundries; light industry; dairy plants and farms as well as food and beverage processors throughout Europe.

The Company was formed in 1991 by Henkel KGaA (Henkel) and Ecolab, Inc. (Ecolab) as a Company of their respective European institutional and industrial hygiene businesses. Under the terms of the Amended and Restated Company Agreement dated June 26, 1991 (Company Agreement), Henkel and Ecolab have joint control over the activities of the Company. The Company Agreement also provides that both partners will share an equal economic interest in the profits or losses of the Company. On December 1, 2001, Ecolab purchased Henkel´s share of the Company. See note 10 of the combined financial statements.

Acquisitions and Divestiture

The Company made certain acquisitions during the fiscal years ended November 30, 2001 and 2000; the aggregate impact of which was immaterial to the combined financial statements.

Waldhausen Divestiture: In June 2000, the Company divested the assets of the Floordress textile and equipment production facility in Waldhausen, Germany in two separate but related transactions for a price equal to the net book value of approximately TEUR 2,249.  Inno Concept, the supplier of plastics to the plant, assumed responsibility of the textile and equipment production (including substantially all the employees and the current production building for textiles).  The Company also entered into a long-term supply agreement for textiles and equipment with Inno Concept.Grupp, the metal supplier, purchased the equipment production building in a real-estate transaction.  As both transactions were for a price equal to the net book value, no gain or loss was recorded on the books for the sale of the assets related to Waldhausen.

41

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements are presented on a combined basis in accordance with the generally accepted accounting principles in the United States of America. The Company is comprised of various entities. These entities have varying legal structures, including stock corporations, limited liability corporations and partnerships formed under the applicable laws in the jurisdictions in which the Company operates. These entities are owned beneficially by identical shareholders or their wholly- owned subsidiaries and are, therefore, considered entities under common control.  All significant intergroup or affiliated company accounts and transactions have been eliminated in combination. The Company’s fiscal year end has been designated as November 30.

Adoption of New Currency Reporting

Prior to 2001, the Company prepared and reported its combined financial statements in Deutsche Marks (“DM”). Beginning in 2001, the Company presented its combined financial statements in Euro (“EUR”). Accordingly figures for 2000 are shown in EUR using the Official Fixed Exchange Rate of 1 EUR = DM 1,95583. Henkel-Ecolab’s 2000 Euro combined financial statements depict the same trends as would have been presented if it had continued to present its Combined Financial Statements in Deutsche Marks. The Company’s Combined Financial Statements will however not be comparable to the Euro financial statements of other companies that previously reported their financial information in a currency other than Deutsche Marks.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.

Cash and Cash Equivalents

Cash equivalents are highly liquid investments with a maturity of three months or less when purchased.

Inventories

Inventories are stated at the lower of cost or market with cost determined using the first-in first-out and average cost methods.

42

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

Property, Plant and Equipment, Net

Property, plant and equipment are stated at historical cost. Merchandising equipment consists primarily of various systems for dispensing cleaning and sanitizing products. Depreciation and amortization are charged to operations using the straight-line method over the following estimated useful lives:

Buildings and improvements	up to 50 years
Machinery and equipment	3 to 10 years
Furniture, fixtures and merchandising equipment	3 to 8 years

Leasehold improvements are amortized on a straight-line basis over the lesser of the useful life of the asset or the remaining term of the associated lease. Betterments, renewals and repairs that extend the life of the asset are capitalized; other repairs and maintenance costs are expensed. The cost and accumulated depreciation/amortization applicable to the assets retired or disposed of are removed from the accounts and any gain or loss is reflected in income in the year of disposal.

Total depreciation expense for property, plant and equipment amounted to TEUR 37,766 and TEUR 35,753 for the years ended November 30, 2001 and 2000, respectively.

Intangible Assets

Intangible assets primarily consist of goodwill, capitalized software, concessions and licenses. These assets are amortized on a straight-line basis over their estimated lives, periods from 3 to 15 years. Total amortization expense for all intangible assets amounted to TEUR 8,676 and TEUR 8,245 for the years ended November 30, 2001 and 2000, respectively.

The Company  capitalizes purchased software which is ready for service and development costs incurred during the application development stage. These costs are amortized using the straight-line method over a maximum of three to five years or the expected life of the product, whichever is less. The carrying value of capitalized software costs are regularly reviewed by the Company and a loss is recognized if the unamortized cost is in excess of the net realizable value.

Long-Lived Assets

The company periodically assesses the recoverability of long-lived and intangible assets based on anticipated future earnings and operating cash flows.

Revenue Recognition

The Company recognizes revenue on product sales at the time title transfers to the customer.  The Company records estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives at the time of sale.

43

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

Shipping and Handling Costs

In connection with the adoption of Emerging Issues Task Force (“EITF”) Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs”, the Company has reclassified certain warehousing and transportation expenses from Selling, General and Administrative expenses (“SG&A”) to Cost of Sales. Amounts reported for prior years have been reclassified to conform to the 2001 presentation. The reclassifications had no effect on the Company’s results of operations or financial position.  Expenses reclassified from SG&A to Costs of Sales were TEUR 66,982 and TEUR 62,205 for the years ended November 30, 2001 and 2000, respectively. The effect of the reclassification was to reduce gross margin by approximately 6.5 percentage points in each year and reduce SG&A as a percent of sales by a comparable amount.

Advertising Costs

The Company expenses the costs of advertising in the period in which the costs are incurred. Advertising expenses were TEUR 21,696 and TEUR 21,093 for the years ended November 30, 2001 and 2000, respectively.

Research expenditures

Research expenditures which relate to the development of new products and processes, including significant improvements and refinements to existing products, approximately TEUR 20,000 and TEUR 18,900 for the years ended November 30, 2001 and 2000, respectively.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The Company will adopt SFAS No. 141 and SFAS No. 142 in the first quarter of fiscal 2002. Upon adoption, the Company will also perform the first of the required impairment tests of goodwill and indefinite-lived intangibles as of December 1, 2001. The Company has not yet determined what impact the adoption of these statements will have on its results of operations and financial position.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which the asset is placed in service. When the liability is initially recorded, entities capitalize the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, entities either settle the obligation for the recorded amount or incur a gain or loss upon settlement. This statement is effective for fiscal years beginning after June 15, 2002, with earlier adoption encouraged. The Company does not believe that the adoption of this statement will have a material impact on its results of operations or financial position.

44

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets to be Disposed Of.” The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30, “Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business,” for the disposal of segments of a business. This statement requires that those long-lived assets be measured at the lower of the carrying amount or fair value less costs to sell, whether reported in continuing operations or in discontinued operations. As a result, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. This statement also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not believe that the adoption of this statement will have a material impact on its results of operations or financial position.

45

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

3. BALANCE SHEET INFORMATION

	November 30, 2001 TEUR		November 30, 2000 TEUR
Accounts Receivable
Accounts Receivable, Trade	240,126		234,661
Allowance for Doubtful Accounts	(13,874	)	(10,568	)
	226,252		224,093
Inventories
Raw Materials	23,264		20,047
Work in Process	6,541		4,022
Finished Goods	89,337		79,093
	119,142		103,162
Property, Plant and Equipment, net
Land	2,308		2,341
Buildings and Improvements	39,045		38,197
Machinery and Equipment	88,852		85,174
Merchandising Equipment and Other	197,703		175,970
Construction in Progress	3,828		4,407
	331,736		306,089
Accumulated Depreciation and Amortization	(231,650	)	(209,271	)
	100,086		96,818
Intangible and Other Assets, net
Goodwill on Acquisitions prior to July 1,1991	10,707		10,707
Goodwill on Acquisitions after July 1,1991	55,690		55,182
Other Intangible Assets, including Capitalized Computer Software Costs	46,667		47,225
Additional Minimum Pension Liability	1,785		2,059
	114,849		115,173
Accumulated Amortization	(64,592	)	(55,863	)
Total Intangible Assets, net	50,257		59,310
Other Assets, net	8,121		7,803
	58,378		67,113

46

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

4. RELATED PARTY TRANSACTIONS

The Company has entered into various contractual arrangements, including those discussed in the following paragraphs, for the supply of products, the performance of general and administrative services and the transfer of technology.

Certain Company entities purchase institutional and industrial hygiene products (primarily finished goods inventories) from Henkel and its subsidiaries under a variety of supply agreements. The terms of these agreements allow these entities to purchase specified quantities at agreed upon prices as defined by an annual supply plan submitted to the related manufacturing facility. Henkel also provides certain Company entities with elective services which include, but are not limited to, general administration, payroll administration, accounting and research and development. The costs of services are charged by Henkel on a monthly basis and may not reflect the costs which the Company would incur if it were necessary to procure such services from outside sources or if such services were performed internally by the Company. Related party purchases and fees incurred by the Company in consideration for these services totaled TEUR 92,155 and TEUR 91,278 for the years ended November 30, 2001 and 2000, respectively.

Royalty payments are shared equally by both parent companies based upon a technology transfer agreement which provides for a royalty payment 1 % of third party net sales as defined. Royalty expense related to this technology transfer agreement amounted to TEUR 7,670 and TEUR 7,455 for the years ended November 30, 2001 and 2000, respectively.  The royalty agreement terminated effective December 1, 2001 when Ecolab acquired the 50% of the Company owned by Henkel.

The Company has entered into agreements with Henkel under which the Company can both borrow from and lend to Henkel both on an overdraft basis and through short term loans of no more than 3 months. There is currently no maximum level of borrowing specified under these agreements. The interest rate basis for both arrangements is the Euro London Interbank Offering Rate (EURO-LIBOR). At November 30, 2001, the interest rates were 4.875 % for EURO overdrafts and 3.53 % for 3 month short term EURO loans. On overdrafts, approximately 50 basis points are paid to compensate Henkel for administration costs.  These agreements terminated effective December 1, 2001 when Ecolab acquired the 50% of the Company owned by Henkel

At November 30, 2000 the Company had loans receivable from Henkel and its subsidiaries of TEUR 6,039. No loans remain outstanding as of November 30, 2001. The fair values of related party loans receivable and payable approximate book value.

The Company incurs and expenses certain costs incurred on behalf of the parents which by their nature are not arm’s length. The Company charges the parents for these costs and has reflected the reimbursement of such costs, net of tax, in the amount of TEUR 879 and TEUR 382 as contributed capital for the years ended November 30, 2001 and 2000.

47

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

5. INCOME TAXES

The components of income before income taxes and the provision for income taxes for the years ended November 30, 2001 and 2000 are as follows:

	2001 TEUR		2000 TEUR
Income before income taxes
Domestic (Germany)	11,957		15,670
Foreign	63,139		73,108
Total	75,096		88,778
Income tax provision (benefit)
Current
Domestic (Germany)	5,281		9,862
Foreign	24,458		26,131
Total current	29,739		35,993
Deferred
Domestic (Germany)	(333	)	1,511
Foreign	1,000		83
Total deferred	667		1,594
Total income tax provision	30,406		37,587

The components of the Company's overall net deferred tax asset at November 30:

	2001 TEUR		2000 TEUR
Deferred tax assets
Tax loss carry forwards	2,030		1,439
Accrued expenses	2,441		5,323
Inventory valuation reserves	1,355		1,973
Accounts receivable reserves	2,943		1,689
Pension provision	6,747		5,156
Depreciation on fixed assets	1,251		569
Other	468		175
Total deferred tax assets	17,235		16,324
Deferred tax liabilities
Amortization on intangible assets	(732	)	(1,040	)
Depreciation on fixed assets	(2,238	)	(2,241	)
Prepaid Pensions	(1,196	)	(930	)
Other	(583	)	(382	)
Total deferred tax liabilities	(4,749	)	(4,593	)
Net deferred tax asset	12,486		11,731

48

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

At November 30, 2001 and 2000, the Company had net foreign operating loss carry forwards for tax purposes of approximately TEUR 6,868 and TEUR 5,010, respectively. A significant portion of these losses have an indefinite carry forward period; the remaining losses have expiration dates up to five years.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences at November 30, 2001 and 2000. During 2000 the valuation allowance decreased by TEUR 694.

A reconciliation of the weighted average European effective tax rate to the effective income tax rate is as follows:

	2001 %	2000 %
Weighted average European statutory rate	35.6	38.6
Non deductible items, principally goodwill	4.3	4.3
Provision for prior years taxes	—	(1.2	)
Deferred taxes refundable to parent	—	—
Change in valuation allowance	—	(0.8	)
Change in tax rates	0.5	—
Other	0.1	1.4
Effective income tax rate	40.5	42.3

The deferred taxes refundable to parent reflect the Company Agreement in which the partners also agreed that all tax benefits realized after the formation of the Company should be refunded to the respective parents if the benefits relate to temporary differences that originated in periods prior to the formation of the Company.

Cash paid for taxes for the years ended November 30, 2001 and 2000 was TEUR 27,317 and TEUR 31,822, respectively.

49

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

6. PENSION AND OTHER BENEFIT PLANS

Henkel-Ecolab sponsors several pension plans for its employees throughout Europe including Germany, France, Netherlands, Belgium, Turkey, Greece, the United Kingdom, Italy, Spain, Austria, Slovenia, Norway, Switzerland and Ireland.

The following tables provide a reconciliation of the changes in the plans benefit obligations and fair value of assets over the two year period ended November 30, 2001 and 2000 and a statement of the funded status as of November 30, 2001 and 2000 with the exception of the Italian termination indemnity plan:

	2001 TEUR		2000 TEUR
Reconciliation of benefit obligation
Obligation at December 1, 2000 and 1999, respectively	147,816		129,303
Service cost	6,613		6,057
Interest cost	8,954		7,875
Actuarial (gain) loss	(759	)	7,996
Benefit payments	(3,412	)	(3,415	)
Obligation at November 30	159,212		147,816
	2001 TEUR		2000 TEUR
Reconciliation of fair value of plan assets
Fair value of plan assets at December 1, 2000 and 1999, respectively	84,387		62,102
Actual (loss)/return on plan assets	(6,008	)	18,740
Company contribution	2,960		3,568
Participant contribution	691		992
Benefit payments	(1,059	)	(1,015	)
Fair value of plan assets at November 30	80,971		84,387
	2001 TEUR		2000 TEUR
Funded status
Funded status as of November 30,	(78,241	)	(63,429	)
Unrecognized transition obligation	2,637		2,982
Unrecognized prior service cost	(344	)	(489	)
Unrecognized net loss (gain)	8,097		(4,367	)
Net amount recognized	(67,851	)	(65,303	)

50

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

The following table provides the amounts recognized in the combined balance sheet as of November 30, 2001 and 2000:

	2001 TEUR		2000 TEUR
Accrued benefit liability	(75,012	)	(67,593	)
Italian termination indemnity plan	(6,323	)	(6,556	)
Employee benefit obligation	(81,335	)	(74,149	)
Intangible asset	1,785		2,059
Accumulated other comprehensive income	5,376		231
Additional minimum pension liability	7,161		2,290
Net amount recognized	(74,174	)	(71,859	)

Included within the Employee Benefit Obligations in the combined balance sheet is the Italian termination indemnity plan which provides a benefit that is payable upon termination of employment virtually in all cases of termination. This plan has no assets and is not included within the pension disclosures provided within this footnote with the exception of the information provided above.

The following table provides the components of net periodic pension cost for the plans for the fiscal years ended November 30, 2001 and 2000:

	2001 TEUR		2000 TEUR
Service cost	6,613		6,057
Interest cost	8,954		7,875
Expected return on plan assets	(6,477	)	(5,834	)
Amortization of transitional obligation	332		381
Amortization of net (gain) loss	(735	)	(554	)
Amortization of prior service cost	45		(111	)
Net amortization	(358	)	(284	)
Net  periodic pension cost	8,732		7,814

Pursuant to the provisions of Statement Of Financial Accounting Standards No. 87 “Employer's Accounting for Pensions”, the Company has recorded an additional pension liability adjustment  of TEUR 7,161, and TEUR 2,290 as of November 30, 2001 and 2000, respectively, representing the amount by which the accumulated benefit obligation over the fair value of plan assets exceeded the accrued pension liability for certain plans.

51

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

The following amounts, net of tax, have been included within other comprehensive income arising from a change in the additional minimum pension liability for the year ended November 30, 2001 and 2000, respectively TEUR (3,584) and TEUR (54).

The accumulated benefit obligation for these plans was TEUR 61,333 atNovember 30, 2001 and TEUR 53,304 at November 30, 2000.

The assumptions used in the measurement of the Company`s benefit obligations are shown in the following table:

	2001 %	2000 %
Range of rates used throughout Europe
Assumed discount rate	4.0 - 6.25	4.0 - 6.25
Expected return on plan assets	4.0 - 8.0	4.0 - 8.0
Rate of increase in future compensation levels	1.75 - 5.0	1.5 - 5.5

52

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

7. TOTAL INDEBTEDNESS

Short Term Debt

Short term debt of TEUR 28,832 and TEUR 6,845 at November 30, 2001 and 2000, respectively, consists primarily of short term credit facilities and bank overdrafts. The weighted average interest rate on short term debt outstanding (in all borrowing entities across Europe) was 4.45%at November 30, 2001 and 6.0% at November 30, 2000.

At November 30, 2001, the Company had TEUR 71,996 available through multiple bank lines of credit under which the Company may borrow on an overdraft or short term basis. Interest rates are based on local money market rates.

Long Term Debt

Long term debt at November 30, 2001 and 2000 consists of the following:

	2001 TEUR		2000 TEUR
Notes	2,015		2,101
Less current maturities	(2,015	)	(84	)
	0		2,017

The note, which is denominated in Danish Kroni, has a fixed annual interest rate of 10.07 % and is due June 30, 2002.

The fair value of short and long term debt approximates the book value.

53

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

8. FINANCIAL RISK MANAGEMENT

Financial risk factors

The Company´s activities expose it to a variety of financial risks, including the effects of foreign currency exchange rates and interest rates.The Company´s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Company. Henkel-Ecolab uses derivative financial instruments such as foreign exchange contracts to hedge certain exposures.

Risk management is carried out by a central treasury department (Group Treasury) under policies approved by the Board of Directors. Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and investing excess liquidity.

Foreign exchange risk

The Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the currencies set out in the table below. The Company uses forward contracts, transacted with Group Treasury, to hedge their exposure to foreign currency risk in the local reporting currency. Group Treasury is responsible for hedging the net position in each currency by using external forward contracts.

At the group level, external foreign exchange contracts are designated as hedges of foreign exchange risk on specific assets, liabilities or future transactions.

Since the Company has subsidiaries not accounting for the results of their operations in Euro, the Euro denominated value of the equity of the Company is also exposed to fluctuations in exchange rates.

The accounts of all foreign subsidiaries and affiliates are generally measured using the local currency as the functional currency, except for two countries where, due to hyperinflation, the functional currency has been changed to the Company´s reporting currency. With the exception of the hyperinflationary countries, assets and liabilities are translated into the Company’s reporting currency, at period-end exchange rates. Income statement accounts are translated to the reporting currency at the average rates of exchange prevailing during the year.

Net unrealized exchange gains or losses resulting from such translation are excluded from net earnings and accumulated in a separate component of combined equity. Gains and losses arising from foreign currency transactions during the year and the translation adjustments from hyperinflationary countries are included in the related income statement category. Total gains and (losses) recognized for the year ended November 30, 2001 and 2000 were (2,650) and 469, respectively.

54

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

Notional Amounts and Credit Exposures of Derivatives

The notional amounts of derivatives summarized below do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure of the Company through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate to exchange rates.

Financial instruments contain an element of risk that the counterparties may not be able to meet the terms of the agreement. However, the Company minimises this risk by limiting its counterparties to major banks and financial institutions. Direct credit risk represents the risk of loss from counterparty default in relation to on-balance sheet products. Management does not expect counterparties to default given their high credit ratings.

Foreign Exchange Risk Management

The Company enters into foreign exchange contracts in managing its foreign exchange rate risks, as indicated in the following table:

	November 30, 2001		November 30, 2000
	Notional Amount TEUR	Credit Exposure TEUR	Notional Amount TEUR	Credit Exposure TEUR
Forward exchange contracts	71,579	—	52,177	—

The purpose of foreign exchange contracts purchased is to hedge various intercompany loans and hedge certain existing and anticipated future net foreign exchange exposures. The anticipated future foreign exchange exposure of the Company is the total of the net balances of all known and planned incoming and outgoing payments of the companies in foreign currencies during a twelve month time horizon.

55

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

The table below summarizes by major currency the contractual amounts of the Company´s forward exchange contracts in EURO. Foreign currency amounts are translated at rates current at the reporting date. The “buy” amounts represent the EURO equivalent of commitments to purchase foreign currencies, and the “sell” amounts represent the EURO equivalent of commitments to sell foreign currencies :

	2001		2000
	Buy TEUR	Sell TEUR	Buy TEUR	Sell TEUR
Pound Sterling/US Dollar	31,618	31,618	32,286	32,286
US Dollar/EURO	11,040	11,040	—	—
Swiss Franc/EURO	8,837	8,837	5,975	5,975
Danish Krona/EURO	5,776	5,776	—	—
Czech Krona/EURO	5,303	5,303	432	432
Pound Sterling/EURO	3,206	3,206	8,147	8,147
Swedish Krona/EURO	2,847	2,847	3,680	3,680
Norwegian Krona/EURO	1,824	1,824	658	658
Slowakian Krona/EURO	576	576	—	—
Hungarian Forint/EURO	552	552	—	—
Polish Zloty/EURO	—	—	1,000	1,000
	71,579	71,579	52,177	52,177

Interest rate risk

The Company is exposed to interest rate risk through changes in the interest expense, which arises through interest bearing liabilities. Estimated future changes in cash flows and balance sheet structure also expose the Company to interest rate risk. The individual entities of the combined company are responsible to manage their short term interest rate exposure through a group cash management system. Long term interest rate exposure is monitored and managed by Group Treasury.

Credit risk

The Company has no significant concentrations of credit risks. The Company has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. Derivative counterparties and cash transactions are limited to high credit quality financial institutions. The Company has policies that limit the amount of credit exposure to any one financial institution.

Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses. Group Treasury aims at maintaining flexibility in funding by keeping committed credit lines available.

56

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

Accounting for derivative financial instruments and hedging activities

Derivative financial instruments are initially recognized in the balance sheet at cost and subsequently are remeasured at their fair value.

Generally derivative transactions entered into by the Company, while providing effective economic hedges under the Company´s risk management policies, do not qualify for hedge accounting under the specific rules in FAS 133. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting under FAS 133 are recognised immediately in the income statement.

Fair value estimation

The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the balance sheet date.

In assessing the fair value of non-traded derivatives and other financial instruments, the Company uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date.

The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values.

57

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

9. COMMITMENTS AND CONTINGENCIES

The Company has a number of operating lease agreements primarily involving motor vehicles, computer and other office equipment. The following is a schedule by year of the future minimum lease payments required under the operating leases that have initial or remaining noncancellable lease terms in excess of one year as of November 30, 2001:

	TEUR
2002	17,591
2003	13,899
2004	9,002
2005	6,660
2006	6,067
thereafter	1,844
Total	55,063

Rent expense for the year ended November 30, 2001 and 2000, was approximately TEUR 14,941 and TEUR 14,274, respectively.

The Company is subject to lawsuits and claims arising out of the conduct of its business, including those relating to commercial transactions and environmental safety. Although the outcomes of such matters are unpredictable, management believes that the final disposition will not have a material adverse effect on the combined financial position or results of operations of the Company.

The Company’s operations and customers are located throughout Europe and operate in the industrial and institutional hygiene business. No single customer accounted for more than 10% of the Company’s sales in 2001 and 2000 and there were no significant accounts receivable from a single customer at November 30, 2001 and 2000. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

58

Henkel-Ecolab

Notes to Combined Financial Statements

November 30, 2001 and 2000

10. SUBSEQUENT EVENTS

Change in shareholders

Effective December 1^st, 2001 Ecolab aquired the 50 % of the Company owned by Henkel. After giving effect to this transaction, the Company is a wholly owned subsidiary of Ecolab.

Acquisition of Kleencare Hygiene businesses

In January 2002, the Company acquired the outstanding share of the Kleencare Hygiene operations in the United Kingdom, France, Switzerland and the Netherlands (“Kleencare”) from LHS Holdings Limited of the United Kingdom.  Kleencare specializes in hygiene services, products and systems for the food and beverage industry. The purchase price of ..approximately EUR 17.7 million (at the year end exchange rate) was financed by utilizing existing unused credit facilities. The acquisition will be accounted for as a purchase; accordingly, the purchase price will be allocated to the underlying assets and liabilities based on their respective estimated values at the date of the acquisition. Unaudited pro forma information related to this acquisition is not included as the impact of the acquisition is not deemed to be material.

59

HENKEL-ECOLAB

Schedule - Valuation and Qualifying Accounts and Reserves
(Thousands)

Description		Balance Beg. of Period	Additions (a)	Deductions from Reserve (b)	Balance, Close of Period
Period Ended November 30, 2000
Allowance for doubtful Accounts	EUR	9,740	4,008	3,180	10,568
	EUR	9,740	4,008	3,180	10,568
Period Ended November 30, 2001
Allowance for doubtful Accounts	EUR	10,568	5,702	2,396	13,874
	EUR	10,568	5,702	2,396	13,874

(a)  Provision for doubtful accounts (charged to expenses)

(b)  Items determined to be uncollectible, less recovery of amounts previously written off.

60

EXHIBIT INDEX

The following documents are filed as exhibits to this Report.

Exhibit No.			Document	Method of Filing
(3)	A.		Restated Certificate of Incorporation.	Incorporated by reference to Exhibit (3) to the Company’s Current Report on Form 8-K dated October 22, 1997.
	B.		By-Laws, as amended through February 18, 1999.	Incorporated by reference to Exhibit (3)B of the Company’s Form 10-K Annual Report, for the year ended December 31, 1998.
(4)	A.		Common Stock.	See Exhibits (3)A and (3)B.
	B.		Form of Common Stock Certificate.	Incorporated by reference to Exhibit (4)B of the Company’s Form 10-K Annual Report for the year ended December 31, 1995.
	C.	(i)	Rights Agreement dated as of February 24, 1996.	Incorporated by reference to Exhibit (4) of the Company’s Current Report on Form 8-K dated February 24, 1996.
		(ii)	Amendment, dated November 5, 2001, to the Rights Agreement dated as of February 24, 1996.	Incorporated by reference to Exhibit (1) of the Company’s Form 8A/A filed November 6, 2001.
	D.		Second Amended and Restated Stockholder’s Agreement between Henkel KGaA and Ecolab Inc., dated November 30, 2001.	Incorporated by reference to Exhibit (10) of the Company’s Current Report on Form 8-K dated November 30, 2001.

61

Exhibit No.			Document	Method of Filing
	E.		Amended and Restated Indenture dated as of January 9, 2001 between Ecolab Inc. and Bank One, N.A. (formerly known as The First National Bank of Chicago) as Trustee.	Incorporated by reference to Exhibit (4)(A) of the Company’s Current Report on Form 8-K dated January 23, 2001.
	F.		Officer’s Certificate establishing terms and conditions of 6.875% Notes due February 1, 2011.	Incorporated by reference to Exhibit 4(B) of the Company’s Current Report on Form 8-K dated January 23, 2001.
	G.		Form of 6.875% Note due February 2, 2011.	Incorporated by reference to Exhibit 4(c) of the Company’s Current Report on Form 8-K dated January 23, 2001.
	H.	(i)	Trust Deed dated 7 February 2002, constituting €300,000,000 5.375% Notes due 2007 between the Company and JPMorgan Chase Bank, London Branch.	Incorporated by reference to Exhibit (4)H(i) of the Company’s Form 10-K Annual Report for the year ended December 31, 2001.
		(ii)	Paying Agency Agreement, dated 7 February 2002, relating to €300,000,000 5.375% Note due 2007 among the Company, JPMorgan Chase Bank, London Branch, J.P. Morgan Bank Luxembourg S.A. and others.	Incorporated by reference to Exhibit (4)H(ii) of the Company’s Form 10-K Annual Report for the year ended December 31, 2001.
(10)	A	(i)	Multicurrency Credit Agreement (“Credit Agreement”) dated as of September 29, 1993, as Amended and Restated as of December 13, 2000, among the Company, the financial institutions party thereto, Citicorp USA, Inc. as Administrative Agent, Citibank International Plc, as Euro-Agent and Bank One, NA and Credit Suisse First Boston as Co-Agents.	Incorporated by reference to Exhibit (10)A of the Company’s Current Report on Form 8-K dated January 23, 2001.

62

Exhibit No.			Document	Method of Filing
		(ii)	Australian Dollar Local Currency Addendum to the Credit Agreement, dated October 17, 1997.	Incorporated by reference to Exhibit (4)B of the Company’s Form 10-Q for the quarter ended September 30, 1997.
		(iii)	Australian Dollar Local Currency Addendum dated as of June 23, 1998 among Ecolab Finance PTY Limited, Ecolab Inc., Citibank, N.A., the Local Currency Agent named therein and the Local Currency Banks party thereto.	Incorporated by reference to Exhibit (4)B of the Company’s Form 10-Q for the quarter ended June 30, 1998.
(10)	B.	(i)	Credit Agreement (364 Day Facility) dated December 7, 2001 among the Company, the Banks and Citicorp USA, Inc.	Incorporated by reference to Exhibit (99)B of the Company’s Form 8-K for the quarter ended November 30, 2001.
		(ii)	Amendment No. 1 to Credit Agreement (364 Day Facility) dated as of October 31, 2002, among the Company, the bank parties thereto (the “Banks”) and Citicorp USA, Inc. as Agent for the Banks.	Filed herewith electronically.
	C.		Ecolab Inc. 1977 Stock Incentive Plan, as amended through May 12, 2000.	Incorporated by reference to Exhibit (10)A of the Company’s Form 10-Q for the quarter ended June 30, 2000.
	D.		Ecolab Inc. 1993 Stock Incentive Plan.	Incorporated by reference to Exhibit (10)B of the Company’s Form 10-K Annual Report for the year ended December 31, 1992.
	E.	(i)	Ecolab Inc. 1997 Stock Incentive Plan, as Amended and Restated as of August 18, 2000.	Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended September 30, 2000.

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Exhibit No.			Document	Method of Filing
		(ii)	Non-Statutory Stock Option Agreement between the Company and Allan L. Schuman with respect to premium-priced option grant effective February 20, 1998 under the Ecolab Inc. 1997 Stock Incentive Plan.  Similar option grants were made to each of the named executive officers of the Company covering varying, but smaller number of shares.	Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended June 30, 1998.
	F.	(i)	1988 Non-Employee Director Stock Option Plan as amended through February 23, 1991.	Incorporated by reference to Exhibit (10)D of the Company’s Form 10-K Annual Report for the year ended December 31, 1990.
		(ii)	Amendment to 1988 Non-Employee Director Stock Option Plan effective May 11, 2001.	Filed herewith electronically.
	G.	(i)	1995 Non-Employee Director Stock Option Plan.	Incorporated by reference to Exhibit (10)D of the Company’s Form 10-K Annual Report for the year ended December 31, 1994.
		(ii)	Amendment No. 1 to 1995 Non-Employee Director Stock Option Plan effective February 25, 2000.	Incorporated by reference to Exhibit (10)E(ii) of the Company’s Form 10-K for the year ended December 31, 1999.
		(iii)	Amendment No. 2 to 1995 Non-Employee Director Stock Option Plan effective May 11, 2001.	Filed herewith electronically.

64

Exhibit No.			Document	Method of Filing
	H.		Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan.	Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended March 31, 2001.
	I.		Form of Director Indemnification Agreement dated August 11, 1989.  Substantially identical agreements are in effect as to each director of the Company.	Incorporated by reference to Exhibit (19)A of the Company’s Form 10-Q for the quarter ended September 30, 1989.
	J.	(i)	Ecolab Executive Death Benefits Plan, as amended and restated effective March 1, 1994.	Incorporated by reference to Exhibit (10)J of the Company’s 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)P hereof.
		(ii)	Amendment No. 1 to Ecolab Executive Death Benefits Plan.	Incorporated by reference to Exhibit (10)H(ii) of the Company’s 10-K Annual Report for the year ended December 31, 1998.
		(iii)	Second Declaration of Amendment to Ecolab Executive Death Benefits Plan, effective March 1, 1998.	Incorporated by reference to Exhibit (10)H(iii) of the Company’s 10-K Annual Report for the year ended December 31, 1998.
	K.		Ecolab Executive Long-Term Disability Plan, as amended and restated effective January 1, 1994.	Incorporated by reference to Exhibit (10)K of the Company’s 10-K Annual Report for the year ended December 31, 1994.  See also Exhibit (10)P hereof.
	L.		Ecolab Executive Financial Counseling Plan.	Incorporated by reference to Exhibit (10)K of the Company’s Form 10-K Annual Report for the year ended December 31, 1992.

65

Exhibit No.			Document	Method of Filing
	M.	(i)	Ecolab Supplemental Executive Retirement Plan, as amended and restated effective July 1, 1994.	Incorporated by reference to Exhibit (10)M(i) of the Company’s 10-K Annual Report for the year ended December 31, 1994.  See also Exhibit (10)P hereof.
		(ii)	First Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan effective as of July 1, 1994.	Incorporated by reference to Exhibit (10)M(ii) of the Company’s 10-K Annual Report for the year ended December 31, 1994.
		(iii)	Second Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan effective as of July 1, 1994.	Incorporated by reference to Exhibit (10)M(iii) of the Company’s Form 10-K Annual Report for the year ended December 31, 1995.
		(iv)	Third Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan, effective March 1, 1998.	Incorporated by reference to Exhibit (10)M(iii) of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.
		(v)	Fourth Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan, effective February 22, 2002.	Incorporated by reference to Exhibit (10)M(v) of the Company’s Form 10-K Annual Report for the year ended December 31, 2001.
	N.		Ecolab Mirror Savings Plan, as amended and restated effective March 1, 2002.	Filed herewith electronically.
	O.	(i)	Ecolab Mirror Pension Plan effective July 1, 1994.	Incorporated by reference to Exhibit (10)O(i) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1994.  See also Exhibit (10)P hereof.
		(ii)	First Declaration of Amendment to Ecolab Mirror Pension Plan effective as of July 1, 1994.	Incorporated by reference to Exhibit (10)O(ii) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1994.

66

Exhibit No.			Document	Method of Filing
		(iii)	Second Declaration of Amendment to Ecolab Mirror Pension Plan effective as of July 1, 1994.	Incorporated by reference to Exhibit (10)O(iii) of the Company’s Form 10-K Annual Report for the year ended December 31, 1995.
		(iv)	Third Declaration of Amendment to Ecolab Mirror Pension Plan, effective March 1, 1998.	Incorporated by reference to Exhibit (10)M(iv) of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.
		(v)	Fourth Declaration of Amendment to Ecolab Mirror Pension Plan, effective February 22, 2002.	Incorporated by reference to Exhibit (10)O(v) of the Company’s Form 10-K Annual Report for the year ended December 31, 2001.
	P.	(i)	Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans.	Incorporated by reference to Exhibit (10)P of the Company’s 10-K Annual Report for the year ended December 31, 1994.
		(ii)	Amendment No. 1 to the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans effective July 1, 1997.	Incorporated by reference to Exhibit (10)N(ii) of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.
		(iii)	First Declaration to Amendment to the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans effective November 13, 1997.	Incorporated by reference to Exhibit (10)N(iii) of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.
		(iv)	Third Declaration of Amendment to the Ecolab Inc. Administrative document for Non-Qualified Benefit Plans effective July 1, 1999.	Incorporated by reference to Exhibit (10)N(iv) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.

67

Exhibit No.			Document	Method of Filing
		(v)	Fourth Declaration of Amendment to Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans, effective February 22, 2002.	Incorporated by reference to Exhibit (10)P(v) of the Company’s Form 10-K Annual Report for the year ended December 31, 2001.
	Q.		1999 Ecolab Inc. Management Performance Incentive Plan.	Incorporated by reference to Exhibit (10)O of the Company’s Form 10-K Annual Report for the year ended December 31, 1998.
	R.		Ecolab Inc. Change in Control Severance Compensation Policy.	Incorporated by reference to Exhibit (10)R of the Company’s Form 10-K Annual Report for the year ended December 31, 2001.
	S.	(i)	Master Agreement, dated as of December 7, 2000, between Ecolab Inc. and Henkel KGaA.	Incorporated by reference to Exhibit 18 of HC Investments, Inc.’s and Henkel KGaA’s Amendment No. 5 to Schedule 13D dated July 16, 1991.
		(ii)	Amendment No. 1 to the Master Agreement, dated December 7, 2000, between Ecolab Inc. and Henkel KGaA	Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended September 30, 2001.
		(iii)	Intellectual Property Agreement dated November 30, 2001, between Ecolab Inc. and Henkel KGaA.	Incorporated by reference to Exhibit (10) of the Company’s Current Report on Form 8-K dated November 30, 2001.

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Exhibit No.			Document	Method of Filing
	T.		Description of Ecolab Management Incentive Plan.	Incorporated by reference to Exhibit (10)R of the Company’s Form 10-K for the year ended December 31, 2001.
	U.	(i)	Hiring Letter of Bruno Deschamps.	Incorporated by reference to Exhibit (10)T of the Company’s Form 10-K for the year ended December 31, 2000.
		(ii)	Separation Agreement between the Company and Bruno Deschamps effective March 11, 2002.	Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended March 31, 2002.
	V.		Ecolab Inc. 2002 Stock Incentive Plan.	Incorporated by reference to Exhibit (10) of the Company’s Form 10-Q for the quarter ended June 30, 2002.
(13)			Those portions of the Company’s Annual Report to Stockholders for the year ended December 31, 2001 which are incorporated by reference into Parts I, II and IV hereof.	Filed herewith electronically.
(21)			List of Subsidiaries as of February 28, 2003.	Filed herewith electronically.
(23)	A.		Consent of PricewaterhouseCoopers LLP to Incorporation by Reference at page 34 hereof is filed as a part hereof.	See page 34 hereof.
	B.		Consent of PricewaterhouseCoopers Gesellschaft mit beschränkter Haftung Wirtschaftsprüfungsgesellschaft.	Filed herewith electronically.
(24)			Powers of Attorney.	Filed herewith electronically.
(99)			Certifications of Chief Executive Officer and Chief Financial Officer.	Filed herewith electronically.
COVER			Cover Letter.	Filed herewith electronically.

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EX-10.BII

Exhibit (10)B(ii)

AMENDMENT NO. 1

to

CREDIT AGREEMENT (364 Day Facility)

Dated as of October 31, 2002

This AMENDMENT NO. 1 TO CREDIT AGREEMENT (“Amendment”), dated as of October 31, 2002, is entered into by and among Ecolab Inc., a Delaware corporation (the “Borrower”), the financial institutions party hereto (the “Banks”), and Citicorp USA, Inc. (“Citicorp”), as administrative agent (the “Agent”) for the Banks.  Each capitalized term used herein and not defined herein shall have the meaning ascribed thereto in the below-defined “Credit Agreement”.

PRELIMINARY STATEMENT

The Borrower, the Banks, and the Agent are parties to the Credit Agreement (364 Day Facility) dated as of December 7, 2001 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”).  The Borrower, the Banks and the Agent have agreed to amend the Credit Agreement pursuant to the terms of this Amendment.

SECTION 1.  Amendment to the Credit Agreement.  Effective as of the date hereof, subject to the satisfaction of the condition precedent set forth in Section 2 below, the Credit Agreement is hereby amended as follows:

(a)  The definition of “Stated Termination Date” is hereby amended by deleting “December 6, 2002” and substituting “October 30, 2003” therefor.

(b)  Section 2.01(a) of the Credit Agreement is amended by deleting the words “on the signature pages hereof” from the last sentence thereof, and substituting therefor “on Schedule II hereto”.

(c)  Section 2.19(a) of the Credit Agreement is amended by deleting the existing reference therein to “60 days” and substituting “45 days” therefor, and by deleting the existing reference therein to “45 days” and substituting “30 days” therefor.

(d)  Section 7.05 of the Credit Agreement is amended by deleting the word “accounts” from the first sentence thereof, and substituting the word “amounts” therefor.

(e)  The proviso to Section 9.01 of the Credit Agreement is amended (i) by inserting “(i)” immediately after “following:” and immediately before the word “waive” in clause (a) thereof; (ii) by inserting the words “change the definition of Majority Banks or” immediately after “(v)” in clause (a) thereof; and (iii) deleting the semi-colon at the end of such Section and substituting a period therefor.

(f)  A new Schedule II, entitled “Commitments”, is added, in the form attached to this Amendment.

SECTION 2.  Condition Precedent.  This Amendment shall become effective and be deemed effective as of the date hereof (or if such items are not received until a later date, on such later date) upon the Agent’s receipt of duly executed originals of this Amendment from the Borrower and each Bank.

SECTION 3.  Covenants, Representations and Warranties of the Borrower.

3.1  Upon the effectiveness of this Amendment, the Borrower hereby reaffirms all covenants, representations and warranties made by it in the Credit Agreement, as amended hereby, and agrees that all such covenants, representations and warranties shall be deemed to have been re-made as of the effective date of this Amendment.

3.2  The Borrower hereby represents and warrants that (i) this Amendment constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditor’s rights generally and by the effect of general principles of equity and (ii) upon the effectiveness of this Amendment, no Event of Default shall exist with respect to the Borrower and no event shall exist which, with the giving of notice, the lapse of time or both, would constitute an Event of Default with respect to the Borrower.

SECTION 4.  Reference to and Effect on the Credit Agreement.

4.1  Upon the effectiveness of this Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of like import shall mean and be a reference to the Credit Agreement, as amended hereby, and each reference to the Credit Agreement in any other document, instrument or agreement executed and/or delivered in connection with the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby.

4.2  Except as specifically amended above, the Credit Agreement, the Notes and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed.

4.3  The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of any party under the Credit Agreement, the Notes or any other document, instrument or agreement executed in connection therewith, nor constitute a waiver of any provision contained therein, except as specifically set forth herein.

2

SECTION 5.  Execution in Counterparts.  This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument.

SECTION 6.  Governing Law.  This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York.

SECTION 7.  Headings.  Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

The remainder of this page is intentionally blank.

3

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

ECOLAB INC.
By:	/s/ Mark D. Vangsgard
	Mark D. Vangsgard
Title:		Vice President and Treasurer
CITICORP USA, INC., as Administrative Agent
By:	/s/ Mary O’Connell
	Mary O’Connell
Title:		Vice President

Ecolab Amendment No. 1 Signature Page 1

Banks
CITICORP USA, INC.
By:	/s/ Mary O’Connell
	Mary O’Connell
Title:		Director

Ecolab Amendment No. 1 Signature Page 2

JPMORGAN CHASE BANK
By:	/s/ Robert P. Kellas
	Robert P. Kellas
Title:		Vice President

Ecolab Amendment No. 1 Signature Page 3

CREDIT SUISSE FIRST BOSTON
By:	/s/ Karl Studer
	Karl Studer
Title:		Director
By:	/s/ Albert Heer
	Albert Heer
Title:		Vice President

Ecolab Amendment No. 1 Signature Page 4

BANK ONE, NA (Main Office Chicago)
By:	/s/ Jenny A. Gilpin
	Jenny A. Gilpin
Title:		Director, Capital Markets

Ecolab Amendment No. 1 Signature Page 5

WELLS FARGO BANK, NATIONAL ASSOCIATION
By:	/s/ Molly S. Van Metre
	Molly S. Van Metre
Title:		Vice President and Senior Banker
By:	/s/ James D. Heinz
	James D. Heinz
Title:		Senior Vice President

Ecolab Amendment No. 1 Signature Page 6

WACHOVIA BANK, N.A.
By:	/s/ Elizabeth Witherspoon
	Elizabeth Witherspoon
Title:		Vice President

Ecolab Amendment No. 1 Signature Page 7

BANK OF AMERICA, N.A.
By:	/s/ Donald J. Chin
	Donald J. Chin
Title:		Managing Director

Ecolab Amendment No.1 Signature Page 8

SCHEDULE II

Commitments

Institution	Commitments
Citicorp USA, Inc.	$	35,000,000
JPMorgan Chase Bank	$	35,000,000
Credit Suisse First Boston	$	32,000,000
Bank One, NA (Main Office Chicago)	$	21,000,000
Wells Fargo Bank, National Association	$	21,000,000
Wachovia Bank, N.A.	$	21,000,000
Bank of America, N.A.	$	10,000,000
Total	$	175,000,000

EX-10.FII

Exhibit (10)F(ii)

ECOLAB INC.

1988 NON-EMPLOYEE DIRECTOR

STOCK OPTION PLAN

AMENDMENT

Pursuant to Paragraph 7 of the Ecolab Inc. 1988 Non-Employee Director Stock Option Plan (“Plan”) and resolutions of the Company’s Board of Directors, dated May 11, 2001, the Company amends the Plan as set forth below.  Words and phrases used herein with initial capital letters which are defined in the Plan are used herein as so defined.

1.Section 5(b)(iv) of the Plan is amended in its entirety to read as follows:

“(iv)  Manner of Option Exercise.  An Option may be exercised by an Optionee in whole or in part from time to time, subject to the conditions contained in the Plan and in the agreement evidencing such Option, by giving written notice of exercise to the Company at its principal executive office (such notice to specify the particular Option that is being exercised and the number of shares with respect to which the Option is being exercised) accompanied by payment, of the total purchase price of the shares to be purchased under the Option.  The total purchase price of the shares may be paid entirely in case (including check, bank draft or money order), by tendering a broker exercise notice, by tendering shares or attesting to ownership thereof of Common Stock already owned by the Optionee (“Previously Acquired Shares”) or by a combination thereof; provided, however, that any such Previously Acquired Shares so tendered or attested to by an Optionee must be “mature” shares, as such term may be defined from time to time by the Financial Accounting Standards Board or any successor body and otherwise acceptable to avoid a charge or expense for the purposes of financial reporting.  For purposes of such payment, Previously Acquired Shares will be valued at their Fair Market Value on the exercise date.  The Company shall not be required to sell or issue any shares under any outstanding Option if, in the sole opinion of the Committee, the issuance of such shares would constitute a violation by the Optionee or the Company of any applicable law or regulation of any governmental authority, including without limitation federal and state securities laws.”

2.Section 5(b)(vii) of the Plan is amended in its entirety to read as follows:

“(vii)  Withholding.  The Company may require an Optionee to promptly pay the Company the amount of any federal, state or local withholding tax attributable to the Optionee’s exercise of an Option before acting on the Optionee’s notice of exercise of the Option.  An Optionee may satisfy any such withholding tax obligation by tendering a broker exercise notice, by tendering or attesting to ownership of Previously Acquired Shares, by electing to withhold shares of Common Stock that are to be issued upon exercise of an Option, or by a combination of such methods, provided that (i) amounts withheld shall not exceed the Company’s statutory minimum withholding obligation for federal and state tax purposes, including payroll taxes, and (ii) any use of Previously Acquired Shares or withholding shall be otherwise acceptable to avoid a charge or expense for financial reporting purposes.  For purposes of satisfying an Optionee’s withholding tax obligation, Previously Acquired Shares tendered or covered by an attestation and shares withheld shall be valued at their Fair Market Value on the exercise date.”

3.This amendment shall be effective as of May 11, 2001.

IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its authorized officers and its corporate seal affixed, as of May 11, 2001.

		ECOLAB INC.
(Seal)		By:	/s/ Lawrence T. Bell
			Lawrence T. Bell Senior Vice President-Law and General Counsel
Attest:	/s/ Sheila B. Holt
	Sheila B. Holt

2

EX-10.GIII

Exhibit (10)G(iii)

ECOLAB INC.

1995 NON-EMPLOYEE DIRECTOR

STOCK OPTION PLAN

AMENDMENT NO. 2

Pursuant to Paragraph 7 of the Ecolab Inc. 1995 Non-Employee Director Stock Option Plan (“Plan”) and resolutions of the Company’s Board of Directors, dated May 11, 2001, the Company amends the Plan as set forth below.  Words and phrases used herein with initial capital letters which are defined in the Plan are used here as so defined.

1.Section 5(b)(vi) of the Plan is amended in its entirety to read as follows:

“(vi)  Payment of Exercise Price.  The total purchase price of the shares to be purchased may be paid entirely in cash (including check, bank draft or money order), by tendering a broker exercise notice, by tendering, or by attestation as to ownership of, shares of the Company’s Common Stock already owned by the Optionee (“Previously Acquired Shares”), or by a combination thereof; provided, however, that any such Previously Acquired Shares tendered or attested to by an Optionee must be “mature” shares, as such term may be defined from time-to-time by the Financial Accounting Standards Board or any successor body and otherwise acceptable to avoid a charge or expense for the purposes of financial reporting.  For purposes of such payment, Previously Acquired Shares will be valued at their Fair Market Value on the exercise date.”

2.Section 5(b)(ix) of the Plan is amended in its entirety to read as follows:

“(ix)  Withholding.  The Company may require an Optionee to promptly pay the Company the amount of any federal, state or local withholding or other employee-related tax attributable to the Optionee’s exercise of an Option before acting on the Optionee’s notice of exercise of the Option.  An Optionee may satisfy any such withholding or employment-related tax obligation by tendering a broker exercise notice, by tendering or attesting to ownership of Previously Acquired Shares or by electing to withhold shares of Common Stock that are to be issued upon exercise of an Option, or by a combination of such methods, provided that (i) amounts withheld shall not exceed the Company’s statutory minimum withholding obligation for federal and state tax purposes, including payroll taxes, and (ii) any use of Previously Acquired Shares or withholding shall be otherwise acceptable to avoid a charge or expense for financial reporting purposes.  For purposes of satisfying an Optionee’s withholding or employment-related tax obligation,

Previously Acquired Shares tendered or covered by an attestation and shares withheld shall be valued at their Fair Market Value on the exercise date.”

3.This amendment shall be effective as of May 11, 2001.

IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its authorized officers and its corporate seal affixed, as of May 11, 2001.

		ECOLAB INC.
(Seal)		By:	/s/ Lawrence T. Bell
			Lawrence T. Bell Senior Vice President-Law and General Counsel
Attest:	/s/ Sheila B. Holt
	Sheila B. Holt

2

EX-10.N

Exhibit (10)N

ECOLAB MIRROR SAVINGS PLAN

(As Amended and Restated Effective as of March 1, 2002)

Pursuant to Section 1.3 of the Ecolab Mirror Savings Plan and Section 5.1 of the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans (the “Plan”), Ecolab Inc. (the “Company”) hereby amends and restates the Plan in its entirety to read as follows:

ARTICLE I

PREFACE

SECTION 1.1.  Effective Date.  The effective date of this restatement of the Plan is March 1, 2002.  The benefit, if any, payable with respect to a former Executive who terminated employment prior to the Effective Date (and who is not rehired by a member of the Controlled Group thereafter) shall be determined by, and paid in accordance with, the terms and provisions of the Plan as in effect prior to the Effective Date.

SECTION 1.2.  Purpose of the Plan.  The purpose of this Plan is to provide additional deferred compensation benefits for certain management and highly compensated employees who perform management and professional functions for the Company and certain related entities.

SECTION 1.3.  Administrative Document.  This Plan includes the Ecolab Inc. Administrative Document for Non-Qualified Plans (the “Administrative Document”), which is incorporated herein by reference.

ARTICLE II

DEFINITIONS

Words and phrases when used herein with initial capital letters which are defined in the Savings Plan or the Administrative Document are used herein as so defined, unless otherwise specifically defined herein or the context clearly indicates otherwise.  The following words and phrases when used in this Plan with initial capital letters shall have the following respective meanings, unless the context clearly indicates otherwise:

SECTION 2.1.  “Account” shall mean the record maintained in accordance with Section 3.4 by the Company for each Executive’s Mirror Savings Benefit.

SECTION 2.2.  “Base Salary” shall mean an Executive’s base salary for the Plan Year (including, for this purpose, any salary reductions caused as a result of participation (1) in an Employer-sponsored plan which is governed by Sections 401(k), 132(f)(4) or 125 of the Code or (2) in this Plan).

SECTION 2.3.  “Bonus.” An Executive’s Bonus for a Plan Year is equal to the sum of (1) the annual cash incentive bonus under the Company’s Management Incentive Plan and/or, if applicable, the Company’s Management Performance Incentive Plan, and (2) any similar annual cash incentive bonus under any other equivalent Employer-sponsored bonus program (as determined by the Administrator), which, in either case, is earned with respect to services performed by the Executive during such Plan Year, whether or not such Bonus is actually paid to

1

the Executive during such Plan Year.  An election to defer a Bonus under this Plan must be made before the period in which the service is performed which gives rise to such Bonus.

SECTION 2.4.  “Death Beneficiary.”

(1)The term “Death Beneficiary” shall mean the person or persons designated by the Executive to receive Mirror Savings Benefits hereunder in the event of his death.  The designation of a Death Beneficiary under the Plan may be made, and may be revoked or changed only by an instrument (in form prescribed by Administrator) signed by the Executive and delivered to the Administrator during the Executive’s lifetime.  If the Executive is married on the date of his death and has been married to such spouse throughout the one-year period ending on the date of death, his designation of a Death Beneficiary other than, or in addition to, his spouse under the Plan shall not be effective unless such spouse has consented in writing to such designation.

(2)Any Mirror Savings Benefits remaining to be paid after the death of a Death Beneficiary shall be paid to the Death Beneficiary’s estate, except as otherwise provided in the Executive’s Death Beneficiary designation.

SECTION 2.5.  “Disability” or “Disabled.” An Executive shall be deemed to have a “Disability” or be “Disabled” if the Executive’s active employment with an Employer ceased due to a disability that entitles the Executive to benefits under (1) any long-term disability plan sponsored by the Company, or (2) in the event that the Executive is not a participant in any such plan, the Social Security Act of the United States.

SECTION 2.6.  “Executive” shall mean an Employee (1) who is in a pay grade of 24 or above or whose Annual Compensation (excluding severance pay) for the preceding Plan Year exceeds the limitation described in Code Section 401(a)(17), and (2) who is selected by the Administrator to participate in the Plan.  Once an Employee has satisfied the requirements of an Executive and commenced participation in the Plan, his participation may continue, notwithstanding the fact that his Annual Compensation is reduced below the limitation described in Code Section 401(a)(17), until the Administrator determines, in his or her sole discretion, that the Employee would fail to satisfy the requirements of a “management or highly compensated employee” under ERISA.

SECTION 2.7.  “Executive Deferrals” shall mean the amounts described in Section 3.1.

SECTION 2.8.  “Hypothetical Investment Fund” shall mean the investment funds designated by the Company pursuant to Section 6.1.

SECTION 2.9.  “Insolvent.”  For purposes of this Plan, an Employer shall be considered Insolvent at such time as it (1) is unable to pay its debts as they mature, or (2) is subject to a pending voluntary or involuntary proceeding as a debtor under the United States Bankruptcy Code.

SECTION 2.10.  “Matching Contributions” shall mean the amounts described in Section 3.3.

2

SECTION 2.11.  “Minimum Benefit” shall mean the sum of the portions of the Executive’s Account attributable to (1) his or her Account balance as of September 1, 1994, and (2) any deferral of his Bonus payable with respect to calendar 1994 and the Matching Contribution thereon.

SECTION 2.12.  “Mirror Savings Benefit.” An Executive’s Mirror Savings Benefit at any particular time shall be equal to the vested amounts credited to his Account at such time, as determined under Articles III and V.

SECTION 2.13.  “Plan” shall mean the Ecolab Mirror Savings Plan, as described herein and as it may be amended from time to time.

SECTION 2.14.  “Savings Plan” shall mean the Ecolab Savings Plan and ESOP, as such plan may be amended from time to time.

SECTION 2.15.  “Unforeseeable Emergency” shall mean an event which results (or will result) in severe financial hardship to the Executive as a consequence of an unexpected illness or accident or loss of the Executive’s property due to casualty or other similar extraordinary or unforeseen circumstances out of the control of the Executive.

ARTICLE III

MIRROR SAVINGS BENEFIT

SECTION 3.1.  Amount of Executive Deferrals.  Each Executive may, within 30 days after the Plan becomes effective as to him and prior to the first day of any Plan year thereafter, by written notice to the Administrator on a form provided by the Administrator, direct his Employer:

(1)to reduce (in accordance with rules established by the Administrator) the Executive’s Base Salary for the balance of the Plan Year in which the Plan becomes effective as to him (but only with respect to Base Salary payable for periods of service commencing after the Executive so directs) or for any following Plan Year (i) by a specified dollar amount or percentage, and/or (ii) by an amount determined by the Administrator which is necessary for the Executive to receive the maximum Matching Contributions under the Savings Plan and this Plan (limited to a maximum Salary Deferral of 25% of the Executive’s Base Salary in the deferral period) (the “Salary Deferrals”), and

(2)to reduce (in accordance with rules established by the Administrator) the Executive’s Bonus which is earned during the Plan Year (i) by a specified dollar amount or percentage, and/or (ii) by an amount determined by the Administrator which is necessary for the Executive to receive the maximum Matching Contribution on such Bonus under this Plan, as defined in Section 3.3(2) (limited to a maximum Bonus Deferral of 25% of the Executive’s Bonus) (the “Bonus Deferrals”), and

(3)to credit the amounts described in paragraphs (a) and (b) of this Subsection (collectively, the “Executive Deferrals”) to the Account described in Section 3.4 at the times described therein.

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SECTION 3.2.  Effect and Duration of Direction Pursuant to Section 3.1.

(1)Plan Year to Plan Year.  Any direction by an Executive to make Executive Deferrals under Section 3.1 shall be effective with respect to the Base Salary and Bonus otherwise earned by the Executive with respect the period to which the direction relates, and the Executive shall not be eligible to receive such Executive Deferrals.  Instead, such Executive Deferrals shall be credited to the Executive’s Account as provided in Section 3.4.  Any such direction made in accordance with Section 3.1 shall remain in effect for subsequent periods described in Section 3.1 unless terminated by the Executive by written notice to the Administrator, on a form provided by the Administrator, prior to the first day of such subsequent period.

(2)Automatic Termination/Suspension of Deferral Election.

(a)An Executive’s direction pursuant to section 3.1 shall automatically terminate on (i) the date the Executive ceases employment with the Employers, (ii) the date on which the Executive’s Employer is deemed Insolvent, or (iii) the date the Plan is terminated.

(b)An Executive’s direction pursuant to Section 3.1 shall automatically be suspended from the first day of the first payroll period in which the Executive receives a hardship distribution under the Savings Plan until the six-month anniversary date of such hardship distribution.  Despite such suspension, such an Executive shall still be required to submit a deferral election with respect to a subsequent Plan Year at the time described in Section 3.1.

SECTION 3.3.  Matching Contributions.

(1)Matching Contributions With Respect to Salary Deferrals.

(a)The Employers shall credit the Account of an Executive with an amount (the “Matching Contributions”) equal to the sum of (1) 100% of the Salary Deferrals which are allocated to an Executive’s Account during a Plan Year and which do not exceed 3% of the Executive’s Base Salary and (2) 50% of the Salary Deferrals which are allocated to an Executive’s Account during a Plan Year and which exceed 3% of the Executive’s Base Salary but do not exceed 5% of the Executive’s Base Salary; provided, however, that such Matching Contributions shall be reduced by the maximum amount of matching contributions that could be made to the Executive’s account under the Savings Plan for such Plan Year (as determined by the Administrator).

(b)The Employers shall also credit the Account of an Executive with an additional Matching Contribution in an amount determined by the Administrator, which amount is equal to the amount of matching contributions (plus earnings allocable thereto) which the Executive is required to forfeit under the Savings Plan due to the application of the before-tax nondiscrimination requirements of the Code (the “True-Up Matching Contributions”).

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(2)Matching Contributions With Respect to Bonus Deferrals.  The Employers shall credit the Account of an Executive with a Matching Contribution equal to 100% of the first 3% of Bonus Deferrals and 50% of the next 2% of Bonus Deferrals, which Bonus Deferrals do not exceed the lesser of (i) the applicable percentage (as specified in this Section 3.3(2)) of the Executive’s Bonus or (ii) the excess of the Executive’s Base Salary and Bonus in respect to the Plan Year in which the Bonus was earned (excluding severance) over the maximum compensation which could be considered under the Savings Plan in such Plan Year under Section 401(a)(17) of the Code.

SECTION 3.4.  Executives’ Accounts.  Each Employer shall establish and maintain on its books an Account for each Executive which shall contain the following entries:

(1)Credits for the Executive Deferrals described in Section 3.1, which Executive Deferrals shall be credited to the Executive’s Account at the time such Executive Deferrals would otherwise have been paid to the Executive;

(2)Credits for the Matching Contributions described in Section 3.3(1)(a), which Matching Contributions shall be credited to the Executive’s Account at the same time as the underlying Salary Deferrals are credited thereto; but no earlier than when the Executive has received (or has been deemed to receive) the maximum Matching Contribution available under the Savings Plan (as determined by the Administrator);

(3)Credits for the True-Up Matching Contributions described in Section 3.3(1)(b) at the time designated by the Administrator following the end of the Plan Year when the nondiscrimination test results under the Savings Plan are known;

(4)Credits for the Matching Contributions described in Section 3.3(2), which Matching Contributions shall be credited to the Executive’s Account at the same time as the underlying Bonus Deferrals are credited thereto;

(5)Credits or charges (including income, expenses, gains and losses) equal to the amounts which would have been attributable to the Executive Deferrals and Matching Contributions if such amounts had been invested on a tax deferred basis in the Hypothetical Investment Fund(s) in which such amounts are deemed to have been invested under Section 6.1.  The entries provided by this Subsection (5) shall continue to be made until the Executive’s entire vested Account has been distributed pursuant to Article IV; and

(6)Debits for any distributions made from the Account pursuant to Article IV.

SECTION 3.5.  Statement of Account.  The Company shall deliver to each Executive a written statement of his Account not less frequently than annually as of the end of each Plan Year.

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ARTICLE IV

PAYMENT OF MIRROR SAVINGS BENEFITS

SECTION 4.1.  Time of Payment.

(1)Payment to Executives.

(a)An Executive shall be entitled to receive the vested portion of his Account upon the earlier of his becoming Disabled or his termination of employment with the Controlled Group for any reason (including retirement).

(b)Notwithstanding the foregoing, the Company may at any time, upon written request of the Executive, cause to be paid to such Executive an amount equal to all or any part of the Executive’s vested Account, other than the portion of his or her Account attributable to Matching Contributions, if the Administrator determines, in its sole and absolute discretion based on such reasonable evidence as it may require, that such a payment or payments is necessary for the purpose of alleviating the consequences of an Unforeseeable Emergency.  Payments made on account of an Unforeseeable Emergency shall be permitted only to the extent reasonably necessary to satisfy the emergency need and may not be made to the extent such Unforeseeable Emergency is or may be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Executive’s assets (to the extent such liquidation would not itself cause severe financial hardship) or by cessation of the Executive Deferrals under this Plan.

(c)Notwithstanding any provision of the Plan to the contrary, if the payment of all or any portion of an Executive’s Account would, in the sole opinion of the Company on the advice of its counsel, result in a profit recoverable by the Company under Section 16(b) of the Securities Exchange Act of 1934, but for the operation of this paragraph, then such payment (or portion thereof) shall be deferred and made at the earliest time that such payment (or portion thereof) would no longer be subject to Section 16(b).

(2)Payment to Death Beneficiaries.  The Death Beneficiary of a deceased Executive shall be entitled to receive the vested Account of the Executive upon the death of the Executive.

(3)Payment Date.  The vested portion of an executive’s Account shall be distributed (or commence to be distributed) to the Executive or Death Beneficiary entitled thereto pursuant to Subsection (1) or (2) of this Section as soon as practicable following the date on which the Executive or Death Beneficiary becomes entitled to such distribution.

SECTION 4.2.  Form of Payment.

(1)Payment in Cash.  All distributions under the Plan shall be made in the form of cash.

(2)Normal Forms of Payment.

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(a)Payments to Executives.  The Mirror Savings Benefit shall be distributed to the Executive in the form of a single lump sum payment.

(b)Payments to Death Beneficiaries.  An Executive’s Mirror Savings Benefit (or the remaining installments thereof if payment to the Executive had commenced) shall be distributed to his or her Death Beneficiary in the form of a single lump sum payment.

(c)Small Benefits.  Notwithstanding any provision of the Plan to the contrary, in the event that an Executive’s Mirror Savings Benefit does not exceed $25,000, such Benefit shall be paid to the Executive in the form of a single lump sum payment.

(d)Payment of Minimum Benefits.  Notwithstanding the foregoing, an Executive’s Minimum Benefit shall be paid in the form previously elected by the Executive and such election shall remain in full force and effect after the Effective Date.

(3)Optional Forms of Payment for Executives.

(a)In General.  An Executive who does not want his or her Mirror Savings Benefit to be paid in the normal form of benefit described in paragraph (a) of Subsection (2) of this Section may elect to receive his Mirror Savings Benefit in the form of annual installment payments payable over a period not exceeding ten years (as elected by the Executive).

(b)Form/Timing of Election.  Any election of an optional form of benefit must be in writing (on a form provided by the Administrator) and filed with the Administrator prior to the Executive’s termination of employment with the Controlled Group because of involuntary termination, death or Disability or at least one (1) year prior to the Executive’s voluntary termination of employment or retirement.  Any such election may be changed at any time and from time to time without the consent of any other person (except as described in Section 2.4), by filing a later signed written election with the Administrator; provided that any election made less than one (1) year prior to the Executive’s voluntary termination of employment shall not be valid, and in such case, payment shall be made in the normal form as provided in Section 4.2(2).

ARTICLE V

VESTING

SECTION 5.1.  Vesting.

(1)In General.  An Executive shall always be 100% vested in both his Executive Deferrals and his Minimum Benefit under the Plan.  Subject to the provisions of Subsection (2) of this Section, an Executive who is credited with an Hour of Service on or after March 1, 2002 shall be immediately 100% vested in all Matching Contributions hereunder.

(2)Forfeiture Provisions.

(a)Notwithstanding the provisions of Subsection (1) hereof, but subject to the requirements of clause (b) of this Subsection, the Employers shall be relieved of any obligation

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to pay or provide any future Mirror Savings Plan Benefits under this Plan and shall be entitled to recover amounts already distributed if, without the written consent of the Company, the Executive, whether before or after termination with the Controlled Group (i) participates in dishonesty, fraud, misrepresentation, embezzlement or deliberate injury or attempted injury, in each case related to the Company or a Controlled Group member, (ii) commits any unlawful or criminal activity of a serious nature, (iii) commits any intentional and deliberate breach of a duty or duties that, individually or in the aggregate, are material in relation to the Executive’s overall duties or (iv) materially breaches any confidentiality or noncompete agreement entered into with the Company or a Controlled Group member.  The Employers shall have the burden of proving that one of the foregoing events have occurred.  Notwithstanding the foregoing, the provisions of this Subsection 2(a) shall not apply to an Executive’s Minimum Benefit or the portion of the Executive’s Account which is attributable to his Executive Deferrals.

(b)Notwithstanding the foregoing, an Executive shall not forfeit any portion of his Mirror Savings Plan Benefits under clause (a) of this Subsection unless (i) the Executive receives reasonable notice in writing setting forth the grounds for the forfeiture, (ii) if requested by the Executive, the Executive (and/or the Executive’s counsel or other representative) is granted a hearing before the full Board of Directors of the Company (the “Board”) and (iii) a majority of the members of the full Board determine that the Executive violated one or more of the provisions of clause (a) of this Subsection.

ARTICLE VI

INVESTMENT OF ACCOUNTS

SECTION 6.1.  Hypothetical Investment Funds.

(1)Hypothetical Investment Fund for Matching Contributions.

(a)Except as described in Clause (b) below, the Company has designated the Ecolab Stock Fund under the Savings Plan as the Hypothetical Investment Fund for Matching Contributions.  Matching Contributions shall be deemed to have been invested in the Ecolab Stock Fund for purposes of crediting earnings and losses to the portion of the Executive’s Account which is attributable to Matching Contributions.  Earnings on any amounts deemed to  have been invested in the Ecolab Stock Fund shall be deemed to have been reinvested in the Ecolab Stock Fund.

(b)Notwithstanding the foregoing, for Executives who are subject to Section 16(b) of the Securities Exchange Act of 1934, Matching Contributions made on or after the date of the execution of this restatement of the Plan and which are made on or after the Executive becomes subject to Section 16(b) of the Securities Exchange Act of 1934 shall be deemed to be made in cash and will be deemed to be invested in accordance with the Hypothetical Investment Fund election(s) in effect from time to time for Executive Deferrals under Subsection (2) below.

(c)Notwithstanding further, any Executive who has completed at least 10 years of service and who has attained age 55 (other than an Executive who is subject to Section 16(b) of the Securities Exchange Act of 1934 (an “Eligible Executive”) may, during each election period described below, elect to designate one or more of the Investment Funds under the Savings Plan

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(other than the Ecolab Stock Fund) as the Hypothetical Investment Fund for Matching Contributions, for that part of his Account which (a) is attributable to Matching Contributions and (b) does not exceed the maximum portion described below.  Each Eligible Executive shall have six election periods, which will be the six consecutive Plan Years commencing with the Plan  Year next following the Plan Year in which the Eligible Executive attains age 55 or completes 10 years of service, whichever last occurs.  In each of the first five election periods, the maximum portion of the Eligible Executive’s Account balance that may be transferred to the other Investment Funds will be the excess of (i) 25% of the sum of the current portion of the Eligible Executive’s Account which is attributable to Matching Contributions (including earnings) over (ii) the total amounts previously transferred pursuant to this election.  In the sixth election period, the maximum portion of the Eligible Executive’s Account balance that may be transferred will be 50% of such excess.  An Eligible Executive may only make one transfer election during each election period and the election may be made at any time during the election period.  Transfer elections hereunder shall be made in accordance with rules established by the Administrator.

(2)Hypothetical Investment Funds for Executive Deferrals.  The Hypothetical Investment Funds for purposes of the portion of an Executive’s Account which is attributable to his Executive Deferrals shall be those same Investment Funds designated by the Company from time to time under the Savings Plan.  Each Executive (or his Death Beneficiary) may elect, in a manner prescribed by the Administrator from time to time, one or more Hypothetical Investment Funds in which his Executive Deferrals are deemed to have been invested for purposes of crediting earnings and losses to the portion of the Executive’s Account which is attributable to Executive Deferrals.  The Company may deem an Executive’s Executive Deferrals to have been invested in the Hypothetical Investment Fund elected by the Executive, if any, or may instead, in its sole discretion, deem such Executive Deferrals to have been invested in one or more Hypothetical Investment Funds selected by the Company.  Earnings on any amounts deemed to have been invested in any Hypothetical Investment Fund shall be deemed to have been reinvested in such Hypothetical Investment Fund.  Notwithstanding the foregoing, any Executive who is subject to Section 16(b) of the Securities Exchange Act of 1934 may not elect and shall not be deemed to have directed any Executive Deferrals to the Ecolab Stock Fund.  An Executive shall be deemed, on the day prior to becoming subject to Section 16(b) or at such other time as he is subject to Section 16(b), to have elected to have Executive Deferrals then deemed to be invested in the Ecolab Stock Fund invested in the Hypothetical Investment Fund known as the Fidelity Retirement Money Market Portfolio unless another permitted election is in place.

(3) Expenses of Hypothetical Investment Funds.  The Hypothetical Investment Funds shall bear and be charged with actual or hypothetical expenses to the same extent that the corresponding Ecolab Stock Fund and other Investment Funds in the Savings Plan bear and are charged with such expenses, as determined by the Administrator.

ARTICLE VII

MISCELLANEOUS

SECTION 7.1.  Effect of Amendment and Termination.  Notwithstanding any provision of the Plan (including the Administrative Document) to the contrary, no amendment or termination of the Plan shall, without the consent of the Executive (or, in the case of his death, his Death

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Beneficiary), adversely affect the vested Account under the Plan of any Executive or Death Beneficiary as such Account exists on the date of such amendment or termination.

SECTION 7.2.  Limitation on Payments and Benefits.  Notwithstanding any provision of this Plan to the contrary, if any amount or benefit to be paid or provided under this Plan or any other plan or agreement between the Executive and a Controlled Group member would be an “Excess Parachute Payment,” within the meaning of Section 280G of the Code, or any successor provision thereto, but for the application of this sentence, then the payments and benefits to be paid or provided under this Plan shall be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any such payment or benefit, as so reduced, constitutes an Excess Parachute Payment; provided, however, that the foregoing reduction shall be made only if and to the extent that such reduction would result in an increase in the aggregate payment and benefits to be provided to the Executive, determined on an after-tax basis (taking into account the excise tax imposed pursuant to Section 4999 of the Code, or any successor provision thereto, any tax imposed by any comparable provision of state law, and any applicable federal, state and local income taxes).  If requested by the Executive or the Company, the determination of whether any reduction in such payments or benefits to be provided under this Plan or otherwise is required pursuant to the preceding sentence shall be made by the Company’s independent accountants, at the expense of the Company, and the determination of the Company’s independent accounts shall be final and binding on all persons.  The fact that the Executive’s right to payments or benefits may be reduced by reason of the limitations contained in this Section 7.2 shall not of itself limit or otherwise affect any other rights of the Executive pursuant to this Plan.  In the event that any payment or benefit intended to be provided under this Plan or otherwise is required to be reduced pursuant to this Section, the Executive (in his or her sole discretion) shall be entitled to designate the payments and/or benefits to be so reduced in order to give effect to this Section.  The Company shall provide the Executive with all information reasonably requested by the Executive to permit the Executive to make such designation.  In the event that the Executive fails to make such designation within ten (10) business days of receiving such information, the Company may effect such reduction in any manner it deems appropriate.

SECTION 7.3.  Establishment of a Trust Fund.

(1)In General.  The Plan is intended to be an unfunded, non-qualified retirement plan.  However, the Company may enter into a trust agreement with a trustee to establish a trust fund (the “Trust Fund”) and to transfer assets thereto (or cause assets to be transferred thereto), subject to the claims of the creditors of the Employers, pursuant to which some or all of the Mirror Savings Plan Benefits shall be paid.  Payments from the Trust Fund shall discharge the Employers’ obligation to make payments under the Plan to the extent that Trust Fund assets are used to satisfy such obligations.

(2)Upon a Change in Control.

(a)Within thirty (30) business days of the occurrence of a Change in Control, to the extent it has not already done so, the Company shall be required to establish an irrevocable Trust Fund for the purpose of paying Mirror Savings Plan Benefits.  Except as described in the following sentence, all contributions to the Trust Fund shall be

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irrevocable and the Company shall not have the right to direct the trustee to return to the Employers, or divert to others, any of the assets of the Trust Fund until after satisfaction of all liabilities to all of the Executives and their Death Beneficiaries under the Plan.  Any assets deposited in the Trust Fund shall be subject to the claims of the creditors of the Employers and any excess assets remaining in the Trust Fund after satisfaction of all liabilities shall revert to the Company.

(b)In addition to the requirements described in Subsection (a) above, the Trust Fund which becomes effective on the Change in Control shall be subject to the following additional requirements:

(i)the trustee of the Trust Fund shall be a third party corporate or institutional trustee;

(ii)the Trust Fund shall satisfy the requirements of a grantor trust under the Code; and

(iii)the Trust Fund shall automatically terminate (A) in the event that it is determined by a final decision of the United States Department of Labor (or, if an appeal is taken therefrom, by a court of competent jurisdiction) that by reason of the creation of, and a transfer of assets to, the Trust, the Trust is considered “funded” for purposes of Title I of ERISA or (B) in the event that it is determined by a final decision of the Internal Revenue Service (or, if an appeal is taken therefrom, by a court of competent jurisdiction) that (I) a transfer of assets to the Trust is considered a transfer of property for purposes of Code Section 83 or any successor provision thereto, or (II) pursuant to Code Section 451 or any successor provision thereto, amounts are includable as compensation in the gross income of a Trust Fund beneficiary in a taxable year that is prior to the taxable year or years in which such amounts would otherwise be actually distributed or made available to such beneficiary by the trustee.  Upon such termination of the Trust, all of the assets in the Trust Fund attributable to the accrued Mirror Savings Plan Benefits shall be immediately distributed to the Executives and the remaining assets, if any, shall revert to the Company.

(c)Within five (5) days following establishment of the Trust Fund, the Company shall transfer (or cause the Employers to transfer) to the trustee of such Trust Fund an amount equal to all 100% of the Account balances of all of the Executives under the Plan.

(d)Following the funding of the Trust Fund pursuant to clause (a) above, the Company shall cause to be deposited in the Trust Fund additional Executive Deferrals and Matching Contributions, as such amounts are credited to the Accounts of the Executives pursuant to Section 3.4 hereof.

(e)Notwithstanding the foregoing, an Employer shall not be required to make any contributions to the Trust Fund if the Employer is insolvent at the time such contribution is required.

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(f)The Administrator shall notify the trustee of the amount of Mirror Savings Plan Benefits to be paid to the Executive (or his Death Beneficiary) from the Trust Fund and shall assist the trustee in making distribution thereof in accordance with the terms of the Plan.

(g)Notwithstanding any provision of the Plan or the Administrative Document to the contrary, the provisions of this Section 7.3(2) hereof (i) may not be amended following a Change in Control and (ii) prior to a Change in Control may only be amended (A) with the written consent of each of the Executives or (B) if the effective date of such Amendment is at least two years following the date the Executives were given written notice of the adoption of such amendment.

IN WITNESS WHEREOF, Ecolab Inc. has executed this Mirror Savings Plan and has caused its corporate seal to be affixed this 8th day of November, 2002.

	ECOLAB INC.
	By:	/s/ Steven L. Fritze
		Steven L. Fritze
		Senior Vice President and Chief Financial Officer
(Seal)
Attest:
/s/ Lawrence T. Bell
Lawrence T. Bell
Senior Vice President - Law, General Counsel and Secretary

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EX-13

Exhibit 13

Financial discussion

The following discussion and analysis provides information that management believes is useful in understanding Ecolab’s operating results, cash flows and financial position. The discussion should be read in conjunction with the consolidated financial statements and related notes.

Forward-Looking Statements

This financial discussion and other portions of this Annual Report to Shareholders contain various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These include expectations concerning business progress and expansion, business acquisitions, debt repayments, susceptibility to changes in technology, global economic conditions and liquidity requirements. These statements, which represent Ecolab’s expectations or beliefs concerning various future events, are based on current expectations. Therefore, they involve a number of risks and uncertainties that could cause actual results to differ materially from those of such Forward-Looking Statements. These risks and uncertainties include the vitality of the hospitality, foodservice and travel industries; restraints on pricing flexibility due to competitive factors and customer and vendor consolidations; changes in oil or raw material prices or unavailability of adequate and reasonably priced raw materials; the occurrence of capacity constraints or the loss of a key supplier; the effect of future acquisitions or divestitures or other corporate transactions; the company’s ability to achieve plans for past acquisitions; the costs and effects of complying with: (i) laws and regulations relating to the environment and to the manufacture, storage, distribution, efficacy and labeling of the company’s products and (ii) changes in tax, fiscal, governmental and other regulatory policies; economic factors such as the worldwide economy, interest rates and currency movements, including, in particular, the company’s exposure to foreign currency risk; the occurrence of (a) litigation or claims, (b) the loss or insolvency of a major customer or distributor, (c) war, (d) natural or manmade disasters (including material acts of terrorism or other hostilities which impact the company’s markets) and, (e) severe weather conditions affecting the foodservice, hospitality and travel industries; loss of, or changes in, executive management; the company’s ability to continue product introductions and technological innovations; and other uncertainties or risks reported from time-to-time in the company’s reports to the Securities and Exchange Commission. In addition, the company notes that its stock price can be affected by fluctuations in quarterly earnings. There can be no assurances that the company’s earnings levels will meet investors’ expectations.

2002 Overview

In 2002, Ecolab achieved a strong financial performance, posting double-digit net income growth, strong cash flow increases, a healthy return on investment and an improved balance sheet. Moreover, the company did this against a challenging global economic environment, utilizing aggressive actions, new product and service introductions and the effective implementation of its successful Circle the Customer – Circle the Globe growth strategy to expand its market potential. The following discusses these actions and others in more detail:

•  Diluted net income per share was $1.60 for 2002, up 10 percent from $1.45 in 2001. Several unusual items affect the comparability in 2002 and 2001 net income and earnings per share. For 2002, these items include (i) a transitional impairment charge from the adoption of Statement of Financial Accounting Standards (SFAS) No.142 of $4.0 million after tax ($0.03 per diluted share), (ii) a one-time gain from benefit plan changes of $3.5 million after tax ($0.03 per diluted share), (iii) special charges related to restructuring and the integration of European operations of $32.4 million after tax ($0.25 per diluted share) and (iv) a gain from discontinued operations of $1.9 million after tax ($0.01 per diluted share). Comparison of results with those of 2001 is also affected by the adoption of SFAS No.142 (the elimination of goodwill amortization) and the acquisition and consolidation of the former European joint venture at the end of 2001. If the European operations had been consolidated with Ecolab for 2001, the effect would have been an increase in diluted income per share of $0.03 for 2001. In addition, if SFAS No. 142 had been applied to 2001 operating results, including the joint venture on a consolidated basis, diluted income per common share would have increased by $0.15 for 2001. Excluding the items previously mentioned from both 2002 and 2001, diluted income per share from ongoing operations on a pro forma basis increased 13 percent to $1.84 in 2002 from $1.63 in 2001.

[CHART]

[CHART]

•  Return on beginning shareholders’ equity was 24 percent for 2002 compared with 25 percent in 2001. Adjusting for the unusual items in 2002, return on beginning shareholders’ equity was 27 percent. This was the eleventh consecutive year the company exceeded its long-term financial objective of a 20 percent return on beginning shareholders’ equity.

•  The company maintained its debt rating within the “A” categories of the major rating agencies during 2002.

•  For the third consecutive year, as well as for the past ten out of twelve years, the company’s stock price out performed the Standard & Poor’s 500 index. Ecolab’s stock price increased 23 percent during 2002 compared with a decrease of 23 percent in the Standard & Poor’s 500 index. Including cash dividends, Ecolab’s total return to shareholders was 24 percent for 2002.

•  Net sales for 2002 reached an all-time high of $3.4 billion and increased 47 percent over 2001. Net sales for 2002 include sales of $0.9 billion for European operations, which was acquired as of year-end 2001. Net sales for 2002 increased 7 percent compared with pro forma sales for 2001, including the European joint venture.

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•  Operating income was $396 million for 2002, an increase of 24 percent from $318 million in 2001. This includes operating income of $84 million for European operations. Operating income represented 11.6 percent of net sales, down from last year’s 13.7 percent. Excluding unusual items (special charges in 2002 and elimination of goodwill amortization and consolidation of the European joint venture in 2001), pro forma operating income for 2002 increased 9 percent over 2001. Pro forma operating income was 13.0 percent of net sales in 2002 compared with 12.7 percent in 2001.

•  The company increased its annual cash dividend rate for the eleventh consecutive year. The cash dividend was increased 7 percent in December 2002 to an annual rate of $0.58 per common share.

•  During 2002, the company completed the plans announced in early 2002 to undertake restructuring and cost saving actions and activities to integrate the newly acquired European operations. The company’s 2002 results also include the impact of acquisitions completed during the year, including Audits International, Kleencare Hygiene and Terminix, Ltd., in order to continue to broaden its product and service offerings in line with its Circle the Customer – Circle the Globe strategy.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of its financial condition and results of operations are based upon the company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported revenues and expenses during the reporting period. Management bases these estimates on historical experience and various other evidence and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the recorded values of certain assets and liabilities. Actual results could differ from these estimates.

Management believes the company’s critical accounting policies and areas that require more significant judgments and estimates used in the preparation of its consolidated financial statements to be:

•  revenue recognition, including the effects of customer based programs and incentives;

•  estimating valuation allowances and accrued liabilities, specifically sales returns and allowances, the allowance for doubtful accounts and litigation and environmental accruals;

•  the determination of actuarially determined liabilities related to pension plans, other postretirement benefit obligations and self-insurance reserves;

•  accounting for income taxes;

•  valuation and useful lives of long-lived and intangible assets; and

•  determining functional currencies for the purpose of consolidating our International operations.

The company recognizes revenue on product sales at the time title transfers to the customer. The company records estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives. If market conditions were to decline, the company may take actions to increase customer incentive offerings, possibly resulting in a reduction of gross profit margins at the time the incentive is offered.

Management estimates sales returns and allowances by analyzing historical returns and credits, and applies these trend rates to the most recent 12 months’ sales data to calculate estimated reserves for future credits. Management estimates the allowance for doubtful accounts by analyzing accounts receivable balances by age, applying historical trend rates to the most recent 12 months’ sales, less actual write-offs to date. In addition, management’s estimates also include separately providing for 100 percent of specific customer balances when it is deemed probable that the balance is uncollectible. Actual results could differ from these estimates under different assumptions.

Management’s current estimated ranges of liabilities related to pending litigation and environmental claims are based on management’s best estimate of probable future costs. The company has recorded the amounts that represent the points in the ranges that management believes are most probable or the minimum amounts when no amount within the range is a better estimate than any other amount. Potential insurance reimbursements are not anticipated in the company’s accruals for environmental liabilities. While the final resolution of litigation and environmental contingencies could result in amounts different than current accruals, and therefore have an impact on the company’s consolidated financial results in a future reporting period, management believes the ultimate outcome will not have a significant effect on the company’s consolidated results of operations, financial position or cash flows.

Pension and other postretirement benefit obligations are actuarially determined. These calculations include assumptions related to the discount rate, projected salary and health care increases and the expected return on assets. The company is self-insured in North America for most workers compensation, general liability and automotive liability losses subject to per occurrence and aggregate annual liability limitations. The company is insured for losses in excess of these limitations. The company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The company determines its liabilities for claims incurred but not reported on an actuarial basis. A change in these assumptions could cause actual results to differ from those reported.

Management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. As part of the process of preparing the company’s consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which the company operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the company’s consolidated balance sheet. Management must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent management believes that recovery is not likely, a valuation allowance must be established. To the extent that a valuation allowance is established or increased, an expense within the tax provision is included in the statement of operations.

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Management periodically reviews its long-lived and intangible assets for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the asset’s carrying value over its estimated fair value. Management also periodically reassesses the estimated remaining useful lives of its long-lived assets. Changes to estimated useful lives would impact the amount of depreciation and amortization expense recorded in earnings.

In 2002, SFAS No.142, “Goodwill and Other Intangible Assets” became effective and as a result, the company ceased to amortize goodwill in 2002. The company estimates the impact of discontinuing the amortization of goodwill to have increased net income by approximately $28.8 million, or $0.22 per diluted share for the year ended December 31, 2002. The company was required to perform an initial impairment review of its goodwill in 2002 under the guidelines of SFAS 142. The result of testing goodwill for impairment was a non-cash charge of $4.0 million ($0.03 per share). All of the impairment charge relates to the Africa/Export reporting unit due to the difficult economic environment in that region. Management has continued to review its goodwill for impairment on a reporting unit basis under the guidelines of SFAS No.142 on an annual basis.

In preparing the consolidated financial statements, the company is required to translate the financial statements of its foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into United States dollars. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss in shareholders’ equity. Income statement accounts are translated at the average rates of exchange prevailing during the year. The different exchange rates from period to period impact the amount of reported income from the company’s International operations.

Operating Results

Consolidated

(thousands, except per share)	2002			2001		2000
Net sales	$	3,403,585		$	2,320,710	$	2,230,661
Operating income	$	395,866		$	318,179	$	343,139
Income
Continuing operations before change in accounting	$	211,890		$	188,170	$	208,555
Change in accounting	(4,002		)			(2,428		)
Discontinued operations	1,882
Net income	$	209,770		$	188,170	$	206,127
Diluted income per common share
Continuing operations before change in accounting	$	1.62		$	1.45	$	1.58
Change in accounting	(0.03		)			(0.02		)
Discontinued operations	0.01
Net income	$	1.60		$	1.45	$	1.56

Financial results for 2002 include several unusual items, most notably (i) a transitional impairment charge from the adoption of SFAS No.142, (ii) a one-time gain from benefit plan changes, (iii) special charges related to restructuring and the integration of European operations and (iv) a gain from discontinued operations. Comparison of results with those of 2001 is also affected by the adoption of SFAS No.142 (the elimination of goodwill amortization) and the acquisition and consolidation of the former European joint venture at the end of 2001. The company has published certain historical unaudited pro forma financial information for 2001 to assist investors in understanding the pro forma effects of the adoption of SFAS No.142, and the acquisition of the former European joint venture, as well as the effects of certain reclassifying adjustments.

In connection with adopting Emerging Issues Task Force (EITF) 01-09, Accounting for Consideration Given by a Vendor to a Customer, the company reclassified certain customer incentive costs from selling, general and administrative expenses to a component of revenue at the beginning of 2002. Prior year results have been reclassified for consistency purposes, the impact of which decreased previously reported revenue by approximately $34 million for each of the years ended December 31, 2001 and 2000. Also, at the beginning of 2002, the company reclassified repair part costs from selling, general and administrative expenses to cost of sales. Prior year costs have been reclassified to increase cost of sales by $31 million for 2001 and $30 million for 2000. These reclassifications had no impact on previously reported net income or shareholders’ equity. The following management discussion reflects these reclassifications.

The non-GAAP financial measures included in the following tables are not presented pursuant to Article 11 (pro forma financial information) of Regulation S-X and should be read in conjunction with the reported results determined in accordance with accounting principles generally accepted in the United States of America. They are provided to assist in the reader’s understanding of the impact of unusual items on the comparability of the company’s operations for the years ended December 31, 2002 and 2001. The tables below reconcile as reported amounts (U.S. GAAP amounts) to pro forma amounts as adjusted for special charges related to the restructuring and integration of European operations, a one-time gain from benefit plan changes, a transitional impairment charge from the adoption of SFAS No.142 and a gain from discontinued operations.

Supplemental 2002 Pro Forma Consolidated Operating Results Information

Year Ended December 31, 2002 (thousands, except per share)	Total			Unusual Items*			Excluding Unusual Items
Operating income	$	395,866		$	46,008		$	441,874
Interest expense, net	(43,895		)				(43,895		)
Income before income taxes	351,971			46,008			397,979
Provision for income taxes	(140,081		)	(17,121		)	(157,202		)
Change in accounting	(4,002		)	4,002
Discontinued operations	1,882			(1,882		)
Net income	$	209,770		$	31,007		$	240,777
Diluted net income per common share	$	1.60		$	0.24		$	1.84

* Unusual items include special charges related to restructuring activities and the integration of European operations of $51.8 million, a one-time gain from benefit plan changes of $5.8 million, a change in accounting for the transitional impairment charge from the adoption of SFAS No. 142 of $4.0 million and a gain from discontinued operations of $1.9 million.

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Supplemental Diluted Earnings Per Share Information

(Diluted earnings per share)	2002			2001
Pro forma income from ongoing operations	$	1.84		$	1.63
Pro forma adjustments:
Acquisition of European joint venture				(0.03		)
Adoption of SFAS No. 142 – to eliminate goodwill amortization				(0.15		)
Special charges	(0.25		)
One-time gain from benefit plan changes	0.03
Adoption of SFAS No. 142 – transitional impairment charge	(0.03		)
Discontinued operations	0.01
Net income, as reported	$	1.60		$	1.45

Consolidated net sales reached $3.4 billion for 2002, an increase of 47 percent over net sales of $2.3 billion in 2001. Business acquisitions, primarily the acquisition of the European joint venture, contributed to the overall sales growth for 2002. Excluding acquisitions, primarily the European joint venture, consolidated net sales increased 4 percent in 2002. Sales growth was experienced in most of the company’s divisions. Changes in currency translation negatively impacted the consolidated sales growth rate by approximately 1 percentage point for 2002. Sales results reflected aggressive selling efforts, the benefits of investments in sales force training and productivity tools, and new products, which were partially offset by the poor economic environment.

The company’s consolidated gross profit margin was 50.4 percent of net sales for 2002, which decreased from a gross profit margin of 51.7 percent in 2001. Cost of sales included restructuring costs of $9.0 million for the year ended December 31, 2002. Excluding these restructuring charges, the gross profit margin was 50.7 percent for 2002. The gross profit margin was also negatively affected by the acquisition and consolidation of the European joint venture. The gross profit margin for 2001 on a pro forma basis (reflecting the European joint venture on a consolidated basis) was 50.2 percent. Ecolab’s gross profit margin benefited from product mix improvements and cost reduction actions.

Selling, general and administrative expenses for 2002 were 37.7 percent of net sales, a decrease from total selling, general and administrative expenses of 38.0 percent of net sales in 2001. The selling, general and administrative expense margin on a pro forma basis (reflecting the consolidation of the European joint venture and the elimination of goodwill amortization) for 2001 was 37.5 percent. This increase in 2002 over the prior year is partially due to stronger sales and income, which resulted in higher commissions and incentive-based compensation. This increase was partially offset by tight cost controls and savings related to restructuring activities in 2002.

During the first quarter of 2002, management approved various restructuring and other cost-saving actions, including costs to integrate the company’s European operations, in order to streamline and improve the company’s global operations. These actions resulted in pre-tax charges of $51.8 million ($32.4 million after tax, or $0.25 per diluted share) in 2002. These charges were partially offset by a curtailment gain of $5.8 million ($3.5 million after tax, or $0.03 per diluted share) attributable to certain benefit plan changes. The restructuring included a reduction of the company’s global workforce during 2002, the closing of several facilities, the discontinuance of selected product lines and other actions. The expected cost savings related to restructuring activities began in 2002 and are expected to have their full impact beginning in 2003. Restructuring savings were approximately $16 million ($10 million after tax, or $0.08 per diluted share) in 2002. Beginning in 2003, the company expects annual pretax savings of $25 million to $30 million ($15 million to $18 million after tax). The company expects to reinvest some of these savings in the business. Further details related to these restructuring expenses are included in Note 3 of the notes to consolidated financial statements.

Operating income for 2002 was $396 million and increased by 24 percent over operating income of $318 million in 2001. As a percentage of net sales, operating income was 11.6 percent compared with 2001 operating income of 13.7 percent on an as reported basis. Excluding special charges, operating income for 2002 was $442 million, or 13.0 percent of net sales. This compared to 2001 pro forma operating income (reflecting the consolidation of the European joint venture and elimination of goodwill amortization) of $404 million, or 12.7 percent of net sales. This comparison of operating income margins reflects tight cost controls, savings from cost reduction initiatives, and the sale of new products.

In addition to continuing operations, a legal issue related to the disposal of a business in 1992 was resolved during 2002, resulting in the recognition of a gain from discontinued operations of approximately $1.9 million (net of income tax benefit of $1.1 million) or $0.01 per diluted share.

The company’s net income for 2002 was $210 million. Net income included restructuring charges of $32.4 million after tax, a curtailment gain of $3.5 million after tax, a gain from discontinued operations of $1.9 million after tax and a SFAS No. 142 transitional impairment charge of $4.0 million after tax. Excluding these items, after-tax income for 2002 was $241 million, an increase of 28 percent over net income of $188 million in 2001. This improvement reflected good operating income growth in most of the divisions, the additional operating income generated by the acquisition of the European joint venture and the elimination of goodwill amortization. This was partially offset by higher net interest expense due to increased borrowings primarily to finance the company’s acquisition of the European joint venture. Currency translation benefited diluted net income by $0.02 per share for 2002. As a percentage of net sales, after-tax income for 2002 was 6.2 percent. Excluding the unusual items previously mentioned, after-tax income for 2002 was 7.1 percent of net sales, down from 8.1 percent in 2001 due to the addition of Europe.

2001 compared with 2000

The non-GAAP financial measures included in the following table are not presented pursuant to Article 11 (pro forma financial information) of Regulation S-X and should be read in conjunction with the reported results determined in accordance with accounting principles generally accepted in the United States of America. It is provided to assist in the reader’s understanding of the impact of unusual items on the comparability of the company’s operations for the year ended December 31, 2000. The table below reconciles as reported amounts (U.S. GAAP amounts) to pro forma amounts as adjusted for the gain on the sale of Jackson, special charges and the cumulative effect of a change in accounting for revenue recognition.

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Supplemental 2000 Pro Forma Consolidated Operating Results Information

Year Ended December 31, 2000 (thousands, except per share)	Total			Unusual Items*			Excluding Unusual Items
Operating income	$	343,139		$	(18,788	)	$	324,351
Interest expense, net	(24,605		)				(24,605		)
Income before income taxes	318,534			(18,788		)	299,746
Provision for income taxes	(129,495		)	8,111			(121,384		)
Equity in earnings of Henkel-Ecolab	19,516						19,516
Change in accounting	(2,428		)	2,428
Net income	$	206,127		$	(8,249	)	$	197,878
Diluted net income per common share	$	1.56		$	(0.06	)	$	1.50

*Unusual items include the gain on the sale of the Jackson MSC, Inc. business of $25.9 million, special charges of $7.1 million and the cumulative effect of a change in accounting for revenue recognition of $2.4 million.

Consolidated net sales reached $2.3 billion for 2001, an increase of 4 percent over net sales of over $2.2 billion in 2000. Sales increased in nearly all of the company’s divisions. Business acquisitions also contributed to the overall sales growth for 2001. Businesses acquired in 2001 and the annualized effect of businesses acquired and disposed of in 2000 accounted for approximately 2 percentage points of the growth in consolidated sales for 2001. Changes in currency translation negatively impacted the consolidated sales growth rate by approximately 2 percentage points for 2001. Sales results reflected benefits from aggressive sales efforts, new account growth, new products, and additional programs to solve customer cleaning needs. These benefits were partially offset by a poor economic environment and a slowdown in the travel and hospitality markets following the September 11 terrorist attacks.

The company’s consolidated gross profit margin was 51.7 percent of net sales for 2001, which decreased from a gross profit margin of 52.6 percent in 2000. The comparison reflected lower fuel costs and restructuring costs in 2001. These effects were offset by increased raw material costs, unfavorable sales mix, fixed costs growing faster than unit volume, foreign currency effects and general cost increases.

Selling, general and administrative expenses for 2001 were 38.0 percent of net sales, a decrease from total selling, general and administrative expenses of 38.2 percent of net sales in 2000. Selling, general and administrative expenses in 2000 included $4.4 million of income for reductions in probable losses related to certain environmental matters partially offset by $4 million of expenses related to a large distributor. Selling, general and administrative expense improvements for 2001 primarily reflected the benefits of a tighter focus on discretionary costs and synergies from acquisitions, which were partially offset by investments in the sales and service force, investments in acquisitions and increased retirement plan and medical costs.

Operating income for 2001 was $318 million and decreased 7 percent from $343 million in 2000. This is a decrease of 2 percent from 2000 when excluding the unusual items that occurred during 2000. Business acquisitions had a minimal effect on operating income for 2001. As a percentage of net sales, operating income was 13.7 percent compared with 2000 operating income of 14.5 percent, excluding unusual items. This decrease in operating income reflects the poor economic environment and a slowdown in the travel and hospitality markets.

The company’s net income for 2001 was $188 million, a decrease of 9 percent compared with net income of $206 million for 2000. Excluding the unusual items from 2000, net income for 2001 decreased 5 percent from $198 million. The decrease in net income reflected the effects of a difficult economic environment, lower gross margins, higher net interest expense, lower equity in the earnings of Henkel-Ecolab and the negative impact of foreign currency translation. As a percentage of net sales, after-tax income for 2001 was 8.1 percent, down from 8.9 percent in 2000, excluding the unusual items previously mentioned.

Operating Segment Performance

(thousands)	2002			2001			2000
Net sales
United States
Cleaning & Sanitizing	$	1,615,171		$	1,548,882		$	1,498,381
Other Services	308,329			273,020			248,317
Total United States	1,923,500			1,821,902			1,746,698
International Cleaning & Sanitizing	1,427,418			472,113			420,031
Total	3,350,918			2,294,015			2,166,729
Effect of foreign currency translation	52,667			26,695			63,932
Consolidated	$	3,403,585		$	2,320,710		$	2,230,661
Operating income
United States
Cleaning & Sanitizing	$	271,838		$	246,936		$	249,182
Other Services	33,051			29,338			25,515
Total United States	304,889			276,274			274,697
International Cleaning & Sanitizing	131,376			44,181			41,399
Total	436,265			320,455			316,096
Corporate	(46,008		)	(4,938		)	18,491
Effect of foreign currency translation	5,609			2,662			8,552
Consolidated	$	395,866		$	318,179		$	343,139
Operating income as a percent of net sales
United States
Cleaning & Sanitizing	16.8		%	15.9		%	16.6		%
Other Services	10.7			10.7			10.3
Total	15.9			15.2			15.7
International Cleaning & Sanitizing	9.2		%	9.4		%	9.9		%

The company’s operating segments have similar products and services and the company is organized to manage its operations geographically. The company’s operating segments have been aggregated into three reportable segments: United States Cleaning & Sanitizing, United States Other Services, and International Cleaning & Sanitizing. The company evaluates the performance of its International operations based on fixed management rates of currency exchange. Therefore, International sales and operating income totals, as well as the International financial information included in this financial discussion, are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2002. All other accounting policies of the reportable segments are consistent with accounting principles generally accepted in the United States of America and the accounting

24

policies of the company described in Note 2 of the notes to consolidated financial statements. Additional information about the company’s reportable segments is included in Note 16 of the notes to consolidated financial statements. The following chart presents the comparative percentage change in net sales for each of the company’s operating segments (excluding Europe) for 2002 and 2001. European operations have been excluded since they were consolidated for the first time in 2002, making percentage comparisons not applicable.

Sales Growth Information	Percent Change From Prior Year
	2002		2001
Net sales
United States Cleaning & Sanitizing
Institutional	6	%	3	%
Kay	9		8
Textile Care	3		(5	)
Professional Products	(4	)	7
Water Care Services	(3	)	5
Vehicle Care	3		9
Food & Beverage	1		1
Total United States Cleaning & Sanitizing	4	%	3	%
United States Other Services
Pest Elimination	7	%	8	%
GCS Service	19		33
Total United States Other Services	13	%	10	%
Total United States	6	%	4	%
International Cleaning & Sanitizing
Asia Pacific	2	%	9	%
Latin America	10		13
Canada	5		7
Africa/Export and Other	5		32
Total International Cleaning & Sanitizing (excluding Europe)	5	%	12	%
Consolidated (excluding Europe)	5	%	4	%

[CHART]

Sales of the company’s United States Cleaning & Sanitizing operations were $1.6 billion in 2002 and increased 4 percent over net sales of $1.5 billion in 2001. Business acquisitions had no effect on the growth in sales for 2002. Sales benefited from good growth in sales of U.S. Institutional and Kay operations. U.S. Institutional operations sales growth during 2002 reflected good growth driven primarily by the non-travel portion of the business. Trends in sales to the travel related business showed improvement over the course of 2002. Sales of Kay’s U.S. operations increased over the prior year with strong growth in both its food retail business and sales to the quickservice market. Textile Care sales increased from the prior year due to increased sales to existing customers as well as sales to new customers. Professional Products sales decreased in 2002 due to both a decline in the core sales of the Janitorial market and a decrease in the non-core specialty business reflecting a planned restructuring of the JaniSource business. Professional Products’ sales, however, were positively impacted at the end of 2002 due to a long-term supply agreement that became effective in December 2002. Water Care Services sales decreased from the prior year due to customer cost cutting and consolidations. Water Care also continues to exit non-core markets. Vehicle Care sales growth for 2002 was primarily due to new business with major oil companies as well as new product introductions. Food & Beverage sales increased slightly from the prior year with good growth in sales to the dairy, beverage and meat and poultry markets which were offset by weak Agri sales.

[CHART]

Sales of United States Other Services operations increased 13 percent to $308 million in 2002, from $273 million in 2001. Excluding the effects of business acquisitions, sales increased 4 percent for 2002. Pest Elimination’s sales in 2002 included strong growth in non-contract services, which was partially offset by a slowdown in the growth of contract services. GCS Service sales growth increased over the prior year, reflecting the continued expansion of its operations through acquisitions and a focus on integrating past acquisitions. Excluding the effects of businesses acquired, GCS sales decreased 1 percent for 2002. The results reflected the division’s focus on standardizing operating procedures and the impact of the hospitality slowdown on the GCS business. United States Other Services also includes modest sales from the addition of EcoSure operations in January 2002.

Management rate-based sales of the company’s International Cleaning & Sanitizing operations reached $1.4 billion for 2002, an increase of 202 percent over sales of $0.5 billion in 2001. International Cleaning & Sanitizing includes European sales of $0.9 billion for 2002. Prior to 2002, the company included the results of the former European joint venture operations in its financial statements using the equity method of accounting. Excluding Europe’s sales, International Cleaning & Sanitizing sales growth was 5 percent for 2002. Excluding all business acquisitions and divestitures, sales also increased 5 percent in 2002. European sales, although not consolidated prior

25

[CHART]

to 2002, increased 8 percent over 2001 due to good growth in sales to the food and beverage markets and European acquisitions. For the Asia Pacific region, Japan, New Zealand and China showed good sales growth for the year while Australia’s sales declined due to the sale of its Hygiene Services business. Asia Pacific sales increased 3 percent in 2002, excluding business acquisitions and divestitures. The increase in Asia Pacific sales was primarily from the institutional and food and beverage markets. Latin America sales increased 8 percent in 2002, excluding business acquisitions, with good growth in all countries except Venezuela due to the economic impact of the devaluation of its currency. Sales in Canada increased over the prior year due to good growth in sales to the institutional market. Sales of the Africa/Export and Other region increased in 2002 reflecting weakness in Israel offset by good growth in South Africa and other operations.

Operating income of the company’s United States Cleaning & Sanitizing operations was $272 million in 2002, an increase of 10 percent from operating income of $247 million in 2001. As a percentage of net sales, operating income increased from 15.9 percent in 2001 to 16.8 percent in 2002. The improvement in reported operating income margins reflected tight cost controls, savings from cost reduction initiatives, the sale of new products and the impact of adopting SFAS No.142. Operating income in 2001 does not reflect the effect of SFAS No.142, and thus includes amortization expenses related to goodwill of $10.6 million. If the provisions of SFAS No. 142 had been applied retroactively to January 1, 2001, operating income for the United States Cleaning & Sanitizing operations would have increased 6 percent and the operating income margin for the U.S. Cleaning & Sanitizing operations would have been 16.6 percent for 2001. The company added 115 sales-and-service associates to its United States Cleaning & Sanitizing operations during 2002.

Operating income of United States Other Services operations increased 13 percent to $33 million in 2002. The operating income margin for United States Other Services was 10.7 percent for both 2002 and 2001. Operating income in 2001 does not reflect the effect of SFAS No. 142 and includes $1.9 million of amortization expense related to goodwill. Excluding acquisitions and the effects of SFAS No. 142, operating income increased 3 percent over 2001. Excluding acquisitions and including the pro forma effects of SFAS No. 142 on the prior year, the operating income margin for United States Other Services was 11.4 percent for both 2002 and 2001. Pest Elimination had strong operating income growth due to increased productivity and cost controls. Operating income for GCS declined due to continued investments in the division’s infrastructure and systems. During 2002, the company added 75 sales-and-service associates to its United States Other Services operations.

Operating income of International Cleaning & Sanitizing operations rose 197 percent to $131 million in 2002 from operating income of $44 million in 2001. The International operating income margin decreased from 9.4 percent in 2001 to 9.2 percent in 2002. Operating income in 2001 does not reflect the effect of SFAS No.142 and includes $5.3 million of amortization expense related to goodwill. Excluding acquisitions and including the pro forma effects of SFAS No.142 on 2001, operating income for 2002 increased 10 percent over the prior year. Excluding acquisitions (primarily Europe) and including the pro forma effects of SFAS No.142 on last year, the operating income margin for International increased to 11.1 percent of net sales from 10.5 percent in 2001. Significant operating income growth and margin improvement from Asia Pacific, Latin America and Canada contributed to the increase. The company added 510 sales-and-service associates to its International Cleaning & Sanitizing operations, including Europe, during 2002.

Operating income margins of the company’s International operations are less than the operating income margins realized for the company’s U.S. operations. The lower International margins are due to higher costs of importing raw materials and finished goods, increased investments in dispensing equipment and the additional costs caused by the difference in scale of International operations where several operating locations are smaller in size, as well as to the additional cost of operating in numerous and diverse foreign jurisdictions. Proportionately larger investments in sales, technical support and administrative personnel are also necessary in order to facilitate growth of International operations.

2001 compared with 2000

Sales of the company’s United States Cleaning & Sanitizing operations were $1.5 billion in 2001 and increased 3 percent over net sales in 2000. Business acquisitions accounted for approximately 1 percentage point of the growth in sales for 2001. Sales reflected solid growth in the company’s Kay, Professional Products and Vehicle Care operations. The sales improvement also reflected benefits from new products and services, as well as aggressive sales efforts and programs. Net selling price increases during 2001 were not significant. U.S. Institutional operations sales growth during 2001 reflected modest growth in its specialty, housekeeping and Ecotemp programs, which were partially offset by the continuing slow down in the economy and the weaker demand in the lodging and restaurant markets due to the events of September 11, 2001. Excluding the acquisition of Facilitec, Institutional’s sales increased 2 percent for 2001. Sales of Kay’s U.S. operations increased over 2000 with significant growth in its food retail business and good growth in sales to the quickservice market. Excluding the acquisition of Southwest Sanitary Distributing Company (SSDC) in February 2000, Kay’s sales for 2001 increased 5 percent over 2000. Textile Care sales decreased in 2001 due to exiting selected businesses and a very competitive market. Professional Products’ sales increased in 2001 with good growth in its healthcare and janitorial sales. Professional Products’ sales have been positively impacted by long-term supply agreements in its janitorial business. Water Care Services’ sales increased over 2000 with good growth in sales to the food and beverage and hospitality markets. Vehicle Care sales growth for 2001 was primarily due to new products and additional business with major oil company chains. Food & Beverage U.S. sales increased in 2001 with good growth in the beverage market.

Sales of the United States Other Services operations increased 10 percent to $273 million in 2001, from $248 million in 2000. Excluding the effects of businesses acquired and disposed of, sales increased 7 percent for 2001. Pest Elimination’s sales in 2001 included solid growth in contract services, slightly offset by a slowdown in non-contract services due to

26

economic conditions. GCS Service sales growth increased over last year reflecting the continued expansion of its operations through acquisitions. Excluding the effects of businesses acquired, GCS sales increased 4 percent for 2001. In the fourth quarter of 2000, the company sold its Jackson dishmachine manufacturing business.

Management rate-based sales of the company’s International Cleaning & Sanitizing operations reached $472 million for 2001, an increase of 12 percent over sales of $420 million in 2000. Business acquisitions accounted for approximately 5 percentage points of the sales increase in 2001 for International Cleaning & Sanitizing operations. Excluding business acquisitions, Asia Pacific sales increased 8 percent with double-digit sales growth in New Zealand and East Asia and good growth in Japan. The increase in Asia Pacific sales was primarily from the food and beverage and institutional markets. Latin America sales increased 7 percent in 2001, excluding business acquisitions, with good growth in almost all countries. Sales in Canada increased in 2001 due to strong growth in sales to the institutional and food and beverage markets. Sales of the Africa/Export region increased sharply in 2001 due to strong results in South Africa and the full-year sales effect of a business, which was acquired in September 2000.

Operating income of the company’s United States Cleaning & Sanitizing operations was $247 million in 2001, a decrease of 1 percent from operating income of $249 million in 2000. Business acquisitions had little effect on operating income for 2001. Operating income included strong growth for Professional Products and Water Care Services with moderate growth in Kay and Vehicle Care operations. Operating income of Institutional, Food & Beverage and Textile Care was lower than the prior year. As a percentage of net sales, operating income decreased from 16.6 percent in 2000 to 15.9 percent in 2001. Operating income margins declined due to lower sales volume, unfavorable sales mix, increased storage and handling costs and increased raw material costs. The company added 50 sales-and-service associates to its United States Cleaning & Sanitizing operations during 2001.

Operating income of United States Other Services operations increased 15 percent to $29 million in 2001. Excluding operating income of businesses acquired in 2001 and the annualized effect of businesses acquired and disposed of in 2000, operating income for 2001 increased 20 percent. Both Pest Elimination and GCS reported double-digit increases in operating income. The operating income margin of United States Other Services operations was 10.7 percent, which is up from 10.3 percent of net sales in 2000. This increase reflected GCS’ efforts to improve income by focusing on operational efficiencies, as well as Pest Elimination’s increased productivity, more efficient use of products and cost controls. During 2001, the company added 120 sales-and-service associates to its United States Other Services operations.

Operating income of International Cleaning & Sanitizing operations rose 7 percent to $44 million in 2001 from operating income of $41 million in 2000. The effects of businesses acquired accounted for approximately 1 percentage point of the growth in operating income for 2001. The International operating income margin decreased from 9.9 percent in 2000 to 9.4 percent in 2001. While the Latin America and Africa/Export regions showed operating income margin improvement, the margins for Asia Pacific and Canada declined due to higher raw material costs. Excluding associates added by Henkel-Ecolab, the company added 160 sales-and-service associates to its International Cleaning & Sanitizing operations during 2001.

Henkel-Ecolab

Prior to November 30, 2001, the company operated cleaning and sanitizing businesses in Europe through a 50 percent economic interest in the Henkel-Ecolab joint venture. On November 30, 2001, Ecolab purchased the remaining 50 percent interest of Henkel-Ecolab it did not previously own from Henkel KGaA. Additional details related to this purchase are included in Note 5 of the notes to consolidated financial statements.

Ecolab consolidated Henkel-Ecolab’s operations effective with the November 30, 2001 acquisition date and end of Henkel-Ecolab’s fiscal year for 2001. Because the company consolidates its International operations on the basis of their November 30 fiscal year ends, Henkel-Ecolab’s balance sheet was consolidated with Ecolab’s balance sheet as of year-end 2001. The income statement for the European operations was consolidated with Ecolab’s operations beginning in 2002.

2001 compared with 2000

The company included the results of Henkel-Ecolab operations in its financial statements using the equity method of accounting through November 30, 2001. The company’s equity in earnings of Henkel-Ecolab, which included royalty income and goodwill amortization, was $16 million in 2001, a decrease of 19 percent when compared to $20 million in 2000. When measured in euros, net income of Henkel-Ecolab for 2001 decreased 13 percent and reflected lower sales volumes driven by slowing economies and increasing raw material, energy and other costs, which were partially offset by price increases.

Henkel-Ecolab sales, although not consolidated in Ecolab’s financial statements, increased 4 percent in 2001 when measured in euros. Sales reflected the impact of Europe’s slowing economies and reduced orders from distributors as they lowered inventory levels. When measured in U.S. dollars, Henkel-Ecolab sales were flat when compared to 2000 due to the negative effects of a stronger U.S. dollar.

Corporate

Corporate operating expense totaled $46.0 million in 2002, compared with corporate operating expense of $4.9 million in 2001 and corporate operating income of $18.5 million in 2000. Prior to 2002, corporate operating expense included overhead costs directly related to the former European joint venture. In 2002, these expenses were included in the International Cleaning & Sanitizing operating segment. The amount remaining in corporate operating expense in 2002 included restructuring and merger integration costs of $51.8 million, which were partially offset by a curtailment gain of $5.8 million related to benefit plan changes. In 2000, corporate operating income also included the $25.9 million gain on the sale of the Jackson business, special charges of $7.1 million and income of $4.4 million for net reductions in probable losses related to certain environmental matters.

Interest and Income Taxes

Net interest expense of $44 million for 2002 increased 54 percent over net interest expense of $28 million in 2001. This increase is primarily due to higher debt levels incurred at year-end 2001 to finance the acquisition of the remaining 50 percent interest of Henkel-Ecolab which Ecolab did not previously own.

Net interest expense for 2001 was $28 million, an increase of 16 percent over net interest expense of $25 million in 2000. This increase reflected higher debt levels during the year, including the additional debt incurred late in the year to purchase the remaining 50 percent of Henkel-Ecolab.

The company’s effective income tax rate was 39.8 percent for 2002, compared with effective income tax rates in 2001 and 2000 of 40.5 percent and 40.7 percent, respectively. Excluding the effects of special charges in 2002, the estimated annual effective income tax rate related to ongoing

27

operations was 39.5 percent. This decrease from prior years was principally due to the adoption of SFAS No. 142 at the beginning of 2002, which eliminated the amortization of goodwill and related income tax effects. Overall effective rates on International operations were higher in 2002, principally due to the addition of the European joint venture. This was partially offset by lower state income tax rates in 2002. Excluding the effects of the sale of Jackson and restructuring expenses in 2000, the effective income tax rate was 40.5 percent in 2000.

Financial Position

The company’s debt continued to be rated within the “A” categories by the major rating agencies during 2002. Significant changes in the company’s financial position during 2002 and 2001 included the following:

•  Total assets reached nearly $2.9 billion at December 31, 2002, an increase of 14 percent over total assets of $2.5 billion at year-end 2001. Accounts receivable have increased 8 percent since year-end 2001, primarily due to the effect of business acquisitions during the year as well as due to the effect of exchange rates. Other assets have increased significantly since year-end 2001 due to payments totaling approximately $125 million to fund the company’s U.S. pension plan during 2002. Other current liabilities have increased since year-end 2001 primarily due to an increase in restructuring accruals and due to the effect of exchange rates.

During 2001 total assets increased to $2.5 billion at year-end 2001 from $1.7 billion at year-end 2000. At year-end 2001, the balance sheet of Henkel-Ecolab was consolidated with the company’s balance sheet due to the acquisition of the remaining 50 percent of Henkel-Ecolab from Henkel KGaA. Total assets as of November 30, 2001 increased approximately $0.7 billion as a result of this acquisition and the consolidation of Henkel-Ecolab.

•  Working capital levels increased to $150 million at December 31, 2002 from $102 million at year-end 2001 reflecting a significant decrease in short-term debt from the prior year. Working capital levels at year-end 2001 of $102 million were up from $69 million at year-end 2000 reflecting lower levels of current liabilities prior to the Henkel-Ecolab acquisition, as well as increases in accounts receivable and inventory due to the consolidation of Europe’s balance sheet for the first time as of year-end 2001. During 2001, short-term debt increased approximately $97 million due to the issuance of commercial paper to finance the acquisition of Henkel-Ecolab.

•  Total debt was $700 million at December 31, 2002 and decreased from total debt of $746 million at year-end 2001. This decrease in total debt during 2002 is principally due to debt repayments made during the year. Total debt at year-end 2000 was $371 million. During 2001, commercial paper borrowings were incurred to fund the acquisition of the remaining 50 percent of the Henkel-Ecolab joint venture. At December 31, 2001, the company classified $266 million of commercial paper borrowings as long-term debt. In February 2002, the company refinanced $266 million of commercial paper borrowings through the issuance of euro 300 million of Euronotes. As of December 31, 2002 the ratio of total debt to capitalization was 39 percent, down from 46 percent at year-end 2001 and compared with 33 percent at year-end 2000. The lower debt to capitalization rate in 2002 is due to repayments made during the year while the higher debt to capitalization ratio for 2001 compared to 2000 was due to funding for the company’s acquisition of the Henkel-Ecolab joint venture.

[CHART]

[CHART]

Cash Flows

Cash provided by operating activities reached a new high of $423 million for 2002, an increase from $364 million in 2001 and $315 million in 2000. Operating cash flows for 2002 reflected the additional cash flows from businesses acquired, primarily the European joint venture, as well as the improvement in accounts receivable and days sales outstanding. The operating cash flow for 2001 increased over 2000 due to a reduction in year-end accounts receivable and the additional cash flows generated by business acquisitions. Changes in net operating asset levels negatively affected the operating cash flow by approximately $70 million in 2002, positively impacted it by $10 million in 2001 and negatively affected it by approximately $2 million in 2000.

Cash flows used for investing activities included capital expenditures of $213 million in 2002, $158 million in 2001 and $150 million in 2000. Worldwide additions of merchandising equipment, primarily cleaning and sanitizing product dispensers, accounted for approximately 70 percent of each year’s capital expenditures. Merchandising equipment is depreciated over 3 to 7 year lives. Cash used for businesses acquired included Terminix Ltd. and Kleencare Hygiene in 2002, Henkel-Ecolab in 2001 and Spartan and Facilitec in 2000. Investing cash flow activity also included the proceeds from the sale of the Jackson business in 2000.

Financing cash flow activity included cash used to reacquire shares and pay dividends and cash provided and used through the company’s debt arrangements. In May 2000, the company announced a program to repurchase up to $200 million of its common stock. Share repurchases totaled $9 million in 2002, $32 million in 2001 and $187 million in 2000. These repurchases were funded with operating cash flows and additional debt. In December 2000, the company announced an authorization to repurchase up to 5 million additional shares of common stock.

In 2002, the company increased its annual dividend rate for the eleventh consecutive year. The company has paid dividends on its common stock for 66 consecutive years. Cash dividends declared per share of common stock, by quarter, for each of the last three years were as follows:

Cash Dividends Declared

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Year
2002	$	0.135	$	0.135	$	0.135	$	0.145	$	0.55
2001	0.13		0.13		0.13		0.135		0.525
2000	0.12		0.12		0.12		0.13		0.49

28

Liquidity and Capital Resources

The company currently expects to fund all of the requirements which are reasonably foreseeable for 2003, including new program investments, scheduled debt repayments, dividend payments, possible acquisitions, share repurchases and pension contributions from operating activities, cash reserves and short-term borrowings. Cash provided by operating activities reached an all time high of $423 million in 2002. While cash flows could be negatively affected by a decrease in revenues, the company does not believe that its revenues are highly susceptible, over the short run, to rapid changes in technology within our industry. The company has a $450 million U.S. commercial paper program and 200 million Australian dollar commercial paper program. Both programs are rated A-1 by Standard & Poor’s and P-1 by Moody’s. To support its commercial paper programs and other general business funding needs, the company maintains a $275 million multi-year committed credit agreement which expires in December 2005 and a $175 million credit facility which expires in October 2003. The company can draw directly on both credit facilities on a revolving credit basis. As of February 18, 2003, approximately $97 million of these credit facilities were committed to support outstanding commercial paper, leaving $353 million available for other uses. In addition, the company has other committed and uncommitted credit lines of approximately $200 million with major international banks and financial institutions to support the company’s general funding needs. Additional details on the company’s credit facilities are included in Note 7 of the notes to consolidated financial statements.

During 2002, the company contributed nearly $125 million to its U.S. pension plan as a result of normal growth in accrued plan benefits, the impact of lower year-end discount rates on the plan liability, and a decline in plan assets during 2002. The company’s contributions to the pension plan did not have a material affect on the company’s consolidated results of operations, financial condition or liquidity. The company does not expect expense for its U.S. pension plan to increase significantly for 2003.

The company does not have relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes. As such, the company is not materially exposed to any financing, liquidity, market or credit risk that could arise if Ecolab had engaged in such relationships.

A schedule of the company’s obligations under various long-term debt agreements and operating leases with noncancelable terms in excess of one year are summarized in the following table:

(thousands)	Payments due by Period
Contractual Obligations	Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 Years
Long-term debt	$	552,895	$	13,152	$	5,095	$	378,475	$	156,173
Operating leases	122,147		32,303		40,610		23,208		26,026
Total contractual cash obligations	$	675,042	$	45,455	$	45,705	$	401,683	$	182,199

The company does not have significant unconditional purchase obligations, or significant other commercial commitments such as commitments under lines of credit, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments.

The company is in compliance with all covenants and other requirements of its credit agreements and indentures. Additionally, the company does not have any rating triggers that would accelerate the maturity dates of its debt.

However, a downgrade in the company’s credit rating could limit or preclude the company’s ability to issue commercial paper under its current programs. A credit rating downgrade could also adversely affect the company’s ability to renew existing, or negotiate new credit facilities in the future and could increase the cost of such facilities. Should this occur, the company could seek additional sources of funding, including issuing term notes or bonds. In addition, the company has the ability at its option to draw upon its $450 million committed credit facilities prior to their termination.

Market Risk

The company enters into contractual arrangements (derivatives) in the ordinary course of business to manage foreign currency exposure and interest rate risks. The company does not enter into derivatives for trading purposes. The company’s use of derivatives is subject to internal policies that provide guidelines for control, counterparty risk and ongoing monitoring and reporting and is designed to reduce the volatility associated with movements in foreign exchange and interest rates on the company’s income statement.

The company enters into forward contracts, swaps, and foreign currency options to hedge certain intercompany financial arrangements, and to hedge against the effect of exchange rate fluctuations on transactions related to cash flows and net investments denominated in currencies other than U.S. dollars. At December 31, 2002, the company had approximately $199 million of foreign currency forward exchange contracts with face amounts denominated primarily in euros.

The company manages interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, the company may enter into interest rate swaps. Under these arrangements, the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. At year-end 2002, the company had an interest rate swap that converts approximately euro 80 million (approximately $80 million U.S. dollars) of its Euronote debt from a fixed interest rate to a floating or variable interest rate and is effective until February 2007. The company also had an interest rate swap agreement on 50 million Australian dollars (approximately $28 million U.S. dollars) of Australian floating rate debt. This agreement is effective through November 2004 and has a fixed annual pay rate of approximately 6 percent.

Based on a sensitivity analysis (assuming a 10 percent adverse change in market rates) of the company’s foreign exchange and interest rate derivatives and other financial instruments, changes in exchange rates or interest rates would not materially affect the company’s financial position and liquidity. The effect on the company’s results of operations would be substantially offset by the impact of the hedged items.

Subsequent Events

In December 2002 (subsequent to the end of the company’s International segment’s year end), the company acquired the Adams Healthcare business of Medical Solutions plc. Adams Healthcare is a leading supplier of hospital hygiene products in the United Kingdom with annual sales of approximately $19 million. These operations will become part of the company’s International Cleaning & Sanitizing operations in 2003.

Also in December 2002, the company sold its Darenas janitorial products distribution business based in Birmingham, UK to Bunzl plc in London, UK. The annualized sales of this entity are approximately $30 million. These operations were part of the company’s International Cleaning & Sanitizing operations.

29

Consolidated statement ofincome

Year ended December 31 (thousands, except per share)	2002			2001		2000
Net sales	$	3,403,585		$	2,320,710	$	2,230,661
Operating expenses (income)
Cost of sales (including special charges (income) of $8,977 in 2002, ($566) in 2001 and $1,948 in 2000)	1,687,597			1,120,254		1,056,263
Selling, general and administrative expenses	1,283,091			881,453		851,995
Gain on sale of Jackson business						(25,925		)
Special charges	37,031			824		5,189
Operating income	395,866			318,179		343,139
Interest expense, net	43,895			28,434		24,605
Income from continuing operations before income taxes and equity in earnings of Henkel-Ecolab	351,971			289,745		318,534
Provision for income taxes	140,081			117,408		129,495
Equity in earnings of Henkel-Ecolab				15,833		19,516
Income from continuing operations before cumulative effect of change in accounting	211,890			188,170		208,555
Cumulative effect of change in accounting	(4,002		)			(2,428		)
Gain from discontinued operations	1,882
Net income	$	209,770		$	188,170	$	206,127
Basic income per common share
Income from continuing operations before change in accounting	$	1.64		$	1.48	$	1.63
Change in accounting	(0.03		)			(0.02		)
Gain from discontinued operations	0.01
Net income	$	1.63		$	1.48	$	1.61
Diluted income per common share
Income from continuing operations before change in accounting	$	1.62		$	1.45	$	1.58
Change in accounting	(0.03		)			(0.02		)
Gain from discontinued operations	0.01
Net income	$	1.60		$	1.45	$	1.56
Weighted-average common shares outstanding
Basic	129,073			127,416		127,753
Diluted	130,787			129,928		131,946

Per share amounts do not necessarily sum due to rounding.

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

30

Consolidatedbalance sheet

December 31 (thousands, except per share)	2002		2001		2000
Assets
Current assets
Cash and cash equivalents	$	49,205	$	41,793	$	43,965
Accounts receivable, net	553,154		514,074		326,937
Inventories	291,506		279,785		168,220
Deferred income taxes	71,147		53,781		50,709
Other current assets	50,925		40,150		10,737
Total current assets	1,015,937		929,583		600,568
Property, plant and equipment, net	680,265		644,323		501,640
Investment in Henkel-Ecolab					199,642
Goodwill, net	695,700		596,925		252,022
Other intangible assets, net	188,670		178,951		55,034
Other assets, net	297,857		175,218		105,105
Total assets	$	2,878,429	$	2,525,000	$	1,714,011
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt	$	160,099	$	233,393	$	136,592
Accounts payable	205,665		199,772		146,428
Compensation and benefits	184,239		132,720		88,330
Income taxes	12,632		18,887
Other current liabilities	303,715		243,180		160,684
Total current liabilities	866,350		827,952		532,034
Long-term debt	539,743		512,280		234,377
Postretirement health care and pension benefits	207,596		183,281		117,790
Other liabilities	164,989		121,135		72,803
Shareholders’ equity (common stock, par value $1.00 per share; shares outstanding: 2002 – 129,940; 2001 – 127,900; 2000 – 127,161)	1,099,751		880,352		757,007
Total liabilities and shareholders’ equity	$	2,878,429	$	2,525,000	$	1,714,011

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

31

Consolidated statement ofcash flows

Year ended December 31 (thousands)	2002			2001			2000
Operating Activities
Net income	$	209,770		$	188,170		$	206,127
Cumulative effect of change in accounting	4,002						2,428
Gain from discontinued operations	(1,882		)
Income from continuing operations	211,890			188,170			208,555
Adjustments to reconcile income from continuing operations to cash provided by operating activities:
Depreciation	194,840			128,020			119,072
Amortization	28,588			34,970			29,364
Deferred income taxes	49,923			(2,950		)	(11,604		)
Equity in earnings of Henkel-Ecolab				(15,833		)	(19,516		)
Henkel-Ecolab royalties and dividends				23,928			15,914
Special charges - asset disposals	6,180			(566		)	2,786
Gain on sale of Jackson business							(25,925		)
Other, net	1,835			(1,373		)	(913		)
Changes in operating assets and liabilities:
Accounts receivable	78			20,570			(30,635		)
Inventories	(3,567		)	(8,014		)	(22,585		)
Other assets	(141,926		)	(26,049		)	(7,332		)
Accounts payable	(8,860		)	(7,451		)	16,626
Other liabilities	84,345			31,059			41,679
Cash provided by operating activities	423,326			364,481			315,486
Investing Activities
Capital expenditures	(212,757		)	(157,937		)	(150,009		)
Property disposals	6,788			3,027			2,092
Capitalized software expenditures	(4,490		)
Businesses acquired and investments in affiliates	(62,825		)	(469,804		)	(90,603		)
Sale of businesses and assets							35,803
Cash used for investing activities	(273,284		)	(624,714		)	(202,717		)
Financing Activities
Net issuances (repayments) of notes payable	(368,834		)	204,218			124,080
Long-term debt borrowings	261,039			149,817
Long-term debt repayments	(1,257		)	(16,283		)	(21,777		)
Reacquired shares	(8,894		)	(32,164		)	(186,516		)
Cash dividends on common stock	(69,583		)	(66,456		)	(61,644		)
Exercise of employee stock options	45,531			19,356			23,112
Other, net	(1,746		)	(975		)	7,510
Cash provided by (used for) financing activities	(143,744		)	257,513			(115,235		)
Effect of exchange rate changes on cash	1,114			548			(1,317		)
Increase (Decrease) in Cash and Cash Equivalents	7,412			(2,172		)	(3,783		)
Cash and cash equivalents, beginning of year	41,793			43,965			47,748
Cash and cash equivalents, end of year	$	49,205		$	41,793		$	43,965

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

32

Consolidated statement of comprehensive income and shareholders' equity

(thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings			Deferred Compensation			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Balance December 31, 1999	$	145,556	$	223,290	$	756,601		$	(13,714	)	$	(59,363	)	$	(290,354	)	$	762,016
Net income					206,127												206,127
Foreign currency translation											(29,712		)				(29,712		)
Comprehensive income																	176,415
Cash dividends declared					(62,769		)										(62,769		)
Stock options, including tax benefits	2,190		44,633														46,823
Stock awards, net issuances			1,949					595						(704		)	1,840
Business acquisitions	424		13,715											(165		)	13,974
Reacquired shares														(186,516		)	(186,516		)
Amortization								5,224									5,224
Balance December 31, 2000	148,170		283,587		899,959			(7,895		)	(89,075		)	(477,739		)	757,007
Net income					188,170												188,170
Foreign currency translation											(5,962		)				(5,962		)
Other comprehensive loss											(586		)				(586		)
Comprehensive income																	181,622
Cash dividends declared					(67,080		)										(67,080		)
Stock options, including tax benefits	1,564		34,985														36,549
Stock awards, net issuances			880					14						(180		)	714
Business acquisitions														(501		)	(501		)
Reacquired shares														(32,164		)	(32,164		)
Amortization								4,205									4,205
Balance December 31, 2001	149,734		319,452		1,021,049			(3,676		)	(95,623		)	(510,584		)	880,352
Net income					209,770												209,770
Foreign currency translation											20,500						20,500
Other comprehensive loss											(985		)				(985		)
Comprehensive income																	229,285
Cash dividends declared					(71,156		)										(71,156		)
Stock options, including tax benefits	2,216		64,617														66,833
Stock awards, net issuances			2,139					(827		)				(658		)	654
Business acquisitions														(116		)	(116		)
Reacquired shares														(8,894		)	(8,894		)
Amortization								2,793									2,793
Balance December 31, 2002	$	151,950	$	386,208	$	1,159,663		$	(1,710	)	$	(76,108	)	$	(520,252	)	$	1,099,751

Common Stock Activity

	2002			2001			2000
Year ended December 31 (shares)	Common Stock	Treasury Stock		Common Stock	Treasury Stock		Common Stock	Treasury Stock
Shares, beginning of year	149,734,067	(21,833,949	)	148,169,930	(21,009,195	)	145,556,459	(16,140,244	)
Stock options	2,216,361			1,564,137			2,189,360
Stock awards, net issuances		25,065			21,382			7,009
Business acquisitions		(2,672	)		(15,017	)	424,111	(4,395	)
Reacquired shares		(198,778	)		(831,119	)		(4,871,565	)
Shares, end of year	151,950,428	(22,010,334	)	149,734,067	(21,833,949	)	148,169,930	(21,009,195	)

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

33

Notesto consolidated financial statements

Note1Nature of Business

Ecolab Inc. (the company) is a global developer and marketer of premium cleaning, sanitizing, pest elimination, maintenance and repair products and services for the hospitality, institutional and industrial markets.  Customers include hotels and restaurants; foodservice, healthcare and educational facilities; quickservice (fast-food) units; grocery stores; commercial and institutional laundries; light industry; dairy plants and farms; and food and beverage processors around the world.

Note 2 Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the company and all majority-owned subsidiaries. Prior to November 30, 2001, the company accounted for its investment in Henkel-Ecolab under the equity method of accounting. As discussed further in Note 5, on November 30, 2001, the company acquired the remaining 50 percent interest of the European joint venture that it did not previously own, and Henkel-Ecolab became a wholly-owned subsidiary of the company. Because the company consolidates its international operations on the basis of their November 30 fiscal year ends, the balance sheet of the European operations was consolidated with the company’s balance sheet beginning with year-end 2001. The income statement for the European operations was consolidated with the company’s operations beginning in 2002. International subsidiaries, including the former European joint venture, are included in the financial statements on the basis of their November 30 fiscal year-ends to facilitate the timely inclusion of such entities in the company’s consolidated financial reporting.

Foreign Currency Translation

Financial position and results of operations of the company’s international subsidiaries generally are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss in shareholders’ equity. The cumulative translation loss as of year-end 2002, 2001 and 2000 was $74,537,000, $95,037,000, and $89,075,000, respectively. Income statement accounts are translated at the average rates of exchange prevailing during the year. The different exchange rates from period to period impact the amount of reported income from the company’s international operations.

Cash and Cash Equivalents

Cash equivalents include highly-liquid investments with a maturity of three months or less when purchased.

Inventory Valuations

Inventories are valued at the lower of cost or market. Domestic chemical inventory costs are determined on a last-in, first-out (lifo) basis. Lifo inventories represented 30 percent, 29 percent and 47 percent of consolidated inventories at year-end 2002, 2001 and 2000, respectively. All other inventory costs are determined on a first-in, first-out (fifo) basis, including the inventory of the European operations which was included in consolidated inventories beginning as of year-end 2001.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Merchandising equipment consists principally of various systems that dispense cleaning and sanitizing products and low-temperature dishwashing machines. The dispensing systems are accounted for on a mass asset basis, whereby equipment is capitalized and depreciated as a group and written off when fully depreciated. Depreciation and amortization are charged to operations using the straight-line method over the assets’ estimated useful lives ranging from
5 to 50 years for buildings, 3 to 7 years for merchandising equipment, and 3 to 11 years for machinery and equipment.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets arise principally from business acquisitions. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Other intangible assets include primarily customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives that results in a weighted average useful life of 15 years as of December 31, 2002.

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 years ended December 31, 2002, 2001 and 2000 was approximately $16.9 million, $5.1 million and $1.7 million, respectively. As of December 31, 2002, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

(thousands)
2003	$	18,827
2004	15,974
2005	14,228
2006	13,975
2007	13,804

Long-Lived Assets

The company periodically reviews its long-lived assets for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. An

34

impairment loss is recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the asset’s carrying value over its fair value.

Revenue Recognition

Prior to 2001, the company recognized revenue as services were performed or products were shipped to customers. During 2000, the company completed an analysis of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” As a result of this analysis, the company changed certain policies to recognize revenue on product sales at the time title transfers to the customer. The cumulative effect of this change on periods prior to 2000 was $2,428,000 (net of income tax benefits of $1,592,000), or $0.02 per diluted share, and has been included in the company’s consolidated statement of income for 2000.

The company records estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives.

Income Per Common Share

The computations of the basic and diluted per share amounts for the company’s operations were as follows:

(thousands, except per share)	2002		2001		2000
Income from continuing operations before change in accounting	$	211,890	$	188,170	$	208,555
Weighted-average common shares outstanding
Basic	129,073		127,416		127,753
Effect of dilutive stock options and awards	1,714		2,512		4,193
Diluted	130,787		129,928		131,946
Income from continuing operations before change in accounting per common share
Basic	$	1.64	$	1.48	$	1.63
Diluted	$	1.62	$	1.45	$	1.58

Stock options to purchase approximately 4.2 million shares for 2002, 3.7 million shares for 2001 and 6.3 million shares for 2000 were not dilutive and, therefore, were not included in the computations of diluted income per common share amounts.

Stock-Based Compensation

The company measures compensation cost for its stock incentive and option plans using the intrinsic value-based method of accounting.

Had the company used the fair value-based method of accounting to measure compensation expense for its stock incentive and option plans beginning in 1995 and charged compensation cost against income, over the vesting periods, based on the fair value of options at the date of grant, net income and the related basic and diluted per common share amounts for 2002, 2001 and 2000 would have been reduced to the following pro forma amounts:

(thousands, except per share)	2002			2001			2000
Net income, as reported	$	209,770		$	188,170		$	206,127
Add: Stock-based employee compensation expense included in reported net income, net of tax	1,688			2,542			3,158
Deduct: Total stock-based employee compensation expense under fair value-based method, net of tax	(15,145		)	(13,172		)	(10,843		)
Pro forma net income	$	196,313		$	177,540		$	198,442
Basic net income per common share
As reported	$	1.63		$	1.48		$	1.61
Pro forma	1.52			1.39			1.55
Diluted net income per common share
As reported	1.60			1.45			1.56
Pro forma	$	1.50		$	1.37		$	1.50

Note 10 to the consolidated financial statements contains the significant assumptions used in determining the underlying fair value of options.

Comprehensive Income

For the company, comprehensive income includes net income, foreign currency translation adjustments, additional minimum pension liabilities and gains and losses on derivative instruments designated and effective as cash flow hedges that are charged or credited to the accumulated other comprehensive loss account in shareholders’ equity.

Derivative Instruments and Hedging Activities

Effective January 1, 2001, the company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended. This statement requires that all derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The company recorded a transition adjustment, which increased other comprehensive income by $47,000 upon adoption of SFAS No. 133.

The company uses foreign currency forward contracts, interest rate swaps and foreign currency debt to manage risks generally associated with foreign exchange rates, interest rates and net investments in foreign operations. The company does not hold derivative financial instruments of a speculative nature. On the date that the company enters into a derivative contract, it designates the derivative as (1) a hedge of (a) the fair value of a recognized asset or liability or (b) an unrecognized firm commitment (a “fair value” hedge), (2) a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a “cash flow” hedge); or (3) a foreign-currency

35

fair-value or cash flow hedge (a “foreign currency” hedge). The company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the company will discontinue hedge accounting prospectively. The company believes that on an ongoing basis its portfolio of derivative instruments will generally be highly effective as hedges. Hedge ineffectiveness during the years ended December 31, 2002 and 2001 was not significant.

All of the company’s derivatives are recognized on the balance sheet at their fair value. The earnings impact resulting from the change in fair value of the derivative instruments is recorded in the same line item in the consolidated statement of income as the underlying exposure being hedged.

Use of Estimates

The preparation of the company’s financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which requires that a liability for costs associated with exit or disposal activities be recognized and measured initially at fair value when the liability is incurred. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 clarifies the requirements of FASB Statement No. 5, “Accounting for Contingencies”, relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The company expects the provisions of SFAS 143, SFAS 146 and FIN 45 will not have a material impact on its consolidated results of operations, cash flows and financial position.

In December, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of FASB No. 123.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements describing the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amendments are effective for fiscal years ending after December 15, 2002. The company adopted SFAS No.148 for its year-end 2002 and has enhanced its stock-based employee compensation disclosures. The company has no immediate plans to change to the fair value-based method of accounting for stock-based compensation.

Reclassifications

In connection with adopting Emerging Issues Task Force (EITF) Issue No. 01-09 “Accounting for Consideration Given by a Vendor to a Customer”, the company reclassified certain customer incentive costs from selling, general and administrative expenses to a component of revenue at the beginning of 2002. Prior year amounts have been reclassified for consistency purposes. The reclassification decreased previously reported revenue by approximately $34 million for each of the years ended December 31, 2001 and 2000. Also, at the beginning of 2002, the company reclassified repair part costs from selling, general and administrative expense to cost of sales. Prior year amounts have also been reclassified for consistency purposes. The impact of this reclassification increased previously reported cost of sales by approximately $31 million and $30 million for the years ended December 31, 2001 and 2000, respectively. These reclassifications had no impact on previously reported net income or shareholders’ equity.

Note 3 Special Charges

In the first quarter of 2002, management approved plans to undertake restructuring and cost saving actions during 2002, including costs related to the integration of the company’s European operations. These actions included global workforce reductions, facility closings, and product line discontinuations. As a result, the company recorded restructuring expense of $47,767,000 ($29,867,000 after tax) for the year ended December 31, 2002. The company also incurred merger integration costs of $4,032,000 ($2,521,000 after tax) related to European and other operations. Restructuring and merger integration costs have been included as “special charges” on the consolidated statement of income with a portion of restructuring expenses included as a component of “cost of sales”. Amounts included as a component of “cost of sales” include asset disposals of $6,180,000 in 2002 and $1,948,000 in 2000 and manufacturing related severance of $2,797,000 for the year ended December 31, 2002.

Also included in “special charges” on the consolidated statement of income for the year ended December 31, 2002 is a one-time curtailment gain of $5,791,000 ($3,501,000 after tax), related to changes to postretirement healthcare benefits made in the first quarter of 2002.

During the fourth quarter of 2001, the company incurred $940,000 in special charges to facilitate the acquisition of Henkel-Ecolab and to begin the integration process following the acquisition.

Management also approved various actions during the fourth quarter of 2000 to improve the long-term efficiency and competitiveness of the company and to reduce costs. These actions included personnel reductions, discontinuance of certain product lines, changes to certain manufacturing and distribution operations and the closing of selected sales and administrative offices. As a result of these actions the company recorded restructuring expenses of $7,137,000 ($4,311,000 after tax). These expenses have also been reported as “special charges” on the consolidated statement of income.

For segment reporting purposes, each of these items has been included in the company’s corporate segment, which is consistent with the company’s

36

internal management reporting. Restructuring expenses for 2002 and 2000 and subsequent reductions to the related liability accounts included the following:

(thousands)	Employee Termination Benefits			Asset Disposals			Other			Total
Initial expense and accrual	$	2,938		$	2,786		$	1,413		$	7,137
Cash payments	(175		)				(123		)	(298		)
Non-cash charges				(2,786		)				(2,786		)
Restructuring liability, December 31, 2000	2,763			0			1,290			4,053
Cash payments	(2,594		)				(1,343		)	(3,937		)
Revision to prior estimates	(169		)	(566		)	53			(682		)
Non-cash charges				566						566
Restructuring liability, December 31, 2001	0			0			0			0
Initial expense and accrual	36,366			6,180			5,221			47,767
Cash payments	(16,033		)				(1,711		)	(17,744		)
Non-cash charges				(6,180		)				(6,180		)
Restructuring liability, December 31, 2002	$	20,333		$	0		$	3,510		$	23,843

Restructuring liabilities are classified in other current liabilities.

Employee termination benefit expenses in 2002 included 695 net personnel reductions through voluntary and involuntary terminations, with the possibility that additional people will be replaced in the future. Individuals were affected through facility closures and consolidation primarily within the corporate administrative, operations and research and development functions.

Asset disposals include inventory and property, plant, and equipment charges. Inventory charges for the year ended December 31, 2002 were $2,391,000 and reflect the discontinuance of product lines which are not consistent with the company’s long-term strategies. Property, plant and equipment charges during the year ended December 31, 2002 were $3,789,000 and reflect the downsizing and closure of production facilities as well as global changes to manufacturing and distribution operations in connection with the integration of European operations.

Other charges of $5,221,000 for the year ended December 31, 2002, include lease termination costs and other miscellaneous exit costs.

Employee termination benefit expenses in 2000 included 86 personnel reductions through voluntary and involuntary terminations primarily in the sales, marketing and corporate administrative functions of the company. Cash payments for these benefits were completed during 2001.

Asset disposals in 2000 included inventory and property, plant and equipment write-downs. Inventory write-downs totaled $1,948,000 and reflect the discontinuance of product lines which were not consistent with the company’s long-term strategies. Revisions of prior year estimates related to inventory write-downs reduced 2001 cost of sales by $566,000. Property, plant and equipment write-downs of $838,000 in 2000 reflected the closing of sales and administrative offices and changes to certain manufacturing and distribution operations.

Other restructuring expenses in 2000 included lease termination and other facility exit costs related to the closing of sales and administrative offices.

Note 4 Gain From Discontinued Operations

During the first quarter of 2002, the company resolved a legal issue related to the disposal of its Chemlawn business in 1992. This resulted in the recognition of a gain from discontinued operations of approximately $1.9 million (net of income tax benefit of $1.1 million), or $0.01 per diluted share for the year ended December 31, 2002.

Note 5 Henkel-Ecolab

Prior to November 30, 2001, the company and Henkel KGaA, Düsseldorf, Germany (“Henkel”), each owned 50 percent of Henkel-Ecolab, a joint venture of their respective European institutional and industrial cleaning and sanitizing businesses. The company accounted for this investment in Henkel-Ecolab under the equity method of accounting. On November 30, 2001, Ecolab purchased the remaining 50 percent interest of this joint venture it did not previously own from Henkel. Because the company consolidates its international operations on the basis of their November 30 fiscal year ends, the balance sheet of Henkel-Ecolab as of November 30, 2001 was consolidated with the company’s balance sheet beginning with year-end 2001. The income statement for the European operations was consolidated with the company’s operations beginning in 2002.

For 2001 and 2000, Henkel-Ecolab results of operations and the company’s equity in earnings of Henkel-Ecolab included:

(thousands)	2001			2000
Henkel-Ecolab
Net sales	$	869,487		$	869,824
Gross profit	419,635			429,405
Income before income taxes	67,286			82,652
Net income	$	40,043		$	47,659
Ecolab equity in earnings
Ecolab equity in net income	$	20,022		$	23,829
Ecolab royalty income from Henkel-Ecolab, net of income taxes	2,123			2,240
Amortization expense for the excess of cost over the underlying net assets of Henkel-Ecolab	(6,312		)	(6,553		)
Equity in earnings of Henkel-Ecolab	$	15,833		$	19,516

Prior to November 30, 2001, the company’s investment in Henkel-Ecolab included the unamortized excess of the company’s investment over its equity in Henkel-Ecolab net assets. This excess was $92 million at November 30, 2001 and was included in goodwill, net at year-end 2001. The excess was being amortized on a straight-line basis over estimated economic useful lives of up to 30 years.

Condensed balance sheet information for Henkel-Ecolab for year-end 2000 was:

November 30 (thousands)	2000
Current assets	$	335,944
Noncurrent assets	151,161
Current liabilities	213,597
Noncurrent liabilities	$	65,614

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The company acquired the remaining 50 percent of Henkel-Ecolab for approximately 483.5 million euros, equal to approximately $432.7 million at rates of exchange prevailing at November 30, 2001 plus approximately $6.5 million of direct transaction related expenses.

The acquisition of Henkel-Ecolab was accounted for under the purchase method of accounting as a step-acquisition. Accordingly, the purchase price was applied to the 50 percent interest of Henkel-Ecolab being acquired.

The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition and the final allocation made during 2002.

November 30, 2001 (thousands)	Initial Allocation		Final Allocation
Current assets	$	178,705	$	178,201
Property, plant and equipment	66,538		67,966
Identifiable intangible assets	119,257		119,203
Goodwill	239,737		252,017
Other assets	9,185		29,678
Total assets acquired	613,422		647,065
Current liabilities	115,559		130,199
Postretirement health care and pension benefits	38,614		38,219
Other liabilities	19,860		39,423
Total liabilities assumed	174,033		207,841
Purchase price	$	439,389	$	439,224

Identifiable intangible assets have a weighted-average useful life of approximately 14 years. Included as a component of identifiable intangible assets are customer relationships of $83 million and intellectual property of $31 million. Goodwill was assigned to the International Cleaning & Sanitizing reportable segment. Approximately 30 percent of the goodwill will be deductible for income tax purposes.

Subsequent to the initial allocation of the purchase price, approximately $28.0 million of restructuring charges were incurred in connection with the acquisition of Henkel-Ecolab. These costs consisted of $24.1 million for employee termination benefits, $0.4 million for asset disposals, including inventory and property, plant and equipment, and $3.5 million for lease termination and other costs. Because the company acquired only 50 percent of Henkel-Ecolab, $14.0 million of these costs were treated as a liability assumed at the date of acquisition and have been treated as additional goodwill in 2002. The remaining $14.0 million, along with $1.9 million of merger integration costs, were treated as operating expenses during 2002 and are included in the “special charges” discussed in Note 3 to the consolidated financial statements.

The following unaudited pro forma financial information reflects the consolidated results of the company and Henkel-Ecolab assuming the acquisition had occurred at the beginning of 2000.

(thousands, except per share)	2001 (unaudited)	2000 (unaudited)
Net sales	$3,182,271	$3,092,985
Income from continuing operations before cumulative effect of change in accounting	192,009	215,651
Diluted income from continuing operations before change in accounting per common share	$1.48	$1.63

These unaudited pro forma results are presented for information purposes only. These unaudited pro forma results also do not include the benefits of improvements from synergies the company anticipates it will realize. The results are not necessarily indicative of results that would have occurred had the acquisition been completed at the beginning of 2000, nor are they necessarily indicative of future operating results.

As part of the transaction, the stockholder agreement between the company and Henkel was amended and extended. The amended stockholder agreement provides, among other things, that Henkel is permitted to increase its ownership in the company to 35 percent of the company’s outstanding common stock. Henkel remains entitled to proportionate representation on the company’s board of directors.

Henkel owned 36.3 million shares, or approximately 28.0 percent, of the company’s outstanding common stock on December 31, 2002.

In 2002, 2001 and 2000, the company and its affiliates sold products and services in the amount of $6,986,000, $507,000 and $625,000 to Henkel or its affiliates, and purchased products and services in the amount of $82,743,000, $4,628,000 and $5,183,000 from Henkel or its affiliates. Transactions between Henkel and Ecolab’s recently acquired European operations are reflected in these numbers beginning in 2002. Prior to 2002, Henkel-Ecolab also acquired and sold products to Henkel. The company also acquired access to certain technology of Henkel during 2000 in return for a payment of approximately $1,700,000. The transactions were made at prices comparable to prices charged to unrelated third parties.

Note 6 Other Business Acquisitions and Divestitures

Business Acquisitions

Significant business acquisitions made by the company during 2002, 2001 and 2000, excluding the acquisition of Henkel-Ecolab, were as follows:

Business Acquired	Date of Acquisition	Ecolab Operating Segment – Type of Business	Estimated Annual Sales Prior to Acquisition (millions)
			(unaudited)
2002
Kleencare Hygiene	Jan. 2002	Europe	$	30
Audits International	Jan. 2002	Pest	3
		Elimination
Terminix Ltd.	Sept. 2002	Europe	65
2001
Ecolab S.A. – 23.5% interest in addition to prior 51% interest	Dec. 2000	Latin America	$	8
Randall International LLC – 25% interest	Jan. 2001	Institutional	8
Envirocare Service Pte. Ltd.	March 2001	Asia Pacific	1
Microbiotecnica	July 2001	Latin America	3
Commercial Parts & Services, Inc.	Oct. 2001	GCS	28
2000
Southwest Sanitary Distributing Co. (SSDC)	Feb. 2000	Kay	$	24
Spartan	Feb. 2000	Latin America	20
ARR/CRS	June 2000	GCS	4
Dong Woo Deterpan Co., Ltd.	June 2000	Asia Pacific	6
Stove Parts Supply Co.	Aug. 2000	GCS	19
Facilitec Corp.	Sept. 2000	Institutional	14
Zohar-Dalia Soap and Detergent Factory (Israel) – 51% interest	Sept. 2000	Africa/Export	15
Peterson’s Commercial Parts & Service	Nov. 2000	GCS	4

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The total consideration paid by the company for the 2002 acquisitions was approximately $63 million. The purchase price of certain acquisitions is subject to post-closing adjustments.

The total consideration paid by the company for the 2001 acquisitions, excluding Henkel-Ecolab, was approximately $30 million, of which approximately $18 million was allocated to goodwill.

The total consideration paid by the company for the 2000 acquisitions included cash of approximately $90 million and 424,111 shares of common stock with a market value of approximately $14 million issued in the SSDC acquisition, of which approximately $88 million was allocated to goodwill.

These acquisitions have been accounted for as purchases and, accordingly, the results of their operations have been included in the financial statements of the company from the dates of acquisition. Net sales and operating income of these businesses were not significant to the company’s consolidated results of operations, financial position and cash flows.

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the year ended December 31, 2002 are as follows:

	United States
(thousands)	Cleaning & Sanitizing			Other Services		Total United States			International Cleaning & Sanitizing			Consolidated
Balance as of December 31, 2001	$	121,046		$	44,796	$	165,842		$	431,083		$	596,925
Goodwill acquired during year*	3,532			4,510		8,042			58,862			66,904
Foreign currency translation									38,472			38,472
Impairment losses upon adoption of SFAS No. 142 on January 1, 2002									(4,002		)	(4,002		)
Impairment losses during 2002	(2,599		)			(2,599		)				(2,599		)
Balance as of December 31, 2002	$	121,979		$	49,306	$	171,285		$	524,415		$	695,700

*All of the goodwill related to businesses acquired in 2002 is expected to be tax deductible. Goodwill acquired also includes adjustments to prior year acquisitions including the restructuring activities discussed in Note 5.

Gain on Sale of Jackson Business

In November 2000, the company sold its Jackson dishmachine manufacturing business for cash proceeds of approximately $36 million. The company realized a gain of $25,925,000 ($14,988,000 after tax). The gain has been included in corporate operating income for segment reporting purposes. Jackson’s total annual sales were approximately $40 million, including intercompany sales to Ecolab. Jackson has continued to supply dishmachines to the company under a long-term supply agreement.

Net sales, excluding intercompany sales, for the business were $13.7 million for 2000. Operating income, excluding intercompany profit, for the business was $1.4 million for 2000. The consolidated financial statements and accompanying notes reflect the operating results of the Jackson dishmachine manufacturing business as a continuing operation in the United States Other Services segment through the date of disposal (November 9, 2000).

Note 7Balance Sheet Information

December 31 (thousands)	2002			2001			2000
Accounts Receivable, Net
Accounts receivable	$	589,149		$	544,371		$	342,267
Allowance for doubtful accounts	(35,995		)	(30,297		)	(15,330		)
Total	$	553,154		$	514,074		$	326,937
Inventories
Finished goods	$	136,721		$	124,657		$	74,392
Raw materials and parts	156,628			156,754			96,430
Excess of fifo cost over lifo cost	(1,843		)	(1,626		)	(2,602		)
Total	$	291,506		$	279,785		$	168,220
Property, Plant and Equipment, Net
Land	$	21,914		$	20,349		$	12,436
Buildings and leaseholds	231,119			221,054			174,651
Machinery and equipment	525,359			452,611			290,017
Merchandising equipment	821,109			743,404			556,205
Construction in progress	18,830			22,217			22,235
	1,618,331			1,459,635			1,055,544
Accumulated depreciation and amortization	(938,066		)	(815,312		)	(553,904		)
Total	$	680,265		$	644,323		$	501,640
Goodwill, Net
Goodwill	$	871,208		$	763,211		$	311,401
Accumulated amortization	(175,508		)	(166,286		)	(59,379		)
Total	$	695,700		$	596,925		$	252,022
Other Intangible Assets, Net
Customer relationships	$	120,324		$	104,277		$	18,521
Intellectual property	71,104			66,418			1,610
Trademarks	50,308			48,540			38,262
Other intangibles	13,502			16,292			17,615
	255,238			235,527			76,008
Accumulated amortization	(66,568		)	(56,576		)	(20,974		)
Total	$	188,670		$	178,951		$	55,034
Other Assets, Net
Deferred income taxes	$	36,797		$	56,952		$	26,768
Pension	106,314
Other	154,746			118,266			78,337
Total	$	297,857		$	175,218		$	105,105
Short-Term Debt
Notes payable	$	146,947		$	230,306		$	68,644
Long-term debt, current maturities	13,152			3,087			67,948
Total	$	160,099		$	233,393		$	136,592
Other Current Liabilities
Discounts and rebates	$	140,354		$	125,123		$	89,041
Other	163,361			118,057			71,643
Total	$	303,715		$	243,180		$	160,684
Long-Term Debt
6.875% notes, due 2011	$	148,974		$	148,847
5.375% Euronotes, due 2007	299,777
Commercial paper				265,860			$	145,800
7.19% senior notes, due 2006	75,000			75,000			75,000
9.68% senior notes, due 1995-2001							14,286
6.00% medium-term notes, due 2001							52,800
Other	29,144			25,660			14,439
	552,895			515,367			302,325
Long-term debt, current maturities	(13,152		)	(3,087		)	(67,948		)
Total	$	539,743		$	512,280		$	234,377

39

The company has a $275 million Multicurrency Credit Agreement with a consortium of banks that has a term through 2005. The company may borrow varying amounts from time to time on a revolving credit basis, with loans denominated in multiple currencies, if available. The company has the option of borrowing based on various short-term interest rates. The agreement includes a covenant regarding the ratio of total debt to capitalization. No amounts were outstanding under the agreement at year-end 2002, 2001 and 2000.

In October 2002, the company renewed an additional $175 million 364-day Credit Agreement with a consortium of banks. This agreement expires in October 2003. The company may borrow varying amounts from time to time on a revolving credit basis. The company has the option of borrowing based on various short-term interest rates. The agreement includes a covenant regarding total debt to capitalization. No amounts were outstanding at year-end 2002.

These credit agreements support the company’s $450 million U.S. commercial paper program and its 200 million Australian dollar commercial paper program. The company had $64.1 million, $355.7 million and $145.8 million in outstanding U.S. commercial paper at December 31, 2002, 2001 and 2000, respectively, with an average annual interest rate of 1.4 percent, 2.0 percent and 6.7 percent, respectively. The company also had 50.0 million, 132.5 million and 34.5 million of Australian dollar denominated commercial paper (in U.S. dollars, approximately $28 million, $69 million and $18 million, respectively) outstanding at December 31, 2002, 2001 and 2000, respectively, with an average annual interest rate of 4.8 percent, 4.5 percent and 6.4 percent, respectively. The U.S. commercial paper outstanding at December 31, 2002 was primarily used to finance the acquisitions as discussed in Note 6.

In February 2002, the company issued euro 300 million ($265.9 million) of 5.375 percent Euronotes, due February 2007.  The proceeds from this debt issuance were used to repay a portion of the U.S. commercial paper outstanding as of December 31, 2001. Therefore, $265.9 million of commercial paper outstanding at December 31, 2001 was classified as long-term debt. As described further in Note 8, the company accounts for a majority of the transaction gains and losses related to the Euronotes as a component of the cumulative translation account.

In January 2001, the company issued $150 million of 6.875 percent notes, due 2011. The proceeds from this debt issuance were used to repay commercial paper outstanding at December 31, 2000. Therefore, commercial paper outstanding at year-end 2000 was also classified as long-term debt.

As of December 31, 2002, the weighted-average interest rate on notes payable was 4.6 percent in 2002, 4.4 percent in 2001 and 7.7 percent for 2000.

As of December 31, 2002, the aggregate annual maturities of long-term debt for the next five years were: 2003 – $13,152,000; 2004 – $2,762,000; 2005 – $2,333,000; 2006 – $76,634,000 and 2007 – $301,841,000.

Interest expense was $47,210,000 in 2002, $31,477,000 in 2001 and $26,707,000 in 2000. Interest income was $3,315,000 in 2002, $3,043,000 in 2001 and $2,102,000 in 2000. Total interest paid was $45,056,000 in 2002, $26,402,000 in 2001 and $27,497,000 in 2000.

Note 8 Financial Instruments

Foreign Currency Forward Contracts

The company has entered into foreign currency forward contracts to hedge transactions related to intercompany debt, subsidiary royalties, product purchases, firm commitments and other intercompany transactions. The company uses these contracts to hedge against the effect of exchange rate fluctuations on forecasted cash flows. These contracts generally relate to the company’s European operations and are denominated in euros (deutsche marks in 2000). The company had foreign currency forward exchange contracts that totaled approximately $199 million at December 31, 2002, $130 million at December 31, 2001 and $65 million at December 31, 2000. These contacts generally expire within one year. In addition, at December 31, 2001 the company had approximately $190 million of foreign currency forward exchange contracts outstanding related to short-term financing of the Henkel-Ecolab acquisition. These contracts matured in February 2002. The gains and losses related to these contracts are included as a component of other comprehensive income until the hedged item is reflected in earnings.

Interest Rate Swaps

The company enters into interest rate swaps to manage interest rate exposures and to achieve a desired proportion of variable and fixed rate debt.

During 2002, the company entered into an interest rate swap agreement in connection with the issuance of its Euronotes. This agreement converts approximately euro 80 million of the Euronote debt from a fixed interest rate to a floating or variable interest rate and is effective until February 2007. This interest rate swap was designated as a fair value hedge and had a value of $3.5 million as of December 31, 2002. The mark to market gain on this agreement has been recorded as part of interest expense and has been offset by the loss recorded in interest expense on the mark to market on this portion of the Euronotes. There is no hedge ineffectiveness on this interest rate swap.

The company has also entered into an interest rate swap agreement to provide for a fixed rate of interest on the first 50 million Australian dollars of Australian floating-rate debt. This agreement was designated as, and effective as, a cash flow hedge of the outstanding debt. The change in fair value of the interest rate swap is recorded in other comprehensive income and recognized as earnings to offset the hedged transactions as they occur.

Net Investment Hedges

In February 2002, the company issued euro 300 million of 5.375 percent Euronotes, due 2007. The company designated a portion (approximately euro 200 million) of this Euronote debt as a hedge of existing foreign currency exposures related to net investments the company has in certain European subsidiaries. Accordingly, the transaction gains and losses on this portion of the Euronotes that are designated and effective as hedges of the company’s net investments have been included as a component of the cumulative translation account. Total transaction losses related to the Euronotes and charged to this shareholders’ equity account were $26.0 million for the year ended December 31, 2002. Transaction gains and losses on the remaining portion of the Euronotes have been included in earnings and were offset by transaction gains and losses related to other euro denominated assets held by the company’s U.S. operations.

40

Credit Risk

The company is exposed to credit loss in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. The company’s risk is limited to the fair value of these contracts. The company monitors its exposure to credit risk by using credit approvals and credit limits and selecting major international banks and financial institutions as counterparties. The company does not anticipate nonperformance by any of these counterparties.

Fair Value of Other Financial Instruments

The carrying amount and the estimated fair value of other financial instruments held by the company were:

December 31 (thousands)	2002		2001		2000
Carrying amount
Cash and cash equivalents	$	49,205	$	41,793	$	43,965
Notes payable	82,847		140,466		68,644
Commercial paper	64,100		355,700		145,800
Long-term debt (including current maturities)	552,895		249,507		156,525
Fair value
Long-term debt (including current maturities)	$	588,003	$	260,518	$	158,162

The carrying amounts of cash equivalents and notes payable approximate fair value because of their short maturities.

The fair value of long-term debt is based on quoted market prices for the same or similar debt instruments.

Note 9 Shareholders’ Equity

Authorized common stock, par value $1.00 per share, was 200 million shares in 2002, 2001 and 2000. Treasury stock is stated at cost. Dividends declared per share of common stock were $0.55 for 2002, $0.525 for 2001 and $0.49 in 2000.

The company has 15 million shares, without par value, of authorized but unissued preferred stock.

Each share of outstanding common stock entitles the holder to one-half of a preferred stock purchase right. A right entitles the holder, upon occurrence of certain events, to buy one one-hundredth of a share of Series A Junior Participating Preferred Stock at a purchase price of $115, subject to adjustment. The rights, however, will not become exercisable unless and until, among other things, any person or group acquires 15 percent or more of the outstanding common stock of the company, or the company’s board of directors declares a holder of 10 percent or more of the outstanding common stock to be an “adverse person” as defined in the rights plan. Upon the occurrence of either of these events, the rights will become exercisable for common stock of the company (or in certain cases common stock of an acquiring company) having a market value of twice the exercise price of a right. The rights provide that the holdings by Henkel KGaA or its affiliates, subject to compliance by Henkel with certain conditions, will not cause the rights to become exercisable nor cause Henkel to be an “adverse person.” The rights are redeemable under certain circumstances at one cent per right and, unless redeemed earlier, will expire on March 11, 2006.

The company reacquired 165,000 shares of its common stock in 2002, 621,700 shares in 2001 and 4,781,500 shares in 2000 through open and private market purchases under prior board authorizations. In December 2000, the company announced a new authorization to repurchase up to 5.0 million shares of Ecolab common stock for the purpose of offsetting the dilutive effect of shares issued for stock incentive plans and for general corporate purposes. As of December 31, 2002, 4.2 million shares remained to be purchased under this program. The company also reacquired 33,778 shares of its common stock in 2002, 209,419 shares in 2001 and 90,065 shares in 2000 related to the exercise of stock options and the vesting of stock awards.

Note10 Stock Incentive and Option Plans

The company’s stock incentive and option plans provide for grants of stock options and stock awards. Common shares available for grant as of December 31 were 6,152,526 for 2002, 1,899,571 for 2001 and 3,501,782 for 2000. Common shares available for grant reflect 6 million shares approved during 2002 for issuance under the plans.

Options may be granted to purchase shares of the company’s stock at not less than fair market value at the date of grant. Options granted in 2002, 2001 and 2000 generally become exercisable over three years from date of grant and expire within ten years from date of grant. A summary of stock option activity and average exercise prices is as follows:

Shares	2002		2001		2000
Granted	2,456,337		2,667,026		2,768,975
Exercised	(2,216,361	)	(1,564,137	)	(2,189,360	)
Canceled	(736,835	)	(556,334	)	(142,090	)
December 31:
Outstanding	11,932,382		12,429,241		11,882,686
Exercisable	7,222,281		7,696,903		5,531,858

Average exercise price per share	2002		2001		2000
Granted	$	48.49	$	38.65	$	39.04
Exercised	20.54		12.38		10.56
Canceled	42.17		44.69		33.66
December 31:
Outstanding	38.70		33.73		30.35
Exercisable	$	35.55	$	30.93	$	17.73

Information related to stock options outstanding and stock options exercisable as of December 31, 2002, is as follows:

Options Outstanding
Range of Exercise Prices					Options Outstanding	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price
$	9.31	-	$	15.19	1,067,673	2.5 years	$	13.19
$	15.28	-	$	35.81	1,200,033	5.2 years	27.09
$	37.92	-	$	38.53	4,091,120	8.3 years	38.22
$	39.44	-	$	41.60	1,324,819	6.8 years	40.17
$	43.91	-	$	48.68	2,443,737	9.9 years	48.51
$	49.00				1,805,000	.4 years	$	49.00

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Options Exercisable
Range of Exercise Prices					Options Exercisable	Weighted-Average Exercise Price
$	9.31	-	$	15.19	1,067,673	$	13.19
$	15.28	-	$	35.81	1,197,758	27.08
$	37.92	-	$	38.53	2,068,579	38.33
$	39.44	-	$	41.60	1,029,584	40.19
$	43.91	-	$	48.68	53,687	45.76
$	49.00				1,805,000	$	49.00

The weighted-average grant-date fair value of options granted in 2002, 2001 and 2000, and the significant assumptions used in determining the underlying fair value of each option grant on the date of grant utilizing the Black-Scholes option-pricing model, were as follows:

	2002			2001			2000
Weighted-average grant-date fair value of options granted
Granted at market prices	$	14.21		$	11.26		$	11.50
Granted at prices exceeding market	—			$	4.74		$	3.38
Assumptions
Risk-free interest rate	3.6		%	4.7		%	6.2		%
Expected life	6 years			6 years			6 years
Expected volatility	26.5		%	24.8		%	19.6		%
Expected dividend yield	1.1		%	1.3		%	1.1		%

The expense associated with shares of restricted stock issued under the company’s stock incentive plan is based on the market price of the company’s stock at the date of grant and is amortized on a straight-line basis over the periods during which the restrictions lapse. Restricted stock awards generally vest over a 4-year period with 50 percent vesting 2 years after grant and the remaining 50 percent vesting 4 years after grant. Stock awards are not performance based and vest with continued employment. Stock awards are subject to forfeiture in the event of termination of employment. In the computation of basic earnings per share, unvested restricted shares are not considered. The effect of restricted stock awards, cancellations and vesting are included in the computation of diluted earnings per share using the treasury stock method. The company issued 33,600 shares in 2002, 5,800 shares in 2001 and 2,600 shares in 2000 under its restricted stock plan.

The company uses the intrinsic value-based method of accounting to measure compensation expense for its stock incentive and option plans. See also Note 2 to the consolidated financial statements for the pro forma net income and related basic and diluted per common share amounts had the company used the fair value-based method of accounting to measure compensation expense.

Note 11Income Taxes

Income from continuing operations before income taxes and equity in earnings of Henkel-Ecolab consisted of:

(thousands)	2002		2001		2000
Domestic	$	258,779	$	249,026	$	275,754
Foreign	93,192		40,719		42,780
Total	$	351,971	$	289,745	$	318,534

The provision for income taxes consisted of:

(thousands)	2002		2001			2000
Federal and state	$	59,601	$	107,055		$	120,318
Foreign	30,557		13,303			20,781
Currently payable	90,158		120,358			141,099
Federal and state	43,974		(1,940		)	(8,930		)
Foreign	5,949		(1,010		)	(2,674		)
Deferred	49,923		(2,950		)	(11,604		)
Provision for income taxes	$	140,081	$	117,408		$	129,495

The company’s overall net deferred tax assets and deferred tax liabilities were comprised of the following:

December 31 (thousands)	2002			2001			2000
Deferred tax assets
Postretirement health care and pension benefits	$	19,249		$	47,792		$	43,089
Other accrued liabilities	52,399			55,758			55,608
Loss carryforwards	13,932			18,679			4,337
Other, net	28,090			17,552			10,923
Valuation allowance	(1,462		)	(1,462		)	(1,462		)
Total	112,208			138,319			112,495
Deferred tax liabilities
Property, plant and equipment basis differences	53,320			40,956			31,183
Intangible assets	38,696			26,381			—
Other, net	3,273			5,403			3,835
Total	95,289			72,740			35,018
Net deferred tax assets	$	16,919		$	65,579		$	77,477

A reconciliation of the statutory U.S. federal income tax rate to the company’s effective income tax rate was:

	2002		2001		2000
Statutory U.S. rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	3.2		4.2		3.9
Foreign operations	1.0		—		0.1
Other, net	0.6		1.3		1.7
Effective income tax rate	39.8	%	40.5	%	40.7	%

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Cash paid for income taxes was approximately $95 million in 2002, $99 million in 2001 and $128 million in 2000.

As of December 31, 2002, undistributed earnings of international subsidiaries of approximately $210 million, were considered to have been reinvested indefinitely and, accordingly, the company has not provided U.S. income taxes on such earnings. If those earnings were remitted to the company, applicable income taxes would be substantially offset by available foreign tax credits.

Note 12 Rentals and Leases

The company leases sales and administrative office facilities, distribution center facilities, automobiles and computers and other equipment under operating leases. Rental expense under all operating leases was $77,593,000 in 2002, $60,365,000 in 2001 and $55,910,000 in 2000. As of December 31, 2002, future minimum payments under operating leases with noncancelable terms in excess of one year were:

(thousands)
2003	$	32,303
2004	23,567
2005	17,043
2006	12,548
2007	10,660
Thereafter	26,026
Total	$	122,147

Note 13 Research Expenditures

Research expenditures that related to the development of new products and processes, including significant improvements and refinements to existing products, were $49,860,000 in 2002, $33,103,000 in 2001 and $35,504,000 in 2000.

Note 14 Commitments and Contingencies

The company and certain subsidiaries are party to various environmental actions that have arisen in the ordinary course of business. These include possible obligations to investigate and mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and other operating or closed facilities. The effect of these actions on the company’s financial position, results of operations and cash flows to date has not been significant. The company is currently participating in environmental assessments and remediation at a number of locations and environmental liabilities have been accrued reflecting management’s best estimate of future costs. At December 31, 2002, the accrual for environmental remediation costs was approximately $3.8 million. Potential insurance reimbursements are not anticipated in the company’s accruals for environmental liabilities.

The company is self-insured in North America for most workers compensation, general liability and automotive liability losses subject to per occurrence and aggregate annual liability limitations. The company is insured for losses in excess of these limitations. The company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The company determines its liability for claims incurred but not reported on an actuarial basis.

While the final resolution of these contingencies could result in expenses different than current accruals, and therefore have an impact on the company’s consolidated financial results in a future reporting period, management believes the ultimate outcome will not have a significant effect on the company’s consolidated results of operations, financial position or cash flows.

Note15 Retirement Plans

Pension and Postretirement Health Care Benefits Plans

The company has a noncontributory defined benefit pension plan covering most of its U.S. employees. Plan benefits are based on years of service and highest average compensation for five consecutive years of employment. Various international subsidiaries also have defined benefit pension plans. Prior to year-end 2001, the international plans were not significant. The information below includes condensed information for the European pension plans associated with the Henkel-Ecolab acquisition as of year-end 2001. Beginning in 2002, the information below includes all of the company’s significant international defined benefit pension plans.

The company provides postretirement health care benefits to certain U.S. employees. The plan is contributory based on years of service and family status, with retiree contributions adjusted annually. Employees outside of the U.S. are generally covered under government-sponsored programs, and the expense and obligation for providing benefits under company plans was not significant.

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A reconciliation of changes in the benefit obligations and fair value of assets of the company’s defined benefit pension plans and the U.S. postretirement health care benefits plan is as follows:

	U.S. Pension Benefits									International Pension Benefits			U.S. Postretirement Health Care Benefits
(thousands)	2002			2001			2000			2002			2002			2001			2000
Benefit obligation, beginning of year	$	396,827		$	347,430		$	307,977		$	172,328		$	134,116		$	110,002		$	95,497
Service cost	21,635			18,925			16,589			9,412			2,814			7,342			6,123
Interest cost	29,237			26,461			24,238			10,973			7,651			8,826			7,738
Company contributions	—			—			—			137			—			—			—
Participant contributions	—			—			—			68			1,214			1,045			856
Acquisitions	—			—			—			43,135			—			—			—
Plan amendments and curtailments	—			726			—			1,522			(40,760		)	—			—
Changes in assumptions	53,467			14,723			12,854			—			24,588			5,001			4,196
Actuarial loss (gain)	(1,889		)	1,064			(3,376		)	(2,554		)	8,659			7,531			245
Benefits paid	(14,122		)	(12,502		)	(10,852		)	(8,913		)	(7,076		)	(5,631		)	(4,653		)
Foreign currency translation	—			—			—			19,768			—			—			—
Benefit obligation, end of year	$	485,155		$	396,827		$	347,430		$	245,876		$	131,206		$	134,116		$	110,002
Fair value of plan assets, beginning of year	$	311,164		$	317,027		$	337,226		$	108,485		$	23,811		$	27,128		$	27,116
Actual losses on plan assets	(43,112		)	(19,244		)	(16,587		)	(9,438		)	(2,866		)	(1,627		)	(1,179		)
Acquisitions	—			—			—			23,331			—			—			—
Company contributions	124,574			25,883			7,240			7,794			3,828			2,896			4,988
Participant contributions	—			—			—			1,052			1,214			1,045			856
Benefits paid	(14,122		)	(12,502		)	(10,852		)	(7,800		)	(7,076		)	(5,631		)	(4,653		)
Foreign currency translation	—			—			—			10,665			—			—			—
Fair value of plan assets, end of year	$	378,504		$	311,164		$	317,027		$	134,089		$	18,911		$	23,811		$	27,128

A reconciliation of the funded status and the actuarial assumptions for the pension and postretirement plans is as follows:

	U.S. Pension Benefits									International Pension Benefits			U.S. Postretirement Health Care Benefits
(thousands)	2002			2001			2000			2002			2002			2001			2000
Funded status	$	(106,651	)	$	(85,663	)	$	(30,403	)	$	(111,787	)	$	(112,295	)	$	(110,305	)	$	(82,874	)
Unrecognized actuarial loss	201,006			73,641			9,748			25,881			56,823			20,644			4,122
Unrecognized prior service cost (benefit)	9,329			11,258			12,413			(55		)	(37,431		)	(6,893		)	(7,444		)
Unrecognized net transition (asset) obligation	(3,508		)	(4,911		)	(6,314		)	833			—			—			—
Prepaid (accrued) benefit costs	$	100,176		$	(5,675	)	$	(14,556	)	$	(85,128	)	$	(92,903	)	$	(96,554	)	$	(86,196	)
Weighted-average actuarial assumptions
Discount rate for service and interest cost, at beginning of year	7.50		%	7.75		%	8.00		%	2.50-7.00		%	7.50		%	7.75		%	8.00		%
Projected salary increases	5.10			5.10			5.10			1.00-5.00		%	—			—			—
Expected return on assets	9.00			9.00			9.00			1.00-8.00		%	9.00			9.00			9.00
Discount rate for year-end benefit obligation	6.75		%	7.50		%	7.75		%	2.00-7.00		%	6.75		%	7.50		%	7.75		%

The aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those plans with accumulated benefit obligations in excess of plan assets were $103,063,000, $90,428,000 and $14,163,000, respectively, as of December 31, 2002. These plans relate to various international subsidiaries and are funded consistent with local practices and requirements.

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Pension and postretirement health care benefits expense for the company’s operations was:

	U.S. Pension Benefits									International Pension Benefits			U.S. Postretirement Health Care Benefits
(thousands)	2002			2001			2000			2002			2002			2001			2000
Service cost – employee benefits earned during the year	$	21,635		$	18,925		$	16,589		$	9,412		$	2,814		$	7,342		$	6,123
Interest cost on benefit obligation	29,237			26,461			24,238			10,973			7,651			8,826			7,738
Expected return on plan assets	(32,675		)	(28,862		)	(26,655		)	(8,556		)	(2,071		)	(2,363		)	(2,366		)
Recognition of net actuarial loss (gain)	—			—			—			394			2,005			—			(2		)
Amortization of prior service cost (benefit)	1,929			1,881			1,881			204			(4,431		)	(551		)	(551		)
Amortization of net transition (asset) obligation	(1,403		)	(1,403		)	(1,403		)	272			—			—			—
Curtailment (gain) loss	—			—			—			1,522			(5,791		)	—			—
Total expense	$	18,723		$	17,002		$	14,650		$	14,221		$	177		$	13,254		$	10,942

Total international pension expense, excluding Henkel-Ecolab, was $1,641,000 and $909,000 in 2001 and 2000, respectively.

The company also has U.S. noncontributory non-qualified defined benefit plans which provide for benefits to employees in excess of limits permitted under its U.S. pension plan. The recorded obligation for these plans was approximately $16 million at December 31, 2002. The annual expense for these plans was approximately $3 million in 2002, $3 million in 2001 and $4 million in 2000.

As of November 30, 2001, the accrued benefit obligation, fair value of plan assets and funded status of the Henkel-Ecolab pension plans were as follows:

(thousands)	2001
Benefit obligation, end of year	$	142,654
Fair value of plan assets, end of year	72,550
Funded status	(70,104		)
Unrecognized net loss	3,628
Unrecognized prior service cost	(154		)
Unrecognized net transition obligation	1,181
Net amount recognized	$	(65,449	)
Discount rate for year-end benefit obligation	4.00% - 6.25		%
Projected salary increases	4.00% - 8.00		%
Expected return on assets	1.75% - 5.00		%

Effective January 2003, the U.S. Pension Plan was amended to provide a cash balance type pension benefit to employees hired on or after the January 2003 effective date.

For postretirement health care benefit measurement purposes, 10.0 percent (for pre-age 65 retirees) and 12.0 percent (for post-age 65 retirees) annual rates of increase in the per capita cost of covered health care were assumed for 2002. The rates were assumed to decrease by 1 percent each year until they reach 5 percent in 2008 for pre-age 65 retirees and 5 percent in 2010 for post-age 65 retirees and remain at those levels thereafter. Health care costs which are eligible for subsidy by the company are limited to a 4 percent annual increase beginning in 1996 for certain employees.

Assumed health care cost trend rates have a significant effect on the amounts reported for the company’s U.S. postretirement health care benefits plan. A one-percentage point change in the assumed health care cost trend rates would have the following effects:

	1 Percentage Point
(thousands)	Increase		Decrease
Effect on total of postretirement service and interest cost components	$	548	$	(517	)
Effect on postretirement benefit obligation	9,003		(8,509		)

Effective March 2002, the company changed its postretirement health care benefits plan to discontinue the employer subsidy for postretirement health care benefits for most active employees. These subsidized benefits will continue to be provided to certain defined active employees and all existing retirees. As a result of these actions, the company recorded a curtailment gain of approximately $6 million in the first quarter of 2002.

Savings Plan

The company provides a 401(k) savings plan for substantially all U.S. employees. Prior to March 2002, employee contributions of up to 6 percent of eligible compensation were matched 50 percent by the company. In March 2002, the company changed its 401(k) savings plan and added an employee stock ownership plan (ESOP). Employee before-tax contributions of up to 3 percent of eligible compensation are matched 100 percent by the company and employee before-tax contributions between 3 percent and 5 percent of eligible compensation are matched 50 percent by the company. The match is 100 percent vested immediately. The company’s contributions are invested in Ecolab common stock and amounted to $12,905,000 in 2002, $9,491,000 in 2001 and $9,036,000 in 2000.

Effective January 2003, the Ecolab Savings Plan was amended to provide that all employee contributions which are invested in the Ecolab Stock Fund will be part of the employee’s ESOP account while so invested.

45

Note 16 Operating Segments

The company’s operating segments have generally similar products and services and the company is organized to manage its operations geographically. The company’s operating segments have been aggregated into three reportable segments.

The “United States Cleaning & Sanitizing” segment provides cleaning and sanitizing products and services to United States markets through its Institutional, Kay, Textile Care, Professional Products, Vehicle Care, Water Care Services and Food & Beverage operations.

The “United States Other Services” segment includes all other U.S. operations of the company. This segment provides pest elimination, kitchen equipment repair and maintenance, and commercial dishwashing services through its Pest Elimination, GCS and Jackson operations, prior to the sale of Jackson in November 2000.

The company’s “International Cleaning & Sanitizing” segment provides cleaning and sanitizing product and service offerings to international markets in Europe, Asia Pacific, Latin America, Africa/Export and Canada. Effective November 30, 2001, Henkel-Ecolab’s total assets were included in the company’s International Cleaning & Sanitizing operations. European operating data has been included beginning in 2002.

Information on the types of products and services of each of the company’s operating segments is included on the inside front cover under “Services/Products Provided”of the Ecolab Overview section of this Annual Report.

The company evaluates the performance of its international operations based on fixed management currency exchange rates. All other accounting policies of the reportable segments are consistent with accounting principles generally accepted in the United States of America and the accounting policies of the company described in Note 2 of these notes to consolidated financial statements. The profitability of the company’s operating segments is evaluated by management based on operating income. Intersegment sales and transfers were not significant.

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

	United States								Other
(thousands)	Cleaning & Sanitizing		Other Services		Total United States		International Cleaning & Sanitizing		Foreign Currency Translation		Corporate			Consolidated
Net sales
2002	$	1,615,171	$	308,329	$	1,923,500	$	1,427,418	$	52,667				$	3,403,585
2001	1,548,882		273,020		1,821,902		472,113		26,695					2,320,710
2000	1,498,381		248,317		1,746,698		420,031		63,932					2,230,661
Operating income (loss)
2002	271,838		33,051		304,889		131,376		5,609		$	(46,008	)	395,866
2001	246,936		29,338		276,274		44,181		2,662		(4,938		)	318,179
2000	249,182		25,515		274,697		41,399		8,552		18,491			343,139
Depreciation & amortization
2002	112,303		4,615		116,918		87,601		11,461		7,448			223,428
2001	118,298		5,384		123,682		28,567		4,802		5,939			162,990
2000	107,537		5,124		112,661		21,895		7,418		6,462			148,436
Total assets
2002	960,912		129,498		1,090,410		1,513,512		95,816		178,691			2,878,429
2001	983,109		128,338		1,111,447		1,309,982		29,215		74,356			2,525,000
2000	953,534		103,182		1,056,716		343,270		47,057		266,968			1,714,011
Capital expenditures
2002	111,349		3,105		114,454		86,497		11,317		489			212,757
2001	114,427		6,911		121,338		33,864		2,035		700			157,937
2000	$	116,666	$	3,381	$	120,047	$	24,714	$	4,434	$	814		$	150,009

Consistent with the company’s internal management reporting, corporate operating income includes special charges recorded for 2002, 2001 and 2000. In addition, corporate overhead costs directly related to the Henkel-Ecolab joint venture in 2001 and 2000 and the gain on sale of the Jackson business ($25.9 million) and income related to net reductions in probable losses related to certain environmental matters ($4.4 million) also have been included in the corporate operating income segment in 2000. Corporate assets are principally cash and cash equivalents and the company’s investment in Henkel-Ecolab, prior to November 30, 2001. Corporate assets in 2002 also included a prepaid pension asset.

46

The company has two classes of products and services within its United States and International Cleaning & Sanitizing operations which comprise 10 percent or more of consolidated net sales. Sales of warewashing products were approximately 23 percent, 26 percent and 26 percent of consolidated net sales in 2002, 2001 and 2000, respectively.  Sales of laundry products and services were approximately 12 percent, 10 percent and 11 percent of consolidated net sales in 2002, 2001 and 2000, respectively. Sales of the recently acquired Henkel-Ecolab operations are reflected in these percentages beginning in 2002.

Long-lived assets of the company’s United States and International operations were as follows:

December 31 (thousands)	2002		2001		2000
United States	$	418,973	$	424,478	$	401,671
International	246,549		211,386		77,283
Corporate	4,653		4,429		4,715
Effect of foreign currency translation	10,090		4,030		17,971
Consolidated	$	680,265	$	644,323	$	501,640

Note 17 New Accounting Standard

Effective January 1, 2002, the company adopted the provisions of SFAS No.142, Goodwill and Other Intangible Assets. This statement discontinued the amortization of goodwill, subject to periodic impairment testing. The effect of discontinuing amortization of these assets for the year ended December 31, 2002 was to increase net income by approximately $28.8 million, or $0.22 for basic and diluted net income per share. This amount includes the additional goodwill amortization that would have been reflected from the acquisition of the remaining 50 percent of the Henkel-Ecolab joint venture on November 30, 2001. The pro forma amounts shown below reflect the effect of retroactive application of the discontinuance of the amortization of goodwill as if the new method of accounting had been in effect during 2001 and 2000. The pro forma information presents the historical information prior to the acquisition of the former European joint venture.

(thousands, except per share)	2002		2001		2000
Reported net income	$	209,770	$	188,170	$	206,127
Goodwill amortization (net of tax)			18,471		17,762
Pro forma net income	$	209,770	$	206,641	$	223,889
Basic earnings per share
Net income, as reported	$	1.63	$	1.48	$	1.61
Goodwill amortization (net of tax)			0.14		0.14
Pro forma basic earnings per share	$	1.63	$	1.62	$	1.75
Diluted earnings per share
Net income, as reported	$	1.60	$	1.45	$	1.56
Goodwill amortization (net of tax)			0.14		0.13
Pro forma diluted earnings per share	$	1.60	$	1.59	$	1.70

Per share amounts do not necessarily sum due to rounding.

The company was required to test all existing goodwill for impairment as of January 1, 2002 on a reporting unit basis. The company’s reporting units are its operating segments. Under SFAS No. 142, the fair value approach is used to test goodwill for impairment. This method differs from the company’s prior policy of using an undiscounted cash flows method for testing goodwill impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. Fair values of reporting units were established using a discounted cash flow method. Where available and as appropriate, comparative market multiples were used to corroborate the results of the discounted cash flow method.

The result of testing goodwill for impairment in accordance with the adoption of SFAS No. 142, was a non-cash charge of $4.0 million, net of tax or $0.03 per share, which is reported on the accompanying consolidated statement of income as a cumulative effect of a change in accounting in 2002. The impairment charge relates to the Africa/Export reporting unit, which is part of the International Cleaning & Sanitizing segment. The primary factor resulting in the impairment charge was the difficult economic environment in the region.

47

Note 18 Quarterly Financial Data (Unaudited)

(thousands, except per share)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Year
2002
Net sales
United States Cleaning & Sanitizing	$	392,349		$	402,113		$	426,339		$	394,370		$	1,615,171
United States Other Services	70,490			78,824			81,629			77,386			308,329
International Cleaning & Sanitizing	324,768			355,524			362,842			384,284			1,427,418
Effect of foreign currency translation	(1,498		)	2,769			24,056			27,340			52,667
Total	786,109			839,230			894,866			883,380			3,403,585
Cost of sales (including special charges of $5,184, $1,908, $ 301 and $1,584 in first, second, third and fourth quarters)	395,945			413,425			434,195			444,032			1,687,597
Selling, general and administrative expenses	304,945			315,363			327,666			335,117			1,283,091
Special charges	12,296			11,818			2,109			10,808			37,031
Operating income
United States Cleaning & Sanitizing	64,940			68,979			80,361			57,558			271,838
United States Other Services	5,262			9,224			10,761			7,804			33,051
International Cleaning & Sanitizing	20,073			33,675			39,938			37,690			131,376
Corporate	(17,480		)	(13,726		)	(2,411		)	(12,391		)	(46,008		)
Effect of foreign currency translation	128			472			2,247			2,762			5,609
Total	72,923			98,624			130,896			93,423			395,866
Interest expense, net	10,512			11,955			10,988			10,440			43,895
Income from continuing operations before income taxes	62,411			86,669			119,908			82,983			351,971
Provision for income taxes	25,370			35,008			47,826			31,877			140,081
Income from continuing operations before change in accounting	37,041			51,661			72,082			51,106			211,890
Change in accounting for goodwill	(4,002		)										(4,002		)
Gain from discontinued operations	1,882												1,882
Net income	$	34,921		$	51,661		$	72,082		$	51,106		$	209,770
Basic income per common share
Income from continuing operations	$	0.29		$	0.40		$	0.56		$	0.39		$	1.64
Change in accounting for goodwill	(0.03		)										(0.03		)
Gain from discontinued operations	0.01												0.01
Net income	0.27			0.40			0.56			0.39			1.63
Diluted income per common share
Income from continuing operations	0.28			0.40			0.55			0.39			1.62
Change in accounting for goodwill	(0.03		)										(0.03		)
Gain from discontinued operations	0.01												0.01
Net income	$	0.27		$	0.40		$	0.55		$	0.39		$	1.60
Weighted-average common shares outstanding
Basic	128,406			128,905			129,287			129,695			129,073
Diluted	130,180			130,613			130,611			131,208			130,787
2001
Net sales
United States Cleaning & Sanitizing	$	389,027		$	393,621		$	407,542		$	358,692		$	1,548,882
United States Other Services	62,277			69,284			69,296			72,163			273,020
International Cleaning & Sanitizing	109,360			117,755			124,931			120,067			472,113
Effect of foreign currency translation	10,735			6,322			5,862			3,776			26,695
Total	571,399			586,982			607,631			554,698			2,320,710
Cost of sales (including restructuring income of $427 in third quarter and $139 in fourth quarter)	272,811			282,598			288,669			276,176			1,120,254
Selling, general and administrative expenses	221,207			224,332			224,899			211,015			881,453
Special charges				(192		)	(53		)	1,069			824
Operating income
United States Cleaning & Sanitizing	60,793			61,788			71,129			53,226			246,936
United States Other Services	5,602			8,205			8,875			6,656			29,338
International Cleaning & Sanitizing	10,820			10,425			14,226			8,710			44,181
Corporate	(1,226		)	(908		)	(685		)	(2,119		)	(4,938		)
Effect of foreign currency translation	1,392			734			571			(35		)	2,662
Total	77,381			80,244			94,116			66,438			318,179
Interest expense, net	6,668			6,816			7,010			7,940			28,434
Income before income taxes and equity in earnings of Henkel-Ecolab	70,713			73,428			87,106			58,498			289,745
Provision for income taxes	28,639			29,737			35,279			23,753			117,408
Equity in earnings of Henkel-Ecolab	2,340			4,502			5,434			3,557			15,833
Net income, as reported	44,414			48,193			57,261			38,302			188,170
Goodwill amortization, net of tax	4,616			4,616			4,616			4,623			18,471
Pro forma net income	$	49,030		$	52,809		$	61,877		$	42,925		$	206,641
Income per common share, as reported
Basic	$	0.35		$	0.38		$	0.45		$	0.30		$	1.48
Diluted	$	0.34		$	0.37		$	0.44		$	0.30		$	1.45
Pro forma income per common share
Basic	$	0.39		$	0.41		$	0.48		$	0.34		$	1.62
Diluted	$	0.38		$	0.41		$	0.48		$	0.33		$	1.59
Weighted-average common shares outstanding
Basic	126,962			127,333			127,675			127,695			127,416
Diluted	130,629			130,068			129,809			129,682			129,928

Restructuring and special charges are included in corporate operating income. Per share amounts do not necessarily sum due to changes in shares outstanding and rounding.

48

Management’s and Accountants’ reports

Report of Management

Management is responsible for the integrity and objectivity of the consolidated financial statements. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include certain amounts based on management’s best estimates and judgments.

To meet its responsibility, management has established and maintains a system of internal controls that provides reasonable assurance regarding the integrity and reliability of the financial statements and the protection of assets from unauthorized use or disposition. These systems are supported by qualified personnel, by an appropriate division of responsibilities and by an internal audit function. There are limits inherent in any system of internal controls since the cost of monitoring such systems should not exceed the desired benefit. Management believes that the company’s system of internal controls is effective and provides an appropriate cost/benefit balance.

The Board of Directors, acting through its Audit Committee composed solely of outside directors, is responsible for determining that management fulfills its responsibilities in the preparation of financial statements and maintains financial control of operations. The Audit Committee recommends to the Board of Directors the appointment of the company’s independent accountants, subject to ratification by the shareholders. It meets regularly with management, the internal auditors and the independent accountants.

The independent accountants provide an objective, independent review as to management’s discharge of its responsibilities insofar as they relate to the fair presentation of the consolidated financial statements. Their report is presented separately.

/s/ Allan L. Schuman

Allan L. Schuman

Chairman of the Board and

Chief Executive Officer

/s/ Steven L. Fritze

Steven L. Fritze

Senior Vice President and

Chief Financial Officer

Report of Independent Accountants

To the Shareholders and Directors

Ecolab Inc.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of comprehensive income and shareholders’ equity and of cash flows present fairly, in all material respects, the consolidated financial position of Ecolab Inc. as of December 31, 2002, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Ecolab Inc.’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 17 to the consolidated financial statements, in 2002 Ecolab Inc. adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

/s/ PricewaterhouseCoopers LLP

Minneapolis, Minnesota

February 18, 2003

49

Summaryoperating and financial data

December 31 (thousands, except per share)	2002			2001			2000
Operations
Net sales
United States	$	1,923,500		$	1,821,902		$	1,746,698
International (at average rates of currency exchange during the year)	1,480,085			498,808			483,963
Total	3,403,585			2,320,710			2,230,661
Cost of sales (including special charges of $8,977 in 2002, income of $566 in 2001 and expenses of $1,948 in 2000)	1,687,597			1,120,254			1,056,263
Selling, general and administrative expenses	1,283,091			881,453			851,995
Special charges, sale of business and merger expenses	37,031			824			(20,736		)
Operating income	395,866			318,179			343,139
Interest expense, net	43,895			28,434			24,605
Income from continuing operations before income taxes, equity earnings and changes in accounting principle	351,971			289,745			318,534
Provision for income taxes	140,081			117,408			129,495
Equity in earnings of Henkel-Ecolab				15,833			19,516
Income from continuing operations	211,890			188,170			208,555
Gain from discontinued operations	1,882
Changes in accounting principles	(4,002		)				(2,428		)
Net income, as reported	209,770			188,170			206,127
Pro forma adjustments				18,471			17,762
Pro forma net income	$	209,770		$	206,641		$	223,889
Income per common share, as reported
Basic – continuing operations	$	1.64		$	1.48		$	1.63
Basic – net income	1.63			1.48			1.61
Diluted – continuing operations	1.62			1.45			1.58
Diluted – net income	1.60			1.45			1.56
Pro forma income per common share
Basic – continuing operations	1.64			1.62			1.77
Basic – net income	1.63			1.62			1.75
Diluted – continuing operations	1.62			1.59			1.72
Diluted – net income	$	1.60		$	1.59		$	1.70
Weighted-average common shares outstanding – basic	129,073			127,416			127,753
Weighted-average common shares outstanding – diluted	130,787			129,928			131,946
Selected Income Statement Ratios
Gross profit	50.4		%	51.7		%	52.6		%
Selling, general and administrative expenses	37.7			38.0			38.2
Operating income	11.6			13.7			15.4
Income from continuing operations before income taxes	10.3			12.5			14.3
Income from continuing operations	6.2			8.1			9.3
Effective income tax rate	39.8		%	40.5		%	40.7		%
Financial Position
Current assets	$	1,015,937		$	929,583		$	600,568
Property, plant and equipment, net	680,265			644,323			501,640
Investment in Henkel-Ecolab							199,642
Goodwill, intangible and other assets	1,182,227			951,094			412,161
Total assets	$	2,878,429		$	2,525,000		$	1,714,011
Current liabilities	$	866,350		$	827,952		$	532,034
Long-term debt	539,743			512,280			234,377
Postretirement health care and pension benefits	207,596			183,281			117,790
Other liabilities	164,989			121,135			72,803
Shareholders’ equity	1,099,751			880,352			757,007
Total liabilities and shareholders’ equity	$	2,878,429		$	2,525,000		$	1,714,011
Selected Cash Flow Information
Cash provided by operating activities	$	423,326		$	364,481		$	315,486
Depreciation and amortization	223,428			162,990			148,436
Capital expenditures	212,757			157,937			150,009
Adjusted EBITDA from continuing operations	619,294			481,169			491,575
Cash dividends declared per common share	$	0.55		$	0.525		$	0.49
Selected Financial Measures/Other
Total debt	$	699,842		$	745,673		$	370,969
Total debt to capitalization	38.9		%	45.9		%	32.9		%
Book value per common share	$	8.46		$	6.88		$	5.95
Return on beginning equity	23.8		%	24.9		%	27.1		%
Dividends per share/diluted net income per common share	34.4		%	36.2		%	31.4		%
Annual common stock price range	$	50.40-36.53		$	44.19-28.50		$	45.69-28.00
Number of employees	20,417			19,326			14,250

50

Summaryoperating and financial data

December 31 (thousands, except per share)	1999				1998			1997			1996			1995			1994			1993			1992
Operations
Net sales
United States	$		1,605,385		$	1,429,711		$	1,251,517		$	1,127,281		$	1,008,910		$	923,667		$	850,648		$	800,872
International (at average rates of currency exchange during the year)	444,413				431,366			364,524			341,231			310,755			265,544			234,981			241,229
Total	2,049,798				1,861,077			1,616,041			1,468,512			1,319,665			1,189,211			1,085,629			1,042,101
Cost of sales (including special charges of $8,977 in 2002, income of $566 in 2001 and expenses of $1,948 in 2000)	963,476				874,793			745,256			694,791			622,342			550,308			505,836			498,513
Selling, general and administrative expenses	796,371				724,304			652,281			588,404			534,637			493,939			450,342			417,974
Special charges, sale of business and merger expenses																	8,000
Operating income	289,951				261,980			218,504			185,317			162,686			136,964			129,451			125,614
Interest expense, net	22,713				21,742			12,637			14,372			11,505			12,909			21,384			35,334
Income from continuing operations before income taxes, equity earnings and changes in accounting principle	267,238				240,238			205,867			170,945			151,181			124,055			108,067			90,280
Provision for income taxes	109,769				101,782			85,345			70,771			59,694			50,444			33,422			27,392
Equity in earnings of Henkel-Ecolab	18,317				16,050			13,433			13,011			7,702			10,951			8,127			8,600
Income from continuing operations	175,786				154,506			133,955			113,185			99,189			84,562			82,772			71,488
Gain from discontinued operations					38,000
Changes in accounting principles																				715
Net income, as reported	175,786				192,506			133,955			113,185			99,189			84,562			83,487			71,488
Pro forma adjustments	16,631				14,934			11,195			10,683			8,096			12,757			3,658			4,054
Pro forma net income	$		192,417		$	207,440		$	145,150		$	123,868		$	107,285		$	97,319		$	87,145		$	75,542
Income per common share, as reported
Basic – continuing operations	$		1.36		$	1.20		$	1.03		$	0.88		$	0.75		$	0.63		$	0.61		$	0.53
Basic – net income	1.36				1.49			1.03			0.88			0.75			0.63			0.62			0.53
Diluted – continuing operations	1.31				1.15			1.00			0.85			0.73			0.62			0.60			0.52
Diluted – net income	1.31				1.44			1.00			0.85			0.73			0.62			0.61			0.52
Pro forma income per common share
Basic – continuing operations	1.49				1.31			1.12			0.96			0.81			0.72			0.64			0.56
Basic – net income	1.49				1.61			1.12			0.96			0.81			0.72			0.65			0.56
Diluted – continuing operations	1.43				1.26			1.08			0.93			0.79			0.71			0.63			0.55
Diluted – net income	$		1.43		$	1.55		$	1.08		$	0.93		$	0.79		$	0.71		$	0.63		$	0.55
Weighted-average common shares outstanding – basic	129,550				129,157			129,446			128,991			132,193			135,100			135,056			134,408
Weighted-average common shares outstanding – diluted	134,419				134,047			133,822			132,817			134,956			137,306			137,421			136,227
Selected Income Statement Ratios
Gross profit	53.0			%	53.0		%	53.9		%	52.7		%	52.8		%	53.7		%	53.4		%	52.2		%
Selling, general and administrative expenses	38.9				38.9			40.4			40.1			40.5			41.5			41.5			40.1
Operating income	14.1				14.1			13.5			12.6			12.3			11.5			11.9			12.1
Income from continuing operations before income taxes	13.0				12.9			12.7			11.6			11.5			10.4			10.0			8.7
Income from continuing operations	8.6				8.3			8.3			7.7			7.5			7.1			7.6			6.9
Effective income tax rate	41.1			%	42.4		%	41.5		%	41.4		%	39.5		%	40.7		%	30.9		%	30.3		%
Financial Position
Current assets	$		577,321		$	503,514		$	509,501		$	435,507		$	358,072		$	401,179		$	311,051		$	264,512
Property, plant and equipment, net	448,116				420,205			395,562			332,314			292,937			246,191			219,268			207,183
Investment in Henkel-Ecolab	219,003				253,646			239,879			285,237			302,298			284,570			255,804			289,034
Goodwill, intangible and other assets	341,506				293,630			271,357			155,351			107,573			88,416			105,607			98,135
Total assets	$		1,585,946		$	1,470,995		$	1,416,299		$	1,208,409		$	1,060,880		$	1,020,356		$	891,730		$	858,864
Current liabilities	$		470,674		$	399,791		$	404,464		$	327,771		$	310,538		$	253,665		$	201,498		$	192,023
Long-term debt	169,014				227,041			259,384			148,683			89,402			105,393			131,861			215,963
Postretirement health care and pension benefits	97,527				85,793			76,109			73,577			70,666			70,882			72,647			63,393
Other liabilities	86,715				67,829			124,641			138,415			133,616			128,608			93,917			29,179
Shareholders’ equity	762,016				690,541			551,701			519,963			456,658			461,808			391,807			358,306
Total liabilities and shareholders’ equity	$		1,585,946		$	1,470,995		$	1,416,299		$	1,208.409		$	1,060,880		$	1,020,356		$	891,730		$	858,864
Selected Cash Flow Information
Cash provided by operating activities	$		293,494		$	235,642		$	235,098		$	254,269		$	166,463		$	169,346		$	175,674		$	120,217
Depreciation and amortization	134,530				121,971			100,879			89,523			76,279			66,869			60,609			60,443
Capital expenditures	145,622				147,631			121,667			111,518			109,894			88,457			68,321			59,904
Adjusted EBITDA from continuing operations	424,481				383,951			319,383			274,840			238,965			203,833			190,060			186,057
Cash dividends declared per common share	$		0.435		$	0.39		$	0.335		$	0.29		$	0.2575		$	0.2275		$	0.1975		$	0.17875
Selected Financial Measures/Other
Total debt	$		281,074		$	295,032		$	308,268		$	176,292		$	161,049		$	147,213		$	151,281		$	236,695
Total debt to capitalization	26.9			%	29.9		%	35.8		%	25.3		%	26.1		%	24.2		%	27.9		%	39.8		%
Book value per common share	$		5.89		$	5.33		$	4.27		$	4.01		$	3.53		$	3.41		$	2.90		$	2.66
Return on beginning equity	25.5			%	34.9		%	25.8		%	24.8		%	21.5		%	21.6		%	23.3		%	23.3		%
Dividends per share/diluted net income per common share	33.2			%	27.1		%	33.5		%	34.1		%	35.3		%	36.7		%	32.4		%	34.4		%
Annual common stock price range	$	44.44-31.69			$	38.00-26.13		$	28.00-18.13		$	19.75-14.56		$	15.88-10.00		$	11.75-9.63		$	11.91-9.07		$	9.57-6.66
Number of employees	12,870				12,007			10,210			9,573			9,026			8,206			7,822			7,601

The former Henkel-Ecolab is included as a consolidated subsidiary effective November 30, 2001. Pro forma results for 1992 through 2001 reflect the effect of retroactive application of the discontinuance of the amortization of goodwill as if SFAS No. 142 had been in effect since January 1, 1992. For 1992 through 1994 the pro forma adjustments also reflect adjustments to eliminate unusual items associated with Ecolab’s acquisition of Kay Chemical Company in December 1994. All per share, shares outstanding and market price data reflect the two-for-one stock splits declared in 1997 and 1993. Adjusted EBITDA from continuing operations is the total of operating income, and depreciation and amortization for the year. Return on beginning equity is net income divided by beginning shareholders’ equity.

51

APPENDIX: Graphic and Image Material

Page Number	Description
20	Bar graph illustrating return on beginning equity for the last five fiscal years as follows:

2002	23.8	%
2001	24.9	%
2000	27.1	%
1999	25.5	%
1998	34.9	%

20 Bar graph illustrating total return to shareholders (share appreciation plus dividends) as well as illustrating total return of the Standard & Poor’s 500 Index for the last five fiscal years as follows:

	Ecolab		S&P 500
2002	24.3	%	(23.4	)%
2001	(5.6	)%	(11.9	)%
2000	11.6	%	(9.1	)%
1999	9.3	%	21.0	%
1998	31.9	%	28.6	%

25 Pie chart illustrating the United States Cleaning & Sanitizing business mix for 2002 as well as bar graph illustrating this segment’s consolidated net sales (in millions) for the last three fiscal years as follows:

2002 Institutional mix	60		%
2002 Food & Beverage mix	17		%
2002 Kay mix	9		%
2002 Professional Products mix	6		%
2002 Textile Care mix	3		%
2002 Vehicle Care mix	3		%
2002 Water Care Services mix	2		%
2002 Sales	$	1,615
2001 Sales	$	1,549
2000 Sales	$	1,498

25 Pie chart illustrating United States Other Services business mix for 2002 as well as bar graph illustrating this segment’s consolidated net sales (in millions) for the last three fiscal years as follows:

2002 Pest Elimination mix	60		%
2002 GCS Service mix	40		%
2002 Sales	$	308
2001 Sales	$	273
2000 Sales	$	248

Page Number	Description
26	Pie chart illustrating the International Cleaning & Sanitizing business mix for 2002 as well as bar graph illustrating this segment’s consolidated net sales (in millions) for the last three fiscal years as follows:

2002 Europe mix	65		%
2002 Asia Pacific mix	17		%
2002 Latin America mix	7		%
2002 Canada mix	6		%
2002 Africa/Export and Other mix	5		%
2002 Sales	$	1,427
2001 Sales	$	472
2000 Sales	$	420

28 Pie chart illustrating mix of shareholders’ equity and total debt for 2002 as well as bar chart illustrating total debt to capitalization ratio for the last three fiscal years as follows:

2002 Shareholders’ Equity mix	61	%
2002 Total Debt mix	39	%
2002 Debt/equity ratio	39	%
2001 Debt/equity ratio	46	%
2000 Debt/equity ratio	33	%

28 Bar graph illustrating cash provided from operating activities (in millions) for the last five fiscal years as follows:

2002	$	423
2001	$	364
2000	$	315
1999	$	293
1998	$	236

EX-21

Exhibit (21)

Registrant

ECOLAB INC.

Name of Affiliate	State or Other Jurisdiction of Incorporation	Percentage of Ownership
Ecolab (Antigua) Ltd.	Antigua	100
Ecolab S.A.	Argentina	100
Ecolab Australia Pty Ltd.	Australia	100
Ecolab Finance Pty Ltd.	Australia	100
Ecolab Pty Ltd.	Australia	100
Ecolab Water Care Services Pty Limited	Australia	100
Gibson Chemical Industries Pty Ltd.	Australia	100
Gibson Chemicals (NSW) Pty Limited	Australia	100
Gibson Chemicals Fiji Pty Limited	Australia	100
Gibson Chemicals Great Britain Pty Limited	Australia	100
Gibson Chemicals Pty Limited	Australia	100
Intergrain Timber Finishes Pty Limited	Australia	100
Leonard Chemical Products Pty Limited	Australia	100
Nippon Thermochemical Australia Pty Limited	Australia	100
Puritan/Churchill Chemical Holdings Pty Limited	Australia	100
Vessey Chemicals (Holdings) Pty Limited	Australia	95
Vessey Chemicals Pty Limited	Australia	100
Vessey Chemicals (Vic.) Pty Limited	Australia	100
Ecolab Ges.m.b.H	Austria	100
Ecolab Limited	Bahamas	100
Ecolab (Barbados) Limited	Barbados	100

Name of Affiliate	State or Other Jurisdiction of Incorporation	Percentage of Ownership
Ecolab N.V.	Belgium	100
Kay N.V.	Belgium	100
Ecolab Emprecendimentos E Participacoes Ltda.	Brazil	100
Ecolab Quimica Ltda.	Brazil	100
Ecolab EOOD	Bulgaria	100
Ecolab Co.	Canada	100
Ecolabone ULC	Canada	100
Ecolab Canada L.P.	Canada	100
Ecolab (Ontario) Holdings Ltd.	Canada	100
Ecolab S.A.	Chile	100
Ecolab Colombia S.A.	Colombia	100
Ecolab, Sociedad Anonima	Costa Rica	100
Ecolab d.o.o.	Croatia	100
Ecolab Hygiene s.r.o.	Czech Republic	100
Ecolab A/S	Denmark	100
Ecolab, S.A. de C.V.	El Salvador	100
Oy Ecolab AB	Finland	100
Alpha Holding S.A.S.	France	100
Ecolab S.A.	France	100
Ecolab SNC	France	100
Kleencare Hygiene SA	France	100
Paragerm SNC	France	100

2

Name of Affiliate	State or Other Jurisdiction of Incorporation	Percentage of Ownership
Bionagro GmbH	Germany	100
Ecolab Asset Administration GmbH & Co. KG	Germany	100
Ecolab Beteiligungs GmbH	Germany	100
Ecolab Deutschland GmbH	Germany	100
Ecolab Deutschland Verwaltungs GmbH	Germany	100
Ecolab Deutschland Holding GmbH & Co. OHG	Germany	100
Ecolab Europe R&D Verwaltungs GmbH	Germany	100
Ecolab Export GmbH	Germany	100
Ecolab GmbH	Germany	100
Ecolab GmbH & Co. OHG	Germany	100
Ecolab Institutional Deutschland GmbH & Co. OHG	Germany	100
Ecolab Management GmbH	Germany	100
Ecolab NFK Beteilgungen Management GmbH	Germany	100
Ecolab NFK R&D GmbH & Co. OHG	Germany	100
Ecolab NFK R&D Verwaltungs GmbH	Germany	100
Ecolab Services GmbH	Germany	100
Lang Apparatebau GmbH	Germany	100
Lang Engineering GmbH	Germany	100
Lang Hygiene Systeme GmbH	Germany	100
Ecolab A.E.B.E.	Greece	100
Ecolab, Sociedad Anonima	Guatemala	100
Peter Cox Insurance Services Limited	Guernsey	100
Quimicas Ecolab, S.A.	Honduras	100

3

Name of Affiliate	State or Other Jurisdiction of Incorporation	Percentage of Ownership
Ecolab Limited	Hong Kong	100
Ecolab Hygiene Kft.	Hungary	100
P.T. Ecolab Indonesia	Indonesia	100
Eclab Export Limited	Ireland	100
Ecolab Finance Company Limited	Ireland	100
Ecolab (Holdings) Limited	Ireland	100
Ecolab Limited	Ireland	100
Ecolab JVZ Limited	Israel	100
Ecolab-Zohar Dalia L.P.	Israel	51
Ecolab-Zohar Dalia Management Company Ltd.	Israel	51
Cohrent Srl	Italy	33
Comac Spa	Italy	33
Elton Chemical Srl	Italy	100
Ecolab S.p.A.	Italy	100
Fimap Srl	Italy	33
Findesadue Srl	Italy	80
Henkel-Ecolab Distribution Srl	Italy	100
Ecolab Limited	Jamaica	100
Ecolab K.K.	Japan	100
Ecolab East Africa (Kenya) Limited	Kenya	100
Ecolab Korea Ltd.	Korea	100
Ecolab SIA	Latvia	100
Ecolab Lebanon S.a.r.l.	Lebanon	100

4

Name of Affiliate	State or Other Jurisdiction of Incorporation	Percentage of Ownership
Ecolab Sdn Bhd	Malaysia	100
Ecolab, S. de R.L. de C.V.	Mexico	100
Ecolab Holdings Mexico, S.A. de C.V.	Mexico	100
Ecolab Maroc S. A.	Morocco	100
Ecolab (Proprietary) Limited	Namibia	100
Ecolab Finance N.V.	Netherlands Antilles (Curacao)	100
Ecolab Holdings B.V.	Netherlands	100
Ecolab International B.V.	Netherlands	100
Ecolab B.V.	Netherlands	100
Kleencare Hygiene BV	Netherlands	100
Ecolab Limited	New Zealand	100
Ecolab Nicaragua, S.A.	Nicaragua	100
Ecolab A/S	Norway	100
Ecolab S.A.	Panama	100
Gibson Chemicals (PNG) Pty. Limited	Papua New Guinea	100
Ecolab Chemicals Ltd.	People’s Republic of China	85
Ecolab Philippines Inc.	Philippines	100
Ecolab Sp.z o.o.	Poland	100
Promleko Serwis Sp.z.o.z.	Poland	33
Henkel-Ecolab S.A.	Portugal	100
Ecolab S.R.L.	Romania	100
ZAO Ecolab	Russia	100
Ecolab Pte. Ltd.	Singapore	100

5

Name of Affiliate	State or Other Jurisdiction of Incorporation	Percentage of Ownership
Ecolab s.r.o.	Slovakian Republic	100
Ecolab d.o.o.	Slovania	100
Ecolab (Proprietary) Ltd.	South Africa	100
Henkel-Ecolab S.A.	Spain	100
Ecolab (St. Lucia) Limited	St. Lucia	100
Ecolab AB	Sweden	100
Ecolab AG	Switzerland	100
Kleencare Hygiene AG	Switzerland	100
Ecolab Ltd.	Taiwan	100
Ecolab East Africa (Tanzania) Limited	Tanzania	100
Ecolab Ltd.	Thailand	100
Ecolab Temizleme Sistemleri A.S.	Turkey	100
Ecolab East Africa (Uganda) Limited	Uganda	100
Ecolab LLC	Ukraine	100
Ecolab Limited	United Kingdom	100
Ecolab (U.K.) Holdings Limited	United Kingdom	100
LHS (UK) Limited	United Kingdom	100
Terminix Limited	United Kingdom	100
Ecolab S. A.	Uruguay	100
Ecolab Foreign Sales Corp.	U.S. Virgin Islands	100
Ecolab S.A.	Venezuela	74
Ecolab Hygiene d.o.o.	Yugoslavia	100
Ecolab Zimbabwe (Pvt) Ltd.	Zimbabwe	100

6

Name of Affiliate	State or Other Jurisdiction of Incorporation	Percentage of Ownership
United States
Ecolab Finance Inc.	Delaware	100
Ecolab Finance (Australia) Inc.	Delaware	100
Ecolab Holdings Inc.	Delaware	100
Ecolab Holdings (Europe) Inc.	Delaware	100
Ecolab Investment Inc.	Delaware	100
Ecolab Israel Holdings LLC	Delaware	100
Ecolab Leasing Corporation	Delaware	100
Ecolab Manufacturing Inc.	Delaware	100
Ecolab Marketing LLC	Delaware	100
Facilitec Inc.	Delaware	100
FastSource Leasing, Inc.	Delaware	100
GCS Service, Inc.	Delaware	100
Ecolab Foundation	Minnesota	100
Kay Chemical Company	North Carolina	100
Kay Chemical International, Inc.	North Carolina	100
ProForce Inc.	North Carolina	100
Argos Food Equipment	Texas	100
SSDC, Inc.	Texas	100
Stove Parts Supply Company	Texas	100

Certain additional subsidiaries, which are not significant in the aggregate, are not shown.

7

EX-23.B

Exhibit (23)B

CONSENT OF PRICEWATERHOUSECOOPERS GmbH

TO INCORPORATION BY REFERENCE

We hereby consent to the incorporation by reference in the Registration Statements of Ecolab Inc. on Form S-8 (Registration Nos. 2-60010; 2-74944; 33-1664; 33-41828; 2-90702; 33-18202; 33-55986; 33-56101; 333-95043; 33-26241; 33-34000; 33-56151; 333-18627; 33-39228; 33-56125; 333-70835; 33-60266; 333-95041; 33-65364; 333-18617; 333-79449; 333-40239; 333-95037; 333-50969; 333-58360; and 333-97927) of our report dated January 11, 2002 relating to the combined financial statements and financial statement schedule of Henkel-Ecolab as of November 30, 2001 and 2000 and for the years then ended, which appears in this Annual Report on Form 10-K of Ecolab Inc.

/s/PricewaterhouseCoopers GmbH

PricewaterhouseCoopers

Gesellschaft mit beschränkter Haftung

Wirtschaftsprüfungsgesellschaft

Düsseldorf, Germany

March 7, 2003

EX-24

Exhibit 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, That the undersigned, a director of Ecolab Inc., a Delaware corporation, does hereby make, nominate and appoint TIMOTHY P. DORDELL and LAWRENCE T. BELL, and each of them, to be my attorney-in-fact, with full power and authority to sign his name to the Annual Report on Form 10-K of Ecolab Inc. for the fiscal year ended December 31, 2002, and all amendments thereto, provided that the Annual Report and any amendments thereto, in final form, be approved by said attorney-in-fact; and his name, when thus signed, shall have the same force and effect as though I had manually signed said document.

IN WITNESS WHEREOF, I have hereunto affixed my signature this 22^nd day of February, 2003.

/s/Les S. Biller

Les S. Biller

/s/Jerry A. Grundhofer

Jerry A. Grundhofer

/s/Stefan Hamelmann

Stefan Hamelmann

/s/James J. Howard

James J. Howard

/s/William L. Jews

William L. Jews

/s/Joel W. Johnson

Joel W. Johnson

/s/Jochen Krautter

Jochen Krautter

/s/Ulrich Lehner

Ulrich Lehner

/s/Jerry W. Levin

Jerry W. Levin

/s/Robert L. Lumpkins

Robert L. Lumpkins

EX-99

Exhibit (99)

CERTFICATIONS

OF

CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Ecolab Inc. does hereby certify that:

a)the Annual Report on Form 10-K of Ecolab Inc. for the year ended December 31, 2002 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

b)information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Ecolab Inc.

Dated:  March 7, 2003	s/Allan L. Schuman
	Allan L. Schuman
	Chairman of the Board and Chief Executive Officer
Dated:  March 7, 2003	/s/Steven L. Fritze
	Steven L. Fritze
	Senior Vice President and Chief Financial Officer