GRAINGER W W INC, DEF 14A, 1997-03-26

GRAINGER W W INC
DEF 14A, 1997-03-26
DURABLE GOODS

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<PAGE>
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )

Filed by the Registrant /X/
Filed by a party other than the Registrant / /

Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12

W.W. GRAINGER, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11

(1) Title of each class of securities to which transaction applies:

------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:

------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:

------------------------------------------------------------------------
(5) Total fee paid:

------------------------------------------------------------------------

/ / Fee paid previously with preliminary materials.

/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:

------------------------------------------------------------------------
(3) Filing Party:

------------------------------------------------------------------------
(4) Date Filed:

------------------------------------------------------------------------

<PAGE>
[LOGO]

455 Knightsbridge Parkway, Lincolnshire, IL 60069-3620
(847) 793-9030

March 26, 1997

TO OUR SHAREHOLDERS:

The 1997 annual meeting of shareholders of W.W. Grainger, Inc., an
Illinois corporation, will be held at Company offices located at 5500
W. HOWARD ST., SKOKIE, ILLINOIS (see map overleaf), on Wednesday,
April 30, 1997, at 10 A.M. (CDT).

We will report at the meeting on our operations and other matters
of current interest. The Board of Directors and management cordially
invite you to attend.

The formal notice of the annual meeting and the proxy statement
follow. Whether or not you plan to attend the meeting, please sign,
date, and return the enclosed proxy promptly to ensure that your
shares will be represented.

Office of the Chairman

/s/ D.W. GRAINGER
-----------------
D. W. Grainger
Chairman of the Board

/s/ J. D. FLUNO /s/ R. L. KEYSER
- ----------------- -----------------
J. D. Fluno R. L. Keyser
Vice Chairman President and
Chief Executive Officer

YOUR VOTE IS IMPORTANT. PLEASE COMPLETE AND
RETURN YOUR PROXY PROMPTLY.
<PAGE>
[LOGO]

1997 Annual Shareholders' Meeting
Wednesday, April 30, 1997 -- 10
A.M. (CDT)

Location: W.W. Grainger, Inc.

5500 W. HOWARD ST.
SKOKIE, IL 60077-2699
(847) 982-9000
(Building Entrance: 7650
Frontage Rd.)

[MAP -- of Chicago and Niles/Skokie, IL areas showing location of the Annual
Meeting.]
<PAGE>

[LOGO]

455 Knightsbridge Parkway, Lincolnshire, IL 60069-3620
(847) 793-9030

---------------------------------------------------------------------

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 30, 1997

The annual meeting of shareholders of W.W. Grainger, Inc. will be held at
Company offices located at 5500 W. HOWARD ST., SKOKIE, ILLINOIS (see map on
previous page), on April 30, 1997, at 10 A.M. (CDT) for the following purposes:

1. To elect eleven directors for the ensuing year;

2. To consider and act upon a proposal to ratify the appointment of
Grant Thornton LLP as independent auditors for the year ending December 31,
1997;

3. To consider and act upon a proposal to approve the Director Stock
Plan;

4. To consider and act upon a proposal to approve the Office of the
Chairman Incentive Plan;

5. To consider and act upon a proposal to approve the 1990 Long Term
Stock Incentive Plan, as amended; and

6. To transact such other business as may properly come before the
meeting and any adjournment thereof.

The Board has fixed the close of business on March 3, 1997, as the record
date for the meeting. Shareholders may vote either in person or by proxy.

By order of the Board of Directors.

J. M. BAISLEY
Secretary

Lincolnshire, Illinois
March 26, 1997
<PAGE>
[LOGO]

455 Knightsbridge Parkway, Lincolnshire, IL 60069-3620

(847) 793-9030

March 26, 1997

PROXY STATEMENT
INTRODUCTION

This proxy statement is furnished in connection with the solicitation on
behalf of the Board of Directors of W.W. Grainger, Inc., an Illinois corporation
(the "Company"), of proxies to be voted at the annual meeting of shareholders of
the Company to be held on April 30, 1997, and at any adjournment thereof. It is
anticipated that this proxy statement and the accompanying form of proxy will be
mailed to shareholders commencing on or about March 26, 1997.

VOTING AT THE MEETING

The Board has fixed the close of business on March 3, 1997, as the record
date for determining shareholders entitled to notice of and to vote at the
meeting. On that date, there were outstanding on the books of the Company
52,464,657 shares of Company common stock. A majority of the shares having
voting power at the meeting will constitute a quorum for the transaction of
business.

In the election of directors, shareholders have the right to cumulative
voting. "Cumulative voting" means that each shareholder has that number of votes
equal to the number of directors to be elected, times the number of shares owned
by such shareholder. The total number of these votes may be cast for one nominee
or apportioned among two or more nominees, as the shareholder desires. In any
matter other than the election of directors, each share is entitled to one vote.

Shares of record on the record date and represented by each properly
executed proxy received by the Company in time to permit its use at the meeting
will be voted in accordance with the instructions indicated in the proxy. If no
instructions are indicated, such shares will be voted as recommended by the
Board. A shareholder who has given a proxy may revoke it by voting in person at
the meeting, or by giving written notice of revocation or a later-dated proxy to
the Secretary of the Company at any time before the voting.

1
<PAGE>
EXPENSES OF SOLICITATION

The expenses of soliciting proxies will be paid by the Company. In addition
to the use of the mails, proxies may be solicited personally, or by telephone or
other means, by directors, officers, and regular employees of the Company and
its subsidiaries who, except for normal overtime pay in certain instances, will
not receive additional compensation therefor, and by representatives of the
Company's stock transfer agent. Arrangements will also be made with brokerage
firms and other custodians, nominees, and fiduciaries for the forwarding of
proxy soliciting material to certain beneficial owners of Company common stock,
and the Company will reimburse such brokerage firms, custodians, nominees, and
fiduciaries for reasonable expenses incurred by them in connection therewith.
D.F. King & Co., Inc. has been retained by the Company to aid in the
solicitation of proxies and will be paid for its services in this regard a fee
approximating $6,000, plus reasonable costs and expenses.

BOARD OF DIRECTORS

ELECTION OF DIRECTORS

Eleven directors are to be elected to hold office until the next annual
meeting of shareholders and until their successors shall have been elected and
qualified. When authorized to vote for any of the directors, as set forth in the
proxy, the person or persons voting the proxy, voting cumulatively, are
permitted to and may apportion the total votes represented by the proxy to one
or more of the nominees. Directors are elected by the votes of a majority of the
shares represented in person or by proxy at the meeting. Broker non-votes and
directions to withhold authority will not count as votes in the election.

If any nominee named herein should not continue to be available for
election, a circumstance that is not expected, discretionary authority may be
exercised to vote for a substitute. Shareholder nominations of persons for
election as directors are subject to the notice requirements described under the
caption OTHER MATTERS appearing later in this proxy statement.

The following pages contain certain information about the nominees. All of
the nominees are presently directors and were previously elected by the
shareholders. Unless otherwise indicated, each of the nominees has served for at
least the past five years in the principal business position currently or most
recently held. For the nominees' beneficial ownership of shares of Company
common stock, see STOCK OWNERSHIP appearing later in this proxy statement.

2
<PAGE>
[PHOTO 1]

GEORGE R. BAKER, age 67, is a corporate director/advisor.
Until 1985, he was a special limited partner of Bear,
Stearns & Co. Inc., investment bankers. Mr. Baker is also a
director of The Midland Company, Reliance Group Holdings,
Inc., Reliance Insurance Company, Williams Hospitality
Group Inc., and WMS Industries, Inc. He was first elected a
director of the Company in 1976 and is a member of the
Board Affairs and Nominating Committee and the Compensation
Committee.

[PHOTO 2]

ROBERT E. ELBERSON, age 68, retired in 1989 as Vice
Chairman and a director of Sara Lee Corporation, a
marketer, manufacturer, and distributor of consumer
products and food services. Until 1986, he served that
company as President and Chief Operating Officer. Mr.
Elberson is also a director of Sonoco Products Company. He
was first elected a director of the Company in 1982 and is
Chairman of the Audit Committee.

[PHOTO 3]

JERE D. FLUNO, age 55, is Vice Chairman of the Company. Mr.
Fluno, who joined the Company in 1969, is a member of the
Office of the Chairman. He is also a director of Andrew
Corporation, a member of the Board of Governors of the
Chicago Stock Exchange, Incorporated, and a director of the
Chicago Stock Exchange subsidiaries, Midwest Clearing
Corporation and Midwest Securities Trust Company. Mr. Fluno
was first elected a director of the Company in 1975.

[PHOTO 4]

WILBUR H. GANTZ, age 59, is President and Chief Executive
Officer of PathoGenesis Corporation, a health care company
discovering and developing therapeutics for infectious
diseases. Prior to assuming this position in 1992, he
served as President of Baxter International Inc., a
manufacturer and distributor of health care products and
services. Mr. Gantz is also a director of Bank of Montreal
and its subsidiaries, Harris Bankcorp, Inc. and Harris
Trust and Savings Bank; The Gillette Company; and
PathoGenesis Corporation. He was first elected a director
of the Company in 1985 and is a member of the Board Affairs
and Nominating Committee and the Compensation Committee.

3
<PAGE>
[PHOTO 5]

DAVID W. GRAINGER, age 69, is Chairman of the Board and,
from 1992 to 1994, was President of the Company. Mr.
Grainger, who joined the Company in 1952, is a member of
the Office of the Chairman. He is also a director of
Allegiance Corporation. Mr. Grainger was first elected a
director of the Company in 1953 and is a member of the
Board Affairs and Nominating Committee.

[PHOTO 6]

RICHARD L. KEYSER, age 54, is the Company's President, a
position assumed in 1994, and Chief Executive Officer, a
position assumed in 1995. Mr. Keyser, who joined the
Company in 1986, is a member of the Office of the Chairman.
Other positions in which he served during the past five
years were Chief Operating Officer of the Company,
Executive Vice President of the Company, and President of
the Grainger Division. Mr. Keyser is also a director of
Morton International, Inc. He was first elected a director
of the Company in 1992.

[PHOTO 7]

JOHN W. MCCARTER, JR., age 59, is President and Chief
Executive Officer of The Field Museum of Natural History, a
position assumed in 1996. Mr. McCarter will continue to
serve as Senior Vice President of Booz, Allen & Hamilton
Inc., a management consulting firm, until his retirement
from that firm in 1997. He is also a director of A.M.
Castle & Co. and HT Insight Funds, Inc., and a trustee of
Harris Insight Funds Trust. Mr. McCarter was first elected
a director of the Company in 1990 and is Chairman of the
Board Affairs and Nominating Committee.

[PHOTO 8]

JAMES D. SLAVIK, age 44, is President of Mark IV Capital,
Inc., an investment company dealing in real estate and
corporate investments. Until 1987, he served as an
investment real estate broker of Coldwell Banker Commercial
Real Estate Services, a real estate brokerage company. Mr.
Slavik is also a director of Mark IV Capital, Inc. He was
first elected a director of the Company in 1987 and is a
member of the Audit Committee and Board Affairs and
Nominating Committee.

4
<PAGE>
[PHOTO 9]

HAROLD B. SMITH, age 63, is Chairman of the Executive
Committee of Illinois Tool Works Inc., a manufacturer and
marketer of engineered components and industrial systems
and consumables. He is also a director of Illinois Tool
Works Inc. and Northern Trust Corporation, and a trustee of
Northwestern Mutual Life Insurance Company. Mr. Smith was
first elected a director of the Company in 1981 and is
Chairman of the Compensation Committee.

[PHOTO 10]

FRED L. TURNER, age 64, is Senior Chairman of the Board and
Chairman of the Executive Committee of McDonald's
Corporation, a restaurant licensor. He joined McDonald's
Corporation in 1956 and assumed his current position in
1990, after serving that company as Chairman of the Board
and Chief Executive Officer. Mr. Turner is also a director
of Aon Corporation, Baxter International Inc., McDonald's
Corporation, and Ronald McDonald House Charities. He was
first elected a director of the Company in 1984 and is a
member of the Audit Committee and the Compensation
Committee.

[PHOTO 11]

JANIECE S. WEBB, age 43, is a Corporate Vice President of
Motorola, Inc., a leading provider of electronic equipment,
systems, components, and services produced for both U.S.
and international markets, and the General Manager of the
International Networks Division of Motorola's Messaging,
Information and Multimedia Sector. She first became a
director of the Company in 1995 and is a member of the
Audit Committee and the Compensation Committee.

MEETINGS AND COMMITTEES OF THE BOARD

Six meetings of the Board were held in 1996. In addition, the directors
acted twice during the year by unanimous consent.

The Board has three standing committees: Audit, Board Affairs and
Nominating, and Compensation. Committee members are elected by the Board shortly
following the annual meeting of shareholders.

Directors who presently serve on the Audit Committee are R.E. Elberson
(Chairman), J.D. Slavik, F.L. Turner, and J.S. Webb. The Audit Committee met
four times in 1996. Each year, the Audit Committee reviews the annual audit plan
with the independent auditors and also reviews the

5
<PAGE>
results of the annual audit with them. In addition, the Audit Committee reviews
the adequacy of internal controls with both the independent auditors and the
Company's internal auditors, and has oversight responsibilities for various
aspects of certain employee benefit plans. Although the Audit Committee, as well
as the Board, is apprised of the nature and costs of the non-audit professional
services provided by the independent auditors, neither the Audit Committee nor
the Board reviews all non-audit services in advance. All services and fees,
however, are subsequently reviewed and approved by the Audit Committee. The
Audit Committee reviews the independence of the independent auditors, giving
consideration to the possible effect of each audit and non-audit service on such
independence.

Directors who presently serve on the Board Affairs and Nominating Committee
are J.W. McCarter, Jr. (Chairman), G.R. Baker, W.H. Gantz, D.W. Grainger, and
J.D. Slavik. The Board Affairs and Nominating Committee, which met once in 1996,
recommends to the Board the size of the Board, criteria for Board membership,
and prospective nominees. It also recommends to the Board the make-up of the
Board committees (Audit, Board Affairs and Nominating, and Compensation), makes
periodic reviews with respect to senior management organization and succession,
and makes initial assessments and recommendations to the Board regarding major
issues or proposals. The Board Affairs and Nominating Committee has not
established any policy or procedure for considering nominees recommended by
shareholders.

Directors who presently serve on the Compensation Committee are H.B. Smith
(Chairman), G.R. Baker, W.H. Gantz, F.L. Turner, and J.S. Webb. The Compensation
Committee, which met five times in 1996, oversees the activities of the Company
in the area of compensation and benefits (generally with regard to all employees
and specifically with regard to officers) and reviews and makes recommendations
concerning compensation-related matters to be submitted to the Board and/or
shareholders for approval. The Compensation Committee also acts as the
administration committee under various stock and incentive plans.

Each director who is not an employee of the Company or any subsidiary
thereof is an alternate member of each Board committee of which such director
has not been specifically appointed a member. An alternate committee member may
serve for all purposes at a committee meeting in place of a specifically
appointed committee member who is absent.

DIRECTORS' FEES AND RELATED INFORMATION

Directors who are not employees of the Company or any subsidiary thereof
receive for their services (i) a retainer fee at the rate of $25,000 per annum,
(ii) an additional retainer fee for serving as chairman of any Board committee
at the rate of $4,000 per annum, and (iii) a fee of $1,000 for each meeting of
the Board and for each meeting of a committee thereof attended. The Company
reimburses related travel expenses. Directors who are employees of the Company
do not receive any fees for Board or Board committee service.

6
<PAGE>
Under the Plan for Payment of Directors' Fees, a non-employee director may
elect to defer payment of all or any portion of the directors' fees until
cessation of service as a director. In the case of deferral, the fees are
payable in either a lump sum or periodic installments. Such deferred fees bear
interest at the ten-year constant maturity Treasury yield, plus one-half of one
percent (0.5%). Two directors have elected to defer payment of 1996 fees.

Under the Post-Service Benefit Plan for Non-Management Directors, a benefit
is provided with respect to any non-employee director who ceases to be a
director (i) after reaching age 70, (ii) after at least five years of service as
a director, or (iii) by reason of permanent disability or death. The benefit is
80% of the retainer for serving as a director at the time of payment, payable
for a number of years equal to the lesser of ten, or the number of years of
service as a director. If the director dies before all payments are made, such
payments are made to the director's spouse, but cease upon the spouse's death.

If the Director Stock Plan is approved, see PROPOSAL TO APPROVE THE DIRECTOR
STOCK PLAN appearing later in this proxy statement, compensation to non-employee
directors would be primarily in or have a value based upon the market price of
shares of Company common stock. In addition, the Plan for Payment of Directors'
Fees and the Post-Service Benefit Plan for Non-Management Directors described
above would be terminated.

In the ordinary course of business during 1996, the Company and its
subsidiaries engaged in various types of business transactions with, and with
affiliates of, organizations with which directors of the Company are associated
in their principal business occupations or otherwise. The transactions are not
deemed material to any of the directors. Similar transactions are likely to
occur in the future.

7
<PAGE>
STOCK OWNERSHIP

The table below, which is based upon information furnished to the Company by
the individuals involved, sets forth the number of shares of Company common
stock beneficially owned (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) on March 7, 1997 by each of the directors, the
nominees and certain executive officers of the Company, and by all directors and
executive officers of the Company as a group. Unless otherwise indicated in the
footnotes following the table, each of the named persons had beneficial
ownership with respect to the shares shown by sole voting and investment power.

<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY OF COMMON
BENEFICIAL OWNER OWNED(1) STOCK(2)
- --------------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
David W. Grainger(3,4,5,6) ................................................ 5,641,317 10.83%
5500 W. Howard St.
Skokie, IL 60077
James D. Slavik (3,7,8,9,10) .............................................. 4,390,156 8.43%
100 Bayview Circle
Suite 4500
Newport Beach, CA 92660
James M. Baisley(11,12,13,14).............................................. 23,278 *
George R. Baker............................................................ 800 *
Donald E. Bielinski(11,12,15).............................................. 72,632 *
Robert E. Elberson......................................................... 13,100 *
Jere D. Fluno(11,12,16).................................................... 189,260 *
Wilbur H. Gantz............................................................ 4,100 *
Richard L. Keyser(11,12,17)................................................ 119,940 *
John W. McCarter, Jr.(18).................................................. 2,500 *
Harold B. Smith(19)........................................................ 17,000 *
Fred L. Turner............................................................. 3,000 *
Janiece S. Webb............................................................ 300 *
Directors and Executive Officers as a group(11,12,13,20,21)................ 10,653,911 20.45%

<FN>
- -------------

(1) In some instances, shares are included as to which beneficial ownership
has been disclaimed in reports filed with the Securities and Exchange
Commission.

(2) An asterisk (*) indicates less than 1%.

(3) Messrs. Grainger and Slavik are known by the Company to be beneficial
owners of more than 5% of the Company's common stock.

(4) Includes 688,498 shares held by The Grainger Foundation Inc., a charitable
foundation, as to which shares Mr. Grainger has shared voting and investment
power.

(5) Includes 762,360 shares held by various family trusts, as to which shares
Mr. Grainger has shared voting and investment power.

8
<PAGE>
(6) Includes 356,155 shares held by various family trusts, as to which shares
Mr. Grainger, alone or with his wife, has voting and investment power.

(7) Excludes 344 shares held by Mr. Slavik's wife, as to which shares Mr.
Slavik disclaims voting or investment power.

(8) Includes 3,218,680 shares held by certain family-owned corporations, as to
which shares Mr. Slavik has sole voting power and shared investment power.

(9) Includes 707,006 shares held by various family trusts, as to which shares
Mr. Slavik has shared voting and investment power.

(10) Includes 82,810 shares held by various family trusts or as custodian for
family members, as to which shares Mr. Slavik, alone or with his wife, has
voting and investment power.

(11) Includes shares that may be acquired within 60 days after March 7, 1997
upon exercise of employee stock options as follows: Mr. Baisley, 17,870
shares; Mr. Bielinski, 57,646 shares; Mr. Fluno, 79,260 shares; Mr. Keyser,
62,840 shares; and all directors and executive officers of the Company as a
group, 319,166 shares. In computing the percentage of shares owned by each
such person and by the group, such shares were added to the total number of
outstanding shares for the separate calculations.

(12) Includes shares of restricted stock as follows: Mr. Baisley, 5,000 shares;
Mr. Bielinski, 10,000 shares; Mr. Fluno, 40,000 shares; Mr. Keyser, 50,000
shares; and all directors and executive officers as a group, 170,500 shares.
Such shares, which are held under the Company's 1990 Long Term Stock
Incentive Plan, are not transferable and are subject to forfeiture during
the applicable restricted period.

(13) Includes 117 shares and 130 shares which Mr. Baisley and all directors and
executive officers of the Company as a group, respectively, are deemed to
have the economic equivalent of investment power by reason of participation
in the Company's supplemental profit sharing plan.

(14) Excludes 250 shares held by Mr. Baisley's son who resides in the same
household, as to which shares Mr. Baisley disclaims voting or investment
power.

(15) Includes 4,260 shares as to which Mr. Bielinski has shared voting and
investment power with his wife.

(16) Includes 62,612 shares as to which Mr. Fluno has shared voting and
investment power with his wife.

(17) Includes 5,134 shares as to which Mr. Keyser has shared voting and
investment power with his wife.

(18) As to such shares, Mr. McCarter has shared voting and investment power
with his wife.

(19) Includes 16,000 shares as to which Mr. Smith has shared voting and
investment power.

(20) Includes 5,748,833 shares as to which members of the group have shared
voting and/or investment power.

(21) Excludes 794 shares held by certain family members, as to which shares
members of the group disclaim voting or investment power.
</TABLE>

9
<PAGE>
The table below sets forth information concerning beneficial ownership of
the Company's common stock on December 31, 1996, as reported in a Schedule 13G
filed with the Securities and Exchange Commission. Schedule 13G filers generally
are institutional investors who acquire beneficial ownership of more than 5% of
a public company's voting securities in the ordinary course of business without
the purpose of changing or influencing control of the company.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE OF
BENEFICIAL OWNER OWNED COMMON STOCK
- ---------------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
J.P. Morgan & Co. Incorporated ............................................. 4,652,965* 9.1%
60 Wall Street
New York, NY 10260

<FN>
- ------------

* In cases where voting power is claimed, includes 2,699,399 shares as to which
there is sole voting power and 89,455 shares as to which there is shared
voting power. In cases where investment power is claimed, includes 4,488,582
shares as to which there is sole investment power and 146,783 shares as to
which there is shared investment power.

</TABLE>
10
<PAGE>
MANAGEMENT COMPENSATION AND BENEFITS

SUMMARY COMPENSATION INFORMATION

Set forth below is certain summary information concerning compensation paid
to or accrued for those persons who, at December 31, 1996, were (i) the
Company's Chief Executive Officer and (ii) each of the four other most highly
compensated executive officers of the Company (the "Named Executive Officers")
for services in all capacities to the Company and its subsidiaries for the
fiscal years ended December 31, 1996, 1995, and 1994:

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION ALL OTHER
COMPENSATION(3)
---------------------- ------------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
AWARDS
------------------------
RESTRICTED STOCK
NAME AND PRINCIPAL POSITION STOCK OPTIONS
(AT 12/31/96) YEAR SALARY BONUS(1) AWARDS(2) (SHARES)
- ---------------------------------- --- --------- ----------- ----------- -----------
Richard L. Keyser ................ $ 576,000 $ 587,878 $3,800,000 23,040
President and Chief Executive 1996 1995 511,950 673,700 -0- 14,840 196$,810 205,576
Officer 1994 458,880 690,000 -0- 13,100 128,877

James M. Baisley ................. $ 267,300 $ 164,951
Senior Vice President, General 1996 1995 262,080 176,433 3$80,000 -0- 6,170 4,690 72,$671 77,584
Counsel, and Secretary 1994 249,600 192,217 -0- 4,740 60,635

Donald E. Bielinski .............. $ 310,560 $ 221,708
Senior Vice President, Marketing 1996 1995 303,000 235,976 7$60,000 -0- 8,560 6,320 89,$553 95,287
and Sales 1994 285,900 254,708 -0- 8,380 72,608

Jere D. Fluno .................... $ 487,200 $ 491,610 $3,040,000 17,330
Vice Chairman 1996 1995 472,800 539,277 -0- 13,360 161$,796 198,873
1994 458,880 690,000 -0- 13,100 128,877

David W. Grainger ................ $ 612,000 $ 148,104 -0- -0-
Chairman of the Board 1996 1995 612,000 161,568 -0- -0- 126$,864 164,868
1994 612,000 352,000 -0- -0- 147,725

<FN>
- ---------------

(1) Includes amounts paid with respect to performance during the indicated
fiscal year under the Company's Management Incentive Program.

(2) Represents the fair market value on the date of award of restricted stock
awarded under the Company's 1990 Long Term Stock Incentive Plan. Shares of
restricted stock have the same rights, including dividend and voting rights,
as other shares of common stock. As of December 31, 1996, Messrs. Keyser,
Baisley, Bielinski and Fluno held 50,000, 5,000, 10,000 and 40,000 shares of
restricted stock, having then-current market values of $4,012,500, $401,250,
$802,500, and $3,210,000, respectively. All such shares are scheduled to
vest in November 2006. With respect to Messrs. Keyser and Fluno,
acceleration of vesting is provided in the event of death or disability or
in the event of a "change of control" of the Company.

(3) The amounts shown were accrued under the Company's non-contributory profit
sharing plan, in which most Company employees participate, and the related
supplemental profit sharing plan.
</TABLE>

11
<PAGE>
STOCK OPTION GRANTS

Set forth below is further information concerning grants of stock options
during the fiscal year ended December 31, 1996 to the Named Executive Officers
other than Mr. Grainger, to whom no stock options were granted during the year.
No stock appreciation rights were granted during the year.

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL OPTIONS
OPTIONS GRANTED TO EXERCISE OR EARLIEST GRANT DATE
GRANTED EMPLOYEES IN BASE PRICE (PER EXERCISE EXPIRATION PRESENT
NAME (SHARES) FISCAL 1996 SHARE)(1) DATE(2) DATE VALUE(3)
- --------------------- ----------- --------------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Keyser.... 23,040 7.97% $ 67.50 4/24/99 4/23/06 $ 500,429
James M. Baisley..... 6,170 2.13% 67.50 4/24/99 4/23/06 134,012
Donald E.
Bielinski........... 8,560 2.96% 67.50 4/24/99 4/23/06 185,923
Jere D. Fluno........ 17,330 5.99% 67.50 4/24/99 4/23/06 376,408

<FN>
- ---------------

(1) The per share option exercise price equals the per share closing price of
Company common stock reported in the Composite Tape for New York Stock
Exchange listed stocks on the business day preceding the date of grant.
Stock optionees presently may make payment of the exercise price of stock
options by delivering already owned shares of Company common stock (based on
the fair market value of the shares at the time). Stock optionees presently
may also direct that shares of Company common stock otherwise deliverable
upon exercise (based on the fair market value of the shares at the time) be
withheld in satisfaction of withholding tax obligations arising from
exercise.

(2) All options granted to the Named Executive Officers were granted on April
24, 1996, and become fully exercisable three years following the date of
grant.

(3) The amounts shown are based on the Black-Scholes option pricing model.
Material assumptions incorporated into this model in estimating the value of
the options are consistent with those required by Statement of Financial
Accounting Standards No. 123 (Accounting for Stock-Based Compensation) and
include the following:

a. Exercise price of $67.50.

b. Expected term of 6.5 years.

c. Interest rate of 6.55%.

d. Volatility of 21.75%.

e. Dividend yield of 1.46%.

The actual value, if any, an executive may realize will depend on the excess
of the stock price over the exercise price on the date the option is
exercised. There is no assurance the value realized by an executive will be
at or near the value estimated by the Black-Scholes model.
</TABLE>

12
<PAGE>
STOCK OPTION EXERCISES AND HOLDINGS

Set forth below is information relating to stock options exercised by the
Named Executive Officers during the 1996 fiscal year and the number of shares of
Company common stock covered by, and the value of, outstanding stock options
held by them at December 31, 1996. At no time during the year did the Company
have any outstanding stock appreciation rights. Mr. Grainger is excluded from
the table as he did not hold any stock options during the year.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/96 AT 12/31/96(3)
SHARES ACQUIRED VALUE -------------------------- ---------------------------
NAME ON EXERCISE(1) REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- --------------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Keyser......... 8,900 $ 407,994 59,080 50,980 $ 2,259,504 $ 808,360
James M. Baisley.......... 10,060 363,101 15,130 15,600 452,230 252,549
Donald E. Bielinski....... 9,876 491,532 49,266 23,260 1,983,587 380,815
Jere D. Fluno............. -0- -0- 66,160 43,790 2,297,563 708,733

<FN>
- ------------

(1) The figures shown are the numbers of shares covered by the exercised stock
options.

(2) The amounts shown are the differences between the per share stock option
exercise prices and fair market values of Company common stock on the dates
of exercise, multiplied by the number of shares covered by the exercised
stock options.

(3) The amounts shown are the differences between the per share stock option
exercise prices and the closing price of Company common stock on December
31, 1996 of $80.25 per share, as reported in the Composite Tape for New York
Stock Exchange listed stocks, multiplied by the number of shares covered by
the unexercised stock options.
</TABLE>

OTHER BENEFITS

The Executive Deferred Compensation Plan, an unfunded plan administered by a
committee of management, permitted participants selected by the committee and
the committee to agree on a salary reduction of between 5% and 15% (or more with
special agreement) for up to four years. The Company allocated to participants'
accounts an additional 15% of the salary reduction to reflect reduced profit
sharing plan contributions. Under the related Plan Agreement, a participant is
entitled to 180 monthly payments, commencing at age 65, in an annual amount that
is based upon the amount of the salary reduction, the additional amount
allocated by the Company, and the number of years from deferment to normal
retirement age. Reduced or increased payments are provided in the event that the
participant begins receiving payments before or after age 65. If a participant
terminates service with the Company prior to qualifying for early benefits
pursuant to the terms of the Plan, or if the Company reduces benefits or
terminates the Plan, or if there is a "change of control" of the Company, the
Plan provides for various benefits to the participant, ranging from a return of
the amount of salary deferral, plus interest, to a lump-sum benefit equal to the
present value of a projected payment stream. If a participant dies before
retirement or before having

13
<PAGE>
received the full amount of the benefits, the balance will be paid to the
participant's designated beneficiary. Although the initiation of salary payment
deferrals has not been permitted for several years and there were no such
deferrals for 1996, all of the Named Executive Officers and certain other
members of management have deferred salary payments under the Plan in prior
years. Payments under the Plan have commenced with respect to Mr. Grainger, who
is receiving $12,280 per month in this regard. If Messrs. Keyser, Baisley,
Bielinski, and Fluno remain employees of the Company until age 65 and then
commence receiving payments under the Plan, the monthly payments would amount to
$10,509, $5,545, $3,664, and $26,207, respectively.

Participation of employees in the Executive Death Benefit Plan, which is
unfunded, is determined by a committee of management. The beneficiary of a
participant who dies while employed by the Company is generally entitled to 120
monthly payments of 50% of the participant's monthly compensation, calculated on
the basis of salary and target bonus under the applicable cash incentive
program. A lump-sum benefit in an amount which, after taxes, approximates the
participant's last year's compensation, calculated on the same basis, is payable
to a participant's designated beneficiary upon death after retirement, as
defined in the Plan. All of the Named Executive Officers and certain other
members of management participate in the Plan.

The Company has minimized its exposure relating to the Executive Deferred
Compensation Plan and the Executive Death Benefit Plan by purchasing life
insurance contracts, which are owned by the Company.

The Management Incentive Program ("MIP"), which is unfunded, is administered
by a committee of management. MIP accounts have been established in the names of
participants. Initial MIP account balances of participants who were participants
in the superseded long-term incentive plan reflect amounts accrued but not paid
under that plan. MIP account balances are adjusted periodically as a result of
MIP bonuses earned, MIP bonuses paid, and the merit salary budget applicable to
exempt employees generally. MIP account balances are generally paid out upon
death, retirement, or long term disability, but are subject to forfeiture in the
event of voluntary resignation or termination for misconduct. Messrs. Baisley,
Bielinski, Fluno, and Grainger currently have MIP account balances of $8,497,
$6,552, $17,009, and $233,099, respectively. If the Office of the Chairman
Incentive Plan is approved, see PROPOSAL TO APPROVE THE OFFICE OF THE CHAIRMAN
INCENTIVE PLAN appearing later in this proxy statement, Messrs. Fluno and
Grainger would participate in that Plan and their MIP account balances would be
paid out. Mr. Keyser, who would also participate in that Plan, does not
currently have a MIP account balance.

The Company provides a separation benefit to certain full-time employees
upon termination of employment (other than for cause) at age 55 or later with at
least 15 years service. This benefit, which is unfunded, is equal to one week's
regular pay for each two full years of continuous employment accrued prior to
December 31, 1984, with a maximum of 13 weeks pay. Mr. Keyser joined the Company
after December 31, 1984 and, accordingly, will not receive the separation
benefit. Had they been eligible and terminated their employment as of the date
of this proxy statement,

14
<PAGE>
Messrs. Baisley, Fluno, and Grainger, who are eligible, and Mr. Bielinski, who
is not eligible, would have received a separation benefit of $5,250, $67,523,
$90,000, and $37,980, respectively.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD

This report of the Compensation Committee of the Board (the "Committee")
discusses the Company's compensation policy and programs for the executive
officers, including members of the Office of the Chairman who consist of Messrs.
Grainger, Fluno, and Keyser, respectively the Chairman, Vice Chairman, and
President and Chief Executive Officer.

The Committee administers the Company's executive compensation programs and
recommends to the Board the compensation for all executive officers. In this
connection, the Committee considers information and data supplied by management
and by an independent compensation and benefits consultant. All members of the
Committee are non-employee directors.

Executive Compensation Policy

The purpose of the executive compensation programs is to enable the Company
to attract and retain qualified executives and to provide appropriate
incentives, including equity incentives, to support the achievement of the
Company's business goals. The overall program includes variable pay components
which link total executive compensation to the creation of shareholder value
over the long term.

When Company performance is at target, the Company's objective is to pay
total compensation at least at the size-adjusted median of a peer group of
companies approved by the Committee. All elements of recurring compensation are
valued to determine the Company's posture relative to the comparator group. For
1996, the Company met its total compensation objective. Based on the Company's
performance, total compensation paid for 1996 was at the peer group median.

The companies used for compensation comparator purposes are not the same
companies used to compare total shareholder return in the stock price
performance graph. The companies in the stock price performance graph are those
comprising the Dow Jones Electrical Components & Equipment Index. However, the
Company's "market" for executive talent is broader than that index. The
compensation comparator group used is representative of the types of major
companies with whom the Company historically competes for talent.

Total compensation for purposes of the Company's total compensation
objective consists of base salary, cash incentive compensation, stock options
and benefits.

Base Salaries

The Committee reviews base salaries annually. Adjustments to base salaries
are determined based on an evaluation of the competitive market, individual
performance, position in the salary

15
<PAGE>
range (where applicable), experience of the executive, and internal equity
issues. After evaluating the competitive market, a merit increase guideline
program for all exempt employees was approved by the Committee for 1996. Salary
adjustments for executive officers were consistent with these salary objectives.

In determining the salary compensation of the members of the Office of the
Chairman, the Committee considers the financial and non-financial performance of
the Company, as well as an analysis of their salaries in relation to those for
comparable positions in the comparator group of companies approved by the
Committee. Mr. Grainger elected not to accept a 1996 salary increase.

Cash Incentives

For executive officers and other key executives, the Management Incentive
Program ("MIP") rewards participants for improvements in economic earnings. The
concept of economic earnings recognizes the fact that capital providers have a
required rate of return on their investment. Economic earnings occur only after
the Company's earnings exceed this required return. The MIP emphasizes the need
to continually improve economic earnings. The basic concept underlying the MIP
is that improved economic earnings result from one or more of the following:

- Increasing the return on existing investments,

- Making new investments that have returns exceeding the Company's cost of
capital, and

- Reducing or eliminating investments that have returns which fail to meet
the Company's cost of capital.

The MIP is structured to provide an appropriate balance between short-term
and long-term results. The program emphasizes the common interests of management
and shareholders with long-term improvements in economic earnings expected to
correspond with long-term improvement in shareholder value.

The MIP is based on quantitative measures, but also provides for utilization
of a qualitative component. The quantitative component is built around target
bonuses which are stated as a percentage of base salary. These target bonuses
were established based on a review of competitive market practice and are
similar to the targets in prior programs. Target bonuses range from 20% to 90%
of base salary. The qualitative component consists of a discretionary factor
under which, if used, total bonuses can be adjusted up or down as much as 10% of
participants' base salaries to account for economic or other conditions outside
the participants' control. Annually, actual results are compared to targets to
determine the amount of the bonus earned.

During 1995, significant progress was made in restructuring operations and
implementing long-term, strategic investments. During 1996, work continued on
implementing these strategic investments and on other strategic initiatives.
Economic earnings for 1996 were slightly above target, resulting in a bonus
multiple that was slightly higher than in 1995, but was less than the 1994

16
<PAGE>
multiple. Bonuses were calculated under the MIP formula based on Company-wide
performance for all executive officers. No discretionary adjustment was made in
this year's bonuses.

Special bonuses, which are included in the summary compensation table
appearing earlier in this proxy statement, were granted to Messrs. Fluno and
Keyser during the year in connection with the reorganization of the Office of
the Chairman.

Stock Option Program

Stock options are awarded at an option price equal to the fair market value
of the underlying Company common stock on the date of award. The stock option
program is considered an important means of aligning the financial interests of
executive officers and other key employees to the longer term financial
interests of the shareholders. The number of option shares awarded at each level
in the organization is designed to provide an economic value that is competitive
with awards made by other companies to those with comparable jobs. Mr. Grainger,
as in prior years, elected not to accept a stock option award.

Restricted Stock Award

Effective in November 1996, the Company awarded restricted stock (generally
subject to forfeiture if employment terminates before the end of a 10-year
restricted period) to executive and other officers of the Company, in each case
subject to the execution of a confidentiality and non-competition agreement with
the Company. Similar awards and agreements are contemplated with respect to
executives who are promoted to or otherwise assume eligible officer positions in
the future. Objectives of the awards and agreements are to protect proprietary
Company information, to preserve the Company's competitive advantages,
particularly in termination of employment situations, to align more closely the
interests of executives with those of shareholders, to provide a strong
executive retention incentive, and to provide for executive continuity. Mr.
Grainger elected not to receive a restricted stock award.

Stock Ownership Guidelines

Ownership in Company stock can encourage executives to consider the
shareholder impact of their decisions and to act to increase shareholder value.
In 1996, the Company established stock ownership guidelines for its officers.
Members of the Office of the Chairman must achieve stock ownership of at least 5
times annual base salary. Other officers must achieve stock ownership of at
least three times or two times annual base salary. These ownership guidelines
must be met within three years of the establishment of the guidelines or within
three years of being named an officer, whichever comes first. Officers who fail
to achieve these ownership levels will not be eligible to receive any
stock-based awards until such time as the ownership levels are again achieved.
The Company believes that these ownership guidelines are important in aligning
the interests of the executive officers of the Company and the shareholders.

17
<PAGE>
Executive Death Benefits

The death benefit component of the executive compensation programs consists
of the Executive Death Benefit Plan, which is discussed in an earlier section.

Other Benefits

Other benefits, including profit sharing and various welfare benefits,
provided to executives are comparable to those provided to most salaried and
hourly Company employees.

Deductibility of Executive Compensation

Section 162(m) of the Internal Revenue Code generally disallows a Federal
income tax deduction to a public company for compensation over $1 million per
fiscal year paid to the company's chief executive officer and its four other
most highly compensated executive officers serving at the end of that year. Not
subject to the deductibility limit, however, is compensation that qualifies as
"performance-based" compensation. A Company objective is to maximize the
deductibility of compensation under Section 162(m) to the extent doing so is
reasonable and consistent with Company strategies and goals. It is anticipated
that awards under the proposed Office of the Chairman Incentive Plan and
exercises of stock options awarded under the proposed 1990 Long Term Stock
Incentive Plan, as amended, will give rise to "performance-based" compensation
not subject to the Section 162(m) deductibility limit.

Harold B. Smith, Chairman

George R. Baker

Wilbur H. Gantz

Fred L. Turner

Janiece S. Webb

Members of the Compensation Committee

of the Board of Directors

18
<PAGE>
STOCK PRICE PERFORMANCE

The following stock price performance graph compares the cumulative total
return on an investment in Company common stock against the cumulative total
return of an investment in each of the S&P 500 Stock Index and the Dow Jones
Electrical Components & Equipment Index for the period commencing December 31,
1991 and ending December 31, 1996. The graph assumes that the value for the
investment in Company common stock and in each index was $100 on December 31,
1991 and that all dividends were reinvested.

[Perf graph filed with Branch Chief]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL
RETURN
<S> <C> <C> <C>
W.W. Grainger, Inc. S&P 500 Stock Index
1991 $ 100 100
1992 $ 112 108
1993 $ 109 118
1994 $ 111 120
1995 $ 129 165
1996 $ 158 203
Fiscal Year Ended December 31

<CAPTION>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL
RETURN
<S> <C>
Dow Jones Electrical Components & Equipment Index
1991 100
1992 100
1993 109
1994 114
1995 148
1996 181
Fiscal Year Ended December 31
</TABLE>

19
<PAGE>
PROPOSAL TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS

Upon the recommendation of its Audit Committee, the Board has appointed
Grant Thornton LLP as independent auditors of the Company for the fiscal year
ending December 31, 1997, which appointment will be submitted for ratification
at the meeting. Grant Thornton LLP and its predecessors have served as
independent auditors of the Company for approximately 60 years. It is expected
that representatives of Grant Thornton LLP will be present at the meeting to
respond to appropriate questions of shareholders and to make any desired
statements.

THE BOARD RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE APPOINTMENT OF
INDEPENDENT AUDITORS.

Approval of the proposal requires the affirmative votes of a majority of the
shares of Company common stock represented in person or by proxy at the meeting.
Broker non-votes and abstentions will have the same effect as votes against the
proposal. In the event the proposal is not approved, the Board will consider the
negative vote as a mandate to appoint other independent auditors of the Company
for the next fiscal year.

PROPOSAL TO APPROVE THE DIRECTOR STOCK PLAN

Upon the recommendation of the Board's Compensation Committee (the
"Committee"), the Board has adopted the Director Stock Plan, subject to approval
of the Director Stock Plan by the shareholders.

The purpose of the Director Stock Plan is to permit a compensation package
for non-employee directors that primarily consists of or has a value based upon
the market price of shares of Company common stock. It is believed that a
compensation package of stock-based incentives will further increase the
identity of interests between non-employee directors and the shareholders. It is
also believed that such a compensation package will enhance the Company's
ability to attract and retain experienced and qualified non-employee directors.

SUMMARY DESCRIPTION OF THE DIRECTOR STOCK PLAN

The following summary of the principal features of the Director Stock Plan
is subject to and qualified in its entirety by the full text of the Director
Stock Plan, a copy of which is included in this proxy statement as Appendix A.

PARTICIPATION. Directors eligible to participate are those directors who
are not employees of the Company or its subsidiaries. Eight of the Company's
eleven current directors are eligible to participate.

ADMINISTRATION. Administration is charged to the Committee, which has power
to award the stock-based incentives and to determine their amounts, types and
terms, subject to prescribed

20
<PAGE>
limitations. The Committee has interpretive and other powers necessary or
advisable for plan administration. Forms of stock-based incentives that may be
awarded by the Committee are described below.

STOCK. Unrestricted shares of Company common stock can be awarded by the
Committee upon any terms it deems appropriate.

STOCK UNITS. A stock unit reflects a commitment by the Company to pay a
benefit that is intended to be the economic equivalent of a share of Company
common stock. Stock units will earn dividend equivalents. Awards of stock units
may but need not be conditioned upon continuation of service as a director for a
specified period of time. Payment of the value of stock units generally will be
made after termination of service as a director. Although the form of payment is
expected to be cash, which would be in an amount equal to the number of stock
units multiplied by the then-current fair market value of a share of Company
common stock, the Committee is empowered to determine that payment be made in
whole or part in shares of Company common stock. Payment in installments
following termination of service is permitted at the discretion of the
Committee.

STOCK OPTIONS. The per share exercise price of any option shall be set by
the Committee, but must be at least 100% of the fair market value of a share of
Company common stock on the date of grant. Upon exercise of an option, the
exercise price is payable in full. With the prior approval of the Committee, the
exercise price may be paid in whole or part by the delivery of shares of Company
common stock owned by the optionee or pursuant to a "cashless exercise" with a
stockbroker. The term of an option is to be determined by the Committee at the
time of grant but cannot be more than 10 years. Each award agreement relating to
an option will set forth the extent to which the optionee will have the right to
exercise the option following termination of service as a director.

According to the Company's tax advisors, a director will not recognize any
income upon the grant of an option but will recognize ordinary income upon its
exercise. The amount of the ordinary income will equal the excess of the fair
market value of the shares covered by the option on the date of exercise over
the exercise price. The Company generally will receive a Federal income tax
deduction in connection with an option at the same time and in the same amount
as the director recognizes ordinary income. Upon a later sale of the shares, the
director generally will recognize capital gain (or loss) to the extent of the
difference between the fair market value of the shares at the time of exercise
and the amount realized on the subsequent sale.

RESTRICTED STOCK. Shares of restricted stock will be subject to risk of
forfeiture if conditions specified in the related award agreement (such as a
period of continued service) are not met. The Committee has discretion to modify
these conditions. Holders of shares of restricted stock will be entitled to
dividends or other distributions and to vote the shares during the applicable
restricted periods.

21
<PAGE>
DEFERRAL OPPORTUNITY. Each non-employee director may elect to defer any or
all cash compensation for serving as a director of the Company, such as Board
and Board committee meeting attendance fees and any retainer fees for serving on
Board committees. Each deferral account will be credited with a number of stock
units equal to the amounts deferred divided by the fair market value of a share
of Company common stock as of the date of deferral.

SHARES AVAILABLE. The number of shares of Company common stock that may be
delivered in connection with stock awards, restricted stock awards, stock option
exercises and payments of stock units in shares of Company common stock is
250,000, subject to adjustment. On March 7, 1997, the closing price of a share
of Company common stock was $79.25, as reported in the Composite Tape for New
York Stock Exchange listed stocks.

ADJUSTMENTS. In the event of changes in outstanding Company common stock by
reason of a merger, stock split, stock dividend or certain other events, the
Committee can adjust the number of shares subject to outstanding stock units,
stock options and other awards, as well as the number of shares of Company
common stock available for delivery.

AMENDMENTS. The Board may amend the Director Stock Plan at any time without
the approval of the Company's shareholders, except that no amendment by the
Board may increase the number of shares of Company common stock available for
delivery, change the minimum option exercise price or the maximum term of an
option, or change the requirements relating to the composition of the Committee.
In addition, no amendment may adversely affect any outstanding stock units,
stock options or other awards without the consent of the director concerned.

NONTRANSFERABILITY. Unless otherwise provided by the Committee, awards and
rights under the Director Stock Plan may not be transferred other than by will,
by the laws of descent and distribution, or to a designated beneficiary.

DURATION. If approved by the shareholders, the Director Stock Plan will be
effective as of April 30, 1997. Although the number of deliverable shares of
Company common stock is limited, the Director Stock Plan does not have a stated
expiration date.

PROPOSED DIRECTOR STOCK PLAN BENEFITS

Subject to approval of the Director Stock Plan by the shareholders, the
following has been approved:

REPLACEMENT OF EXISTING BENEFITS. As described earlier in this proxy
statement, non-employee directors with five years or more of service with the
Company have been provided a post-service benefit under the Post-Service
Benefits Plan for Non-Management Directors. The amount of this benefit has not
been linked to the performance of Company common stock. In place of this fixed
benefit, which would be eliminated for current and future directors, the Company
would award to

22
<PAGE>
each existing non-employee director stock units having a market value on April
30, 1997 equal to $20,000 multiplied by years of Board service up to ten. The
amounts, which generally reflect the undiscounted sum of benefits calculated as
of that date under the Post-Service Benefits Plan, would range from $40,000 to
$200,000 per existing non-employee director, aggregating $1,380,000 for all
existing non-employee directors as a group. In addition, account balances of
existing non-employee directors under the Plan for Payment of Directors' Fees
described earlier in this proxy statement, which balances aggregated
approximately $274,000 as of March 7, 1997, would be converted into stock units
on the basis of the market value of Company common stock on April 30, 1997.

ANNUAL RETAINER. Future annual retainers to non-employee directors for
Board service would be paid in the form of unrestricted shares of Company common
stock. The retainer applicable to the one-year period following an annual
meeting would be paid as of the date of that annual meeting, with the number of
unrestricted shares being equal to the annual retainer fee for Board service
(presently $25,000) divided by the fair market value of a share of Company
common stock on the date of the annual meeting, rounded up to the next higher 50
shares.

OPTIONS. Non-employee directors would receive options effective on the date
of each annual meeting. The number of shares covered by each option will equal
an amount (currently set at $75,000) divided by the fair market value of a share
of Company common stock on the date of the annual meeting, rounded up to the
next higher 100 shares. The option exercise price will equal 100% of such value.
Each option will have a 10-year term and be fully exercisable three years after
the date of grant. Upon retirement after age 70 or with at least five years of
Board service, a non-employee director's options will become fully exercisable
and remain exercisable during a grace period (initially set at three years) but
not beyond the original term. A non-employee director whose service terminates
under any other circumstances could exercise the option only during the first 90
days following the termination and only to the extent that the option had then
been exercisable.

DEFERRALS. Non-employee directors would be permitted to defer into stock
unit accounts their Board and Board committee meeting attendance fees and/or
retainer fees for serving as chair of a Board committee.

FUTURE ACTIONS. Notwithstanding the foregoing, all future actions under the
Director Stock Plan are subject to the discretion of the Committee.

THE BOARD RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE THE DIRECTOR STOCK
PLAN.

23
<PAGE>
PROPOSAL TO APPROVE THE OFFICE OF THE CHAIRMAN INCENTIVE PLAN

Upon the recommendation of the Board's Compensation Committee (the
"Committee"), the Board has adopted the Office of the Chairman Incentive Plan
("OCIP"), subject to approval of the OCIP by the shareholders.

Section 162(m) of the Internal Revenue Code generally disallows a Federal
income tax deduction to a public company for compensation over $1 million per
fiscal year paid to the company's chief executive officer and its four other
most highly compensated executive officers serving at the end of that year. An
exception, however, is provided for qualifying "performance-based" compensation.
It is intended that incentive compensation paid pursuant to the OCIP to members
of the Office of the Chairman will qualify as "performance-based" compensation
within the meaning of Section 162(m) and, therefore, not be subject to the
deductibility limitation.

SUMMARY DESCRIPTION OF THE OCIP

The following summary of the principal features of the OCIP is subject to
and qualified in its entirety by the full text of the OCIP, a copy of which is
included in this proxy statement as Appendix B.

Participants in the OCIP for a given fiscal year will consist of only those
executive officers who are designated by the Committee during the first 90 days
of that year as members of the Office of the Chairman. The participating
executive officers will not be eligible to receive an award with respect to that
year under the Company's Management Incentive Program ("MIP") or any similar
plan or program.

The OCIP will be administered by the Committee. All determinations,
interpretations and actions of the Committee in connection with the OCIP will be
conclusive. The Board will have the power to amend, suspend or terminate the
OCIP without shareholder approval, except that no such action may adversely
affect rights under an award already made unless the affected participant
consents and no such action may increase the maximum amount that can be earned
as OCIP awards.

Awards under the OCIP are expected to be paid in cash. If a participant's
employment terminates during a year of participation by reason of death,
retirement, voluntary resignation after July 1 of such year, or disability, the
Committee may determine, after the amount of the incentive fund for that year
has been determined, that a pro rata award be paid.

Awards under the OCIP with respect to any fiscal year are limited in the
aggregate to an incentive fund equal to 5% of the Company's net earnings for
that year, as determined in accordance with generally accepted accounting
principles and reported to the Company's shareholders.

The maximum award to any individual participant for any fiscal year will
equal the amount of the incentive fund, divided by the number of participants
for that year. In its discretion, the Committee may decrease (but not increase)
the OCIP award to any one or more participants, based

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upon its assessment of corporate performance, individual performance, and other
objective or subjective factors, including strategic goals, that it may deem
appropriate. It is intended that the Committee will exercise this negative
discretion as necessary to cause actual awards under the OCIP generally to
correspond with the awards that would have been paid to OCIP participants had
they been MIP participants. A decrease in the OCIP award to any one participant
will not increase the maximum award to any other participant. In no case can the
Committee exercise discretion to cause OCIP awards to approximate MIP awards if
the maximum OCIP awards, calculated as above, are inadequate for the purpose.

PROPOSED OCIP BENEFITS

The Committee has designated Messrs. Fluno, Grainger, and Keyser as the
executive officers who will participate in the OCIP for 1997, subject to
approval of the OCIP by the shareholders. These executive officers are currently
the members of the Office of the Chairman.

The amount of the award payable to any participant in the OCIP for 1997 will
not be ascertainable until after the end of the year. If the OCIP had been in
effect during 1996, the aggregate incentive fund would have been $10.43 million
and, if the current members of the Office of the Chairman were designated the
participants, the maximum award to any one participant for that year would have
been $3.48 million. With respect to the intention that the Committee exercise
negative discretion as necessary to cause OCIP awards generally to correspond
with MIP awards, reference is made to the information concerning MIP awards to
members of the Office of the Chairman included in the summary compensation table
appearing earlier in this proxy statement.

THE BOARD RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE THE OFFICE OF THE
CHAIRMAN INCENTIVE PLAN.

PROPOSAL TO APPROVE
THE 1990 LONG TERM STOCK INCENTIVE PLAN, AS AMENDED

Upon the recommendation of the Board's Compensation Committee (the
"Committee"), the Board has adopted certain amendments to the 1990 Long Term
Stock Incentive Plan, subject to approval of the 1990 Long Term Stock Incentive
Plan, as so amended (the "1990 Plan"), by the shareholders.

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The purpose of the amendments and of submitting the 1990 Plan to the
shareholders for approval is to permit the Company to continue to receive the
full benefit of Federal income tax deductions in connection with exercises of
stock options granted under the 1990 Plan. These deductions are equal to the
excess of the fair market value of the shares at the time of exercise over the
option exercise price. As discussed earlier in this proxy statement, however,
Section 162(m) of the Internal Revenue Code limits the deductibility of
compensation paid during a given fiscal year to a public company's chief
executive officer and its four other most highly compensated executive officers
in certain cases. The exception from the deductibility limitation for qualifying
"performance-based" compensation also was discussed.

Regulations under Section 162(m) provide that gain realized upon the
exercise of stock options or stock appreciation rights can qualify as
"performance-based" compensation if various conditions are satisfied. One
condition (applicable to grants after the 1997 annual meeting in the case of the
Company) is that the grant be under a plan with a shareholder-approved provision
setting forth the maximum number of shares with respect to which stock options
or stock appreciation rights may be granted during a specified period to any
employee. In this connection, the amendments provide a maximum of 400,000 shares
(being slightly less than 10% of the total number of shares authorized under the
1990 Plan) for grants to any employee in a calendar year. Another condition is
that any gain realized by the employee on exercise result solely from an
increase in the value of the shares after the grant. This condition would
preclude grants involving below-market exercise prices. Although the Company has
not granted under the 1990 Long Term Stock Incentive Plan any stock options or
stock appreciation rights involving below-market exercise prices, the amendments
codify the Company's practice in this regard. More particularly, the amendments
require that stock options and stock appreciation rights be granted with
exercise prices of no less than 100%, rather than 85% as previously provided, of
the fair market value of the underlying shares at the time of grant.

The amendments will be the first amendments to the 1990 Long Term Stock
Incentive Plan since it was approved by the shareholders at the 1990 annual
meeting. Included in this proxy statement as Appendix C is a copy of the full
text of the 1990 Plan. All summary information in this proxy statement
concerning the 1990 Plan is subject to and qualified in its entirety by that
text.

The 1990 Plan authorizes a variety of stock-based incentives. Although the
1990 Plan is similar in many respects to the Director Stock Plan discussed
earlier in this proxy statement, there are also differences. As concerns
eligibility, employees eligible to participate in the 1990 Plan are employees of
the Company and its subsidiaries who hold positions of responsibility and are
designated participants by the Committee. As concerns shares available for
grants, the aggregate number of shares of Company common stock which have been
or may be issued or for which stock options or stock appreciation rights may be
granted under the 1990 Plan cannot exceed 4,028,414, subject to adjustment.
(This number includes shares remaining available for grants under a predecessor
plan and reflects the Company's two-for-one stock split in 1991.) At December
31, 1996, 2,471,719 shares were available for future grants. Further concerning
shares available for grants, and

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as previously noted, grants of stock options or stock appreciation rights to any
one employee during a calendar year will be subject to a share limitation.

It is believed that awards under the 1990 Plan will continue to be valuable
in attracting and retaining highly qualified key employees and in allying their
interests with those of the shareholders.

THE BOARD RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE THE 1990 LONG TERM
STOCK INCENTIVE PLAN, AS AMENDED.

OTHER MATTERS

NOTICE REQUIREMENTS

Any shareholder who desires to have a proposal included in the Company's
proxy soliciting material relating to the Company's 1998 annual meeting of
shareholders (in accordance with Rule 14a-8 of Regulation 14A under the
Securities Exchange Act of 1934, as amended) should send to the Secretary of the
Company at the Company headquarters a signed notice of intent to submit the
proposal at the meeting. The notice, including the text of the proposal, must be
received at such offices no later than November 26, 1997 in order for the
proposal to be considered for inclusion in such proxy soliciting material.

The Company's By-laws require that there be furnished to the Company written
notice with respect to the nomination of a person for election as a director
(other than a person nominated at the direction of the Board), as well as the
submission of a proposal (other than a proposal submitted at the direction of
the Board), at a meeting of shareholders. In order for the nomination or
submission to be proper, the notice must contain certain information concerning
the nominating or proposing shareholder, and the nominee or proposal, as the
case may be. For a nomination, the notice must be furnished no later than the
date calculated in accordance with the notice requirements referred to in the
preceding paragraph. For a proposal, the notice must be furnished generally not
less than 30 days nor more than 60 days before the meeting. A copy of the
applicable By-law provisions may be obtained without charge upon written request
to the Secretary of the Company.

DISCRETIONARY AUTHORITY

The Board does not know of any matters other than those described in this
proxy statement that will be presented for consideration at the meeting. If any
matter not described in this proxy statement should properly be so presented, it
is intended that the proxies will be voted on the matter in accordance with the
judgment of the person or persons voting them.

YOUR VOTE IS IMPORTANT. PLEASE COMPLETE AND SIGN
THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTLY IN THE
ACCOMPANYING POSTPAID ENVELOPE.

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APPENDIX A

W.W. GRAINGER, INC.
DIRECTOR STOCK PLAN

ARTICLE 1. ESTABLISHMENT, OBJECTIVES, AND DURATION.

1.1. ESTABLISHMENT OF THE PLAN. W.W. Grainger, Inc., an Illinois
corporation (the "Company"), hereby establishes its Director Stock Plan (the
"Plan").

1.2. OBJECTIVES OF THE PLAN. The objectives of the Plan are to enhance the
ability of the Company to attract and retain the best-qualified directors, to
increase the identity of interest between directors and the Company's
shareholders, and to provide additional incentives for directors to maximize the
long-term success of the Company's business.

1.3. DURATION OF THE PLAN. The Plan shall become effective on the date of
its approval by the shareholders of the Company (the "Effective Date"). Subject
to the right of the Board to amend or terminate the Plan pursuant to Article 14,
(i) Awards may be granted from time to time on or after the Effective Date so
long as Shares reserved for delivery under Section 4.1 remain available and (ii)
Compensation earned by the Outside Directors from time to time after the
Effective Date may be deferred.

ARTICLE 2. DEFINITIONS.

2.1. "Account": see Section 8.1.

2.2. "Award" means, individually or collectively, a grant by the Committee
under this Plan of Options, Restricted Stock, Stock, and Stock Units, whether
formula-based or otherwise.

2.3. "Annual Meeting" means an annual meeting of the shareholders of the
Company.

2.4. "Award Agreement" means an agreement between the Company and an Outside
Director setting forth the terms applicable to an Award. Except as otherwise
provided in the Plan, the terms of an Award Agreement need not be the same for
each Outside Director, nor for each grant, and may reflect distinctions based on
the reasons for termination of Service.

2.5. "Board" means the Board of Directors of the Company.

2.6. "Committee" means the Compensation Committee of the Board, which shall
be comprised entirely of Outside Directors.

2.7. "Company": see Section 1.1.

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2.8. "Compensation" means all retainer, meeting, committee, and chair fees
payable in cash to an Outside Director for Service.

2.9. "Deferral Election": see Section 10.2.

2.10. "Director" means any member of the Board.

2.11. "Distribution Election": see Section 8.6.

2.12. "Effective Date": see Section 1.3.

2.13. "Exchange Act" means the Securities Exchange Act of 1934, as amended.

2.14. "Expiration Date": see Section 5.4.

2.15. "Fair Market Value" means, as of any specified date, the closing price
of the Shares on the New York Stock Exchange, or any other national stock
exchange or national market system on which the Shares are then traded, on the
last preceding trading day on which the Shares were traded.

2.16. "Option" means an option to purchase Shares granted under Article 5.

2.17. "Option Price" means the price at which a Share may be purchased under
an Option.

2.18. "Outside Director" means a Director who is not an employee of the
Company or a Subsidiary.

2.19. "Period of Restriction" means the period established by the Committee
in its discretion during which the transfer of Restricted Stock is limited in
some manner, and the Shares are subject to a substantial risk of forfeiture, all
as provided in Article 6.

2.20. "Restricted Stock" means an Award granted under Article 6.

2.21. "Rule 16b-3" means Rule 16b-3 (or a successor rule) of the Securities
and Exchange Commission under the Exchange Act, as such Rule may be amended from
time to time.

2.22. "Service" means an Outside Director's service on the Board or any
Board committee.

2.23. "Shares" means shares of common stock of the Company.

2.24. "Stock" means an Award of Shares granted under Article 7.

2.25. "Stock Units" means the units in which an Account is denominated. A
Stock Unit is an unsecured obligation of the Company that is intended, subject
to the terms of Article 8, to represent the economic equivalent of one Share.

2.26. "Subsidiary" means any corporation, partnership, joint venture,
limited liability company, or other entity in which the Company owns securities
representing a majority of the aggregate voting power.

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ARTICLE 3. ADMINISTRATION.

3.1. GENERAL. The Plan shall be administered by the Committee. Except as
may be limited by law, the articles of incorporation or By-laws of the Company,
or the Plan, the Committee shall have full power and discretion to determine the
amounts, types and terms of Awards; to determine the terms of any Award
Agreement; to construe and interpret the Plan and any Award Agreement; to
establish, amend, or waive rules for the Plan's administration; to make all
other determinations which may be necessary or advisable for the administration
of the Plan; and (subject to Section 14.3) to amend the terms of any outstanding
Award. To the extent permitted by law, the Committee shall have the authority to
delegate administrative duties to officers or Directors of the Company.

3.2. DECISIONS BINDING. All determinations and decisions made by the
Committee under the Plan shall be final, conclusive, and binding on all persons,
including the Company, its shareholders, Outside Directors, and their respective
estates and beneficiaries.

ARTICLE 4. SHARES SUBJECT TO PLAN.

4.1. SHARES AVAILABLE FOR GRANTS. Subject to adjustment as provided in
Section 4.2, the number of Shares reserved for delivery under the Plan is
250,000. If any Shares subject to any Award are forfeited or such Award
otherwise terminates without the delivery of such Shares, the Shares subject to
such Award, to the extent of any such forfeiture or termination, shall again be
available for delivery under the Plan. Shares delivered pursuant to the Plan may
be treasury stock or newly-issued Shares.

4.2. ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in
corporate capitalization (such as a stock split, stock dividend, spin-off, or
other distribution of stock or property of the Company), or any merger,
consolidation, separation, reorganization (whether or not tax-free) or any
partial or complete liquidation of the Company, the Committee may make such
adjustment in the number and class of Shares which may be delivered under
Section 4.1 as it may determine in its discretion to be appropriate.

ARTICLE 5. OPTIONS.

5.1. AWARD OF OPTIONS. Subject to the terms of the Plan, Options may be
awarded to Outside Directors in such number, upon such terms, and at such time
or times as the Committee shall determine in its discretion.

5.2. AWARD AGREEMENT. Each Option shall be evidenced by an Award Agreement
that shall specify the Option Price, the Expiration Date of the Option, the
number of Shares subject to the Option, and such other provisions as the
Committee may determine.

5.3. OPTION PRICE. The Option Price for each grant of an Option shall be
at least 100% of the Fair Market Value of a Share on the date the Option is
granted.

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5.4. DURATION OF OPTIONS. Each Option shall expire at such time as the
Committee shall determine at the time of grant (the "Expiration Date"), but in
no event after the tenth anniversary of the date of such grant.

5.5. EXERCISE OF OPTIONS. Each Option shall be exercisable at such times
prior to the Expiration Date and be subject to such restrictions and conditions
as the Committee shall determine in its discretion, including, without
limitation, restrictions on the Shares acquired pursuant to the exercise of such
Option.

5.6. PAYMENT. Options shall be exercised by the delivery of a written
notice of exercise to the Company, setting forth the number of Shares with
respect to which the Option is to be exercised, and accompanied by full payment
for the Shares. Upon the exercise of any Option, the exercise price shall be
payable by any one or combination of the following means:

(i) cash or its equivalent,

(ii) with the prior approval of the Committee, delivery of Shares
already owned by the Outside Director and valued at the Fair Market Value
thereof at the time of exercise,

(iii) with the prior approval of the Committee, a cashless exercise
through a broker-dealer approved for this purpose by the Company.

5.7. TERMINATION OF SERVICE. Each Award Agreement shall set forth the
extent to which the Outside Director shall have the right to exercise an Option
after termination of Service, but in no event shall any Option be exercised
after its Expiration Date.

5.8. NONTRANSFERABILITY OF OPTIONS. Except as may otherwise be specified
by the Committee in its discretion, no Option may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than (i) by will, (ii)
by the laws of descent and distribution, or (iii) pursuant to a beneficiary
designation in accordance with Article 11.

ARTICLE 6. RESTRICTED STOCK.

6.1. AWARD OF RESTRICTED STOCK. Subject to the terms of the Plan,
Restricted Stock may be awarded to Outside Directors in such number of Shares,
upon such terms, and at such time or times as the Committee shall determine in
its discretion.

6.2. RESTRICTED STOCK AGREEMENT. Each Restricted Stock Award shall be
evidenced by an Award Agreement that shall specify the Period of Restriction,
the number of Shares of Restricted Stock granted, and such other provisions as
the Committee may determine.

6.3. NONTRANSFERABILITY. Except as may otherwise be specified by the
Committee in its discretion, Restricted Stock may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated until after the end of
the applicable Period of Restriction. Shares of Restricted Stock shall vest and
become freely transferable after the end of the applicable Period of
Restriction.

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6.4. OTHER RESTRICTIONS. The Committee may impose such other conditions
and/or restrictions on any Restricted Stock as it deems advisable, including
without limitation a stipulated purchase price for any Share of Restricted
Stock. The Company may retain possession of the certificates representing Shares
of Restricted Stock until all conditions and/or restrictions applicable to such
Shares have been satisfied.

6.5. VOTING RIGHTS. Shares of Restricted Stock shall have the same voting
rights as unrestricted Shares.

6.6. DIVIDENDS AND OTHER DISTRIBUTIONS. Shares of Restricted Stock shall
have the same dividend rights as unrestricted Shares; provided, however, that
(i) the Committee may in its discretion provide that dividends shall be
reinvested in additional Shares of Restricted Stock based on the Fair Market
Value of the Shares on the applicable dividend payment date and on such other
terms as may be determined by the Committee in its discretion and (ii) the
Committee may impose any restrictions it deems appropriate on dividends payable
in any form other than cash.

6.7. TERMINATION OF SERVICE. The extent, if any, to which the Outside
Director shall have the right to receive unvested Shares of Restricted Stock
following termination of the Outside Director's Service shall be set forth in
each Restricted Stock Award Agreement and, subject to Section 14.3, may
subsequently be modified by the Committee in its discretion.

ARTICLE 7. STOCK.

7.1. AWARD OF STOCK. Subject to the provisions of the Plan, Shares of
Stock may be awarded to Outside Directors in such number, upon such terms, and
at such time or times as the Committee shall determine in its discretion.

7.2. AWARD AGREEMENT. Each Stock Award may, but need not, be evidenced by
an Award Agreement that shall specify the number of Shares to which the Award
pertains, the purchase price (if any), and such other provisions as the
Committee shall determine.

ARTICLE 8. STOCK UNITS AND ACCOUNTS.

8.1. ACCOUNTS. One or more accounts (each, an "Account") shall be created
and maintained on the books of the Company for each Outside Director to which
shall be credited all Stock Units that may be attributed to such Outside
Director from time to time in connection with (i) Awards of Stock Units by the
Committee pursuant to Article 9, (ii) deferrals of Compensation by such Outside
Director pursuant to Article 10, or (iii) the automatic reinvestment of dividend
equivalents pursuant to Section 8.3. Accounts shall be maintained solely for
accounting purposes and shall not require a segregation of any assets of the
Company.

8.2. VESTING. Stock Units awarded by the Committee pursuant to Article 9
shall become vested and nonforfeitable upon such terms as the Committee may
determine. Stock Units credited

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to an Outside Director's Account by reason of his or her election to defer
Compensation pursuant to Article 10 shall at all times be fully vested and
nonforfeitable. Any additional Stock Units resulting from the crediting of
dividend equivalents to an Outside Director's Account or Accounts pursuant to
Section 8.3 shall be vested and nonforfeitable to the same extent and at the
same time or times as the underlying Stock Units giving rise to such dividend
equivalents.

8.3. DIVIDEND EQUIVALENTS. Dividend equivalents shall be earned on Stock
Units and credited to an Outside Director's Account as of any date (a "Dividend
Payment Date") on which the Company pays any dividend on the outstanding Shares
(a "Dividend"). Such dividend equivalents shall be expressed as a number of
Stock Units equal to:

(i) the number of Stock Units credited to an Outside Director's Account
as of the record date for such Dividend multiplied by the value of the per
Share amount of such Dividend (as determined by the Committee in the case of
dividends paid other than in cash),

DIVIDED BY:

(ii) the Fair Market Value of a Share as of the Dividend Payment Date.

8.4. AMOUNT OF PAYMENT. The amount of value payable to an Outside Director
on account of a Stock Unit as of the date of any payment determined in
accordance with Section 8.5 shall equal the Fair Market Value of a Share on such
date.

8.5. TIMING AND METHOD OF PAYMENT. The value of vested Stock Units shall
be paid to an Outside Director in a lump sum as soon as administratively
possible following the termination of such Outside Director's service as a
Director, except that (i) the Committee may otherwise provide in an Award
Agreement, (ii) an Outside Director may otherwise provide in a Distribution
Election, or (iii) the Company may defer such payment on account of any or all
Stock Units for up to six months after the date of such termination of such
service to the extent necessary to ensure the availability of an exemption under
Rule 16b-3. All payments on account of Stock Units shall be made in cash unless
the Committee determines in its discretion to make a payment or payments in
Shares; provided that any fractional Shares shall be paid in cash based on the
Fair Market Value of a Share on the date of such payment.

8.6. DISTRIBUTION ELECTIONS. The Committee may in its discretion permit
the Outside Director to specify in a written notice delivered to the Secretary
of the Company (a "Distribution Election") such Outside Director's election with
respect to (i) when payment to such Outside Director in respect of Stock Units
(whether resulting from an Award under Article 9 or from deferrals pursuant to
Article 10) shall commence, and (ii) whether such payment shall be in a lump sum
or in such number of annual installments as the Outside Director may designate,
subject to a maximum number of installments that the Committee shall determine
from time to time, but not in excess of ten (10). To the extent the Committee
permits Distribution Elections, an Outside Director may make or change such a
Distribution Election as to the entire balance of his or her Account at any

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time or from time to time, but only by a Distribution Election filed with the
Company no later than December 31 of the year next preceding such Outside
Director's termination of service as a Director. Any Distribution Election that
is not made or changed timely shall be disregarded.

8.7. NONTRANSFERABILITY OF STOCK UNITS. Except as may otherwise be
specified by the Committee in its discretion, no Stock Unit may be transferred
in any manner other than (i) by will, (ii) by the laws of descent and
distribution, or (iii) pursuant to a beneficiary designation in accordance with
Article 11.

8.8. UNSECURED OBLIGATION. An Outside Director shall be a general
unsecured creditor of the Company with respect to all Stock Units credited to
his or her Account or Accounts. The Committee may, but is not required to,
establish a so-called "rabbi" trust or similar mechanism to fund the Company's
obligations under this Plan; provided, however, that any funds contained therein
shall remain subject to the claims of the Company's general creditors.

ARTICLE 9. AWARD OF STOCK UNITS BY THE COMMITTEE.

9.1. AWARD OF STOCK UNITS. Subject to the terms of the Plan, Stock Units
may be awarded to Outside Directors in such number, upon such terms, and at such
time or times as the Committee shall determine in its discretion. Stock Units
may be awarded in substitution for, or replacement of, the rights or interests
(whether vested or unvested) of Outside Directors under other plans of the
Company.

9.2. AWARD AGREEMENT. Each Stock Unit Award shall be evidenced by an Award
Agreement that shall specify the number of Stock Units to which the Award
pertains, the vesting of such Stock Units, the extent (if any) to which a
payment is to be made in respect of Stock Units that are unvested upon the
termination of an Outside Director's Service, and such other provisions as the
Committee shall determine.

ARTICLE 10. DEFERRALS BY OUTSIDE DIRECTORS.

10.1. DEFERRAL ELECTION. An Outside Director may elect to defer receipt of
all or any specified portion of any Compensation payable to him or her, and to
have such amounts credited to his or her Account in accordance with Section
10.3; provided, however, that the Committee may in its discretion (i) provide
that any such election shall be subject to the prior approval of the Committee
or (ii) suspend the right of all Outside Directors to defer receipt of
Compensation to be received after the date of such suspension.

10.2. TIMING OF DEFERRAL ELECTION. A deferral election shall be made by
written notice (a "Deferral Election") filed with the Secretary of the Company:

(i) on or before the Effective Date (covering Compensation to be earned
after the Effective Date),

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(ii) no more than 30 days after an Outside Director is first elected or
appointed to the Board (covering Compensation to be earned at any time after
the filing of such election),

(iii) on or before the date of any Annual Meeting (covering Compensation
to be earned after such Annual Meeting), or

(iv) on or before such other date or dates as may be approved in advance
by the Committee (covering Compensation earned for such period or periods
commencing after such other date as may be specified by the Committee).

Subject to Section 8.6, a Deferral Election may be accompanied by a
Distribution Election. Subject to Section 10.1, any Deferral Election shall
continue in effect (including with respect to the Compensation relating to
subsequent periods) unless and until revoked or modified by a new Deferral
Election filed with the Secretary of the Company. Amounts credited to an Outside
Director's Account prior to the effective date of any such revocation or
modification of a Deferral Election shall not be affected by such revocation or
modification. An Outside Director who has revoked a Deferral Election may file a
new Deferral Election to defer Compensation relating exclusively to services to
be rendered during the calendar year following the year in which such new
Deferral Election is filed with the Company.

10.3. DEFERRALS CREDITED TO ACCOUNT. Any Compensation deferred by an
Outside Director pursuant to this Article 10 shall be allocated to his or her
Account and deemed to be invested in a number of Stock Units equal to (i) the
amount of such Compensation DIVIDED BY (ii) the Fair Market Value of a Share on
the date Compensation would otherwise have been paid.

ARTICLE 11. BENEFICIARY DESIGNATION.

Unless the Committee in its discretion determines otherwise, each Outside
Director may from time to time name any beneficiary or beneficiaries (who may be
named contingently or successively) to whom any benefit under the Plan is to be
paid in the event of such Outside Director's death before he or she receives any
or all of such benefit. Each such designation shall revoke all prior
designations by such Outside Director, shall be in a form prescribed by the
Company, and will be effective only when filed by the Outside Director in
writing with the Company during the Outside Director's lifetime. In the absence
of any such designation, benefits remaining unpaid at the Outside Director's
death shall be paid to his or her estate.

ARTICLE 12. TAX WITHHOLDING.

If any federal, state, and local tax withholding may be required in respect
of the grant, vesting or exercise of any Award or the settlement of any Stock
Unit (any such event, "Taxable Event"), the Company shall have the authority to
withhold, or require an Outside Director to remit to the Company, an amount
sufficient to satisfy such tax withholding. The Company may defer the payment of
cash or delivery of Shares in connection with a Taxable Event until such
withholding requirements have been satisfied. The Committee may, in its
discretion, permit an Outside Director to

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elect, subject to such conditions as the Committee may require, to have the
Company withhold Shares otherwise deliverable pursuant to the Plan and having a
Fair Market Value sufficient to satisfy all or part of any Outside Director's
estimated total federal, state, and local tax obligation associated with a
Taxable Event.

ARTICLE 13. RIGHTS OF DIRECTORS.

Nothing in the Plan shall interfere with or limit in any way the right of
the Company's shareholders to terminate any Outside Director's Service at any
time, nor confer upon any Outside Director any right to continue in Service.

ARTICLE 14. AMENDMENT, MODIFICATIONS, AND TERMINATION.

14.1. AMENDMENT, MODIFICATION, AND TERMINATION. Subject to the terms of
the Plan, the Board may at any time and from time to time, alter, amend, suspend
or terminate the Plan in whole or in part without the approval of the Company's
shareholders, except that no such amendment shall increase the number of Shares
available for delivery under the Plan, change the minimum Option Price or
maximum term of an Option, or change the requirements relating to the
composition of the Committee.

14.2. ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR
NONRECURRING EVENTS. In connection with any unusual or nonrecurring events
(including, without limitation, the events described in Section 4.2) affecting
the Company or of changes in applicable laws, regulations, or accounting
principles, the Committee may in its discretion adjust:

(i) the terms of Options, Restricted Stock, Stock and Stock Units
(including, without limitation, in the number, class and/or price of Shares
or Stock Units subject to, or to be distributed in connection with,
outstanding Awards or Stock Units) and

(ii) the criteria specified in the Award Agreements related to
outstanding Awards,

whenever the Committee determines that such adjustments are appropriate in order
to prevent dilution or enlargement of the benefits intended to be made available
under the Plan.

14.3. AWARDS PREVIOUSLY GRANTED. Notwithstanding any other provision of
the Plan to the contrary, no termination, amendment, or modification of the Plan
shall adversely affect in any material way any previously granted Award, without
the written consent of the Outside Director holding such Award.

ARTICLE 15. NONALIENABILITY.

Except as may otherwise be specified by the Committee in its discretion, no
Award, Stock Unit, nor any right to a payment of Stock Units pursuant to Section
8.5 shall be subject in any manner to

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anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors of the Outside Director or the Outside
Director's beneficiary, other than (i) by will, (ii) by the laws of descent and
distribution, or (iii) pursuant to a beneficiary designation in accordance with
Article 11.

ARTICLE 16. SUCCESSORS.

All obligations of the Company under the Plan shall be binding on any
successor to the Company, whether the existence of such successor is the result
of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company. The Company and
such successor shall be jointly and severally liable for all of the Company's
obligations under the Plan.

ARTICLE 17. LEGAL CONSTRUCTION.

17.1. GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.

17.2. ARTICLES AND SECTIONS. Except where otherwise indicated by the
context, any reference to an "Article" or "Section" shall be to an Article or
Section of this Plan.

17.3. SEVERABILITY. If any part of the Plan is declared to be unlawful or
invalid, such unlawfulness or invalidity shall not invalidate any other part of
the Plan. Any part of the Plan so declared to be unlawful or invalid shall, if
possible, be construed in a manner which will give effect to the terms of such
part to the fullest extent possible while remaining lawful and valid.

17.4. LEGAL COMPLIANCE. If the Company determines that the exercise or
nonforfeitability of, or delivery of benefits pursuant to, any Award or Deferral
Election would violate any applicable provision of (i) federal or state
securities laws or (ii) the listing requirements of any national securities
exchange or national market system on which are then listed any of the Company's
equity securities, then the Company may postpone any such exercise,
nonforfeitability or delivery, as applicable, but the Company shall use all
reasonable efforts to cause such exercise, nonforfeitability or delivery to
comply with all such provisions at the earliest practicable date. If the Company
deems necessary to comply with any applicable securities law, the Company may
require a written investment intent representation by an Outside Director and
may require that a restrictive legend be affixed to certificates for Shares
delivered pursuant to the Plan.

17.5. GOVERNING LAW. The Plan and all Award Agreements shall be construed
in accordance with and governed by the laws of the State of Illinois, without
regard to the conflict of laws principles thereof.

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<PAGE>
APPENDIX B

W.W. GRAINGER, INC.
OFFICE OF THE CHAIRMAN INCENTIVE PLAN

PURPOSE.

The purpose of the Office of the Chairman Incentive Plan (the "Plan") is to
compensate participants appropriately for the financial performance of W.W.
Grainger, Inc. (including subsidiaries thereof, the "Company") and to ensure to
the Company current Federal income tax deductibility of annual incentive
compensation that might otherwise not be deductible by the Company as a result
of Section 162(m) of the Internal Revenue Code.

PARTICIPATION.

All executive officers of the Company who are designated by the Compensation
Committee of the Company's Board of Directors or successor committee (the
"Committee") no later than 90 days after the beginning of a fiscal year as
members of the Office of the Chairman will participate in the Plan with respect
to that year. As concerns any year of participation in the Plan, a participant
will not be eligible to receive any award of annual incentive cash compensation
(i) under the management incentive program or successor program or plan of the
Company, or (ii) under a similar program or plan of any business of the Company.

ADMINISTRATION.

The Plan will be administered by the Committee, which shall have sole
authority to interpret the Plan. All determinations, interpretations and actions
of the Committee in connection with the Plan shall be final, conclusive, and
binding upon all concerned.

DETERMINATION OF AWARDS.

With respect to each fiscal year, awards under the Plan will be limited to
an incentive fund equal to 5% of the Company's net earnings, as determined in
accordance with generally accepted accounting principles and as reported to the
Company's shareholders. The portion of the incentive fund allocated to each
participant will be equal to the amount of the incentive fund divided by the
number of participants in the Plan with respect to that year.

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The Committee may reduce, but not increase, a participant's award under the
Plan, based upon the Committee's assessment of corporate performance, individual
performance, competitive practice, and such other factors as the Committee may
deem appropriate. The reduction of one participant's award by the Committee will
not cause an increase or decrease in any other participant's award.

Awards to participants will be paid in cash on or before March 15 of the
year following the year for which the award was earned, as determined by the
Committee. If a participant dies, retires or is disabled during a year of
participation, a pro rata award may be paid, as determined by the Committee,
after the determination of the incentive fund. If a participant voluntarily
resigns after July 1 of a year of participation, a pro rata award may be paid,
as determined by the Committee, after the determination of the incentive fund.

AMENDMENT AND TERMINATION.

The Company's Board of Directors may amend, suspend, or terminate the Plan
at any time, subject to the following restrictions:

- No action may adversely affect rights under an award already made, without
the consent of the participant; and

- Unless the shareholders of the Company so approve, no action may increase
the maximum amount that can be earned as awards under the Plan.

39
<PAGE>
APPENDIX C

W.W. GRAINGER, INC.
1990 LONG TERM STOCK INCENTIVE PLAN, AS AMENDED

SECTION 1. OBJECTIVE.

The objective of the W.W. Grainger, Inc. 1990 Long Term Stock Incentive Plan
(the "Plan") is to attract and retain the best available executive personnel and
other key employees to be responsible for the management, growth and success of
the business, and to provide an incentive for such employees to exert their best
efforts on behalf of the Company and its shareholders.

SECTION 2. DEFINITIONS.

2.1. GENERAL DEFINITIONS. The following words and phrases, when used
herein, shall have the following meanings:

(a) "Act" -- The Securities Exchange Act of 1934, as amended.

(b) "Agreement" -- The document which evidences the grant of any Award
under the Plan and which sets forth the terms, conditions, and limitations
relating to such Award.

(c) "Award" -- The grant of any stock option, stock appreciation right,
share of restricted stock, share of phantom stock, other stock-based award,
or any combination thereof.

(d) "Board" -- The Board of Directors of W.W. Grainger, Inc.

(e) "Code" -- The Internal Revenue Code of 1986, as amended, including
the regulations promulgated pursuant thereto.

(f) "Committee" -- The Compensation Committee of the Board of Directors
of the Company, which shall consist of three or more members. The members of
the Committee shall be disinterested persons within the meaning of Rule
16b-3, as the same may be amended or supplemented from time to time, as
promulgated under the Act. No member of the Committee shall be eligible to
receive Awards under the Plan unless permitted by such Rule 16b-3.

(g) "Common Stock" -- The present shares of common stock of the Company,
and any shares into which such shares are converted, changed or
reclassified.

(h) "Company" -- W.W. Grainger, Inc., an Illinois corporation, and its
groups, divisions, and subsidiaries.

(i) "Employee" -- Any person employed by the Company as an employee.

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(j) "Fair Market Value" or "FMV" -- The fair market value of Common
Stock on a particular day shall be the closing price of the Common Stock on
the New York Stock Exchange, or any other national stock exchange on which
the Common Stock is traded, on the last preceding trading day on which such
Common Stock was traded.

(k) "Option" -- The right to purchase Common Stock of the Company at a
stated price for a specified period of time. For purposes of the Plan, the
option is a Non-Qualified Stock Option.

(l) "Other Stock Based Award" -- An award under Section 9 that is
valued in whole or in part by reference to, or is otherwise based on, the
Company's Common Stock.

(m) "Participant" -- Any Employee designated by the Committee to
participate in the Plan.

(n) "Phantom Stock" -- A right to receive payment from the Company in
cash, stock, or in combination thereof, in an amount determined by the Fair
Market Value.

(o) "Period of Restriction" -- The period during which Shares of
Restricted Stock or Phantom Stock rights are subject to forfeiture or
restrictions on transfer pursuant to Section 8 of the Plan.

(p) "Restricted Stock" -- Shares granted to a Participant which are
subject to restrictions on transferability pursuant to Section 8 of the
Plan.

(q) "Shares" -- Shares of Common Stock.

(r) "Stock Appreciation Right" or "SAR" -- The right to receive a
payment from the Company in cash, Common Stock, or in combination thereof,
equal to the excess of the Fair Market Value of a share of Common Stock on
the date of exercise over a specified price fixed by the Committee, but
subject to such maximum amounts as the Committee may impose.

2.2. OTHER DEFINITIONS. In addition to the above definitions, certain
words and phrases used in the Plan and any Agreement may be defined elsewhere in
the Plan or in such Agreement.

SECTION 3. COMMON STOCK.

3.1. NUMBER OF SHARES. Subject to the provisions of Section 3.3, the
number of Shares which may be issued or sold or for which Options or Stock
Appreciation Rights may be granted under the Plan may not exceed 4,028,414
Shares.* Notwithstanding the foregoing, the total number of Shares

- ------------

* As adjusted to reflect (i) the number of shares remaining available for
grants under the Company's Restated 1975 Non-Qualifed Stock Option Plan and (ii)
the Company's 1991 two-for-one stock split.

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with respect to which Options or Stock Appreciation Rights may be granted to any
Participant shall not exceed 400,000 Shares (proportionately adjusted pursuant
to Section 3.3) in any calendar year.

3.2. RE-USAGE. If an Option or SAR expires or is terminated, surrendered,
or canceled without having been fully exercised, if Restricted Stock is
forfeited, or if any other grant results in any Shares not being issued, the
Shares covered by such Option, SAR, grant of Restricted Stock or other grant, as
the case may be, shall again be immediately available for Awards under the Plan.

3.3. ADJUSTMENTS. In the event of any change in the outstanding Common
Stock by reason of a stock split, stock dividend, combination, reclassification
or exchange of Shares, recapitalization, merger, consolidation or other similar
event, the number of SARs and the number of Shares available for Options, grants
of Restricted Stock, and Other Stock Based Awards and the number of Shares
subject to outstanding Options, SARs, grants of Restricted Stock, and Other
Stock Based Awards, and the price thereof, and the Fair Market Value, as
applicable, shall be appropriately adjusted by the Committee in its sole
discretion and any such adjustment shall be binding and conclusive on all
parties. Any fractional Shares resulting from any such adjustment shall be
disregarded.

SECTION 4. ELIGIBILITY AND PARTICIPATION.

Participants in the Plan shall be those key employees selected by the
Committee to participate in the Plan who hold positions of responsibility and
whose participation in the Plan the Committee or management of the Company
determines to be in the best interests of the Company.

SECTION 5. ADMINISTRATION.

5.1. COMMITTEE. The Plan shall be administered by the Committee, which
shall consist of three or more members of the Board of Directors and who shall
not be eligible to participate in the Plan. The members of the Committee shall
be appointed by and shall serve at the pleasure of the Board, which may from
time to time change the Committee's membership.

5.2. AUTHORITY. The Committee shall have the sole and complete authority
to:

(a) determine the individuals to whom Awards are granted, the type and
amounts of awards to be granted and the time of all such grants;

(b) determine the terms, conditions and provisions of, and restrictions
relating to, each Award granted;

(d) prescribe, amend and rescind rules and regulations relating to the
Plan;

(e) determine the content and form of all Agreements;

(f) determine all questions relating to Awards under the Plan;

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(g) maintain accounts, records and ledgers relating to Awards;

(h) maintain records concerning its decisions and proceedings;

(i) employ agents, attorneys, accountants or other persons for such
purposes as the Committee considers necessary or desirable;

(j) do and perform all acts which it may deem necessary or appropriate
for the administration of the Plan and to carry out the objectives of the
Plan.

5.3. DETERMINATIONS. All determinations, interpretations, or other actions
made or taken by the Committee pursuant to the provisions of the Plan shall be
final, binding, and conclusive for all purposes and upon all persons.

5.4. DELEGATION. Except as required by Rule 16b-3 promulgated under the
Act (and any successor to such rule) with respect to the grant of Awards to
Participants who are subject to Section 16 of the Act, the Committee may
delegate to appropriate senior officers of the Company its duties under the Plan
pursuant to such conditions and limitations as the Committee may establish.

SECTION 6. STOCK OPTIONS.

6.1. TYPE OF OPTION. It is intended that only non-qualified stock options
may be granted by the Committee under this section of the Plan.

6.2. GRANT OF OPTION. An Option may be granted to Participants at such
time or times as shall be determined by the Committee. Each Option shall be
evidenced by an Option Agreement that shall specify the exercise price, the
duration of the Option, the number of Shares to which the Option applies, and
such other terms and conditions not inconsistent with the Plan as the Committee
shall determine.

6.3. OPTION PRICE. The per share option price shall be at least 100% of
the Fair Market Value at the time the Option is granted.

6.4. EXERCISE OF OPTIONS. Options awarded under the Plan shall be
exercisable at such times and shall be subject to such restrictions and
conditions, including the performance of a minimum period of service after the
grant, as the Committee may impose, which need not be uniform for all
participants; provided, however, that no Option shall be exercisable for more
than 10 years after the date on which it is granted.

6.5. PAYMENT. The Committee shall determine the procedures governing the
exercise of Options, and shall require that the per share option price be paid
in full at the time of exercise. The Committee may, in its discretion, permit a
Participant to make payment in cash, or in Shares already owned by the
Participant, valued at the Fair Market Value thereof, as partial or full payment
of the exercise price. As soon as practical after full payment of the exercise
price, the Company shall deliver to the Participant a certificate or
certificates representing the acquired Shares.

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6.6. RIGHTS AS A SHAREHOLDER. Until the exercise of an Option and the
issuance of the Shares in respect thereof, a Participant shall have no rights as
a Shareholder with respect to the Shares covered by such Option.

SECTION 7. STOCK APPRECIATION RIGHTS.

7.1. GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be
granted to Participants at such time or times as shall be determined by the
Committee and shall be subject to such terms and conditions as the Committee may
decide. A grant of an SAR shall be made pursuant to a written Agreement
containing such provisions not inconsistent with the Plan as the Committee shall
approve.

7.2. EXERCISE OF SARS. SARs may be exercised at such times and subject to
such conditions, including the performance of a minimum period of service, as
the Committee shall impose. SARs which are granted in tandem with an Option may
only be exercised upon the surrender of the right to exercise an equivalent
number of Shares under the related Option and may be exercised only with respect
to the Shares for which the related Option is then exercisable. Notwithstanding
any other provision of the Plan, the Committee may impose conditions on the
exercise of an SAR, including, without limitation, the right of the Committee to
limit the time of exercise to specified periods, as may be required to satisfy
the applicable provisions of Rule 16b-3 as promulgated under the Act or any
successor rule.

7.3. PAYMENT OF SAR AMOUNT. Upon exercise of an SAR, the Participant shall
be entitled to receive payment of an amount determined by multiplying:

(a) any increase in the Fair Market Value of a Share at the date of
exercise over the Fair Market Value of a Share at the date of grant, by

(b) the number of Shares with respect to which the SAR is exercised;

provided, however, that at the time of grant, the Committee may establish,
in its sole discretion, a maximum amount per Share which will be payable
upon exercise of an SAR.

7.4. METHOD OF PAYMENT. Subject to the discretion of the Committee, which
may be exercised at the time of grant, the time of payment, or any other time,
payment of an SAR may be made in cash, Shares or any combination thereof.

SECTION 8. RESTRICTED STOCK OR PHANTOM STOCK.

8.1. GRANT OF RESTRICTED STOCK OR PHANTOM STOCK. The Committee may grant
Shares of Restricted Stock or Phantom Stock rights to such Participants at such
times and in such amounts, and subject to such other terms and conditions not
inconsistent with the Plan as it shall determine. Each grant of Restricted Stock
or Phantom Stock rights shall be evidenced by a written Agreement setting forth
the terms of such Award.

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<PAGE>
8.2. RESTRICTIONS ON TRANSFERABILITY. Restricted Stock or Phantom Stock
rights may not be sold, transferred, pledged, assigned, or otherwise alienated
until such time, or until the satisfaction of such conditions as shall be
determined by the Committee (including without limitation, the satisfaction of
performance goals or the occurrence of such events as shall be determined by the
Committee). At the end of the period of restriction applicable to any Restricted
Stock, such Shares will be transferred to the Participant free of all
restrictions.

8.3. RIGHTS AS A SHAREHOLDER. Unless otherwise determined by the Committee
at the time of grant, Participants holding Restricted Stock granted hereunder
may exercise full voting rights and other rights as a Shareholder with respect
to those Shares during the period of restriction. Holders of Phantom Stock
rights shall not be deemed Shareholders and, except to the extent provided in
accordance with the Plan, shall have no rights related to any Shares.

8.4. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless otherwise determined by the
Committee at the time of grant, Participants holding Restricted Stock shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares, provided that if any such dividends or distributions are paid in
shares of stock, such shares shall be subject to the same forfeiture
restrictions and restrictions on transferability as apply to the Restricted
Stock with respect to which they were paid. Unless otherwise determined by the
Committee at the time of grant, Participants holding Phantom Stock rights shall
be entitled to receive cash payments equal to any cash dividends and other
distributions paid with respect to a corresponding number of Shares.

8.5. PAYMENT OF PHANTOM STOCK RIGHTS. The Committee may, at the time of
grant, provide for other methods of payment in respect of Phantom Stock rights
in cash, Shares, partially in cash and partially in Shares, or in any other
manner not inconsistent with this Plan.

SECTION 9. OTHER STOCK BASED AWARDS AND OTHER BENEFITS.

9.1. OTHER STOCK BASED AWARDS. The Committee shall have the right to grant
Other Stock Based Awards which may include, without limitation, the grant of
Shares based on certain conditions, the payment of cash based on the performance
of the Common Stock, and the payment of Shares in lieu of cash under other
Company incentive bonus programs. Payment under or settlement of any such Awards
shall be made in such manner and at such times as the Committee may determine.

9.2. OTHER BENEFITS. The Committee shall have the right to provide types
of Awards under the Plan in addition to those specifically listed utilizing
shares of stock or cash, or a combination thereof, if the Committee believes
that such Awards would further the purposes for which the Plan was established.
Payment under or settlement of any such Awards shall be made in such manner and
at such times as the Committee may determine.

45
<PAGE>
SECTION 10. AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN.

The Board of Directors at any time may terminate or suspend the Plan, and
from time to time may amend or modify the Plan. No amendment, modification, or
termination of the Plan shall in any manner adversely affect any Award
theretofore granted under the Plan without the consent of the Participant.

SECTION 11. TERMINATION OF EMPLOYMENT.

11.1. TERMINATION OF EMPLOYMENT DUE TO RETIREMENT. Unless otherwise
determined by the Committee at the time of grant, in the event a Participant's
employment terminates by reason of retirement, any Option or SAR granted to such
Participant which is then outstanding may be exercised at any time prior to the
expiration of the term of the Option or SAR or within three (3) years following
the Participant's termination of employment, whichever period is shorter, and
any Restricted Stock, Phantom Stock rights, or other Award then outstanding for
which any restriction has not lapsed prior to the effective date of retirement
shall be forfeited.

11.2. TERMINATION OF EMPLOYMENT DUE TO DEATH OR DISABILITY. Unless
otherwise determined by the Committee at the time of grant, in the event a
Participant's employment is terminated by reason of death or disability, any
Option or SAR granted to such Participant which is then outstanding may be
exercised by the Participant or the Participant's legal representative at any
time prior to the expiration date of the term of the Option or SAR or within
three (3) years following the Participant's termination of employment, whichever
period is shorter, and any Restricted Stock, Phantom Stock rights, or other
Award then outstanding shall become nonforfeitable and shall become transferable
or payable, as the case may be, as though any restriction had expired.

11.3. TERMINATION OF EMPLOYMENT FOR ANY OTHER REASON. Unless otherwise
determined by the Committee at the time of grant, in the event the employment of
the Participant shall terminate for any reason other than misconduct or one
described in Section 11.1 or 11.2, any Option or SAR granted to such Participant
which is then outstanding may be exercised by the Participant at any time prior
to the expiration date of the term of the Option or SAR or within three (3)
months following the Participant's termination of employment, whichever period
is shorter; any Restricted Stock, Phantom Stock rights, or other Award then
outstanding for which any restriction has not lapsed prior to the date of
termination of employment shall be forfeited upon termination of employment. If
the employment of a Participant is terminated by the Company by reason of the
Participant's misconduct, any outstanding Option or SAR shall cease to be
exercisable on the date of the Participant's termination of employment; any
Restricted Stock, Phantom Stock rights, or other Award then outstanding for
which any restriction has not lapsed prior to the date of termination of
employment shall be forfeited upon termination of employment. As used herein,
"misconduct" means that the Participant has engaged, or intends to engage, in
competition with the Company, has induced any customer of the Company to breach
any contract with the Company, has made any unauthorized disclosure of any of
the secrets or confidential information of the Company, has

46
<PAGE>
committed an act of embezzlement, fraud, or theft with respect to the property
of the Company, or has deliberately disregarded the rules of the Company in such
a manner as to cause any loss, damage, or injury to, or otherwise endanger the
property, reputation, or employees of the Company. The Committee shall determine
whether a Participant's employment is terminated by reason of misconduct.

11.4. ACCRUAL OF RIGHT AT DATE OF TERMINATION. The Participant shall have
the right to exercise an Option or SAR as indicated in Sections 11.1, 11.2, and
11.3 only to the extent the Participant's right to exercise such Option or SAR
had accrued at the date of termination of employment pursuant to the terms of
the Option or SAR Agreement and had not previously been exercised.

SECTION 12. MISCELLANEOUS PROVISIONS.

12.1. NON-TRANSFERABILITY OF AWARDS. Unless otherwise determined by the
Committee at the time of grant, and except as provided in Section 11, no Awards
granted under the Plan shall be assignable, transferable, or payable to or
exercisable by anyone other than the Participant to whom it was granted.

12.2. NO GUARANTEE OF EMPLOYMENT OR PARTICIPATION. Nothing in the Plan
shall interfere with or limit in any way the right of the Company to terminate
any Participant's employment at any time, nor confer upon any Participant any
right to continue in the employment of the Company. No employee shall have a
right to be selected as a Participant, or, having been so selected, to receive
any future awards.

12.3. TAX WITHHOLDING. The Company shall have the authority to withhold,
or require a Participant to remit to the Company, an amount sufficient to
satisfy Federal, state, and local withholding tax requirements on any Award
under the Plan, and the Company may defer payment of cash or issuance of Shares
until such requirements are satisfied. The Committee may, in its discretion,
permit a Participant to elect, subject to such conditions as the Committee shall
require, to have Shares otherwise issuable under the Plan withheld by the
Company and having a Fair Market Value sufficient to satisfy all or part of the
Participant's estimated total federal, state, and local tax obligation
associated with the transaction.

12.4. GOVERNING LAW. The Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by the Code or Act,
shall be governed by the law of the State of Illinois and construed in
accordance therewith.

12.5. EFFECTIVE DATE. The Plan shall be submitted to the Shareholders of
the Company for approval at the 1990 Annual Meeting of Shareholders of the
Company scheduled to be held on April 25, 1990, and shall be effective
immediately upon such approval by the Shareholders of the Company; provided,
however, that no Award requiring the issuance of Shares shall be exercised or
paid out unless at the time of such exercise or payout (i) such Shares are
covered by a currently effective registration statement filed under the
Securities Act of 1933, as amended, if one is then

47
<PAGE>
required, or in the sole opinion of the Company and its counsel such issuance of
Shares is otherwise exempt from the registration requirements of such act, and
(ii) such Shares are listed on any securities exchange upon which the Common
Stock of the Company is listed.

12.6. TERMINATION OF THE 1975 PLAN. The Company's Restated 1975
Non-Qualified Stock Option Plan shall be terminated as of the date of
Shareholder approval of this Plan, provided, however, that such termination
shall not affect any Options or Stock Appreciation Rights outstanding
thereunder, all of which shall remain subject to and be governed by such plan.

12.7. UNFUNDED PLAN. Insofar as the Plan provides for Awards of cash,
Shares, rights or a combination thereof, the Plan shall be unfunded. The Company
may maintain bookkeeping accounts with respect to Participants who are entitled
to Awards under the Plan, but such accounts shall be used merely for bookkeeping
convenience. The Company shall not be required to segregate any assets that may
at any time be represented by interests in Awards nor shall the Plan be
construed as providing for any such segregation. None of the Committee, the
Company or its Board of Directors shall be deemed to be a trustee of any cash,
Shares or rights to Awards granted under the Plan. Any liability of the Company
to any Participant with respect to an Award or any rights thereunder shall be
based solely upon any contractual obligations that may be created by the Plan
and any Agreement, and no obligation of the Company under the Plan shall be
deemed to be secured by any pledge or other encumbrance on any property of the
Company.

12.8. PROVISIONS RELATING TO SECTION 16 PERSONS. Notwithstanding any other
provision herein, any Award granted hereunder to an Employee who is then subject
to Section 16 of the Act is subject to the following limitations:

(a) The Award may provide for the issuance of Shares as a stock bonus
for no consideration other than services rendered or to be rendered. In the
event that the Award provides for the issuance of Shares for any other type
of consideration, the amount of such consideration shall either (i) be equal
to the amount (such as the par value of such Shares) required to be received
by the Company in order to assure compliance with applicable state law or
(ii) be equal to or greater than 50% of the Fair Market Value of such Shares
on the date of grant of such Award.

(b) Any Option or similar right (including an SAR) granted to such
Employee pursuant to the Plan shall not be transferable other than by will
or the laws of descent and distribution and shall be exercisable during the
Employee's lifetime only by him or by his guardian or legal representative.

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[LOGO]

- --------------------------------------------------------------

NOTICE
of annual
meeting of
shareholders
and PROXY
STATEMENT

April 30, 1997
M Printed on recycled paper.
945-PS-97
<PAGE>
PROXY

COMMON PROXY W.W. GRAINGER, INC. COMMON PROXY

455 KNIGHTSBRIDGE PARKWAY, LINCOLNSHIRE, IL 60069
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY FOR ANNUAL SHAREHOLDERS' MEETING APRIL 30, 1997

The undersigned hereby appoints Jere D. Fluno, David W. Grainger, and
Richard L. Keyser, and each of them, proxies of the undersigned with full power
of substitution to represent the undersigned and to vote all of the shares of
the Common Stock of the Company which the undersigned is entitled to vote at the
Annual Meeting of Shareholders of W.W. Grainger, Inc. to be held on April 30,
1997 and at any and all adjournments thereof, with all the powers the
undersigned would possess if personally present and voting thereat.

A majority of said proxies or substitutes who shall be present at the
meeting may exercise all powers hereunder. All proxies will be voted as
specified. If no specification is made, the proxy will be voted FOR items 1,
2, 3, 4, and 5. If authority is given to vote for the election of directors,
this proxy may be voted cumulatively for directors as set forth in the proxy
statement.

CONTINUED, AND TO BE SIGNED AND DATED, ON REVERSE SIDE SEE REVERSE
SIDE

<PAGE>

/X/ Please mark votes as in this example.

MANAGEMENT RECOMMENDS A VOTE FOR ITEMS 1, 2, 3, 4, AND 5.

1. Election of Directors
Nominees: George R. Baker, Robert E. Elberson, Jere D. Fluno, Wilbur H. Gantz,
David W. Grainger, Richard L. Keyser, John W. McCarter, Jr., James D. Slavik,
Harold B. Smith, Fred L. Turner, Janiece S. Webb.

FOR WITHHELD
ALL FROM ALL
NOMINEES / / / / NOMINEES

/ /________________________________________________
For, except vote withheld from nominees named above

2. Proposal to ratify appointment of Grant FOR AGAINST ABSTAIN
Thornton LLP as independent auditors for / / / / / /
the year ending December 31, 1997.

3. Proposal to approve Director Stock Plan. / / / / / /

4. Proposal to approve Office of the Chairman / / / / / /
Incentive Plan.

5. Proposal to approve 1990 Long Term Stock / / / / / /
Incentive Plan, as amended.

6. In their discretion upon such other matters / / / / / /
as may properly come before the meeting.

MARK HERE MARK HERE
FOR ADDRESS IF YOU PLAN
CHANGE AND TO ATTEND
NOTE AT LEFT / / THE MEETING / /

Please sign exactly as your name or names appear hereon. Joint owners should
each sign personally. If signing in a fiduciary or representative capacity,
give full title as such.

Signature:_______________________________________

Date:____________________________________________

Signature:_______________________________________

Date:____________________________________________

<PAGE>

APPENDIX

1. On Inside Front Cover - a map representing location of the Annual Meeting.

2. On page 3 through 5 - 11 photos of the Board of Directors nominees.

3. On page 19 - Stock Price Performance graph filed with Branch Chief.