Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Gross profit, defined as the difference between net sales and cost of product sold, of $1,098.9 million for the nine months ended September 30, 2005 increased by $18.9 million, or 1.8%, over the $1,080.0 million reported for the nine months ended September 30, 2004. On an organic basis and excluding the impact of a $14.5 million charge to cost of product sold during the nine months ended September 30, 2004 resulting from the sale of inventory that had been revalued at selling price less costs to sell in purchase accounting at the date of the Acquisition, gross profit decreased by $29.3 million. This was primarily attributable to higher costs of raw and other purchased materials, partly offset by the impact of increases in the selling prices of our products. Gross profit margin for the nine months ended September 30, 2005 was 44.9% compared to 48.5% for the year-ago period. Gross profit margin for the nine months ended September 30, 2004 was reduced approximately 65 basis points as a result of the aforementioned $14.5 million charge resulting from purchase accounting.

Selling, administrative, and research expenses for the nine months ended September 30, 2005 of $774.4 million increased by $4.3 million, or 0.6%, from $770.1 million for the nine months ended September 30, 2004. On an organic basis, selling, administrative, and research expenses decreased by $19.4 million, or 2.5%, reflecting continuing efforts to reduce and control spending. This decrease was more than offset by the effect of changes in foreign currency translation rates and the incremental impact of expenses of Katayama Nalco for the first five months of 2005.

Amortization of intangible assets was $61.4 million and $73.0 million for the nine months ended September 30, 2005 and 2004, respectively. The decrease was attributable to lower amortization of customer relationships, which are amortized using an accelerated method.

In-process research and development was a one-time charge of $122.3 million recorded during the nine months ended September 30, 2004, as a result of purchase accounting related to the Acquisition. The value of purchased IPR&D was comprised of five ongoing development projects at the date of the Acquisition. Purchased IPR&D was derived by assigning values to those projects identified by management as having economic value, but that had not yet reached technological feasibility and had no alternative future use.

Business optimization expenses, representing mostly employee severance and related costs, were $21.3 million for the nine months ended September 30, 2005, and included a $14.2 million charge recorded in June to support a plan to de-layer our management structure and reduce costs in lower-performing business units. The plan calls for the elimination of approximately 220 positions, primarily in Europe and North America.

Other income (expense), net was a net expense of $3.6 million and $6.5 million for the nine months ended September 30, 2005 and 2004, respectively. In November 2004, the Company terminated the monitoring services provided to the Company by affiliates of the Sponsors. Monitoring fees for such services were $8.4 million for the nine months ended September 30, 2004. Also contributing to the decrease in net other expense was a favorable change in foreign currency transaction gains and losses of $4.3 million. A $2.4 million impairment charge in 2005 related to a business held for sale, an increase in losses from asset write-offs and disposals of $5.9 million, and a $1.3 decrease in equity in earnings of unconsolidated subsidiaries partly offset these favorable variations.

Net interest expense, defined as the combination of interest income and interest expense, of $186.5 million for the nine months ended September 30, 2005 increased by $6.5 million from the $180.0 million reported for the nine months ended September 30, 2004. The impact of higher interest rates on variable rate borrowings more than offset the impact of a lower average debt level compared to the year-ago period.

The effective tax rate for the nine months ended September 30, 2005 was 47.8%. The rate varies from the U.S. statutory income tax rate of 35% primarily due to the incremental tax on dividends received from non-U.S. subsidiaries, foreign taxes provided at less than the 35% U.S. statutory rate, U.S. state income taxes, nondeductible expenses, and other permanent differences.

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

These items also contributed to the variation between the U.S. statutory income tax rate and the Company's effective income tax rate for the nine months ended September 30, 2004. In addition, the effective rate was impacted by the charge for purchased IPR&D, which is not tax deductible, and a valuation allowance for the income tax benefit on the interest expense from the senior discount notes issued by Nalco Finance Holdings LLC and Nalco Finance Holdings, Inc. in January 2004.

A valuation allowance for the income tax benefit on the senior discount note interest was recorded during the first nine months of 2004, pending a determination as to whether the deduction was realizable. During the fourth quarter of 2004, the valuation allowance for this tax benefit was reversed when it was determined that the deduction could be realized.

Minority interest expense was $0.8 million higher than the $3.6 million for the nine months ended September 30, 2004, reflecting improved results for most of the Company's non-wholly owned subsidiaries.

Liquidity and Capital Resources

Operating activities. Historically, the Company's main source of liquidity has been its solid cash flow generated by operating activities. For the nine months ended September 30, 2005, cash provided by operating activities was $172.1 million, a decrease of $84.0 million from the same period last year. This decrease was mostly attributable to higher working capital requirements, most notably for accounts payable. Also contributing was the payment of year-end incentive plan and commission accruals.

Investing activities. Cash used for investing activities was $47.6 million for the nine months ended September 30, 2005, which was mostly attributable to net property additions of $45.3 million.

Cash used for investing activities was $37.5 million for the nine months ended September 30, 2004. This was mostly the result of net property additions of $57.7 million, partly offset by $25.3 million of net purchase price adjustments received from Suez related to the Acquisition. Approximately 40% of the capital spending was attributable to our SAP information systems project in Europe.

Financing activities. Net cash used for financing activities totaled $110.6 million during the nine months ended September 30, 2005, which was mostly attributable to a net decrease in borrowings.

Net cash used for financing activities totaled $253.3 million during the nine months ended September 30, 2004. This was primarily comprised of repayment of borrowings since the proceeds of the senior discount notes issued in January 2004 were used to make a return of capital distribution to the Company's sole shareholder at the time of the distribution and to pay fees and expenses related to that offering.

Since the Transactions, we have been highly leveraged. Our liquidity requirements are significant, primarily due to debt service requirements as well as research and development and capital investment. Our primary source of liquidity will continue to be cash flow generated from operations, but we also have availability under a $250 million revolving credit facility and a $100 million receivables facility, in each case subject to certain conditions. We believe that our financial position and financing structure will provide flexibility in worldwide financing activities and permit us to respond to changing conditions in credit markets.

Senior credit facilities. On November 4, 2003, we entered into senior credit facilities which provided for a revolving credit facility, a $300 million six-year term loan A facility (which includes an €88.0 million tranche) which matures in November 2009 and a $1,300 million seven-year term loan B facility which matures in November 2010. Borrowings under the senior credit facilities bear interest at a floating base rate plus an applicable margin. The applicable margin for borrowings under the revolving credit facility and the term loan A facility is 1.50% with respect to base rate borrowings and 2.50% with respect to LIBOR or Eurocurrency borrowings and may be reduced subject to our attaining certain leverage ratios. The applicable margin for borrowings under the term loan B facility is 1.50%

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

with respect to base rate borrowings and 2.00% with respect to LIBOR or Eurocurrency borrowings. The applicable margin for borrowings under the term loan B facility is not subject to adjustment.

In addition to paying interest on outstanding principal under the senior credit facilities, we are required to pay a commitment fee to the lenders under the revolving credit facility in respect of the unutilized commitments at a rate equal to 0.50%. We also pay customary letter of credit fees.

The term loan A facility will amortize each year in quarterly amounts at a rate of 5% per annum in year one, 10% per annum in year two, 15% per annum in year three, 20% per annum in year four and 25% per annum in each of years five and six.

The term loan B facility will amortize each year in an amount equal to 1% per annum in equal quarterly installments for the first six years and nine months, with the remaining amount payable on November 4, 2010.

At September 30, 2005, the outstanding balance of the term loan A and term loan B facilities was $120.2 million and $1,081.0 million, respectively.

Principal amounts outstanding under the revolving credit facility will be due and payable in full at maturity on November 4, 2009. At September 30, 2005, no borrowings were outstanding under the revolving credit facility.

The senior credit facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our subsidiaries (including Nalco Company) to sell assets, incur additional indebtedness or issue preferred stock, repay other indebtedness, pay dividends and distributions or repurchase certain capital stock, create liens on assets, make investments, loans or advances, make certain acquisitions, engage in mergers or consolidations, enter into sale and leaseback transactions, engage in certain transactions with affiliates, amend certain material agreements governing our indebtedness, change the business conducted by us and our subsidiaries (including Nalco Company) and enter into hedging agreements. In addition, the senior credit facilities require Nalco Company to maintain the following significant financial covenants: a maximum total leverage ratio, a minimum interest coverage ratio and a maximum capital expenditures limitation. We were in compliance with all covenants at September 30, 2005.

Senior notes, senior subordinated notes and senior discount notes. As part of the Transactions in November 2003, Nalco Company issued $665 million aggregate principal amount of 7¾% U.S. dollar-denominated senior notes due 2011, €200 million aggregate principal amount of 7¾% euro-denominated senior notes due 2011, $465 million aggregate principal amount of 8 7/8% U.S. dollar-denominated senior subordinated notes due 2013 and €200 million aggregate principal amount of 9% euro-denominated senior subordinated notes due 2013.

On January 21, 2004, our subsidiaries, Nalco Finance Holdings LLC and Nalco Finance Holdings Inc., issued $694.0 million aggregate principal amount at maturity of 9.0% senior discount notes due 2014. Prior to February 1, 2009, interest will accrue on the notes in the form of an increase in the accreted value of such notes. The accreted value of each note will increase from the date of issuance until February 1, 2009 at a rate of 9.0% per annum, reflecting the accrual of non-cash interest, such that the accreted value will equal the principal amount at maturity on February 1, 2009. Cash interest payments on the notes will be due and payable beginning in 2009. Our primary source of liquidity for such payments will be cash flow generated from the operations of subsidiaries, including Nalco Holdings LLC and Nalco Company. However, the terms of Nalco Company's senior credit agreement fully prohibit Nalco Holdings LLC and our other subsidiaries from paying dividends or otherwise transferring assets to the issuers. In addition, the terms of certain of the indentures governing the existing senior notes and senior subordinated notes of Nalco Company significantly restrict Nalco Company and our other subsidiaries from paying dividends, making distributions and otherwise transferring assets to the issuers of the senior discount notes. For example, the ability of Nalco

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Company to make such payments is governed by a formula based on 50% of its consolidated net income (which, as defined in such indentures, excludes impairment charges, amortization charges from purchase accounting and any after-tax extraordinary, unusual or nonrecurring gains and losses).

In addition, as a condition to making such payments to the issuers based on such formula, Nalco Holdings LLC must have an Adjusted EBITDA to interest expense ratio of at least 2.0 to 1 after giving effect to any such payments. Notwithstanding such restrictions, such indentures permit an aggregate of $50.0 million of such payments to be made whether or not there is availability under the formula or the conditions to its use are met.

In December 2004, Nalco Finance Holdings LLC and Nalco Finance Holdings Inc. redeemed a portion of the senior discount notes with an accreted value of $162.3 million using proceeds from the November 2004 initial public offering of common stock of Nalco Holding Company. After the partial redemption, the aggregate principal amount at maturity of the notes declined to $460.8 million from $694.0 million.

The indentures governing the senior notes, the senior subordinated notes and senior discount notes limit our ability and the ability of our restricted subsidiaries to:

	•	incur additional indebtedness;

	•	pay dividends on or make other distributions or repurchase certain capital stock;

	•	make certain investments;

	•	enter into certain types of transactions with affiliates;

	•	limit dividends or other payments by our restricted subsidiaries;

	•	use assets as security in other transactions; and

	•	sell certain assets or merge with or into other companies.

Subject to certain exceptions, the indentures governing the senior notes, the senior subordinated notes, and the senior discount notes permit the Company and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness.

Covenant compliance. The breach of covenants in our senior credit agreement that are tied to ratios based on Adjusted EBITDA could result in a default under that agreement and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under our indentures. Additionally, under our debt agreements, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Adjusted EBITDA.

Adjusted EBITDA is used to determine our compliance with many of the covenants contained in the indentures governing the notes and in our senior credit agreement. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indentures and our senior credit facility. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors to demonstrate compliance with our financing covenants.

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Adjusted EBITDA is calculated as follows:

(dollars in millions)				Three Months ended September 30, 2005				Three Months ended September 30, 2004				Nine Months ended September 30, 2005				Nine Months ended September 30, 2004
Net earnings (loss)				$	17.4			$	2.0			$	22.6			$	(122.3	)
Interest, net					63.7				61.7				186.5				180.0
Income tax provision					18.1				27.2				24.7				46.8
Depreciation					33.3				23.8				100.0				80.7
Amortization					20.3				23.9				61.4				73.0
EBITDA				$	152.8			$	138.6			$	395.2			$	258.2
Non-cash charges (1)					5.0				14.5				20.8				167.5
Business optimization expenses (2)					3.5				—				21.3				—
Unusual items (3)					4.3				2.2				6.8				6.7
Other adjustments (4)					(1.1	)			1.9				(4.1	)			5.6
Adjusted EBITDA				$	164.5			$	157.2			$	440.0			$	438.0

(1)	Non-cash charges are further detailed on the following table:

(dollars in millions)				Three Months ended September 30, 2005				Three Months ended September 30, 2004				Nine Months ended September 30, 2005				Nine Months ended September 30, 2004
In-process research and development				$	—			$	—			$	—			$	122.3
Inventory step-up					—				—				—				14.5
Asset write-offs					—				—				4.9				—
Profit sharing expense and 401(k) funded by Suez					1.1				8.0				10.9				24.0
Other					3.9				6.5				5.0				6.7
Non-cash charges				$	5.0			$	14.5			$	20.8			$	167.5

	In-process Research and Development

	In-process research and development was a one time charge of $122.3 million recorded during the nine months ended September 30, 2004, as a result of purchase accounting entries related to the Acquisition.

	Inventory Step-Up

	As a result of purchase accounting for the Acquisition, we wrote up our inventory to fair value and subsequently charged the write up to cost of sales as the inventory was sold.

	Profit Sharing and 401(k) Expense Funded by Suez

	In conjunction with the Acquisition, we entered into an agreement with Suez whereby Suez will reimburse us for certain profit-sharing and 401(k) matching contributions made by us to the Profit-Sharing Trust.

	Other

	Other non-cash charges include the non-cash impact on earnings of our equity investments and minority interests. Non-cash charges also includes the non-cash portion of rent expense under the sublease that we entered into with Suez in conjunction with the Acquisition.

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

(2)	Business optimization expenses for 2005 include costs associated with the de-layering of our management structure, cost reductions in lower-performing business units, and the redesign and optimization of work processes. See note 7 to Item 1 for more information.

(3)	Unusual items are further detailed on the following table:

(dollars in millions)				Three Months ended September 30, 2005				Three Months ended September 30, 2004				Nine Months ended September 30, 2005				Nine Months ended September 30, 2004
Loss (gain) on sales, net of expenses				$	2.6			$	—			$	3.7			$	—
Other unusual items (a)					1.7				2.2				3.1				6.7
				$	4.3			$	2.2			$	6.8			$	6.7

	(a)	Other unusual items for the three months ended September 30, 2005 primarily include costs associated with an offering of Nalco Holding Company common stock by our parent company, Nalco LLC. Other unusual items for the nine months ended September 30, 2005 mostly represent these costs and certain inventory write-offs. Other unusual items for the three months and nine months ended September 30, 2004 primarily include certain costs associated with the Transactions.

(4)	We are required to make adjustments to EBITDA for monitoring fees paid to the Sponsors, franchise taxes, and 401(k) matching contributions.

Our covenant levels and ratios for the four quarters ended September 30, 2005 are as follows:

				Covenant Level at September 30, 2005				Ratios
Senior credit facility (1)
Minimum Adjusted EBITDA to cash interest ratio					1.70x				2.85x
Maximum net debt to Adjusted EBITDA ratio					6.50x				4.92x
Indentures (2)
Minimum Adjusted EBITDA to fixed charge ratio required to incur additional debt pursuant to ratio provisions					2.00x				2.47x

	(1)	During 2005, our senior credit facility requires us to maintain an Adjusted EBITDA to cash interest ratio at a minimum of 1.70x and a net debt to Adjusted EBITDA ratio at a maximum of 6.50x, in each case for the most recent four quarter period. Failure to satisfy these ratio requirements would constitute a default under the senior credit agreement. If our lenders failed to waive any such default, our repayment obligations under the senior credit agreement could be accelerated, which would also constitute a default under our indentures.

	(2)	Our ability to incur additional debt and make certain restricted payments under our indentures, subject to specified exceptions, is tied to an Adjusted EBITDA to fixed charge ratio of at least 2.0 to 1, except that we may incur certain debt and make certain restricted payments and certain permitted investments without regard to the ratio, such as up to an aggregate principal amount of $1,950 million (including $1,201.2 million that was outstanding under our term loan facilities as of September 30, 2005) and investments in similar business and other investments equal to 6% of Nalco Holding Company consolidated assets.

Local lines of credit. Certain of our non-U.S. subsidiaries have lines of credit to support local requirements. As of September 30, 2005, the aggregate outstanding balance under these local lines of credit was approximately $18.3 million. Certain of these lines of credit are equally and ratably secured with obligations under our senior credit facilities.

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Receivables facility. Nalco Company entered into a receivables facility on June 25, 2004 that provides up to $100 million in funding from a commercial paper conduit sponsored by JPMorgan Chase Bank, one of the lenders under Nalco Company's senior credit facilities, based on availability of eligible receivables and satisfaction of other customary conditions.

Availability of funding under the receivables facility depends primarily upon the outstanding trade accounts receivable balance from time to time. Aggregate availability is determined by using a formula that reduces the gross receivables balance by factors that take into account historical default and dilution rates, excessive concentrations and average days outstanding and the costs of the facility. Based on the terms of this facility and on the criteria described above, as of September 30, 2005, approximately $163.6 million of our accounts receivable balance was considered eligible for financing under the program, of which approximately $87.0 million would have been available for funding. As of September 30, 2005, we had $78.7 million of outstanding borrowings under this facility.

This facility is treated as a general financing agreement resulting in the borrowings and related receivables being shown as liabilities and assets, respectively, on our consolidated balance sheet and the costs associated with the receivables facility being recorded as interest expense.

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the Company's exposures to market risk since December 31, 2004.

Item 4.	Controls and Procedures

(a)	Evaluation of disclosure controls and procedures.

The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period, have concluded that the Company's disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities as appropriate to allow timely decisions regarding required disclosures.

(b)	Changes in internal controls over financial reporting.

	There were no changes in the Company's internal controls over financial reporting that occurred during the third quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

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Part II.    Other Information

Item 1.    Legal Proceedings

The U.K. Health and Safety Executive ("HSE") has sent notice that it intends to initiate legal proceedings against the Company's U.K. subsidiary under the Health and Safety at Work Act. The place of these proceedings is not indicated in the notice. This notice references a legionella outbreak that is claimed to have originated at cooling towers owned by one of the subsidiary's customers. The HSE indicates that the proceedings will relate to the cleaning of these cooling towers. The Company has not received any specific charges or claims for relief, but will, in any event, defend and refute any contention that it has violated any law.

Item 6.    Exhibits

(a)	The following are included herein:

	Exhibit 10.1	Material Contracts – Amendment No. 3 to the Receivables Transfer Agreement

	Exhibit 10.2	Material Contracts – Amendment No. 3 to Credit Agreement

	Exhibit 31.1	Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 31.2	Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 32.1	Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

The Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NALCO HOLDING COMPANY
/s/ BRADLEY J. BELL
Name:				Bradley J. Bell
Title:				Executive Vice President and Chief Financial Officer

Dated: November 10, 2005

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