GRAINGER W W INC, 10-K, 1999-03-26

GRAINGER W W INC
10-K, 1999-03-26
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ANNUAL REPORT

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number 1-5684
W.W. Grainger, Inc.
(Exact name of registrant as specified in its charter)

Illinois 36-1150280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 Knightsbridge Parkway, Lincolnshire, Illinois 60069-3620
(Address of principal executive offices) (Zip Code)

Registrant's telephone number including area code: 847/793-9030

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

Common Stock $0.50 par value, New York Stock Exchange
and accompanying Preferred Stock Chicago Stock Exchange
Purchase Rights

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

Yes ___X____ No ________

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant was $3,283,966,623 as of the close of trading reported on the
Consolidated Transaction Reporting System on March 1, 1999.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

Common Stock $0.50 par value 93,315,991 shares outstanding as of March 1, 1999

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement relating to the annual meeting of shareholders
of the registrant to be held on April 28, 1999 are incorporated by reference
into Part III hereof.

The Exhibit Index appears on page 15 in the sequential numbering system.

(The Securities and Exchange Commission has not approved or disapproved of this
report nor has it passed on the accuracy or adequacy hereof.)

1
<PAGE>

<TABLE>
<S> <C>
CONTENTS

Page

PART I

Item 1: BUSINESS............................................................. 3-6

THE COMPANY........................................................ 3

GRAINGER INDUSTRIAL SUPPLY......................................... 3-4

ACKLANDS-GRAINGER INC.............................................. 4

GRAINGER PARTS..................................................... 5

GRAINGER, S.A. de C.V.............................................. 5

GRAINGER GLOBAL SOURCING........................................... 5

GRAINGER CUSTOM SOLUTIONS.......................................... 5

GRAINGER INTEGRATED SUPPLY......................................... 5

GRAINGER CONSULTING SERVICES....................................... 5

INTERNET COMMERCE.................................................. 6

LAB SAFETY SUPPLY, INC............................................. 6

INDUSTRY SEGMENTS.................................................. 6

COMPETITION........................................................ 6

EMPLOYEES.......................................................... 6

Item 2: PROPERTIES........................................................... 6-7

Item 3: LEGAL PROCEEDINGS.................................................... 7

Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 7

Executive Officers Of The Company................................................... 7-8

PART II

Item 5: MARKETS FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS.................................... 8

Item 6: SELECTED FINANCIAL DATA.............................................. 9

Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND THE RESULTS OF OPERATIONS...................................... 9-14

RESULTS OF OPERATIONS.............................................. 9-11

YEAR 2000.......................................................... 12-13

FINANCIAL CONDITION................................................ 13

INFLATION AND CHANGING PRICES...................................... 14

Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 14

Item 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 14

PART III

Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 14

Item 11: EXECUTIVE COMPENSATION............................................... 14

Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 14

Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 14

PART IV

Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K...... 15

Signatures.......................................................................... 16

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................ 17

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................... 18-38
</TABLE>

2
<PAGE>

PART I
Item 1: Business

The Company

The registrant, W.W. Grainger, Inc., was incorporated in the State of Illinois
in 1928. It is the leading North American provider of maintenance, repair, and
operating (MRO) supplies, services, and related information to businesses and
institutions. W.W. Grainger, Inc. regards itself as being in the service
business. As used herein, "Company" means W.W. Grainger, Inc., and/or its
subsidiaries as the context may require.

In late 1997, the Company began an organizational restructuring with the
formation of several business operations. Several of these operations were
originally part of the Grainger branch-based business. In addition, Grainger
Integrated Supply began refocusing on serving customers through materials
management service contracts. These changes were made to create greater focus
and accountability in serving the diverse needs of the Company's customers. 1998
was a transition year in establishing the refocused organization.

The Company offers a breadth of MRO solutions by combining products, services,
and information. It tailors its capabilities toward the objective of providing
the lowest total cost MRO solution to select customer groups. The Company serves
the diverse needs of its customers through several focused businesses.

The Branch-based Distribution businesses serve traditional customers with
immediate MRO needs. The other businesses of the Company serve customers with
more complex needs and/or customers who prefer to purchase through less
traditional channels, such as the Internet and direct marketing.

The Company also has a business support function which provides coordination and
guidance in the areas of Accounting, Administrative Services, Aviation, Business
Development, Communications, Compensation and Benefits, Employee Development,
Finance, Government Regulations, Human Resources, Industrial Relations, Investor
Relations, Insurance and Risk Management, Internal Audit, International
Operations, Legal, Planning, Real Estate and Construction Services, Security and
Safety, Taxes, and Treasury services. These services are provided in varying
degrees to all of the business units.

A number of Company-wide strengths provide each business with an advantage in
serving its market. These strengths include technology and information
management, supplier partnerships, supply chain integration skills, and an
understanding of the customers' MRO environments. The Company's efforts are
guided by two major initiatives to drive growth and provide value:

o Create focused businesses to serve customer needs and find new growth
opportunities within existing businesses.
o Develop and embrace new technologies that strengthen the Company's current
capabilities and help drive the future of the MRO marketplace.

The Company does not engage in basic or substantive product research and
development activities. New items are added regularly to the Company's product
lines on the basis of market information, recommendations of its employees,
customers, and suppliers, and other factors. The Company's research and
development, instead, are focused on new methods of serving customers.

For a discussion of the Year 2000 issue, see "Item 7: Management's Discussion
and Analysis of Financial Condition and the Results of Operations" appearing
later in this report.

Branch-based Distribution Businesses

The Company's Branch-based Distribution businesses provide customers with
solutions to their immediate MRO needs throughout North America. Logistics
networks are configured for rapid availability. A broad selection of MRO
products is offered at local branches through user-friendly catalogs and via the
Internet. The Branch-based Distribution businesses include Grainger Industrial
Supply, Acklands-Grainger Inc., Grainger Parts, Grainger, S.A. de C.V.,
Puerto Rico, Grainger Export, and Grainger Global Sourcing.

Grainger Industrial Supply
- ---------------------------
The focus of Grainger Industrial Supply is to provide a broad-line of MRO
products quickly and easily to American businesses of all sizes. Its primary
customers are small and medium-sized companies. It also addresses large-sized
companies' immediate MRO needs.

Grainger Industrial Supply operates 349 branches in all 50 states. These
branches are located within 20 minutes of the majority of U.S. businesses and
carry inventory to support their local market needs. Products are available for
immediate pick-up, same-day shipment, or delivery.

3
<PAGE>
An average branch has 15 employees and handles about 280 transactions per day.
During 1998, an average of approximately 98,100 sales transactions were
completed daily. Each branch tailors its inventory to local product demand. In
1998, Grainger Industrial Supply invested more than $8,900,000 in new branches,
relocations, and additions to branches. Three new branches were opened, seven
were relocated, and a number of remodeling projects were completed during the
year.

Grainger Industrial Supply has six Zone Distribution Centers (ZDCs) in
operation. The ZDC logistics network provides a break-bulk function for faster
branch stock replenishment. In addition, ZDCs handle shipped orders for all
branches located in their zone.

Large computer controlled stocks, which are maintained at two Regional
Distribution Centers (RDCs), located in Greenville County, South Carolina, and
Kansas City, Missouri, and a National Distribution Center (NDC) located in the
Chicago area, provide the branches and customers with some protection against
variable demand and delayed factory deliveries. The NDC is a centralized storage
and shipping facility servicing the entire network with slower moving inventory
items.

During 1998, Grainger Industrial Supply began its conversion from its legacy
systems to a new business enterprise system. This conversion will continue into
1999.

Grainger Industrial Supply sells principally to contractors, service shops,
industrial and commercial maintenance departments, manufacturers, hotels,
government, and health care and educational facilities. Sales transactions
during 1998 were made to more than 1,300,000 customers. Grainger Industrial
Supply estimates that approximately 24% of 1998 sales consisted of items bearing
the Company's registered trademarks, including DAYTON(R) (principally electric
motors, heating and ventilation equipment), TEEL(R) (liquid pumps), SPEEDAIRE(R)
(air compressors), AirHandler(R) (air filtration equipment), DEM-KOTE(R) (spray
paints), WESTWARD(R) (hand and power tools), and LUMAPRO(TM) (task and outdoor
lighting), as well as other trademarks. The Company has taken steps to protect
these trademarks against infringement and believes that they will remain
available for future use in its business. Sales of remaining items generally
consisted of other well recognized brands.

Grainger Industrial Supply's marketing programs had important changes in 1998.
Now, all marketing resources are integrated to achieve maximum results during
each promotion. Sales calls, phone sales, branch merchandising, direct
marketing, and advertising are all focused around the overall marketing program.

The Grainger Industrial Supply Catalog offers more than 81,000 MRO products from
more than 1,000 suppliers, most of whom are manufacturers. Approximately 2
million copies of the catalog are printed and distributed. The most current
edition was issued in January 1999. The largest supplier in 1998, a diversified
manufacturer through 20 of its divisions, accounted for 10.8% of purchases. No
significant difficulty has been encountered with respect to sources of supply.

The Grainger Industrial Supply Electronic Catalog brings, directly to the
customer's place of business, a fast, easy way to select products. Through the
Electronic Catalog, the customer can use a variety of ways to describe a needed
product, and then review Grainger Industrial Supply's offerings, complete with
specifications, prices, and pictures. Another Electronic Catalog feature
includes a cross-reference function that allows customers to retrieve product
information using their own stock numbers. More than 350,000 copies of the
current version of the Electronic Catalog have been distributed. The Electronic
Catalog is also used at the branches as a training tool and a resource for
identifying appropriate products for customers' applications.

The Internet is an important growth initiative for Grainger Industrial Supply.
Access to Grainger Industrial Supply 24 hours a day, 7 days a week, is a major
convenience for many customers.

Acklands-Grainger Inc. (AGI)
- ----------------------------
AGI, acquired in December 1996, is the leading branch-based Canadian broad line
MRO distributor. It serves customers through 180 branches and 6 distribution
centers across Canada. AGI distributes tools, lighting, HVAC, safety supplies,
pneumatics, instruments, welding equipment and supplies, motors, and shop
equipment, as well as many other items. A comprehensive catalog is used to
showcase the product line and to help customers select products. This catalog,
with over 70,000 products listed, supports the efforts of 268 sales
representatives throughout Canada. A French language catalog was introduced
during 1998. During 1998, an average of 17,800 sales transactions were completed
daily.

4
<PAGE>

Grainger Parts
- --------------
Grainger Parts provides access to over 250,000 parts and accessories through its
centralized warehouse located in Northbrook, Illinois. Over 180,000 pages of
parts diagrams are maintained on-line. Grainger Parts handled about 1,800,000
customer calls in 1998 through its call centers in Northbrook, Illinois and
Waterloo, Iowa.

Grainger Parts maintained its ISO 9002 certification in 1998. Grainger Parts'
100% compliance with ISO 9002 standards ranked them among the top 10% of all
ISO-certified companies.

Grainger, S.A. de C.V.
- ----------------------
Grainger, S.A. de C.V. serves the traditional MRO product needs of customers in
Mexico. The business employed 66 sales representatives at December 31, 1998.
From its 80,000 square foot facility outside Monterrey, the business provides
rapid delivery of over 60,000 products throughout Mexico.

Grainger Global Sourcing
- ------------------------
Grainger Global Sourcing procures competitively priced, high quality products
sourced outside the United States. These items are sold primarily under private
label by Grainger Industrial Supply and the Company's other businesses. Products
obtained through Grainger Global Sourcing in 1998 include WESTWARD(R) tools and
LUMAPRO(TM) lighting products.

Other Business Units

While some larger companies have immediate MRO needs that can be handled by the
Company's Branch-based Distribution businesses, many also require integrated
supply or commodity management services to handle their more complex purchasing
and operating environments. In addition, as technology advances and the MRO
marketplace evolves, some customers are choosing to buy products through less
traditional channels such as the Internet and direct marketing. For these
customers, the Company offers a number of solutions. These businesses include
Grainger Custom Solutions, Grainger Integrated Supply, Grainger Consulting
Services, Internet Commerce, and Lab Safety Supply, Inc.

Grainger Custom Solutions
- -------------------------
Grainger Custom Solutions was formed in 1998 and serves large customers that are
looking to businesses to manage entire MRO product categories. Many companies
are looking for some of the benefits of integrated supply, but are not ready for
a total outsourcing solution or on-site management services.

Grainger Custom Solutions offers customers management of six major product
categories, along with access to the other broad product lines from Grainger
Industrial Supply. Customers are guaranteed specific cost reductions, with
incentives for both them and Grainger Custom Solutions if targets are exceeded.

In 1998, the business began operating two call centers and four distribution
centers. Grainger Custom Solution's customers' additional broad product needs
are fulfilled through the Grainger Industrial Supply branch system.

Grainger Integrated Supply
- --------------------------
Grainger Integrated Supply is focused on customers who have chosen to outsource
their entire indirect materials management process. By retaining Grainger
Integrated Supply for this purpose, these organizations are better able to focus
on their core business objectives and improve their global competitiveness.

Grainger Integrated Supply offers a full complement of on-site outsourcing
solutions, including business process reengineering, inventory management,
supply chain management, tool crib management, and information management.
Grainger Integrated Supply provides its clients with access to millions of
products through its relationships with world class manufacturers, service
providers, and distributors, including Grainger Industrial Supply. Products not
covered through these partnerships are found through Grainger Integrated
Supply's product sourcing process.

Grainger Consulting Services
- ----------------------------
Many customers realize that they are not effectively managing their MRO
procurement process, but are not sure what approach to take to improve the
process. Grainger Consulting Services is a leading professional services firm
specializing in MRO materials management consulting.

Grainger Consulting Services provides the expertise and professional resources
that help clients address indirect materials management issues and improve
operating efficiencies, productivity, and asset utilization. The business offers
consulting services which include process reengineering, inventory database
development, and "turn-key" stockroom set up.

5
<PAGE>

Internet Commerce
- -----------------
The Company's product information content, relationships with leading
manufacturers and distributors, and access to over two million business
customers position the Company uniquely to benefit from Internet commerce. The
Grainger.com site was one of the first MRO Web sites. In 1998, Internet Commerce
continued to invest to increase its Internet presence. New functionality for
Grainger.com included the introduction of CasterMatch(SM), another in the
Company's MatchMaker(SM) series and a new, more powerful search capability was
added. Grainger.com also began accepting credit card purchases in 1998. The
Company was pleased to have Grainger.com once again be named among the top ten
business-to-business Internet sites in the world by Advertising Age's Business
Marketing Magazine.

In February 1999, the Company announced OrderZone.com by Grainger, an Internet
marketplace where customers can buy products from a number of different
suppliers using a single site. The Company has brought six industry leaders
together to create a one-stop, on-line, business-to-business service for the
procurement of a wide variety of products and services. OrderZone.com is a
powerful, easy, and convenient solution for businesses looking to streamline
their procurement process. Internet Commerce applied its expertise to create
this Internet-based multi-distributor site. Customers can search across products
from a number of leading complementary distributors. A single order can be
placed across multiple distributors, and customers will receive a single
invoice. Currently in test market, OrderZone.com is expected to open for
business later in 1999.

Lab Safety Supply, Inc.
- -----------------------
Lab Safety Supply is a leading direct marketer of safety products and other
industrial supplies to U.S. businesses. Located in Janesville, Wisconsin, Lab
Safety Supply reaches its customers through its General Catalog, targeted
catalogs, and other marketing materials which are distributed throughout the
year.

Customers select Lab Safety Supply for its extensive product depth (over 50,000
products in the 1999 General Catalog), its superior technical knowledge, and its
excellent service. It is a primary safety supplier for many small and
medium-sized companies and a critical safety back-up supplier for many larger
companies.

Industry Segments
The Company has concluded that it has one reportable industry segment:
Branch-based Distribution. For segment information and the Company's
consolidated revenue and operating earnings see "Item 7: Management's Discussion
and Analysis of Financial Condition and the Results of Operations," and "Item 8:
Financial Statements and Supplementary Data." The total assets of the Company
for the last five years were: 1998, $2,103,902,000; 1997, $1,997,821,000; 1996,
$2,119,021,000; 1995, $1,669,243,000; and 1994, $1,534,751,000.

Competition
The Company faces competition in all the markets it serves, from manufacturers
(including some of the Company's own suppliers) that sell directly to certain
segments of the market, from wholesale distributors, catalog houses, and certain
retail enterprises.

The principal means by which the Company competes with manufacturers and other
distributors is by providing local stocks, efficient service, account managers,
competitive prices, its several catalogs, which include product descriptions and
in certain cases, extensive technical and application data, procurement process
consulting services, utilizing electronic and Internet commerce technology, and
other efforts to assist customers in lowering their total MRO costs. The Company
believes that it can effectively compete on a price basis with its manufacturing
competitors on small orders, but that such manufacturers may enjoy a cost
advantage in filling large orders.

The Company serves a number of diverse markets, and is able in some markets to
reasonably estimate the Company's competitive position within that market.
However, taken as a whole, the Company is unable to determine its market shares
relative to others engaged in whole or in part in similar activities.

Employees
As of December 31, 1998, the Company had 15,270 employees, of whom 12,967 were
full-time and 2,303 were part-time or temporary. The Company has never had a
major work stoppage and considers its employee relations generally to be good.

Item 2: Properties

As of December 31, 1998, the Company's facilities totaled 16,799,000 square
feet, an increase of 2.1% over 1997. The Company's Grainger Industrial Supply
and Acklands-Grainger Inc. (AGI) businesses account for the majority of the
Company's total square footage. Grainger Industrial Supply facilities are
located throughout the United States. AGI facilities are located throughout
Canada.

6
<PAGE>
The Company's Grainger Industrial Supply branches range in size from 2,000 to
109,000 square feet and average 22,000 square feet. Most are located in or near
major metropolitan areas, many in industrial parks. A typical owned branch is on
one floor, is of masonry construction, consists primarily of warehouse space,
contains an air-conditioned office and sales area, and has off-the-street
parking for customers and employees. The Company considers that its properties
are generally in good condition and well maintained, and are suitable and
adequate to carry on the Company's business. The significant facilities of the
Company are briefly described below:
<TABLE>
<CAPTION>
Size in
Location Facility and Use Square Feet
- ---------------------------- ---------------------------------------------- ------------
<S> <C>
Chicago Area (1) General Offices & National Distribution Center 1,517,000
Kansas City, MO (1) Regional Distribution Center 1,435,000
Greenville County, SC (1) Regional Distribution Center 1,090,000
United States (1) 6 Zone Distribution Centers 1,345,000
United States (2) 349 Grainger Industrial Supply branch locations 7,581,000
United States and Mexico (3) All other facilities 1,573,000
Canada (4) 181 AGI facilities 2,258,000
----------
Total square feet 16,799,000
==========
<FN>
The Company is constructing an office facility to house a large portion of the
Chicago-area office workforce on owned property. Construction of this Lake
Forest, Illinois facility is scheduled to be completed during 1999. Certain
Chicago-area owned and leased office facilities will be vacated when this new
facility becomes operational.
- -------------------------------------------------------------------------------

(1) These facilities are either owned or leased with leases expiring between
1999 and 2003. The owned facilities are not subject to any mortgages.

(2) Grainger Industrial Supply branches consist of 278 owned and 71 leased
properties. The owned facilities are not subject to any mortgages.

(3) Other facilities represent owned and leased general branch offices,
distribution centers, and branches. 2 branches are located in Puerto Rico,
and 1 branch/distribution center is located in Monterrey, Mexico. The owned
facilities are not subject to any mortgages.

(4) The majority of these facilities were acquired through the acquisition of
the industrial distribution business of Acklands Limited on December 2,
1996. The properties consist of general offices, distribution centers, and
branches that are either owned or leased. The owned facilities are not
subject to any mortgages.
</FN>
</TABLE>

Item 3: Legal Proceedings
There are pending various legal and administrative proceedings involving the
Company that are incidental to the business. It is not expected that the outcome
of any such proceeding will have a material adverse effect upon the Company's
consolidated financial position or its results of operations.

Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.

Executive Officers of the Company
Following is information about the Executive Officers of the Company as of March
1, 1999. Executive Officers of the Company generally serve until the next annual
election of officers, or until earlier resignation or removal.

Positions and Offices Held and Principal
Name and Age Occupations and Employment During the Past Five Years
- ------------------------- -----------------------------------------------------
James M. Baisley (66) Senior Vice President (a position assumed in 1995
after serving as Vice President), General Counsel,
and Secretary.

Donald E. Bielinski (49) Group President, a position assumed in 1997 after
serving as Senior Vice President, Marketing and
Sales. Prior to assuming the last-mentioned
position in 1995, Mr. Bielinski served as Senior
Vice President, Organization and Planning. He has
also served as Vice President and Chief Financial
Officer.

Wesley M. Clark (46) Group President, a position assumed in 1997 after
serving as Senior Vice President, Operations and
Quality. Prior to assuming the last-mentioned
position earlier in 1997, Mr. Clark served as Vice
President, Field Operations and Quality.
Previously, he served as President of the Sanitary
Supply and Equipment businesses.

(continued on next page)

7
<PAGE>
Positions and Offices Held and Principal
Name and Age Occupations and Employment During the Past Five Years
- ------------------------- -----------------------------------------------------
Jere D. Fluno (57) Vice Chairman. Mr. Fluno is a member of the Office
of the Chairman.

Gary J. Goberville (52) Vice President, Human Resources. Before joining
the Company in 1995, Mr. Goberville served as an
executive with GenCorp, Inc.

David W. Grainger (71) Senior Chairman of the Board, a position assumed
in 1997 after serving as Chairman of the Board. He
was the Company's Chief Executive Officer until
1995 and President from 1992 to 1994. Mr. Grainger
is a member of the Office of the Chairman.

Richard L. Keyser (56) Chairman of the Board, a position assumed in 1997,
and Chief Executive Officer, a position assumed in
1995. Other positions in which he served during
the past five years were President, Chief
Operating Officer, Executive Vice President, and
Grainger Division President. Mr. Keyser is a
member of the Office of the Chairman.

P. Ogden Loux (56) Senior Vice President, Finance and Chief Financial
Officer, positions assumed in 1997 after serving
as Vice President, Finance. Prior to assuming the
last-mentioned position in 1994, Mr. Loux served
the Grainger Division as Vice President, Business
Support.

Robert D. Pappano (56) Vice President, Financial Reporting and Investor
Relations, a position assumed in 1995 after
serving as Vice President and Treasurer.

James T. Ryan (40) Vice President, Information Services, a position
assumed in 1994 after serving as President, Parts
Company of America. Prior to assuming the
last-mentioned position in 1993, Mr. Ryan served
as Director, Product Management of the Grainger
Division.

John A. Schweig (41) Senior Vice President (a position assumed in 1997
after serving as Vice President), Business
Development and International. Prior to assuming
these responsibilities in 1996, Mr. Schweig served
as Vice President and General Manager, Direct
Marketing. Previously, he served the Grainger
Division as Vice President, Marketing.

John W. Slayton, Jr. (53) Senior Vice President, Supply Chain Management, a
position assumed in 1997 after serving as Senior
Vice President, Product Management. Prior to
assuming the last-mentioned position in 1995, Mr.
Slayton served as Vice President, Product
Management of the Grainger Division.

PART II

Item 5: Markets for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock is traded on the New York Stock Exchange and the
Chicago Stock Exchange, with the ticker symbol GWW. The high and low sales
prices for the common stock, and the dividends declared and paid for each
calendar quarter during 1998 and 1997, as adjusted to reflect the Company's
2-for-1 stock split effective May 11, 1998, are shown below.

Prices
----------------------------
Quarters High Low Dividends
- ----------------------------------------------------------------------------
1998 First $51 13/16 $46 1/2 $0.135
Second 54 23/32 49 1/8 0.15
Third 51 13/16 39 3/16 0.15
Fourth 47 36 7/16 0.15
- ----------------------------------------------------------------------------
Year $54 23/32 $36 7/16 $0.585
- ----------------------------------------------------------------------------
1997 First $41 1/4 $36 13/16 $0.125
Second 40 1/2 35 1/4 0.135
Third 49 7/8 39 0.135
Fourth 49 9/32 42 5/8 0.135
- ----------------------------------------------------------------------------
Year $49 7/8 $35 1/4 $0.53
- ----------------------------------------------------------------------------

The approximate number of shareholders of record of the Company's common stock
as of March 1,1999 was 1,800.

8
<PAGE>

Item 6: Selected Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
(In thousands of dollars except for per share amounts)
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............................. $4,341,269 $4,136,560 $3,537,207 $3,276,910 $3,023,076
Net earnings.......................... 238,504 231,833 208,526 186,665 127,874
Net earnings per basic share.......... 2.48 2.30 2.04 1.84 1.26
Net earnings per diluted share........ 2.44 2.27 2.02 1.82 1.25
Total assets.......................... 2,103,902 1,997,821 2,119,021 1,669,243 1,534,751
Long-term debt........................ 122,883 131,201 6,152 8,713 1,023
Cash dividends paid per share......... $ 0.585 $ 0.53 $ 0.49 $ 0.445 $ 0.39

NOTE: 1994 net earnings include restructuring charges of $49,779.
</TABLE>

Item 7: Management's Discussion and Analysis of Financial Condition and the
Results of Operations

RESULTS OF OPERATIONS

The Company has adopted Statement of Financial Accounting Standards (SFAS)
No.131, "Disclosures About Segments of an Enterprise and Related Information."
SFAS No. 131 requires disclosure of certain business segment information based
on how management evaluates the business. In late 1997, the Company began an
organizational restructuring with the formation of several business operations
to meet the diverse needs of its customers. The Company has reported 1998 data
reflecting this new organization. 1997 and 1996 segment data were not reported
because it is impractical to restate these years to reflect the new
organization. (See Note 15 to the Consolidated Financial Statements included in
the Company's 1998 Form 10-K).

All per share data have been adjusted to reflect the 2-for-1 stock split
effective May 11, 1998.

The following table, which is included as an aid to understanding changes in the
Company's Consolidated Statements of Earnings, presents various items in the
earnings statements expressed as a percent of net sales for the years ended
December 31, 1998, 1997, and 1996, and the percent of increase (decrease) in
such items in 1998 and 1997 from the prior year.
<TABLE>
<CAPTION>

Years Ended December 31,
---------------------------------------------------------------
Items in Consolidated Statements Percent of Increase
of Earnings as a Percent of (Decrease) from
Net Sales Prior Year
--------------------------------- ----------------------
1998 1997 1996 1998 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0% 4.9% 16.9%
Cost of merchandise sold............................. 63.2 63.9 64.2 3.8 16.4
Operating expenses................................... 27.4 26.6 26.0 8.0 19.5
Other (income) deductions, net....................... 0.2 0.1 (0.1) 102.5 (204.9)
Income taxes......................................... 3.7 3.8 4.0 2.9 12.4
Net earnings......................................... 5.5% 5.6% 5.9% 2.9% 11.2%
</TABLE>

As used in "Item 7: Management's Discussion and Analysis of Financial Condition
and the Results of Operations," "Grainger branch-based business" reflects the
operations of the Company excluding Acklands-Grainger Inc., Lab Safety Supply,
Inc., and Grainger Parts.

Net Sales
The 1998 Company net sales increase of 4.9%, as compared with 1997, was
principally volume related. This increase primarily represented the effects of
the Company's market initiatives which included new product additions, and the
National Accounts, Integrated Supply, and direct marketing programs. Partially
offsetting the growth from these initiatives was a decline in sales at
Acklands-Grainger Inc. (AGI), the Company's Canadian subsidiary. This decline
resulted from an unfavorable change in the Canadian exchange rate. In Canadian
dollars, AGI's sales rate was relatively flat when comparing 1998 with 1997.
Weak demand in the mining, forestry, oil, exploration, and agriculture sectors
was the primary cause for AGI's flat sales performance. The Company's sales
growth rate was 6.1% after excluding AGI from both 1998 and 1997.

9
<PAGE>
The Company's Grainger branch-based business experienced selling price increases
of about 0.7% when comparing 1998 with 1997. Sales to National Account customers
within the Grainger branch-based business increased to approximately
$1,120,000,000. Sales to National Account customers increased about 8%, on a
comparable basis, over 1997.

The 1997 Company net sales increase of 16.9%, as compared with 1996, was
principally volume related. This increase was affected by 1997 having one less
sales day than 1996 (on a daily basis, net sales increased 17.4%). Excluding the
incremental net sales of AGI, the Canadian industrial distribution business
acquired on December 2, 1996, net sales increased 7.7% (8.1% on a daily basis).
This increase primarily represented the effects of the Company's marketing
initiatives which included new product additions, the expansion of branch
facilities, and the National Accounts, Integrated Supply, and direct marketing
programs. Partially offsetting the growth from these initiatives were two
factors. Sales in the 1997 third quarter were negatively affected by the United
Parcel Service's (UPS) work stoppage which began on August 4, 1997, and lasted
more than two weeks. The Company estimates that 1997 sales were approximately
$14,000,000 lower as a result of the UPS work stoppage. The second factor was
that daily sales of seasonal products for the Company, excluding AGI, declined
an estimated 4% in the year 1997, as compared with the same 1996 period. Many
regions of the United States experienced milder weather during most of 1997
versus 1996.

The Company's Grainger branch-based business experienced selling price increases
of about 1.1% when comparing the year 1997 with 1996. The Grainger branch-based
business National Accounts program showed strong growth for the year, with sales
increasing to approximately $1,015,000,000. Daily sales to National Account
customers increased approximately 17%, on a comparable basis, over 1996.

Net Earnings
Net earnings for 1998 increased 2.9% over 1997. The increase for 1998 was lower
than the increase in net sales due to losses incurred in developing business
ventures, operating expenses increasing at a rate faster than the growth rate in
net sales, lower interest income, higher interest expense, and higher
unclassified-net expenses, partially offset by higher gross profit margins. A
number of factors contributed to 1998 net earnings increasing at a slower rate
than 1998 net sales.

1. The Company continues to invest in developing its business operations. The
following operations experienced pre-tax operating losses for the year
1998:
Operating
(Loss)
Net Sales (pre-tax)
--------- ----------
(In thousands of dollars)

Grainger Integrated Supply....... $80,577 $(17,685)
Mexico business.................. 49,325 (3,399)

Grainger Integrated Supply's average daily sales grew about 56% for the
year 1998 as compared with 1997. Grainger Integrated Supply serves
customers through materials management services contracts. These contracts
are characterized by a complete outsourcing of the indirect materials
process. Customers not meeting the above definition were transferred to
the Company's Grainger Custom Solutions and Grainger Industrial Supply
businesses during 1998. Average daily sales in Mexico grew about 21% for
the year 1998 as compared with 1997. Grainger Integrated Supply and the
Mexico business continue to grow sales, improve processes, develop
systems, and expand marketing programs.

2. The Company's business-to-business Web site, Grainger.com, allows
customers to do business using the Internet. The Company developed an
Internet marketplace where customers will be able to buy products from a
number of different suppliers using a single site. This marketplace
concept is currently being tested with customers. In developing these
Internet initiatives, the Company incurred operating expenses of
approximately $14,000,000 in 1998 and $6,000,000 in 1997.

3. Operating expenses related to data processing were higher by an estimated
$15,000,000 as compared with 1997, as adjusted for 1998 volume increases.
This was primarily due to incurring expenses related to Year 2000
compliance and the ongoing installation of the new business enterprise
system.

4. Operating expenses were also higher in 1998 versus 1997 as a result of the
following investments:
a. Development of the Grainger Custom Solutions business; and
b. Expanded marketing programs at Lab Safety Supply.

10
<PAGE>
The decrease in interest income resulted from lower average daily invested
balances and from lower average interest rates earned. The increase in interest
expense resulted from higher average interest rates paid on all outstanding
debt, partially offset by lower average borrowings and by higher capitalized
interest. The higher unclassified-net expense primarily resulted from foreign
currency translation losses relating to the Company's operations in Mexico and
to a write-off of abandoned capital projects.

The Company's gross profit margin increased by 0.67 percentage point when
comparing the years 1998 and 1997. Of note are the following factors affecting
the Company's gross profit margin:

1. Ongoing programs to reduce product costs improved the gross profit margin.

2. Selling price increases of 0.7% on Grainger Industrial Supply Catalog
products improved the gross profit margin.

3. The change in product mix improved the gross profit margin. The sales of
Lab Safety Supply (generally higher than average gross profit margins)
increased as a percent of total sales. The sales of AGI (generally lower
than average gross profit margins) decreased as a percent of total sales.

Net earnings for 1997 increased 11.2% over 1996. This increase for 1997 was
lower than the increase in net sales due to operating expenses increasing at a
rate faster than the rate of growth in net sales, lower interest income, higher
interest expense, and a higher effective income tax rate, partially offset by
higher gross profit margins. Factors contributing to the increase in operating
expenses were the following:

1. Payroll and other operating expenses were higher as a result of the
following initiatives:
a. Continued expansion of the Company's integrated supply business;
b. Continued development of the Company's full service marketing
capabilities on the Internet;
c. Continued refocus and realignment of the Direct Sales force;
d. Increased advertising expenses supporting the Company's marketing
initiatives; and
e. Expansion of the Company's telesales capability.

2. Payroll and other operating expenses were higher by an estimated
$13,000,000 for Year 2000 compliance, of which approximately $10,000,000
related to outside services.

3. The operating expenses of AGI, which contributed to the increase, were
included for the entire year of 1997 as compared with only the month of
December in 1996.

The decrease in interest income resulted from lower average daily invested
balances. This decrease was partially offset by higher average interest rates
earned. The increase in interest expense resulted from higher average
borrowings, partially offset by lower average interest rates paid on all
outstanding debt. The increase in interest expense was primarily related to debt
added to finance the AGI acquisition and to the short-term debt added to
partially fund the repurchase of shares of the Company's common stock.

The Company's effective income tax rate was 40.5% for the year 1997 versus 40.2%
for the year 1996. The increase in the effective income tax rate is attributable
to proportionately higher income generated in Canada (AGI), which is taxed at a
higher rate than domestic income.

The Company's gross profit margin increased by 0.30 percentage point when
comparing the years 1997 and 1996. Excluding AGI, the Company's gross profit
margin increased 0.56 percentage point when comparing the years of 1997 and
1996. Of note were the following factors affecting the gross profit margin for
the Company, excluding AGI:

1. The change in product mix was favorable as sales of seasonal products
(generally lower than average gross profit margins) declined, and Lab
Safety Supply sales (generally higher than average gross profit margins)
increased as a percent of total sales.

2. Selling price increases exceeded the level of cost increases. Partially
offsetting the above factors was an unfavorable change in selling price
category mix, which primarily resulted from the growth in sales to the
Company's larger volume customers.

Net earnings were negatively affected by the UPS work stoppage which occurred in
August 1997. The gross profit margin lost on the estimated $14,000,000 in lost
sales, along with the incremental operating expenses incurred to serve customers
during this period, resulted in an estimated negative effect on net earnings of
about $0.03 per share.

11
<PAGE>
Year 2000
The Company uses various software and technology that is affected by the Year
2000 issue. The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or in miscalculations causing disruptions to operations, including, among other
things, a temporary inability to process transactions, to send invoices to
customers, or to engage in similar normal business activities. The Year 2000
issue affects virtually all companies and organizations.

The Company has put in place project teams dedicated to implementing a Year 2000
solution and to improving the Company's overall systems capabilities. The teams
are actively working to achieve the objectives of Year 2000 compliance and
improved internal systems. The work includes the modification of certain
existing systems, a major new system initiative, replacing hardware and software
for other systems, the creation of contingency plans, and surveying suppliers of
goods and services with whom the Company does business.

In addition to solving some Year 2000 issues, the major new system initiative
reduces the complexity which has evolved over time from the development of
in-house systems. This complexity, which makes it difficult to change and modify
systems quickly, has resulted in a proliferation of programs and databases.
These issues will be addressed by the installation of a new business enterprise
system to replace a majority of the Company's primary operating systems. This
major system initiative has been undertaken to improve the Company's ability to
quickly respond to changing market conditions, to reduce the cost of maintaining
and supporting existing systems, and to leverage the use of information.

The Company is using a standard methodology with three phases for the Year 2000
compliance project. Phase I includes conducting a complete inventory of
potentially affected areas of the business (including information technology and
non-information technology), assessing and prioritizing the information
collected during the inventory, and completing detailed project plans to address
all key areas of the project. Phase II includes the remediation and testing of
all mission critical areas of the project, surveying suppliers of goods and
services with whom the Company does business, and the creation of contingency
plans to address potential Year 2000 related problems. Phase III of the project
includes the remediation and testing of non-mission critical areas of the
project, and the implementation of contingency plans as may be necessary. The
Company completed Phase I. Phase II and Phase III are in process.

The Company is using both internal and external resources to reprogram, replace,
and test the software and hardware for Year 2000 compliance. Year 2000 work for
mission critical and most non-mission critical systems and testing of all system
revisions is planned to be completed in the third quarter of 1999. The expenses
associated with this project include both a reallocation of existing internal
resources plus the use of outside services. Project expenses for 1998 and 1997
amounted to an estimated $39 million. The total remaining expenses associated
with the Year 2000 project are estimated to be between $34 and $39 million. Due
to the Year 2000 project and the major new system initiative, 1998 data
processing expenses were approximately $15 million higher than 1997 expenses as
adjusted for 1998 volume related charges. The data processing expenses for 1999
are estimated to be a net $10 to $12 million higher than the 1998 expenses as
adjusted for 1999 volume related changes. It is expected that these projects
will be funded through the Company's operating cash flows.

In addition to addressing internal systems, the Company's Year 2000 project team
has surveyed suppliers of goods and services with whom the Company does
business. This is being done to determine the extent to which the Company is
vulnerable to failures by third parties to remediate their own Year 2000 issues.
However, there can be no guarantee that the systems of other companies,
including those on which the Company's systems interact, will be timely
converted. A failure to convert by another company on a timely basis or a
conversion by another company that is incompatible with the Company's systems,
may have a material adverse effect on the Company.

As part of Phase II of the Year 2000 project, the Company is creating
contingency plans to address potential Year 2000 related problems with key
business processes. These plans, which are scheduled to be completed and tested
in the second quarter of 1999, are expected to address risks to the Company's
systems as well as risks from third party suppliers, customers, and others with
whom the Company does business. It is recognized that while the Company cannot
eliminate all potential risks, the effect of the risks on the business can be
partially mitigated by creating and testing contingency plans where appropriate.

12
<PAGE>

The estimated expenses for these projects and the dates by which the Company
will complete the Year 2000 work are based on management's current assessment
and were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans, and
other factors. However, there can be no guarantee that these estimates will be
achieved or that all components of Year 2000 compliance will be addressed as
planned. Uncertainties include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and the sources and timeliness of various systems
replacements.

Management believes that failure to address the Year 2000 issue on a timely
basis could have a material adverse effect on the Company and continues to be
committed to devoting the appropriate resources to address the Year 2000 issue.

FINANCIAL CONDITION
Working capital was $541,872,000 at December 31, 1998, compared with
$649,107,000 at December 31, 1997, and $704,175,000 at December 31, 1996. The
ratio of current assets to current liabilities was 1.8, 2.2, and 2.1 at such
dates.

Net cash flows from operations of $334,591,000 in 1998, $426,563,000 in 1997,
and $272,410,000 in 1996, have continued to improve the Company's financial
position and serve as the primary source of funding for capital requirements.
For information as to the Company's cash flows, see "Item 8: Financial
Statements and Supplementary Data."

In each of the past three years, a portion of working capital has been used for
additions to property, buildings, and equipment, and capitalized software as
summarized in the following table.
<TABLE>
<CAPTION>

1998 1997 1996
-------- -------- -------
(In thousands of dollars)

<S> <C> <C> <C>
Land, buildings, structures, and improvements....... $85,016 $78,529 $31,881
Furniture, fixtures, machinery, and equipment....... 45,170 29,723 30,170
-------- -------- -------
130,186 108,252 62,051
Capitalized software................................ 36,983 122 900
-------- -------- -------
Total............................................... $167,169 $108,374 $62,951
======== ======== =======
</TABLE>
On April 29, 1998, the Company's Board of Directors voted to restore an existing
share repurchase authorization to its original level of 10,000,000 shares. The
Company repurchased 4,483,100 shares of its common stock during 1998, 8,435,972
shares of its common stock during 1997, and 819,200 shares of its common stock
during 1996. As of December 31, 1998, approximately 5,600,000 shares of common
stock remain available under this repurchase authorization.

Dividends paid to shareholders were $56,683,000 in 1998, $53,934,000 in 1997,
and $50,035,000 in 1996.

On December 2, 1996, the Company acquired AGI for approximately $289,334,000,
including transaction expenses. The purchase consisted of cash payments and
transaction expenses of $136,801,000 (funded principally by short-term debt of
$132,874,000), and the issuance of 4,079,772 shares of W.W. Grainger, Inc.
common stock valued at $152,533,000. The Company repurchased the 4,079,772
shares during 1997, which is included in the 8,435,972 shares repurchased during
1997.

Internally generated funds have been the primary source of working capital and
funds needed for expanding the business, supplemented by debt as circumstances
dictated. In addition to continuing facilities optimization efforts, business
development, and systems and other infrastructure enhancements, funds are being
expended for the consolidation of Chicago-area offices into the Lake Forest,
Illinois office facility currently being constructed.

The Company continues to maintain a low debt ratio and strong liquidity
position, which provides flexibility in funding working capital needs and
long-term cash requirements. In addition to internally generated funds, the
Company has various sources of financing available, including commercial paper
sales and bank borrowings under lines of credit and otherwise. Total debt as a
percent of shareholders' equity was 18%, 12%, and 11%, at December 31, 1998,
1997, and 1996, respectively.

13
<PAGE>

INFLATION AND CHANGING PRICES
Inflation during the last three years has not been a significant factor to
operations. The predominant use of the last-in, first-out (LIFO) method of
accounting for inventories and accelerated depreciation methods for financial
reporting and income tax purposes result in a substantial recognition of the
effects of inflation in the primary financial statements.

The major impact of inflation is on buildings and improvements, where the gap
between historic cost and replacement cost continues to be significant for these
long lived assets. The related depreciation expense associated with these assets
increases significantly when adjusting for the cumulative effect of inflation.

The Company believes the most positive means to combat inflation and advance the
interests of investors lies in continued application of basic business
principles, which include improving productivity, increasing working capital
turnover, and offering products and services which can command proper price
levels in the marketplace.

Item 8: Financial Statements and Supplementary Data
The financial statements and supplementary data are included on pages 18 to 38.
See the Index to Financial Statements and Supplementary Data on page 17.

Item 9: Disagreements on Accounting and Financial Disclosure
None.

PART III

Item 10: Directors and Executive Officers of the Registrant
Information regarding directors of the Company will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held April 28, 1999, and, to the extent required, is incorporated herein by
reference. Information regarding executive officers of the Company is set forth
under the caption "Executive Officers."

Item 11: Executive Compensation
Information regarding executive compensation will be set forth in the Company's
proxy statement relating to the annual meeting of shareholders to be held April
28, 1999, and, to the extent required, is incorporated herein by reference.

Item 12: Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management will be set forth in the Company's proxy statement relating to the
annual meeting of shareholders to be held April 28, 1999, and, to the extent
required, is incorporated herein by reference.

Item 13: Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions will be set
forth in the Company's proxy statement relating to the annual meeting of
shareholders to be held April 28, 1999, and, to the extent required, is
incorporated herein by reference.

14
<PAGE>
<TABLE>

<S> <C>

PART IV

Item 14: Exhibits, Financial Statement Schedule, and Reports on Form 8-K

(a) 1. Financial Statements. See Index to Financial Statements and
Supplementary Data.

2. Financial Statement Schedule. See Index to Financial Statements and
Supplementary Data.

3. Exhibits: Exhibit Index
-------------
(3) (a) Restated Articles of Incorporation dated April 27, 1994,
incorporated by reference to Exhibit 3(i) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
(b) By-laws, as amended, incorporated by reference to Exhibit
3(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.

(10) Material Contracts:
(a) No instruments which define the rights of holders of the
Company's Industrial Development Revenue Bonds are filed
herewith, pursuant to the exemption contained in Regulation
S-K, Item 601(b)(4)(iii). The Company hereby agrees to
furnish to the Securities and Exchange Commission, upon
request, a copy of any such instrument.
(b) Shareholders rights agreement dated April 26, 1989,
incorporated by reference to Exhibit 10(m) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1989, and a related Certificate of Adjustment, incorporated
by reference to Exhibit 4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1991.
(c) Certificate of Adjustment pursuant to the Rights Agreement
dated as of April 26, 1989, between the Company and The
First National Bank of Boston, as Rights Agent, which
Certificate relates to the two-for-one stock split of the
Company effective at the close of business on May 11, 1998,
incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1998.
(d) Compensatory Plans or Arrangements
(i) W.W. Grainger, Inc. Director Stock Plan, as amended. 39-52
(ii) W.W. Grainger, Inc. Office of the Chairman Incentive
Plan, incorporated by reference to Appendix B of the
Company's Proxy Statement dated March 26, 1997.
(iii) W.W. Grainger, Inc. 1990 Long-Term Stock Incentive
Plan, as amended. 53-66
(iv) W.W. Grainger, Inc. 1975 Non-Qualified Stock Option
Plan as Amended and Restated, incorporated by
reference to Exhibit 10(a) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1987.
(v) Executive Death Benefit Plan, as amended. 67-75
(vi) Executive Deferred Compensation Plan, incorporated
by reference to Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1989.
(vii) 1985 Executive Deferred Compensation Plan, as
amended. 76-87
(viii) Summary Description of Management Incentive Program
Based on Improved Economic Earnings. 88-93
(ix) Supplemental Profit Sharing Plan, as amended,
incorporated by reference to Exhibit 10(c)(ii) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
(x) Form of Change in Control Employment Agreement
between the Company and certain of its executive
officers. 94-115

(11) Computations of Earnings Per Share. See Index to Financial
Statements and Supplementary Data.

(21) Subsidiaries of the Company. 116

(23) Consent of Independent Certified Public Accountants. See Index to
Financial Statements and Supplementary Data.

(27) Financial Data Schedule.

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of 1998.
</TABLE>

15
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly issued this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

DATE: March 24, 1999

W.W. GRAINGER, INC.

By: /s/ R. L. Keyser By: /s/ P. O. Loux
--------------------------------- -----------------------
R. L. Keyser P.O. Loux
Chairman of the Board Senior Vice President, Finance
and Chief Executive Officer and Chief Financial Officer
(a Principal Executive Officer and (Principal Financial Officer)
a Director)

By: /s/ J. D. Fluno By: /s/ R. D. Pappano
--------------------------------- -----------------------
J. D. Fluno R. D. Pappano
Vice Chairman Vice President, Financial Reporting
(a Principal Executive Officer and and Investor Relations
a Director) (Principal Accounting Officer)

By: /s/ D. W. Grainger
---------------------------------
D. W. Grainger
Senior Chairman of the Board
(a Principal Executive Officer and
a Director)

/s/ George R. Baker March 24, 1999 /s/ James D. Slavik March 24, 1999
- ---------------------- --------------- --------------------- ---------------
George R. Baker James D. Slavik
Director Director

/s/ Robert E. Elberson March 24, 1999 /s/ Harold B. Smith March 24, 1999
- ---------------------- --------------- -------------------- ---------------
Robert E. Elberson Harold B. Smith
Director Director

/s/ Wilbur H. Gantz March 24, 1999 /s/ Fred L. Turner March 24, 1999
- ---------------------- --------------- -------------------- ---------------
Wilbur H. Gantz Fred L. Turner
Director Director

/s/ John W. McCarter, Jr. March 24, 1999 /s/ Janiece S. Webb March 24, 1999
- ------------------------- -------------- -------------------- ---------------
John W. McCarter, Jr. Janiece S. Webb
Director Director

16
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 1998, 1997, and 1996

Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....................... 18

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF EARNINGS.............................. 19

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS................ 19

CONSOLIDATED BALANCE SHEETS

ASSETS.................................................... 20

LIABILITIES AND SHAREHOLDERS' EQUITY...................... 21

CONSOLIDATED STATEMENTS OF CASH FLOWS............................ 22-23

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY.................. 24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................... 25-36

SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS............................ 36

EXHIBIT 11 - COMPUTATIONS OF EARNINGS PER SHARE.......................... 37

EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......... 38

17
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Shareholders and
Board of Directors of
W.W. Grainger, Inc.

We have audited the accompanying consolidated balance sheets of W.W.
Grainger, Inc., and Subsidiaries as of December 31, 1998, 1997, and 1996, and
the related consolidated statements of earnings, comprehensive earnings,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of W.W. Grainger,
Inc., and Subsidiaries as of December 31, 1998, 1997, and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.

We have also audited Schedule II of W.W. Grainger, Inc., and Subsidiaries for
the years ended December 31, 1998, 1997, and 1996. In our opinion, this Schedule
presents fairly, in all material respects, the information required to be set
forth therein.

GRANT THORNTON LLP

Chicago, Illinois
February 3, 1999

18
<PAGE>
<TABLE>
<CAPTION>

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except for per share amounts)

Years Ended December 31,
-----------------------------------------------
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Net sales .............................. $ 4,341,269 $ 4,136,560 $ 3,537,207
Cost of merchandise sold ............... 2,743,598 2,642,208 2,269,993
------------- ------------- -------------
Gross profit ................... 1,597,671 1,494,352 1,267,214

Warehousing, marketing, and
administrative expenses .............. 1,189,689 1,101,193 921,685
------------- ------------- -------------
Operating earnings ............. 407,982 393,159 345,529

Other income or (deductions)
Interest income ...................... 1,560 2,896 4,554
Interest expense ..................... (6,652) (5,461) (1,228)
Unclassified--net .................... (2,043) (958) 33
------------- ------------- -------------
(7,135) (3,523) 3,359
------------- ------------- -------------
Earnings before income taxes ... 400,847 389,636 348,888

Income taxes ........................... 162,343 157,803 140,362
------------- ------------- -------------
Net earnings ................... $ 238,504 $ 231,833 $ 208,526
============= ============= =============
Earnings per share:
Basic ................................ $ 2.48 $ 2.30 $ 2.04
============= ============= =============
Diluted .............................. $ 2.44 $ 2.27 $ 2.02
============= ============= =============
Average number of shares outstanding:
Basic ................................ 96,231,829 100,604,518 102,295,506
============= ============= =============
Diluted .............................. 97,846,658 102,178,952 103,272,408
============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)

Years Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net Earnings ................................ $ 238,504 $ 231,833 $ 208,526

Other comprehensive earnings:
Foreign currency translation adjustments .. (10,354) (6,948) (2,262)
--------- --------- ---------
Comprehensive earnings ...................... $ 228,150 $ 224,885 $ 206,264
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

19
<PAGE>
<TABLE>
<CAPTION>

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)

December 31,
------------------------------------
ASSETS 1998 1997 1996
---------- ---------- ----------

<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .................................. $ 43,107 $ 46,929 $ 126,935
Accounts receivable, less allowances for
doubtful accounts of $15,951 for 1998, $15,803 for 1997,
and $15,302 for 1996 ..................................... 463,377 455,457 433,575
Inventories ................................................ 626,731 612,132 686,925
Prepaid expenses ........................................... 11,950 9,122 11,971
Deferred income tax benefits ............................... 61,200 59,348 60,837
---------- ---------- ----------
Total current assets ................................... 1,206,365 1,182,988 1,320,243

PROPERTY, BUILDINGS, AND EQUIPMENT
Land ....................................................... 135,636 133,213 132,095
Buildings, structures, and improvements .................... 662,236 583,823 510,386
Furniture, fixtures, machinery, and equipment .............. 411,295 370,122 343,231
---------- ---------- ----------
1,209,167 1,087,158 985,712
Less accumulated depreciation
and amortization ......................................... 548,639 494,245 434,728
---------- ---------- ----------
Property, buildings, and
equipment--net ......................................... 660,528 592,913 550,984

DEFERRED INCOME TAXES ........................................ 3,187 -- --

other assets
Goodwill ................................................... 177,355 187,963 192,555
Customer lists and other intangibles ....................... 89,573 89,699 91,882
---------- ---------- ----------
266,928 277,662 284,437

Less accumulated amortization .............................. 86,296 70,814 54,574
---------- ---------- ----------
180,632 206,848 229,863

Capitalized software--net .................................. 33,280 970 2,369
Sundry ..................................................... 19,910 14,102 15,562
---------- ---------- ----------
Other assets--net ........................................ 233,822 221,920 247,794
---------- ---------- ----------
TOTAL ASSETS ................................................. $2,103,902 $1,997,821 $2,119,021
========== ========== ==========
</TABLE>

20
<PAGE>
<TABLE>
<CAPTION>

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED BALANCE SHEETS--CONTINUED
(In thousands of dollars)

December 31,
-----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 1996
----------- ----------- -----------

<S> <C> <C> <C>
CURRENT LIABILITIES
Short-term debt ............................................. $ 88,060 $ 2,960 $ 135,275
Current maturities of long-term debt ........................ 22,831 23,834 24,753
Trade accounts payable ...................................... 287,055 261,802 240,779
Accrued contributions to employees'
profit sharing plans ...................................... 75,113 62,234 56,258
Accrued expenses ............................................ 158,214 148,149 131,199
Income taxes ................................................ 33,220 34,902 27,804
----------- ----------- -----------
Total current liabilities ............................... 664,493 533,881 616,068

LONG-TERM DEBT (less current maturities) ...................... 122,883 131,201 6,152

DEFERRED INCOME TAXES ......................................... -- 2,871 2,207

ACCRUED EMPLOYMENT RELATED BENEFITS COSTS ..................... 37,785 35,207 31,932

SHAREHOLDERS' EQUITY
Cumulative Preferred Stock--
$5 par value--authorized, 12,000,000 shares,
issued and outstanding, none .............................. -- -- --
Common Stock--$0.50 par value--authorized,
300,000,000 shares;
issued, 107,233,771 shares, 1998,
106,971,524 shares, 1997, and
106,676,052 shares, 1996 .................................. 53,617 53,486 53,338
Additional contributed capital .............................. 249,482 242,289 235,649
Treasury stock, at cost--13,728,672 shares, 1998,
9,249,572 shares, 1997,
and 819,200 shares, 1996 .................................. (572,900) (378,899) (32,090)
Unearned restricted stock compensation ...................... (17,238) (16,528) (17,597)
Cumulative translation adjustments .......................... (19,564) (9,210) (2,262)
Retained earnings ........................................... 1,585,344 1,403,523 1,225,624
----------- ----------- -----------
Total shareholders' equity .............................. 1,278,741 1,294,661 1,462,662
----------- ----------- -----------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ........................................ $ 2,103,902 $ 1,997,821 $ 2,119,021
=========== =========== ===========

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

21
<PAGE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)

Years Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------

<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ................................................ $ 238,504 $ 231,833 $ 208,526
Provision for losses on accounts receivable ................. 10,310 9,984 9,131
Depreciation and amortization:
Property, buildings, and equipment ........................ 58,256 63,257 61,585
Intangibles and goodwill .................................. 15,964 16,394 12,676
Capitalized software ...................................... 4,645 1,556 2,474
Change in operating assets and liabilities-
net of the effects of the
business acquisition:
(Increase) in accounts receivable ......................... (18,230) (31,866) (28,871)
(Increase) decrease in inventories ........................ (14,599) 74,793 (7,430)
(Increase) decrease in prepaid expenses ................... (2,828) 2,849 255
(Increase) decrease in deferred income taxes .............. (7,910) 2,153 70
Increase in trade accounts payable ........................ 25,253 21,023 1,891
Increase in other current liabilities ..................... 22,944 22,926 3,724
(Decrease) increase in
current income taxes payable ............................ (1,682) 7,098 4,339
Increase in accrued employment
related benefits costs .................................. 2,578 3,275 3,186
Other--net .................................................. 1,386 1,288 854
--------- --------- ---------
Net cash provided by operating activities ..................... 334,591 426,563 272,410

Cash flows from investing activities:
Additions to property, buildings, and equipment ............. (130,186) (108,252) (62,051)
Proceeds from sale of property, buildings,
and equipment--net ........................................ 4,315 3,066 8,069
Expenditures for capitalized software ....................... (36,983) (122) (900)
Net cash paid for business acquisition ...................... -- -- (136,144)
Other--net .................................................. (13,488) 1,682 (1,032)
--------- --------- ---------
Net cash (used in) investing activities ....................... (176,342) (103,626) (192,058)
</TABLE>

22
<PAGE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
(In thousands of dollars)

Years Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in short-term debt .................. $ 85,100 $(132,315) $ 111,698
Proceeds from long-term debt ................................ -- 126,127 1,500
Long-term debt payments ..................................... (1,079) (1,997) (2,549)
Stock options exercised ..................................... 443 2,239 2,890
Tax benefit of stock incentive plan ......................... 4,107 3,759 3,709
Purchase of treasury stock--net ............................. (193,959) (346,822) (32,090)
Cash dividends paid ......................................... (56,683) (53,934) (50,035)
--------- --------- ---------
Net cash (used in) provided by financing activities ........... (162,071) (402,943) 35,123
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ........................................ (3,822) (80,006) 115,475

Cash and cash equivalents at beginning of year ................ 46,929 126,935 11,460
--------- --------- ---------
Cash and cash equivalents at end of year ...................... $ 43,107 $ 46,929 $ 126,935
========= ========= =========
Non-cash investing and financing activities
from acquisition of business:
Fair value of assets acquired ............................. $ 338,101
Liabilities acquired ...................................... (49,424)
Fair value of common stock issued ......................... (152,533)
---------
Net cash paid for business acquisition ........................ $ 136,144
=========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

23
<PAGE>

<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars except for per share amounts)

Unearned
Additional Restricted Cumulative
Common Contributed Treasury Stock Translation Retained
Stock Capital Stock Compensation Adjustments Earnings
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ............. $ 50,894 $ 61,101 $ -- $ (19) $ -- $ 1,067,133
Exercise of stock options .............. 169 6,404 -- -- -- --
Issuance of 4,079,772 shares
of common stock
for business acquisition ............. 2,040 150,493 -- -- -- --
Issuance of 470,000 shares
of restricted common stock ........... 235 17,625 -- (17,860) -- --
Amortization of unearned
restricted stock compensation ........ -- 26 -- 282 -- --
Purchase of 819,200 shares of
treasury stock ....................... -- -- (32,090) -- -- --
Cumulative translation
adjustments .......................... -- -- -- -- (2,262) --
Net earnings ........................... -- -- -- -- -- 208,526
Cash dividends paid
($0.49 per share) .................... -- -- -- -- -- (50,035)
----------- ----------- ----------- ------------ ----------- -----------
Balance at December 31, 1996 ........... 53,338 235,649 (32,090) (17,597) (2,262) 1,225,624

Exercise of stock options .............. 138 5,753 -- -- -- --
Issuance of 20,000 shares
of restricted common stock ........... 10 793 -- (803) -- --
Amortization of unearned
restricted stock compensation ........ -- 107 -- 1,872 -- --
Purchase of 8,430,372 shares
of treasury stock, net of
5,600 shares issued .................. -- (13) (346,809) -- -- --
Cumulative translation
adjustments .......................... -- -- -- -- (6,948) --
Net earnings ........................... -- -- -- -- -- 231,833
Cash dividends paid
($0.53 per share) .................... -- -- -- -- -- (53,934)
----------- ----------- ----------- ------------ ----------- -----------
Balance at December 31, 1997 ........... 53,486 242,289 (378,899) (16,528) (9,210) 1,403,523

Exercise of stock options .............. 105 4,316 -- -- -- --
Issuance of 52,500 shares
of restricted common stock ........... 26 2,706 -- (2,732) -- --
Amortization of unearned
restricted stock compensation ........ -- 129 -- 2,022 -- --
Purchase of 4,479,100 shares
of treasury stock, net of
4,000 shares issued .................. -- 42 (194,001) -- -- --
Cumulative translation
adjustments .......................... -- -- -- -- (10,354) --
Net earnings ........................... -- -- -- -- -- 238,504
Cash dividends paid
($0.585 per share) ................... -- -- -- -- -- (56,683)
----------- ----------- ----------- ------------ ----------- -----------
Balance at December 31, 1998 ........... $ 53,617 $ 249,482 $ (572,900) $ (17,238) $ (19,564) $ 1,585,344
=========== =========== =========== ============ =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

24
<PAGE>

W.W. Grainger, Inc., and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INDUSTRY INFORMATION
The Company is engaged in the distribution of maintenance, repair, and operating
(MRO) supplies, services, and related information to businesses and institutions
in North America.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions are eliminated from
the consolidated financial statements.

STOCK SPLIT
The consolidated financial statements have been retroactively restated to
reflect the 2-for-1 stock split effective May 11, 1998.

MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the estimates of revenues and expenses.
Actual results could differ from those estimates.

REVENUE RECOGNITION
The Company recognizes revenue at the date products are shipped or at the date
services are completed.

INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
primarily by the last-in, first-out (LIFO) method.

PROPERTY, BUILDINGS, AND EQUIPMENT Property, buildings, and equipment are valued
at cost.

For financial statement purposes, depreciation and amortization are provided in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, principally on the declining-balance and
sum-of-the-years-digits methods. The principal estimated useful lives used in
determining depreciation are as follows:

Buildings, structures, and improvements.......... ... 10 to 45 years
Furniture, fixtures, machinery, and equipment........ 3 to 10 years

Improvements to leased property are amortized over the initial terms of the
respective leases or the estimated service lives of the improvements, whichever
is shorter.

The Company capitalized interest costs of $2,323,000, $1,810,000, and
$1,772,000, in 1998, 1997, and 1996, respectively.

FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are generally
measured using the local currency as the functional currency. Net exchange gains
or losses resulting from the translation of financial statements of foreign
operations, and related long-term debt, except for those from highly
inflationary economies, are recorded as a separate component of shareholders'
equity.

PURCHASED TAX BENEFITS
The Company purchased tax benefits through leases as provided by the Economic
Recovery Tax Act of 1981. Realized tax benefits, net of repayments, are included
in Deferred Income Taxes.

INCOME TAXES
Income taxes are recognized during the year in which transactions enter into the
determination of financial statement income, with deferred taxes being provided
for temporary differences between financial and tax reporting.

COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income."

25
<PAGE>

SFAS No. 130 requires disclosure of the components of and total comprehensive
income in the period in which they are recognized in the financial statements.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise arising from transactions and other events and circumstances
from non-owner sources. It includes all changes in shareholders' equity during
the reporting period except those resulting from investments by owners and
distributions to owners.

The Company's comprehensive income includes foreign currency translation
adjustments with no related income tax effects. The cumulative amount of other
comprehensive income adjustments were ($19,564,000), ($9,210,000), and
($2,262,000) at December 31, 1998, 1997, and 1996, respectively.

SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers.

EMPLOYEE BENEFITS
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." The provisions of SFAS No. 132 revise employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
does not change the measurement or expense recognition of these plans.

CAPITALIZED SOFTWARE
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," is effective for fiscal years beginning
after December 15, 1998. SOP 98-1 provides guidance on accounting for the costs
of computer software developed or obtained for internal use. The Company plans
to adopt SOP 98-1 beginning January 1,1999.

NOTE 2--BUSINESS ACQUISITION

Effective December 2, 1996, the Company purchased the stock of a subsidiary of
Acklands Limited (a Canadian corporation). The business acquired is the largest
nationwide distributor of broad line industrial supplies in Canada. The
aggregate purchase price was approximately $289,334,000 including transaction
expenses. The purchase consisted of cash payments and transaction expenses of
$136,801,000 (funded principally by short-term debt of $132,874,000) and the
issuance of 4,079,772 shares of W.W. Grainger, Inc. common stock valued at
$152,533,000. The acquisition is being accounted for as a purchase, and
accordingly, the financial statements include results of operations from the
date of acquisition. The purchase included intangibles, including trademarks and
goodwill, valued at $173,420,000 to be amortized over periods of five to forty
years.

The following unaudited pro forma summary presents the combined results of
operations of the Company and the acquired business, as if the acquisition had
occurred at the beginning of 1996. The pro forma amounts give effect to certain
adjustments, including the amortization of intangibles, foreign currency
translation, increased interest expense and income tax effects. This pro forma
summary does not necessarily reflect the results of operations as they would
have been if the businesses had constituted a single entity during this period
and is not necessarily indicative of results which may be obtained in the
future.

Year Ended December 31, 1996
(Pro forma,
in thousands of dollars
except for per share amounts)
Net sales................................. $3,847,665
Operating earnings........................ $ 368,203
Net earnings.............................. $ 216,680
Earnings per share:
Basic................................... $ 2.04
Diluted................................. $ 2.02

26
<PAGE>

NOTE 3--CASH FLOWS

The Company considers investments in highly liquid debt instruments, purchased
with an original maturity of ninety days or less, to be cash equivalents. For
cash equivalents the carrying amount approximates fair value due to the short
maturity of these instruments.

Cash paid during the year for:

1998 1997 1996
-------- -------- --------
(In thousands of dollars)
Interest (net of amounts capitalized).. $5,027 $5,773 $974
======== ======== ========
Income taxes........................... $165,668 $143,471 $131,726
======== ======== ========

NOTE 4--CASH

Checks outstanding of $74,183,000, $54,218,000, and $35,366,000, are included in
Trade accounts payable at December 31, 1998, 1997, and 1996, respectively. These
amounts are immaterial to the consolidated financial statements.

NOTE 5--CONCENTRATION OF CREDIT RISK

The Company places temporary cash investments with institutions of high credit
quality and, by policy, limits the amount of credit exposure to any one
institution.

The Company has a broad customer base representing many diverse industries doing
business in all regions of the United States as well as other areas of North
America. Consequently, in management's opinion, no significant concentration of
credit risk exists for the Company.

NOTE 6--INVENTORIES

Inventories primarily consist of merchandise purchased for resale.

Inventories would have been $217,455,000, $215,707,000, and $209,305,000 higher
than reported at December 31, 1998, 1997, and 1996, respectively, if the
first-in, first-out (FIFO) method of inventory accounting had been used for all
Company inventories. Inventories under FIFO approximate replacement cost.

NOTE 7--OTHER ASSETS

Included in other assets are intangibles such as customer lists and goodwill.
Customer lists are amortized on a straight-line basis over periods of five to
sixteen years. Goodwill represents the cost in excess of net assets of acquired
companies and is amortized on a straight-line basis over periods of five to
forty years. The Company's goodwill is predominately denominated in Canadian
dollars and accordingly, the changes in the asset balance are due to foreign
exchange rate fluctuations.

Other assets also includes net capitalized software used in the Company's
business. During 1998, the Company acquired a new business enterprise software
system. Amortization of capitalized software is predominately on a straight-line
basis over five years. Amortization expense was $4,645,000, $1,556,000, and
$2,474,000 for the years ended December 31, 1998, 1997, and 1996, respectively.

27
<PAGE>
NOTE 8--SHORT-TERM DEBT

The following summarizes information concerning short-term debt:

<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
Bank Debt (In thousands of dollars)
- ---------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31 .................................... $ 3,704 $ 2,960 $ 135,275
Maximum month-end balance during the year ..................... $ 3,704 $ 139,187 $ 135,275
Average amount outstanding during the year .................... $ 2,565 $ 119,962 $ 13,796
Weighted average interest rates during the year ............... 6.0% 3.5% 3.8%
Weighted average interest rates at December 31 ................ 5.7% 6.2% 3.2%

Commercial Paper
- ---------------------------------------------------------------
Outstanding at December 31 .................................... $ 84,356 -- --
Maximum month-end balance during the year ..................... $ 84,356 $ 81,355 --
Average amount outstanding during the year .................... $ 15,668 $ 15,429 $ 1,436
Weighted average interest rates during the year ............... 5.3% 5.7% 5.7%
Weighted average interest rates at December 31 ................ 5.4% -- --
</TABLE>

The Company and its subsidiaries had committed lines of credit totaling
$318,069,000 and $168,983,000 at December 31, 1998 and 1997, respectively,
including $13,069,000 and $13,983,000 denominated in Canadian dollars. A Company
subsidiary also has a $32,673,000 and $34,958,000 uncommitted line of credit
denominated in Canadian dollars as of December 31, 1998 and 1997, respectively.
At December 31, 1998, borrowings under the subsidiaries' committed lines of
credit were $3,704,000. The Company has guaranteed these borrowings.

At December 31, 1996, available lines of credit were $186,483,000 including a
$36,483,000 working capital line of credit denominated in Canadian dollars.

At December 31, 1996, in connection with the business acquisition described in
Note 2, a Company subsidiary had approximately $131,000,000 in outstanding
banker's acceptances included in short-term debt. During 1997 this debt was
refinanced as described in Note 10.

NOTE 9--EMPLOYEE BENEFITS

RETIREMENT PLANS. A majority of the Company's employees are covered by a
noncontributory profit sharing plan. This plan provides for annual employer
contributions based upon a formula primarily related to earnings before federal
income taxes, limited to 15% of the total compensation paid to all eligible
employees. The Company also sponsors additional profit sharing and defined
benefit plans which cover most of the other employees. Provisions under all
plans were $65,576,000, $55,052,000, and $49,450,000 for the years ended
December 31, 1998, 1997, and 1996, respectively.

POSTRETIREMENT BENEFITS. The Company has a health care benefits plan covering
most of its retired employees and their dependents. A majority of the Company's
employees become eligible for participation when they qualify for retirement
while working for the Company.

The amount charged to operating expense for postretirement health care benefits
was $4,256,000, $3,653,000, and $3,578,000 for the years ended December 31,
1998, 1997, and 1996, respectively. Components of the expense were:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In thousands of dollars)

<S> <C> <C> <C>
Service cost ............................................... $ 3,076 $ 2,442 $ 2,309
Interest cost .............................................. 2,546 2,272 2,080
Expected return on assets .................................. (968) (738) (611)
Amortization of transition asset (22 year amortization) .... (143) (143) (143)
Amortization of unrecognized gain .......................... (180) (262) (139)
Amortization of prior service cost ......................... (75) 82 82
------- ------- -------
$ 4,256 $ 3,653 $ 3,578
======= ======= =======
</TABLE>

28
<PAGE>

Participation in the plan is voluntary at retirement and requires participants
to make contributions, as determined by the Company, toward the cost of the
plan. The accounting for the health care benefits plan anticipates future
cost-sharing changes to retiree contributions that will maintain the current
cost-sharing ratio between the Company and the retirees. Plan design and
eligibility changes effective January 1, 1998, included modifications to
eligibility requirements and the adjustment of benefit maximums.

A Group Benefit Trust has been established as the vehicle to process benefit
payments. The assets of the trust are invested in a Standard & Poor's 500 index
fund. The assumed weighted average long-term rate of return is 7.4%, which is
net of a 32.4% tax rate. The funding of the trust is an estimated amount which
is intended to allow the maximum deductible contribution under the Internal
Revenue Code of 1986, as amended, and was $2,444,000, $859,000, and $379,000 for
the years ended December 31, 1998, 1997, and 1996, respectively.

A reconciliation of the beginning and ending balances of the accumulated
postretirement benefit obligation (APBO), the fair value of assets, and the
funded status of the benefit obligation as of December 31, 1998, 1997, and 1996,
is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Benefit obligation at beginning of year .......... $ 35,866 $ 31,909 $ 33,482
Service cost ................................... 3,076 2,442 2,310
Interest cost .................................. 2,546 2,272 2,080
Plan participants' contributions ............... 366 376 293
Amendments ..................................... -- (2,516) --
Actuarial loss (gain) .......................... 3,503 2,544 (5,442)
Benefits paid .................................. (1,682) (1,161) (814)
-------- -------- --------
Benefit obligation at end of year ................ 43,675 35,866 31,909
-------- -------- --------
Fair value of plan assets at beginning of year ... 16,127 12,307 10,288
Actual return on plan assets ................... 4,444 3,745 2,161
Employer contribution .......................... 2,444 859 379
Plan participants' contributions ............... 366 377 293
Benefits paid .................................. (1,682) (1,161) (814)
-------- -------- --------
Fair value of plan assets at end of year ......... 21,699 16,127 12,307
-------- -------- --------
Funded status .................................... (21,976) (19,739) (19,602)

Unrecognized transition asset .................... (2,285) (2,428) (2,570)
Unrecognized net actuarial gain .................. (4,359) (4,589) (4,388)
Unrecognized prior (benefits) service cost ....... (927) (1,003) 1,595
-------- -------- --------
Accrued postretirement benefits costs ............ $(29,547) $(27,759) $(24,965)
======== ======== ========
</TABLE>
To determine the APBO as of December 31, 1998, 1997, and 1996, the assumed
weighted average discount rate used was 6.8%, 7.0%, and 7.5%, respectively. The
assumed health care cost trend rate for 1999 is 8.0%. Beginning in 2000, the
assumed health care cost trend rate declines on a straight-line basis until
2009, when the ultimate trend rate of 5.0% is achieved.

If the assumed health care cost trend rate was increased by one percentage point
for each year, the APBO as of December 31, 1998, would increase by $9,822,000.
The aggregate of the service cost and interest cost components of the 1998 net
periodic postretirement benefits expense would increase by $1,453,000.

If the assumed health care cost trend rate was decreased by one percentage point
for each year, the APBO as of December 31, 1998, would decrease by $7,637,000.
The aggregate of the service cost and interest cost components of the 1998 net
periodic postretirement benefits expense would decrease by $1,108,000.

29
<PAGE>

NOTE 10--LONG-TERM DEBT

Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>

1998 1997 1996
-------- -------- -------
(In thousands of dollars)
<S> <C> <C> <C>
Uncommitted revolving credit facility...... $117,885 $126,127 $ --
Industrial development revenue bonds....... 27,650 27,650 27,650
Other...................................... 179 1,258 3,255
145,714 155,035 30,905
Less current maturities.................... 22,831 23,834 24,753
-------- -------- -------
$122,883 $131,201 $ 6,152
======== ======== =======
</TABLE>

As part of the permanent financing for a Canadian Subsidiary, the Company
maintained a $130,693,000 uncommitted revolving credit facility, denominated in
Canadian dollars. The Company has $117,885,000 outstanding at December 31, 1998
relating to this facility with a weighted average interest rate of 5.6%. The
Company has the intent and the ability to refinance the obligation on a
long-term basis through its credit lines and therefore it is included in
long-term debt.

The industrial development revenue bonds include various issues that bear
interest at a variable rate up to 15%, or variable rates up to 78.2% of the
prime rate, and come due in various amounts from 2001 through 2021. Interest
rates on some of the issues are subject to change at certain dates in the
future. The bondholders may require the Company to redeem certain bonds
concurrent with a change in interest rates and certain other bonds annually. In
addition, $13,545,000 of these bonds had an unsecured liquidity facility
available at December 31, 1998, for which the Company compensated a bank through
a commitment fee of 0.1%. There were no borrowings related to this facility at
December 31, 1998. The Company classified $22,755,000 of bonds currently subject
to redemption options in current maturities of long-term debt at December 31,
1998, 1997, and 1996.

The aggregate amounts of long-term debt maturing in each of the five years
subsequent to December 31, 1998, are as follows:

Amounts Amounts
Payable Under Subject to
Terms of Redemption
Agreements Options
------------- -----------
(In thousands of dollars)

1999.................................. $76 $22,755
2000.................................. 83 4,895
2001.................................. 20 --
2002.................................. -- --
2003.................................. 117,885 --

30
<PAGE>

NOTE 11--LEASES

The Company leases various land, buildings, and equipment. The Company
capitalizes all significant leases which qualify as capital leases.

At December 31, 1998, the approximate future minimum aggregate payments for all
leases were as follows:

<TABLE>
<CAPTION>
Operating Leases
----------------------------------
Real Personal Capital
Property Property Total Leases
---------- ---------- ---------- -------
(In thousands of dollars)
<S> <C> <C> <C> <C>
1999 ................................................. $ 17,604 $ 798 $ 18,402 $ 75
2000 ................................................. 10,617 224 10,841 75
2001 ................................................. 7,503 -- 7,503 15
2002 ................................................. 6,349 -- 6,349 --
2003 ................................................. 3,426 -- 3,426 --
Thereafter ........................................... 4,751 -- 4,751 --
---------- ---------- ---------- -------
Total minimum payments required ...................... 50,250 1,022 51,272 165
Less amounts representing sublease income ............ 3,842 -- 3,842
---------- ---------- ----------
$ 46,408 $ 1,022 $ 47,430
========== ========== ==========
Less imputed interest ................................ 14
-------
Present value of minimum lease payments
(included in long-term debt) ....................... $ 151
=======
</TABLE>
Total rent expense, including both items under lease and items rented on a
month-to-month basis, was $16,336,000, $21,396,000, and $18,434,000 for 1998,
1997, and 1996, respectively.

NOTE 12--STOCK INCENTIVE PLANs

The Company's Long-Term Stock Incentive Plan ("The Plan") allows the Company to
grant a variety of incentive awards to key employees of the Company. A maximum
of 8,056,828 shares of common stock are authorized for issuance under the Plan,
in connection with awards of non-qualified stock options, stock appreciation
rights, restricted stock, phantom stock rights, and other stock-based awards.

The Plan authorizes the granting of restricted stock which is held by the
Company until certain terms and conditions as specified by the Company are
satisfied. Except for the right of disposal, holders of restricted stock have
full shareholders' rights during the period of restriction, including voting
rights and the right to receive dividends.

The Plan authorizes the granting of options to purchase shares at a price of not
less than 100% of the closing market price on the last trading day preceding the
date of grant. The options expire within ten years after the date of grant.

Shares covered by terminated, surrendered or canceled options or stock
appreciation rights that are unexercised, by forfeited restricted stock, or by
the forfeiture of other awards that do not result in shares being issued, are
again available for awards under the Plan.

There were 52,500 shares of restricted stock issued in 1998 with a weighted
average fair market value of $52.04 per share. There were 20,000 shares of
restricted stock issued in 1997 with a fair market value of $40.125 per share.
There were 470,000 shares of restricted stock issued in 1996 with a fair market
value of $38 per share. The shares are scheduled to vest ten years from
issuance, although accelerated vesting is provided in certain instances.
Restricted stock released totaled 400, 1,000, and 2,000 shares in 1998, 1997,
and 1996, respectively. Compensation expense related to restricted stock awards
is based upon market price at date of grant and is charged to earnings on a
straight-line basis over the period of restriction. Total compensation expense
relating to restricted stock was $2,022,000, $1,872,000, and $282,000 in 1998,
1997, and 1996, respectively.

31
<PAGE>

During 1997, the Company adopted a Director Stock Plan in which non-employee
directors participate. A total of 500,000 shares of common stock were reserved
for issuance in connection with awards of stock, stock units, stock options,
restricted stock, and other stock-based awards under the new plan.

The Company awarded Stock Units under the Director Stock Plan in connection with
the termination of previous director compensation plans. A Stock Unit is
essentially the economic equivalent of a share of Company stock. Additional
deferred fees and dividends are converted to Stock Units based on the market
value of the stock at the relevant time.

Payment of the value of Stock Units generally will be made after the termination
of service as a director. As of December 31, 1998 and 1997, eight directors held
Stock Units, in connection with which the Company had recognized expense of
$286,000 and $1,850,000, respectively.

Transactions involving stock options are summarized as follows:

<TABLE>
<CAPTION>
Weighted
Average
Price Per
Option Shares Share Exercisable
------------ ---------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1996........... 3,027,884 $23.18 1,833,524
==========
Granted................................ 577,460 $33.81
Exercised.............................. (482,362) $17.00
Canceled or expired.................... (59,860) $31.06
----------
Outstanding at December 31, 1996......... 3,063,122 $26.01 1,710,182
==========
Granted................................ 694,660 $37.38
Exercised.............................. (412,702) $19.17
Canceled or expired.................... (51,720) $33.63
----------
Outstanding at December 31, 1997......... 3,293,360 $29.14 1,679,900
==========
Granted................................ 884,620 $51.35
Exercised.............................. (335,900) $19.94
Canceled or expired.................... (51,640) $38.32
----------
Outstanding at December 31, 1998......... 3,790,440 $35.01 1,732,300
========== ==========
</TABLE>

All options were issued at market price on the date of grant. Options were
issued with initial vesting periods ranging from one to five years.

Information about stock options outstanding at December 31, 1998, is as follows:

Options Outstanding
- --------------------------------------------------------------------------------
Weighted Average
-----------------------------------------
Range of Exercise Number Remaining Contractual Exercise
Prices Outstanding Life (Years) Price
- ----------------- ----------- --------------------- --------

$13.94-$29.44 1,074,840 2.9 $23.32
$33.75-$38.75 1,822,020 7.2 $33.99
$41.13-$52.88 893,580 9.3 $51.06

Options Exercisable
- ------------------------------------------------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
- ----------------- ----------- ---------------------
$13.94-$29.44 1,074,840 $23.32
$33.75-$41.13 657,460 $30.95

Shares available for future awards were 3,877,538, 4,767,018, and 4,943,438, at
December 31, 1998, 1997, and 1996, respectively.

32
<PAGE>

In accordance with Statement of Financial Accounting Standard (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Company has elected to continue
to account for stock compensation under Accounting Principles Board Opinion No.
25. Pro forma net earnings and earnings per share, as calculated under SFAS No.
123, are as follows:

1998 1997 1996
-------- -------- --------
(In thousands of dollars
except for per share amounts)
Net earnings.................. $234,257 $229,107 $206,696
Earnings per share:
Basic....................... $ 2.43 $ 2.28 $ 2.02
Diluted..................... $ 2.39 $ 2.25 $ 2.00

The weighted average fair value of the stock options granted during 1998, 1997,
and 1996 was $16.12, $12.95, and $10.88, respectively. The fair value of each
option grant was estimated using the Black-Scholes option-pricing model based on
the date of the grant and the following weighted average assumptions:

1998 1997 1996
-------- -------- --------
Risk-free interest rate....... 5.8% 6.7% 6.6%
Expected life................. 7.0 years 7.0 years 6.5 years
Expected volatility........... 20.1% 21.0% 21.8%
Expected dividend yield....... 1.5% 1.5% 1.5%

NOTE 13--ISSUANCE OF PREFERRED SHARE PURCHASE RIGHTS

The Company adopted a Shareholder Rights Plan, under which there is outstanding
one preferred share purchase right (Right) for each outstanding share of the
Company's common stock. Each Right, under certain circumstances, may be
exercised to purchase one four-hundredth of a share of Series A Junior
Participating Preferred Stock (intended to be the economic equivalent of one
share of the Company's common stock) at a price of $62.50, subject to
adjustment. The Rights become exercisable only after a person or a group, other
than a person or group exempt under the plan, acquires or announces a tender
offer for 20% or more of the Company's common stock. If a person or group, other
than a person or group exempt under the plan, acquires 20% or more of the
Company's common stock or if the Company is acquired in a merger or other
business combination transaction, each Right generally entitles the holder,
other than such person or group, to purchase, at the then-current exercise
price, stock and/or other securities or assets of the Company or the acquiring
company having a market value of twice the exercise price.

The Rights expire on May 15, 1999, unless earlier redeemed. They generally are
redeemable at $.01 per Right until thirty days following announcement that a
person or group, other than a person or group exempt under the plan, has
acquired 20% or more of the Company's common stock. They are also automatically
redeemable, at the redemption price, upon consummation of certain transactions
approved by shareholders in accordance with procedures provided in the plan. The
Rights do not have voting or dividend rights and, until they become exercisable,
have no dilutive effect on the earnings of the Company.

NOTE 14--INCOME TAXES

Income tax expense consisted of the following:

1998 1997 1996
-------- --------- --------
(In thousands of dollars)
Current provision:
Federal (including foreign).......... $141,462 $128,470 $113,968
State................................ 28,791 27,180 26,324
-------- --------- --------
Total current...................... 170,253 155,650 140,292
Deferred tax (benefits) expense........ (7,910) 2,153 70
-------- --------- --------
Total provision........................ $162,343 $157,803 $140,362
======== ========= ========

The deferred tax (benefits) expense represent the net effect of the changes in
the amounts of temporary differences.

33
<PAGE>

The income tax effects of temporary differences that gave rise to the net
deferred tax asset as of December 31, 1998, 1997, and 1996 were:
<TABLE>
<CAPTION>

1998 1997 1996
-------- -------- --------
(In thousands of dollars)
Current deferred tax assets (liabilities):
<S> <C> <C> <C>
Inventory valuations ..................................... $ 22,648 $ 23,761 $ 25,059
Administrative and general expenses
deducted on a paid basis for tax purposes .............. 30,926 28,267 26,759
Employment related benefits expense ...................... 2,454 2,160 1,778
Restructuring costs ...................................... 5,214 5,432 7,428
Other .................................................... (42) (272) (187)
-------- -------- --------
Total net current deferred tax asset ................... 61,200 59,348 60,837
-------- -------- --------
Noncurrent deferred tax assets (liabilities):
Purchased tax benefits ................................... (22,185) (26,185) (29,693)
Differences related to property,
buildings, and equipment ............................... (388) (816) (400)
Intangible amortization .................................. 9,135 9,116 14,681
Employment related benefits expense ...................... 15,038 14,012 12,709
Net operating loss carryforwards ......................... 4,372 1,785 --
Other .................................................... 1,587 1,002 496
-------- -------- --------
Total gross noncurrent deferred tax asset (liability) .... 7,559 (1,086) (2,207)
Less valuation allowance ................................. (4,372) (1,785) --
-------- -------- --------
Total net noncurrent deferred tax asset (liability) .... 3,187 (2,871) (2,207)
-------- -------- --------
Net deferred tax asset ..................................... $ 64,387 $ 56,477 $ 58,630
======== ======== ========
</TABLE>
The purchased tax benefits represent lease agreements acquired in prior years
under the provisions of the Economic Recovery Act of 1981.

Net Operating Loss carryforwards (NOLs) represent temporary differences that
enter into the calculation of deferred tax balances. Since 1997, the Company has
experienced NOLs for a foreign start-up operation. The full amount of the
deferred tax asset is offset by a valuation allowance due to the uncertainty of
utilizing these NOLs.

A reconciliation of income tax expense with U.S. federal income taxes at the
statutory rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Federal income taxes at the statutory rate.................. $140,296 $136,373 $122,111
Foreign rate differences.................................... 1,703 2,034 (4)
State income taxes, net of federal income tax benefits...... 17,637 17,954 17,010
Other--net.................................................. 2,707 1,442 1,245
-------- -------- --------
Income tax expense........................................ $162,343 $157,803 $140,362

Effective tax rate........................................ 40.5% 40.5% 40.2%
</TABLE>

34
<PAGE>

NOTE 15--SEGMENT INFORMATION

The Company has one reportable segment: Branch-based Distribution. The
Branch-based Distribution segment provides customers with solutions to their
immediate MRO needs. Branch-based Distribution is an aggregation of the
following business segments: Grainger Industrial Supply, Acklands-Grainger Inc.,
Grainger Parts, Grainger, S.A. de C.V., Puerto Rico, Grainger Export, and
Grainger Global Sourcing. The Other column includes the Grainger Custom
Solutions, Grainger Integrated Supply, Grainger Consulting Services, Internet
Commerce, and Lab Safety Supply, Inc. segments.

The Company's segments offer differing ranges of services and/or products and
require different resources and marketing strategies. The segments were formed
in late 1997 as the Company refocused its organization to meet the diverse needs
of its customers. The restatement of comparable financial information for 1997
and 1996 is not practicable.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment transfer prices were
established at external selling prices less costs not incurred due to the
related party sale.

1998
---------------------------------------
(In thousands of dollars)
Branch-based
Distribution Other Totals
---------- ---------- ----------
Total net sales ...................... $3,881,237 $ 728,020 $4,609,257
Intersegment net sales ............... 260,230 7,758 267,988
Net sales from external customers .... 3,621,007 720,262 4,341,269
Segment operating earnings ........... 435,167 11,214 446,381

Segment assets ....................... $1,805,396 $ 189,298 $1,994,694
Depreciation and amortization ........ 54,500 19,638 74,138
Additions to long-lived assets ....... 115,905 21,954 137,859

Following are reconciliations of the segment information with the consolidated
totals per the financial statements (in thousands of dollars).
1998
------------
Operating earnings:
Total operating earnings for reportable segments ............ $ 446,381
Unallocated expenses ........................................ (38,326)
Elimination of intersegment profits ......................... (73)
------------
Total Consolidated operating earnings ..................... $ 407,982
============
Assets:
Total assets for reportable segments ........................ $ 1,994,694
Unallocated assets .......................................... 109,208
------------
Total Consolidated assets ................................. $ 2,103,902
============

1998
--------------------------------------
Segment Consolidated
Other Significant Items: Totals Adjustments Totals
-------- ---------- ------------
Depreciation and amortization ........ $ 74,138 $ 4,727 $ 78,865
Additions to long-lived assets ....... 137,859 31,981 169,840

Long-lived
Geographic Information: Revenues Assets
---------- ----------
United States ............................ $3,940,604 $ 692,747
Canada ................................... 329,565 180,613
Other foreign countries .................. 71,100 1,080
---------- ----------
$4,341,269 $ 874,440
========== ==========

Long-lived assets consists of property, buildings, equipment, capitalized
software, goodwill, and other intangibles.

Revenues are attributed to countries based on location of customer.

35
<PAGE>
NOTE 16--SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
A summary of selected quarterly information for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 Quarter Ended
----------------------------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales ........................ $ 1,057,107 $ 1,118,970 $ 1,120,038 $ 1,045,154 $ 4,341,269
Gross profit ..................... $ 385,155 $ 401,959 $ 405,311 $ 405,246 $ 1,597,671
Net earnings ..................... $ 57,172 $ 59,250 $ 56,089 $ 65,993 $ 238,504
Earnings per share--basic ........ $ 0.59 $ 0.61 $ 0.58 $ 0.70 $ 2.48
Earnings per share--diluted ...... $ 0.58 $ 0.60 $ 0.57 $ 0.69 $ 2.44
</TABLE>

<TABLE>
<CAPTION>
1997 Quarter Ended
----------------------------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales ........................ $ 985,556 $ 1,051,206 $ 1,066,927 $ 1,032,871 $ 4,136,560
Gross profit ..................... $ 353,280 $ 371,029 $ 373,152 $ 396,891 $ 1,494,352
Net earnings ..................... $ 54,609 $ 57,559 $ 56,480 $ 63,185 $ 231,833
Earnings per share--basic ........ $ 0.52 $ 0.57 $ 0.57 $ 0.64 $ 2.30
Earnings per share--diluted ...... $ 0.52 $ 0.56 $ 0.56 $ 0.63 $ 2.27
</TABLE>

W.W. Grainger, Inc., and Subsidiaries

SCHEDULE II--ALLOWANCE FOR DOUBTFUL ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

Balance at Charged to Balance
beginning costs and at end
Description of period expenses Deductions (a) Other (b) of period
- ---------------------------------- --------- ---------- -------------- --------- ---------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts

1998.............................. $15,803 $10,310 $10,162 $ -- $15,951

1997.............................. 15,302 9,984 9,483 -- 15,803

1996.............................. 14,229 9,131 8,824 766 15,302

(a) Accounts charged off as uncollectible, less recoveries.
(b) Business acquired.

</TABLE>

36
<PAGE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries EXHIBIT 11

COMPUTATIONS OF EARNINGS PER SHARE

1998 1997 1996
------------ ------------ ------------
Basic:
<S> <C> <C> <C>
Average number of shares outstanding during the year ................. 96,231,829 100,604,518 102,295,506
============ ============ ============
Net earnings ......................................................... $238,504,000 $231,833,000 $208,526,000
============ ============ ============
Earnings per share ................................................... $ 2.48 $ 2.30 $ 2.04
============ ============ ============
Diluted:

Average number of shares outstanding during the year (basic) ......... 96,231,829 100,604,518 102,295,506

Common equivalents

Shares issuable under outstanding options ........................ 3,187,915 3,249,490 3,065,756

Shares which could have been purchased based on
the average market value for the period ........................ 2,114,482 2,184,102 2,193,264
------------ ------------ ------------
1,073,433 1,065,388 872,492

Dilutive effect of exercised options prior to being exercised ........ 21,604 18,046 33,442
------------ ------------ ------------
Shares for the portion of the period
that the options were outstanding .................................. 1,095,037 1,083,434 905,934

Contingently issuable shares ......................................... 519,792 491,000 70,968
------------ ------------ ------------
1,614,829 1,574,434 976,902
------------ ------------ ------------
Average number of shares outstanding during the year ................. 97,846,658 102,178,952 103,272,408
============ ============ ============
Net earnings ......................................................... $238,504,000 $231,833,000 $208,526,000
============ ============ ============
Earnings per share ................................................... $ 2.44 $ 2.27 $ 2.02
============ ============ ============
</TABLE>

37
<PAGE>
EXHIBIT 23

CONSENT OF INDEPENDENT CERTIFIED

PUBLIC ACCOUNTANTS

We hereby consent to the incorporation of our report on page 18 of this Form
10-K by reference in the prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 2-67983, 2-54995, 33-43902, and 333-24215) and on
Form S-4 (No. 33-32091) of W.W. Grainger, Inc.

GRANT THORNTON LLP

Chicago, Illinois
March 24, 1999

38
<PAGE>

Exhibit 10(d)(i) to the Annual Report
on Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1998

W.W. GRAINGER, INC.
DIRECTOR STOCK PLAN
AS AMENDED DECEMBER 9, 1998

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 became effective on April 30, 1997
(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.

39
<PAGE>

2.6. "Change in Control" means any one or more of the following events:

(i) approval by the shareholders of the Company of:

(A) any merger, reorganization or consolidation of
the Company or any Subsidiary with or into any corporation or
other Person if Persons who were the beneficial owners (as
such term is used in Rule 13d-3 under the Securities Exchange
Act of 1934 (the "Act")) of Common Stock and securities of the
Company entitled to vote generally in the election of
directors ("Voting Securities") immediately before such
merger, reorganization or consolidation are not, immediately
thereafter, the beneficial owners, directly or indirectly, of
at least 60% of the then-outstanding common shares and the
combined voting power of the then-outstanding Voting
Securities ("Voting Power") of the corporation or other Person
surviving or resulting from such merger, reorganization or
consolidation (or the parent corporation thereof) in
substantially the same respective proportions as their
beneficial ownership, immediately before the consummation of
such merger, reorganization or consolidation, of the
then-outstanding Common Stock and Voting Power of the Company;

(B) the sale or other disposition of all or
substantially all of the consolidated assets of the Company,
other than a sale or other disposition by the Company of all
or substantially all of its consolidated assets to an entity
of which at least 60% of the common shares and the Voting
Power outstanding immediately after such sale or other
disposition are then beneficially owned (as such term is used
in Rule 13d-3 under the Act) by shareholders of the Company in
substantially the same respective proportions as their
beneficial ownership of Common Stock and Voting Power of the
Company immediately before the consummation of such sale or
other disposition; or

provided, however, that if the consummation of an event described in
this paragraph (i) (a "Transaction") is subject to an Other Party
Approval Requirement (as defined below), the approval of such
Transaction by the shareholders of the Company shall not be deemed a
Change in Control until the first date on which such Other Party
Approval Requirement has been satisfied. For this purpose, "Other Party
Approval Requirement" means a requirement expressly set forth in a
Transaction Agreement (as defined below) between the Company and
another Person to the effect that such Person shall obtain the approval
of one or more elements of the Transaction by the stockholders,
members, partners, or other holders of equity interests of such Person
(or of a parent of such Person) prior to the consummation of such
Transaction in order to comply with the mandatory provisions of (x) the
law of the jurisdiction of the

40
<PAGE>

incorporation or organization of such Person (or its parent) or (y) the
articles of incorporation or other charter or organizational documents
of such Person (or its parent) that are applicable to such Transaction.
For this purpose, "Transaction Agreement" means a written agreement
that sets forth the terms and conditions of the Transaction;

(ii) the following individuals cease for any reason to
constitute a majority of the directors of the Company then serving:
individuals who, on the Effective Date, constitute the Board and any
subsequently appointed or elected director of the Company (other than a
director whose initial assumption of office is in connection with an
actual or threatened election contest, including a consent
solicitation, relating to the election or removal of one or more
directors of the Company) whose appointment or election by the Board or
nomination for election by the Company's shareholders was approved or
recommended by a vote of at least two-thirds of the Company's directors
then in office whose appointment, election or nomination for election
was previously so approved or recommended or who were directors on the
Effective Date; or

(iii) the acquisition or holding by any person, entity or
"group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act,
other than by any Exempt Person (as defined below), the Company, any
Subsidiary, any employee benefit plan of the Company or a Subsidiary)
of beneficial ownership (within the meaning of Rule 13d-3 under the
Act) of 20% or more of either the Company's then-outstanding Common
Stock or Voting Power; provided that:

(A) no such person, entity or group shall be deemed
to own beneficially any securities held by the Company or a
Subsidiary or any employee benefit plan (or any related trust)
of the Company or a Subsidiary;

(B) no Change in Control shall be deemed to have
occurred solely by reason of any such acquisition if both (x)
after giving effect to such acquisition, such person, entity
or group has beneficial ownership of less than 30% of the
then-outstanding Common Stock and Voting Power of the Company
and (y) prior to such acquisition, at least two-thirds of the
directors described in (and not excluded from) paragraph (ii)
of this definition vote to adopt a resolution of the Board to
the specific effect that such acquisition shall not be deemed
a Change in Control; and

(C) no Change in Control shall be deemed to have
occurred solely by reason any such acquisition or holding in
connection with any merger, reorganization or consolidation of
the Company or any Subsidiary which is not a Change in Control
within the meaning of paragraph (i)(A) above.

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

41
<PAGE>

2.8. "Company": see Section 1.1.

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

2.10. "Deferral Election": see Section 10.2.

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

2.12. "Distribution Election": see Section 8.6.

2.13. "Effective Date": see Section 1.3.

2.14. "Exempt Person" means any one or more of the following:

(i) any descendant of W.W. Grainger (deceased) or any spouse,
widow or widower of any such descendant (any such descendants, spouses,
widows and widowers collectively defined as the "Grainger Family
Members");

(ii) any descendant of E.O. Slavik (deceased) or any spouse,
widow or widower of any such descendant (any such descendants, spouses,
widows and widowers collectively defined as the "Slavik Family Members"
and with the Grainger Family Members collectively defined as the
"Family Members");

(iii) any trust which is in existence on the Effective Date
and which has been established by one or more Grainger Family Members,
any estate of a Grainger Family Member who died on or before the
Effective Date, and The Grainger Foundation (such trusts, estates and
named entity collectively defined as the "Grainger Family Entities");

(iv) any trust which is in existence on the Effective Date and
which has been established by one or more Slavik Family Members, any
estate of a Slavik Family Member who died on or before the Effective
Date, Mark IV Capital, Inc., and Mountain Capital Corporation (such
trusts, estates and named entities collectively defined as the "Slavik
Family Entities" and with the Grainger Family Entities collectively
defined as the "Existing Family Entities");

(v) any estate of a Family Member who dies after the Effective
Date or any trust established after the Effective Date by one or more
Family Members or Existing Family Entities; provided that one or more
Family Members, Existing Family Entities or charitable organizations
which qualify as exempt organizations under Section 501(c) of the Code
("Charitable Organizations"), collectively, are the beneficiaries of at
least 50% of the actuarially determined beneficial interests in such
estate or trust;

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(vi) any Charitable Organization which is established by one
or more Family Members or Existing Family Entities (a "Family
Charitable Organization");

(vii) any corporation of which a majority of the voting power
and a majority of the equity interest is held, directly or indirectly,
by or for the benefit of one or more Family Members, Existing Family
Entities, estates or trusts described in clause (v) above, or Family
Charitable Organizations; or

(viii) any partnership or other entity or arrangement of which
a majority of the voting interest and a majority of the economic
interest is held, directly or indirectly, by or for the benefit of one
or more Family Members, Existing Family Entities, estates or trusts
described in clause (v) above, or Family Charitable Organizations.

2.15. "Expiration Date": see Section 5.4.

2.16. "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 trading day on which the Shares were traded prior to such specified date.

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

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

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

2.20. "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.

2.21 "Person" means any individual, corporation, partnership, limited
liability company, sole proprietorship, trust or other entity.

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

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

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

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

2.26. "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.

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

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 bylaws 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
500,000.* 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 a Subsidiary), 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

- ---------------------------------
*As adjusted to reflect the Company's 1998 two-for-one stock split.

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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.

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.

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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 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.

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.

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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 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.

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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 as of
such date; provided, however, that if the event that gave rise to such the
payment is the occurrence of a Change in Control, such amount of value shall
equal the greater of (i) the Fair Market Value of a Share as of the date of the
Change in Control or (ii) the average Fair Market Value of a Share calculated
over the last 10 trading days on which the Shares were traded on the New York
Stock Exchange (or other stock exchange or national market system on which the
Shares are then listed for trading) ended on the date of the Change in Control.

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 first to occur of (i) termination of such Outside
Director's service as a Director or such later date that an Outside Director may
elect pursuant to a Distribution Election or (ii) the occurrence of a Change in
Control. All payments on account of Stock Units shall be made in cash.

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 (except as may otherwise be provided in Section 8.5),
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 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.

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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),

(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.

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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 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.

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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 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.

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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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Exhibit 10(d)(iii) to the Annual Report
on Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1998

W.W. GRAINGER, INC.
1990 LONG TERM STOCK INCENTIVE PLAN
AS AMENDED DECEMBER 9, 1998

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) "Change in Control" means any one or more of the following events:

(i) approval by the shareholders of the Company of:

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the then-outstanding Voting Securities ("Voting Power") of the
corporation or other Person surviving or resulting from such
merger, reorganization or consolidation (or the parent
corporation thereof) in substantially the same respective
proportions as their beneficial ownership, immediately before
the consummation of such merger, reorganization or
consolidation, of the then-outstanding Common Stock and Voting
Power of the Company;

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election by the Company's shareholders was approved or recommended by a
vote of at least two-thirds of the Company's directors then in office
whose appointment, election or nomination for election was previously
so approved or recommended or who were directors on the Effective Date;
or

(iii) the acquisition or holding by any person, entity or
"group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act,
other than by any Exempt Person (as such term is defined below), the
Company, any Subsidiary, any employee benefit plan of the Company or a
Subsidiary) of beneficial ownership (within the meaning of Rule 13d-3
under the Act) of 20% or more of either the Company's then-outstanding
Common Stock or Voting Power; provided that:

(C) no Change in Control shall be deemed to have
occurred solely by reason of any such acquisition or holding
in connection with any merger, reorganization or consolidation
of the Company or any Subsidiary which is not a Change in
Control within the meaning of paragraph (i)(A) above.

Notwithstanding the occurrence of any of the events specified in
paragraphs (i), (ii) or (iii) of this definition, no Change in Control shall
occur with respect to any Participant if (x) the event which otherwise would be
a Change in Control (or the transaction which resulted in such event) was
initiated by such Participant, or was discussed by him with any third party,
without the approval of the Board with respect to such Participant's initiation
or discussion, as applicable, or (y) such Participant is, by written agreement,
a participant on his own behalf in a transaction in which the persons (or their
affiliates) with whom such Participant has the written agreement cause the
Change in Control to occur and, pursuant to the written agreement, such
Participant has an equity interest (or a right to acquire such equity interest)
in the resulting entity.

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

(g) "Committee" - The Compensation Committee of the Board, which shall
consist of two or more members. The members of the Committee shall be
"non-employee directors" within the meaning of Rule 16b-3, as the same may be
amended or supplemented from time to time, as promulgated under the Act.

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

(i) "Company" - W.W. Grainger, Inc., an Illinois corporation.

(j) "Effective Date" - December 9, 1998.

(k) "Employee" - Any person designated as an employee of the Company or
a Subsidiary on the payroll records thereof.

(l) "Exempt Person" means any one or more of the following:

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(v) any estate of a Family Member who dies after the Effective
Date or any trust established after the Effective Date by one or more
Family Members or Existing Family Entities; provided that one or more
Family Members, Existing Family Entities or charitable organizations
which qualify as exempt organizations under Section 501(c) of the Code
("Charitable Organizations"), collectively, are the beneficiaries of at
least 50% of the actuarially determined beneficial interests in such
estate or trust;

(vi) any Charitable Organization which is established by one
or more Family Members or Existing Family Entities (a "Family
Charitable Organization");

(m) "Fair Market Value" - 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.

(n) "Option" - The right to purchase Common Stock at a stated price for
a specified period of time. For purposes of the Plan, the option is a
non-qualified stock option.

(o) "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 Common Stock.

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

(q) "Person" - Any individual, corporation, partnership, limited
liability company, sole proprietorship, trust or other entity.

(r) "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.

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(s) "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.

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

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

(v) "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.

(w) "Subsidiary" - Any corporation, partnership, joint venture, limited
liability company, or other entity in which the Company directly or indirectly
owns securities representing a majority of the aggregate voting power.

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 8,056,828
Shares.* Notwithstanding the foregoing, the total number of Shares with respect
to which Options or Stock Appreciation Rights may be granted to any Participant
shall not exceed 800,000 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,

- --------

* As adjusted to reflect (i) the number of shares remaining available for grants
under the Company's Restated 1975 Non-Qualified Stock Option Plan, (ii) the
Company's 1991 two-for-one stock split and (iii) the Company's 1998 two-for-one
stock split.

** As adjusted to reflect the Company's 1998 two-for-one stock split.

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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. 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;

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

(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.

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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.

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.

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.

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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.

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.

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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.

Section 10. Amendment, Modification, and Termination of Plan.

The Board 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 to a Participant without the consent of such 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 six (6) 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.

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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 six
(6) 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 or a Subsidiary 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 or a Subsidiary, has induced any
customer of the Company or a Subsidiary to breach any contract with the Company
or a Subsidiary, has made any unauthorized disclosure of any of the secrets or
confidential information of the Company or a Subsidiary, has committed an act of
embezzlement, fraud, or theft with respect to the property of the Company or a
Subsidiary, or has deliberately disregarded the rules of the Company or a
Subsidiary in such a manner as to cause any loss, damage, or injury to, or
otherwise endanger the property, reputation, or employees of the Company or a
Subsidiary. 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.

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Section 12. Change in Control.

Except as otherwise provided in an Agreement, if a Change in Control
occurs, then:

(i) the Participant's Restricted Stock that was forfeitable
shall thereupon become nonforfeitable; and

(ii) any unexercised Option or SAR, whether or not exercisable
on the date of such Change in Control, shall thereupon be fully
exercisable and may be exercised, in whole or in part.

Section 13. Miscellaneous Provisions.

13.1. 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.

13.2. No Guarantee of Employment or Participation. Nothing in the Plan
shall interfere with or limit in any way the right of the Company or a
Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employment of the Company or a
Subsidiary. No employee shall have a right to be selected as a Participant, or,
having been so selected, to receive any future awards.

13.3. 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.

13.4. 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.

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13.5. Effectiveness of Plan. The Plan became effective upon its approval
by the shareholders of the Company on April 25, 1990; 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 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.

13.6. 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.

13.7. 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 Board 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.

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Exhibit 10(d)(v) to the Annual Report
on Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1998

W.W. GRAINGER, INC.

EXECUTIVE DEATH BENEFIT PLAN
(Conformed Copy Including Amendments Effective May 8, 1995, December 9, 1998
and March 3, 1999)

ARTICLE 1

PURPOSE

1.1 Purpose. The purpose of this W.W. GRAINGER, INC.
EXECUTIVE DEATH BENEFIT PLAN (the "Plan") is to improve and maintain
relations with a select group of management employees (the "key
employees"), to induce them to remain employed by W.W. Grainger, Inc.,
and to provide an incentive to them to not enter into competitive
employment or engage in a competitive business by providing
supplemental survivor security benefits. All benefits hereunder shall
be paid solely from the general assets of the Company, and the right of
any Participant or Beneficiary to receive payments under this Plan
shall be as an unsecured general creditor of the Company.

1.2 Construction. In construing the terms of the Plan, the
primary consideration shall be the Plan's stated purpose, i.e., to
provide certain disability and survivors' benefits and to supplement
certain benefits from the Company's Group Insurance Plans.

ARTICLE II

DEFINITIONS AND DESIGNATIONS

2.1 "Annual Compensation" shall mean the sum of:

(a) the annual salary of the Participant determined
by the Board of Directors of the Company in effect on the Date
Creating an Entitlement, and

(b) the Participant's target bonus under the
Company's Management Incentive Program (which term shall be
deemed to include such equivalent incentive bonus programs as
the Committee may recognize for purposes of this Plan) for the
calendar year in which the Date Creating an Entitlement
occurs.

2.2 "Average Monthly Earnings" shall mean Annual Compensation
divided by twelve (12).

2.3 "Committee" shall mean the Compensation Committee of

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Management described in Article VII hereof.

2.4 "Company" shall mean W.W. Grainger, Inc., an Illinois
corporation, and its divisions and subsidiaries.

2.5 'Date Creating an Entitlement' shall mean the
Participant's date of death for benefits described in Section 4.1 or
date of Termination of Service for benefits described in Section 4.3.
Notwithstanding, if a Participant's annual salary and/or target bonus
under the Company's Management Incentive Program is significantly
decreased while such Participant continues to be employed in good
standing by the Company, the Committee may, in its sole discretion,
define Date Creating an Entitlement for that Participant as the day
immediately prior to the effective date of such decrease.

2.6 "Disability" means a condition that totally and
continuously prevents the Participant, for at least six (6) consecutive
months, from engaging in an "occupation" for Compensation or profit.
During the first twenty-four (24) months of total disability,
"occupation" means the Participant's occupation at the time the
disability began. After that period, "occupation" means any occupation
for which the Participant is or becomes reasonably fitted by education,
training or experience. Notwithstanding the foregoing, a disability
shall not exist for purposes of this Plan if the Participant fails to
qualify for disability benefits under the Social Security Act, unless
the Committee determines, in its sole discretion, that a disability
exists.

2.7 "Early Retirement Date" shall mean the earliest of the
date on which the Participant:

(a) attains age sixty (60),

(b) attains age fifty-five (55) or older after
completing ten (10) Years of Service,

(d) incurs a Disability.

2.8 "Forfeiting Act" shall mean the Participant's fraud,
dishonesty, willful destruction of Company property, revealing Company
trade secrets, acts of competition against the Company or acts in aid
of a competitor of the Company.

2.9 "Group Life Insurance Plan" shall mean the Company's Group
Term Life and Accidental Death and Dismemberment Insurance Plan, as
amended from time to time.

2.10 "Normal Retirement Date" shall mean the date on which the
Participant attains age sixty-five (65).

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2.11 "Participant" shall mean a person designated as such
under Article III of the Plan.

2.12 "Plan" shall mean the W.W. Grainger, Inc. Executive Death
Benefit Plan.

2.13 "Termination of Service" shall mean the Participant's
ceasing his Service with the Company for any reason whatsoever, whether
voluntarily or involuntarily, including by reason of death or
disability.

2.14 "Years of Service" shall mean a year that a Participant
hereunder is "Eligible" under the W.W. Grainger, Inc. Employees Profit
Sharing Plan.

ARTICLE III

PARTICIPATION

3.1 Eligibility to Participate. An Employee of the Company
shall become eligible to be a Participant in the Plan by designation of
the Committee. The Committee shall make such designation, specifying
the effective date of the Participant's eligibility. The Committee
shall notify each Participant of his eligibility date. Each designated
Employee shall furnish such information and perform such acts as the
Committee may require prior to becoming a Participant.

3.2 Re-Employment. Any Participant who terminates employment
shall not be eligible to participate in the Plan on re-employment
unless the Committee so determines. In such event, the Committee shall
specify the effective date of the Participant's renewed eligibility.
The Committee shall notify each re-employed former Participant of his
eligibility, of the effective date and of the conditions of
participation.

ARTICLE IV

DEATH BENEFITS

4.1 Death During Employment. If a Participant's death occurs
while he is in the employ of the Company, his Beneficiary shall receive
a monthly payment in an amount equal to:

(a) fifty percent (50%) of the Participant's Average
Monthly Earnings as defined under the Plan on the Date
Creating an Entitlement, which payments shall commence on the
first day of the month following the Participant's death and
end as of the date on which the 120th monthly payment is made;
or"

(b) for a Participant who was a Participant on the
effective date

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of the First Amendment of the Plan [May 8, 1995], and
notwithstanding anything to the contrary in section 8.2:

(i) fifty percent (50%) of the Participant's
Average Monthly Earnings as defined under the Plan on
the Date Creating an Entitlement, determined without
regard to Section 2.1(b)."

(ii) which payment shall commence on the
first day of the month following the Participant's
death and end as of the later of the date the
Participant would have attained age 65 or the date on
which the 120th monthly payment is made,

if the benefit so calculated would have a greater present
value on the date of the Participant's death than the benefit
calculated under paragraph (a) next above. The Committee shall
use reasonable and consistent assumptions to determine present
values.

4.2 Additional Death Benefit. The Company will maintain death
benefit coverage for each Participant in the amount of fifty thousand
dollars ($50,000) under the Company's Group Life Insurance Plan.
Payment of such benefit shall be made in accordance with the provisions
of the Group Life Insurance Plan.

4.3 Death After Retirement. If a Participant incurs
Termination of Service on or after an Early Retirement Date, or on or
after his Normal Retirement Date, and dies after such Termination of
Service, the Company will pay to his Beneficiary a lump sum death
benefit equal to one hundred percent (100%) of his Annual Compensation
as defined under the Plan on the Date Creating an Entitlement. Such
death benefit amount shall be increased to reflect estimated federal
income tax payable on such death benefit, based on the then maximum tax
rate, determined in accordance with rules established from time to time
by the Committee, provided that in no event shall the death benefit
exceed two hundred percent (200%) of Annual Compensation.

4.4 Death After Termination of Employment. Except as provided
in Section 4.3, no benefits shall be payable to or on behalf of a
Participant whose death occurs subsequent to his Termination of
Employment.

4.5 Benefit Upon Change in Control. Upon a Change in Control
(as defined in Section 2.1(e) of the W.W. Grainger, Inc. 1990 Long Term
Stock Incentive Plan, as may be amended from time to time), for each
Participant who then has reached his Early Retirement Date or Normal
Retirement Date, the Company immediately will pay to such Participant a
lump sum benefit equal to the present value (determined using 120% of
the applicable federal rate as defined under Section 1274 of the
Internal Revenue Code and published periodically by the Internal
Revenue Service) of the death benefit that would have been payable on
behalf of such Participant under Section 4.3 if such Participant had
died at age eighty (80). In determining whether a Participant has
reached his Early Re-

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tirement Date or Normal Retirement Date for purposes of this Section
4.5, the Participant's age and Years of Service each shall be deemed
increased by three (3) years. Following payment of a benefit under this
Section 4.5, no additional benefits shall be payable to or on behalf of
a Participant under this Plan.

ARTICLE V

BENEFICIARIES

5.1 Designation by Participant. Each Participant may designate
a Beneficiary or Beneficiaries who shall, upon his death, receive the
death benefits, if any, payable pursuant to Sections 4.1 and 4.3. The
Participant's Beneficiary under this Plan shall be the Beneficiary
designated by the Participant in the Special Beneficiary Designation
filed under the Company's Group Life Insurance Plan unless the
Participant files a written notice of a different Beneficiary
Designation in such form as the Committee requires. The form may
include contingent Beneficiaries. A Beneficiary Designation shall be
effective when filed with the Committee during the Participant's life
and shall cancel and revoke all prior designations.

5.2 Payment of Benefits Upon Death - Other Beneficiary. If no
primary or contingent Beneficiary survives a Participant or if no
Beneficiary Designation is in effect upon his death, then the payments
shall be made to the deceased Participant's spouse. If his spouse does
not survive him, then payments shall be made to the Participant's
descendants who survive him by right of representation; or if no
descendants of the Participant survive him, then to his estate. In the
event any person entitled to receive benefits in accordance with this
Section dies prior to his receipt of all of the benefits to which he is
entitled, the balance of such benefits, if any, shall be payable to the
next class of recipients.

5.3 Minors and Persons Under Legal Disability. Benefits
payable to a minor or a person under a legal disability shall be paid
in a manner determined appropriate by the Committee.

ARTICLE VI

CLAIMS PROCEDURE

6.1 Claim for Benefits. Any claim for benefits under the Plan
shall be made in writing to any member of the Committee. If such claim
for benefits is wholly or partially denied by the Committee Members,
the Committee Members shall, within a reasonable period of time, but
not later than sixty (60) days after receipt of the claim, notify the
claimant of the denial of the claim. Such notice of denial shall be in
writing and shall contain:

(a) the specific reason or reasons for denial of the
claim,

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(b) a reference to the relevant Plan provisions upon
which the denial is based,

(c) a description of any additional material or
information necessary for the claimant to perfect the claim,
together with an explanation of why such material or
information is necessary, and

(d) an explanation of the Plan's claim review
procedure.

6.2 Request for Review of a Denial of a Claim for Benefits.
Upon the receipt by the claimant of written notice of denial of the
claim, the claimant may within ninety (90) days file a written request
to the full Committee, requesting a review of the denial of the claim,
which review shall include a hearing if deemed necessary by the
Committee. In connection with the claimant's appeal of the denial of
his claim, he may review relevant documents and may submit issues and
comments in writing.

6.3 Decision Upon Review of Denial of Claim for Benefits. The
Committee shall render a decision on the claim review promptly, but no
more than sixty (60) days after the receipt of the claimant's request
for review, unless special circumstances (such as the need to hold a
hearing) require an extension of time, in which case the sixty (60)-day
period shall be extended to one hundred twenty (120) days. Such
decision shall:

(a) include specific reasons for the decision,

(b) be written in a manner calculated to be
understood by the claimant, and

ARTICLE VII

COMMITTEE

7.1 General Rights, Powers and Duties of the Committee. The
Compensation Committee of Management shall be the Named Fiduciary and
Committee responsible for the management, operation and administration
of the Plan. In addition to any powers, rights and duties set forth
elsewhere in the Plan, it shall have the following powers and duties:

(a) to adopt such rules and regulations consistent
with the provisions of the Plan as it deems necessary for the
proper and efficient administration of the Plan;

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(b) to enforce the Plan in accordance with its terms
and any rules and regulations it establishes;

(c) to maintain records concerning the Plan
sufficient to prepare reports, returns and other information
required by the Plan or by law;

(d) to construe and interpret the Plan and to resolve
all questions arising under the Plan;

(e) to direct the Company to pay benefits under the
Plan, and to give such other directions and instructions as
may be necessary for the proper administration of the Plan;

(f) to employ or retain agents, attorneys, actuaries,
accountants or other persons, who may also be employed by or
represent the Company; and

(g) to be responsible for the preparation, filing and
disclosure on behalf of the Plan of such documents and reports
as are required by any applicable federal or state law.

7.2 Information to be Furnished to Committee. The Company
shall furnish the Committee such data and information as it may
require. The records of the Company shall be determinative of each
Participant's period of employment, termination of employment and the
reason therefor, leave of absence, re-employment, Years of Service,
personal data, and Compensation or bonus reductions. Participants and
their Beneficiaries shall furnish to the Committee such evidence, data
or information, and execute such documents as the Committee requests.

7.3 Responsibility. No member of the Committee or of the Board
of Directors of the Company shall be liable to any person for any
action taken or omitted in connection with the administration of this
Plan unless attributable to his own fraud or willful misconduct; nor
shall the Company be liable to any person for any such action unless
attributable to fraud or willful misconduct on the part of a director,
officer or employee of the Company.

ARTICLE VIII

AMENDMENT AND TERMINATION

8.1 Amendment. The Plan may be amended in whole or in part by
the Company at any time by a resolution of the Board of Directors
delivered to the Committee; provided, however, that no amendment of the
Plan adopted on or after the date of a Change in Control shall (i)
adversely affect the eligibility of any Participant to continue

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to qualify as a Participant or (ii) eliminate, reduce or otherwise
adversely affect the amount or terms of benefits payable to or on
behalf of any Participant.
8.2 Right to Terminate Plan. The Company reserves the right to
reduce or terminate benefits under the Plan with regard to any or all
Participants at any time before the date of a Change in Control by a
resolution of the Board of Directors delivered to the Committee;
provided however, that both before and after a Change in Control, a
Beneficiary receiving benefits payable by the Plan shall continue to
receive such benefits, and further provided, that at any time before
the date of a Change in Control, the Company may not terminate its
obligation to pay the death benefit to the Beneficiary of a Participant
who:

(a) already has incurred a Termination of Service
after his Early or Normal Retirement Date, or

(b) is still an active Employee but has attained an
Early Retirement Date.

The amount of the benefit payable in the event clause (b) above is
applicable shall be determined as if the date of the reduction in
benefits or termination of the Plan is a Date Creating an Entitlement.
The Committee shall notify any Participant affected by such reduction
of termination or such action and its effective date within thirty (30)
days after it receives notice from the Company. Notwithstanding the
foregoing, on and after the date of a Change in Control, the provisions
of Section 4.5 shall be applicable, rather than the foregoing
provisions of this Section 8.2, with respect to participants who are
then living.

ARTICLE IX

MISCELLANEOUS

9.1 No Funding nor Guarantee. This plan is unfunded. Nothing
contained in the Plan shall be deemed to create a trust or fiduciary
relationship of any kind. The rights of Participants and of any
Beneficiary shall be no greater than the rights of unsecured general
creditors of the Company. Nothing contained in the Plan constitutes a
guarantee by the Company that the assets of the Company will be
sufficient to pay any benefit to any person.

9.2 Inalienability of Benefits. The right of any Participant
or Beneficiary to any benefit or payment under the Plan shall not be
subject to voluntary or involuntary transfer, alienation, pledge,
assignment, garnishment, sequestration or other legal or equitable
process. Any attempt to transfer, alienate, pledge, assign or otherwise
dispose of such right or any attempt to subject such right to
attachment, execution, garnishment, sequestration or other legal or
equitable process shall be null and void.

9.3 No Implied Rights. Neither the establishment of the Plan
nor any

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modification thereof shall be construed as giving any Participant,
Beneficiary or other person any legal or equitable right unless such
right shall be specifically provided for in the Plan or conferred by
affirmative action of the Company in accordance with the terms and
provisions of the Plan.

9.4 Forfeiture for Cause. Notwithstanding any other provisions
of this Plan to the contrary, if the Participant commits one or more
Forfeiting Acts during his employment with the Company, all benefits
due the Participant or his Beneficiary shall be forfeited. This
provision shall apply regardless of the date the Company first learns
of the occurrence of a Forfeiting Act.

9.5 Binding Effect. The provisions of the Plan shall be
binding on the Company, the Committee and all persons entitled to
benefits under the Plan, together with their respective heirs, legal
representatives and successors in interest.

9.6 Governing Laws. The Plan shall be construed and
administered according to the laws of the State of Illinois.

9.7 Number and Gender. Whenever appropriate, the singular
shall include the plural, the plural shall include the singular, and
the masculine shall include the feminine or neuter.

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Exhibit 10(d)(vii) to the Annual Report
on Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1998

W.W. GRAINGER, INC.
1985 EXECUTIVE DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective as of October 28, 1998)

SECTION ONE

PURPOSE

1.1 The purpose of this W. W. GRAINGER, INC. 1985 EXECUTIVE DEFERRED
COMPENSATION PLAN, as amended and restated effective as of October 28, 1998
(hereinafter referred to as the "1985 Plan") is to provide certain employees of
W.W. Grainger, Inc. with a program to permit them to defer a portion of their
present compensation to provide them with financial security in addition to the
Company's other retirement programs.

SECTION TWO

DEFINITIONS

2.1 The terms defined in this Section shall have the meanings shown
unless the context requires otherwise.

2.2 "Agreement" means the W.W. Grainger, Inc. 1985 Executive Deferred
Compensation Agreement (substantially in the form attached to this 1985 Plan)
entered into between the Company and the Employee to carry out the 1985 Plan
with respect to such Participant.

2.3 "Beneficiary" means the person, trust or other legal entity
designated by a Participant pursuant to Section 4.8.

2.4 "Committee" means the Compensation Committee of Management
described in Section Six to manage and administer the 1985 Plan.

2.5 "Company" means W.W. Grainger, Inc., an Illinois corporation, and
includes its subsidiaries.

2.6 "Compensation" means the Participant's base salary paid during the
calendar year.

2.7 "Deferral Period" means the period commencing on the Participant's
Effective Date of Participation and ending on the date his Compensation
Reductions cease.

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2.8 "Disability" means a condition that totally and continuously
prevents the Participant, for at least-six consecutive months, from engaging in
an "occupation" for Compensation or profit. During the first twenty-four months
of total disability, "occupation" means the Participant's occupation at the time
the disability began. After that period, occupation means any occupation for
which the Participant is or becomes reasonably fitted by education, training or
experience. Notwithstanding the foregoing, a disability shall not exist for
purposes of this 1985 Plan if the Participant fails to qualify for disability
benefits under the Social Security Act, unless the Committee determines, in its
sole discretion, that a disability exists.

2.9 "Early Benefit Date" means the date of Termination of Service of
the Participant for reasons other than death or disability prior to attainment
of age sixty-five but after the earliest of the date on which the Participant:

(a) attains age sixty,

(b) attains age fifty-five or older after completing ten Years of
Service, or

2.10 "Effective Date of Participation" means the January 1 following
the date the Employee executes an Agreement.

2.11 "Normal Benefit Date" means the date of Termination of Service of
the Participant when he attains age sixty-five.

2.12 "Participant" means any Employee of the Company who is selected by
the Committee and who enters into an Agreement.

2.13 "Profit Sharing Plan" means the W.W. Grainger, Inc. Employees
Profit Sharing Plan, as amended from time to time.

2.14 "Service" means Service as accumulated under the Profit Sharing
Plan.

2.15 "Termination of Service" means the Participant's ceasing his
service with the Company for any reason whatsoever, whether voluntarily or
involuntarily, including by reason of death or disability.

2.16 "Year of Service" means a year that a Participant hereunder is
"Eligible" under the Profit Sharing Plan, or if he is not a Participant in the
Profit Sharing Plan, a year that he would meet the requirements of the Profit
Sharing Plan which would make him "Eligible" if he were a Participant in the
Profit Sharing Plan.

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SECTION THREE

PARTICIPANT COMPENSATION REDUCTION

3.1 Compensation Reduction. Prior to the Effective Date of
Participation, each Employee designated eligible to participate in the 1985 Plan
shall execute an Agreement and irrevocably elect to defer a portion of his
Compensation otherwise earned and payable on or after the Effective Date of
Participation (as determined by the Committee). The amount of annual
Compensation to be deferred shall be set forth in Section 4 of the Agreement and
shall be not less than five percent (5%) nor greater than fifteen percent (15%)
of Compensation (or such greater percentage as may be approved by the Committee)
for a period of not less than one nor more than four years. The amount deferred
shall result in corresponding reductions in the Compensation payable to the
Participant during the Deferral Period.

3.2 Company Contributions. If the Participant elects to participate,
the Company will allocate fifteen percent (15%) of the amount of the
Participant's Compensation Reduction to be used as provided in the 1985 Plan.
The Compensation Reduction elected by a Participant under the 1985 Plan during
the Deferral Period shall reduce the Participant's Recognized Compensation under
the Profit Sharing Plan during the same period.

SECTION FOUR

BENEFITS

4.1 Normal Benefit.

(a) If the Participant continues his Service until his Normal Benefit
Date, the Company shall pay to the Participant one hundred eighty equal
monthly installments commencing on the first day of the month following
his Normal Benefit Date, as Compensation earned for services rendered
prior to such date, of one-twelfth of the amount per annum specified in
Section 5 of the Agreement (the "Normal Benefit").

(b) If the Participant continues in Service with the Company after he
has attained age sixty-five and with the consent of the Committee, his
Normal Benefit payments shall commence on the first day of the month
following his Termination of Service. The Normal Benefit shall be
increased by an annualized interest rate factor of six percent (6%) to
reflect the later commencement of the benefit after the Normal Benefit
Date. Such increased benefit amount shall be payable for one hundred
eighty months.

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4.2 Continuation of Normal Benefit. If a Participant who is entitled to
the Normal Benefit dies after his Normal Benefit Date, his Beneficiary shall be
entitled to receive the remaining Normal Benefit payments, if any, that would
have been paid to the Participant if the Participant had survived until he
retrieved one hundred eighty monthly Normal Benefit payments. In lieu of such
monthly payments, the Committee may determine, in its sole discretion, to make
an actuarially determined equivalent lump sum payment to the Beneficiary.

4.3 Early Benefit.

(a) If a Participant incurs a Termination of Service on an Early
Benefit Date, the Company shall pay to the Participant in equal monthly
installments commencing on the first day of the month following the
later of his attaining age fifty-five or his Early Benefit Date, as
Compensation earned for services rendered prior to such time,
one-twelfth of the amount per annum specified in Section 5 of the
Agreement reduced by an annualized interest rate factor of six percent
(6%) to reflect the earlier commencement of the benefit prior to the
Normal Benefit Date. If the Participant dies before he has received one
hundred eighty monthly Early Benefit payments, his Early Benefit
payments shall cease, and the Company shall pay to the Participant's
Beneficiary a Survivor's Benefit pursuant to Section 4.6 hereof.

(b) Prior to such Termination of Service, the Participant may elect to
defer commencement of payment of his benefits until the first day of
any month after he attains age fifty-five but not later than the month
after he attains age sixty-five. In such event the Company shall pay to
the Participant in equal monthly installments one-twelfth of the amount
per annum specified in Section 5 of the Agreement, reduced by an
annualized interest rate factor of six percent (6%) to reflect the
earlier commencement of the benefit prior to the Normal Benefit Date.
If the Participant dies before he has received one hundred eighty
monthly Early Benefit payments, his Early Benefit payments shall cease,
and the Company shall pay to the Participant's Beneficiary a Survivor's
Benefit pursuant to Section 4.6 hereof.

4.4 Disability Benefit. If the Participant incurs a Termination of
Service before age sixty-five as a result of a disability (as defined in Section
2.8) which results from a bodily injury sustained or sickness which first
manifests itself while his Agreement is in effect, the Company shall pay to the
Participant, in equal monthly installments commencing on the first day of the
month after the Participant has been disabled for a period of six consecutive
months, one-twelfth of the amount per annum specified in Section 6 of the
Agreement until the Participant attains his Normal Benefit Date or ceases to be
totally and continuously disabled (the "Disability Benefit"). After the
Participant who is receiving a Disability Benefit attains his Normal Benefit
Date, he shall be entitled to the Normal Benefit.

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4.5 Termination of Service Prior to Early Benefit Date.

(a) Except as provided in Sections 4.3 (Early Benefit), 4.4 (Disability
Benefit) and 4.6 (Survivor's Benefit), upon Termination of Service of
the Participant before his Early Benefit Date the Company shall pay to
the Participant, as Compensation earned for services rendered prior to
his Termination of Service, a lump sum equal to the sum of:

(i) the actual amounts of his Compensation Reduction made
pursuant to Section 4 of the Agreement,

(ii) a percentage of the amount of Company allocations made in
behalf of such Participant pursuant to Section 3.2 hereof,
based on the following schedule:

Years of Service Percentage

0-4 50
5-6 60
7-9 80
10 and Over 100

(iii) interest through the date of Termination of Service,
compounded quarterly, on the amounts of (i) and (ii) above at
the end of each quarter at half the rate on ninety-day U.S.
Treasury Bills in effect at the end of each quarter,

(the "Termination Benefit"). Such payment shall be made within ninety
days following Termination of Service.

(b) Notwithstanding any other provision of the 1985 Plan, upon any
termination of the Participant's participation in the 1985 Plan while
the Participant continues in the Service of the Company, the
Participant shall immediately cease to be eligible for any other
benefits under the 1985 Plan and shall be entitled to receive only his
Termination Benefit at the time of his Termination of Service with the
Company.

4.6 Survivor's Benefit. If the Participant dies while in the Service of
the Company before his Normal Benefit Date, or after Termination of Service if
he was eligible for an Early Benefit or Disability Benefit at the time his
Termination of Service occurred, the Company shall pay to the Participant's
Beneficiary in equal monthly installments commencing on the first day of the
month after the Participant's death one-twelfth of the amount per annum
specified in Section 7 of the Agreement (the "Survivor's Benefit") until the
later of:

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(a) the date the Participant would have attained age sixty-five, or

(b) the date on which the one hundred eightieth payment is made reduced
by the number of payments which were made to the Participant under
Section 4.3 hereof.

4.7 Proportionate Adjustment of Benefits. If the amount of actual
deferral is less than the amount of expected deferral based upon the
Participant's election in Section 4 of the Agreement, the benefits under
Sections 4.1 (Normal Benefit), 4.3 (Early Benefit), 4.4 (Disability Benefit) and
4.6 (Survivor's Benefit) will be adjusted proportionately based upon a fraction,
the numerator of which is the actual amount of deferral and the denominator of
which is the expected amount of deferral under Section 4 of his Agreement. In
the case of death or disability during the Deferral Period, the denominator will
be the expected amount of deferral for the actual period that deferrals were
made.

4.8 Recipients of Payments; Designation of Beneficiary. All payments to
be made by the Company under the 1985 Plan shall be made to' the Participant
during his lifetime,-provided that if the Participant dies prior to the
completion of such payments, then all subsequent payments under the 1985 Plan
shall be made by the Company to the Beneficiary or Beneficiaries determined in
accordance with this Section 4.8. The Participant's Beneficiary under this 1985
Plan shall be the Beneficiary designated by the Participant under the Profit
Sharing Plan unless the Participant files a written notice of a different
Beneficiary designation with the Committee in such form as the committee
requires. The form may include contingent Beneficiaries. The Participant may
from time to time change the designated Beneficiary or Beneficiaries without the
consent of such Beneficiary or Beneficiaries by filing a new designation in
writing with the Committee. (If a Participant maintains his primary residence in
a state which has community property laws, the spouse of a married Participant
shall join in any designation of a Beneficiary or Beneficiaries other than the
spouse.) If no designation shall be in effect at the time when any benefits
payable under this 1985 Plan shall become due, the Beneficiary shall be the
spouse of the Participant, or if no spouse is then living, the representatives
of the Participant's estate.

4.9 Withholding; Employment Taxes. To the extent required by the law in
effect at the time payments are made, the Company shall withhold from payments
made hereunder any taxes required to be withheld by the federal or any state or
local government.

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SECTION FIVE

CLAIMS PROCEDURE

5.1 Claim for Benefits. Any claim for benefits under the 1985 Plan
shall be made in writing to any member of the Committee. If such claim for
benefits is wholly or partially denied by the Committee Members, the Committee
Members shall, within a reasonable period of time, but not later than sixty days
after receipt of the claim, notify the claimant of the denial of the claim. Such
notice of denial shall be in writing and shall contain:

(a) the specific reason or reasons for denial of the claim,

(b) a reference to the relevant 1985 Plan provisions upon which the
denial is based,

(c) a description of any additional material or information necessary
for the claimant to perfect the claim, together with an explanation of
why such material or information is necessary, and

(d) an explanation of the 1985 Plan's claim review procedure.

5.2 Request for Review of a Denial of a Claim for Benefits. Upon the
receipt by the claimant of written notice of denial of the claim, the claimant
may within ninety days file a written request to the full Committee, requesting
a review of the denial of the claim, which review shall include a hearing if
deemed necessary by the Committee. In connection with the claimant's appeal of
the denial of his claim, he may review relevant documents and may submit issues
and comments in writing.

5.3 Decision Upon Review of Denial of Claim for Benefits. The Committee
shall render a decision on the claim review promptly, but no more than sixty
days after the receipt of the claimant's request for review, unless special
circumstances (such as the need to hold a hearing) require an extension of time,
in which case the sixty-day period shall be extended to one hundred twenty days.
Such decision shall:

(a) include specific reasons for the decision,

(b) be written in a manner calculated to be understood by the claimant,
and

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SECTION SIX

COMMITTEE

6.1 General Rights, Powers, and Duties of the Committee. The
Compensation Committee of Management shall be the Named Fiduciary and Committee
responsible for the management, operation and administration of the 1985 Plan.
In addition to any powers, rights, and duties set forth elsewhere in the 1995
Plan, it shall have the following powers and duties:

(a) to adopt such rules and regulations consistent with the provisions
of the 1985 Plan as it deems necessary for the proper and efficient
administration of the 1985 Plan;

(b) to enforce the 1985 Plan in accordance with its terms and any rules
and regulations it establishes;

(c) to maintain records concerning the 1985 Plan sufficient to prepare
reports, returns, and other information required by the 1985 Plan or by
law;

(d) to construe and interpret the 1985 Plan; to resolve all questions
arising under the 1985 Plan; and to approve the amounts of the
Compensation Reductions in excess of fifteen percent (15%) of
Compensation;

(e) to direct the Company to pay benefits under the 1985 Plan, and to
give such other directions and instructions as may be necessary for the
proper administration of the 1985 Plan;

(f) to employ or retain agents, attorneys, actuaries, accountants or
other persons, who may also be employed by or represent the Company;
and

(g) to be responsible for the preparation, filing, and disclosure on
behalf of the 1985 Plan of such documents and reports as are required
by any applicable federal or state law.

6.2 Information to be Furnished to Committee. The Company shall furnish
the Committee such data and information as it may require. The records of the
Company shall be determinative of each Participant's period of employment,
termination of employment and the reason therefor, leave of absence,
reemployment, Years of Service, personal data, and Compensation. Participants
and their Beneficiaries shall furnish to the Committee such evidence, data or
information, and execute such documents as the Committee requests.

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6.3 Responsibility. No member of the Committee or of the Board of
Directors of the Company shall be liable to any person for any action taken or
omitted in connection with the administration of this 1985 Plan unless
attributable to his own fraud or willful misconduct; nor shall the Company be
liable to any person for any such action unless attributable to fraud or willful
misconduct on the part of a director, officer or employee of the Company.

SECTION SEVEN

AMENDMENT AND TERMINATION

7.1 Rights on Termination of Service. Except as expressly provided in
Section Four or, if Termination of Service occurs after a Change in Control,
Section 7.5 hereof, the Company shall not be required or be liable to make any
payment under this 1985 Plan subsequent to the Termination of Service of the
Participant.

7.2 No Right to Company Assets. Neither the Participant nor any other
person shall acquire by reason of the 1985 Plan or Agreement any right in or
title to any assets, funds or property of the Company whatsoever including,
without limiting the generality of the foregoing, any specific funds, assets, or
other property which the Company, in its sole discretion, may set aside in
anticipation of a liability hereunder. No trust shall be created in connection
with or by the execution or adoption of this 1985 Plan or the Agreement, and any
benefits which become payable hereunder shall be paid from the general assets of
the Company. The Participant shall have only a contractual right to the amounts,
if any, payable hereunder unsecured by any asset of Company.

7.3 No Employment Rights. Nothing herein shall constitute a contract of
continuing Service or in any manner obligate the Company to continue the
services of the Participant, or obligate the Participant to continue in the
Service of the Company, and nothing herein shall be construed as fixing or
regulating the bonuses or other Compensation payable to the Participant.

7.4 Company's Right to Terminate. The Company reserves the right at any
time by resolution of its Board of Directors delivered to the Committee to amend
or terminate the 1985 Plan and/or the Agreement pertaining to the Participant or
to reduce the amount of benefits payable, provided however, that:

(a) in the event of any such termination, the Participant shall be
entitled to the Termination Benefit specified in Section 4.5 of this
1985 Plan at the time of the termination of the 1985 Plan and/or his
Agreement except that:

(i) the interest rate set forth in subsection 4.5(a)(iii)
shall be one hundred percent (100%) of the rate on ninety-day
U.S. Treasury Bills; and

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(ii) the Participant will be entitled to one hundred percent
(100%) of the Company allocations made pursuant to Section 3.2
of the 1985 Plan;

(b) in the event of any amendment which reduces the amount of benefits
payable hereunder, a reduction may not reduce the amount of the Normal
Benefit payable at age sixty-five to an amount less than the Normal
Benefit that could be provided by the amount of the Termination Benefit
calculated in accordance with subsection 7.4(a) hereof using the date
the reduction of benefit is adopted as the date of termination. In
calculating the Normal Benefit payable at age sixty-five that could be
provided by the Termination Benefit (as modified), the Committee shall
use an interest rate no less than the average of the interest rate on
U.S. Treasury Bonds with twenty year maturities as published by the
Federal Reserve Board for the twelve months ending on December 31 of
the calendar year prior to the date on which the calculation is being
made rounded to the nearest one-tenth of one percent (.1%). A reduction
in the amount of a benefit may not change the ratio of the benefits
provided in Sections 4.1, 4.3, 4.4 and 4.6 hereof to the Normal Benefit
as set forth in the affected Participant's Agreement; and

(c) benefits which are being paid at the time the 1985 Plan is
terminated or when benefits are reduced will continue to be paid
without reduction in accordance with the 1985 Plan and the Agreement
which pertains to the particular Participant.

The Committee shall notify each Participant affected by any amendment,
termination or reduction of such action and its effective date within thirty
days after it receives notice from the Company.

7.5 Change in Control. If there is a Change in Control as defined in
Section 7.6 hereof, notwithstanding any other provision of this Plan and/or
Agreement, the Plan and all Agreements hereunder shall be terminated in their
entirety (unless subsection 7.6(c) is applicable) and:

(a) each Participant or his Beneficiary who is then receiving a benefit
hereunder shall be paid by the Company a lump sum payment equal to the
present value of the remaining payments due him under this Plan based
upon an interest rate which is no greater than one-half the interest
rate set forth in subsection 7.4(b) hereof;

(b) each Participant who is not then receiving a benefit shall be paid
by the Company a lump sum equal to the greater of:

(i) the amount of the Termination Benefit as modified in
subsection 7.4(a), or

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(ii) the present value of his Normal Benefit payable beginning
at age sixty-five based upon an interest rate determined by
the Company which is no greater than one-half the interest
rate set forth in subsection 7.4(b) hereof.

7.6 Definition of Change in Control. "Change in Control shall mean:

(a) the sale of the Company or substantially all of its assets, in any
form whatsoever, including merger, consolidation, or other
reorganization;

(b) the acquisition after October 28, 1998 by any individual (excluding
individuals who are Directors of the Company on October 28, 1998),
corporation, partnership or other person or entity, together with his
or her "Affiliates" and "Associates" (as defined in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended September 30, 1981) of
five percent (5%) or more of the outstanding shares of the common stock
of the Company followed by a change in the makeup of a majority of the
Board of Directors, within two years from the acquisition of such
amount of shares; or

(c) any sale of a substantial portion of the Company or its assets or
any substantial change in the ownership of the outstanding shares of
common stock of the Company which the Company, in its sole discretion,
determines to be a Change in Control under this Section. "Change in
Control" under this clause (c) may terminate the Plan either in its
entirety, or only as to the Participants who service with the Company
is terminated as a result of such sale or change in ownership.

SECTION EIGHT

MISCELLANEOUS

8.1 Setoff. If at the time payments or installments of payments are to
be made hereunder the Participant or the Beneficiary or both are indebted or
obligated to the Company, then the payments remaining to be made to the
Participant or the Beneficiary or both may, at the discretion of the Company, be
reduced by the amount of such indebtedness or obligation, provided, however,
that an election by the Company not to reduce any such payment or payments shall
not constitute a waiver of its claim for such indebtedness or obligation.

8.2 Nonassignability. Neither the Participant nor any other person
shall have any right to commute, sell, assign, pledge, anticipate, mortgage or
otherwise encumber, transfer, hypothecate or convey in advance of actual receipt
the amounts, if any, payable hereunder, or any part thereof, which are, and all
rights to which are, expressly

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declared to be unassignable and nontransferable. Except for debts owed to the
Company, no part of the amounts payable hereunder shall, prior to actual
payment, be subject to seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by the Participant or any other
person, or be transferable by operation of law in the event of the Participant's
or any other person's bankruptcy or insolvency.

8.3 Gender and Number. Wherever appropriate herein, the masculine may
mean the feminine and the singular may mean the plural or vice versa.

8.4 Notice. Any notice required or permitted to be given under the 1985
Plan shall be sufficient if in writing and hand delivered, or sent by registered
or certified mail, and if given to the Company, delivered to the principal
office of the Company, directed to the attention of the Compensation Committee
of Management. Such notice shall be deemed given as of the date of delivery or,
if delivery is made by mail, as of the date shown on the postmark or the receipt
for registration or certification.

8.5 Governing Laws. The 1985 Plan shall be construed and administered
according to the laws of the State of Illinois.

IN WITNESS WHEREOF, the Company has amended and restated this W.W.
Grainger, Inc. 1985 Executive Deferred Compensation Plan on November 3, 1998.

W.W. GRAINGER, INC.

By: // J.D. Fluno //
----------------------
Its: Vice Chairman
---------------
ATTEST:

// K.S. Kirsner //
- ---------------------------
Its: Assistant Secretary
--------------------

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Exhibit 10(d)(viii) to the Annual Report
on Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1998

SUMMARY DESCRIPTION OF THE
1999 MANAGEMENT INCENTIVE PROGRAM (MIP)
BASED ON IMPROVED ECONOMIC EARNINGS
FOR W.W. GRAINGER, INC.

I. INTRODUCTION

The Company Management Incentive Program (MIP) was initiated
January 1, 1993 for employees in grades 13 and above with the first
payout in March 1994. For eligible participants, this program
replaced participation in both the discontinued Team Achievement
Bonus (TAB) and the Long-term Incentive Program (LTIP).

The effective date of the Team Incentive Program (TIP) was January 1,
1994. This program included employees in salary grades 10 through 12.
The first payout was made in March 1995. For eligible participants,
this program replaced participation in the discontinued Team
Achievement Bonus (TAB) program and other short-term incentive
programs.

Effective January 1, 1997, the MIP and the TIP were combined into one
program. Changes were made to various provisions to accomplish this
transition. This Summary Description details the provisions of the
combined program.

II. BACKGROUND

During 1993, the Company adopted Economic Earnings (EE) as a key
financial measurement. EE incorporates the attributes of growth,
asset management and earnings to evaluate financial performance.
Conceptually, long-term improvements in EE should correspond to
long-term improvements in shareholder value.

The MIP is designed to encourage decision making that results in
improvement in EE and to compensate executives, middle managers and
key staff appropriately for positive or negative performance
resulting from business decisions. By linking EE to incentive
compensation, the MIP should influence participants to make business
decisions consistent with long-term shareholders' interests.

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III. ELIGIBILITY FOR PARTICIPATION

Employees in incentive-eligible salary grades 10 and above are
eligible to participate in this program, subject to the provisions in
Section IV. These employees are responsible for decisions affecting
EE and/or major policy direction.

Several business units have established incentive programs unique to
their units. Employees who would otherwise be eligible for the
Company MIP will instead participate in their unit-level program.
Employees may not participate in multiple incentive programs at the
same time.

Effective January 1, 1997, members of the Office of the Chairman
participate in the Office of the Chairman Incentive Plan (OCIP).

IV. ELIGIBILITY PROVISIONS

Specific eligibility provisions are developed and reviewed annually.
Eligibility provisions are as follows:

A. Full-Year Participation -- Employees in grades 10 and above who
were employed in those grades for the full year will be
eligible to receive a full award under the MIP, except as noted
below.

B. First-Year Participation -- Individuals who are hired or
promoted into a position eligible for participation in the MIP
on or before July 1 will be eligible to receive a pro-rata
award based on the number of months in the eligible position.
Employees hired or promoted after July 1 are not eligible to
participate for the year.

C. Transfer From Another Management Incentive Program --
Individuals who are promoted or transferred into an eligible
position from a position eligible for incentive pay under
another management incentive program will receive an award
prorated based on the number of months in each eligible
position.

D. Promotions within MIP -- Participants who are promoted during
the year from one MIP eligible position to another shall have
their target award percentage based on the salary grade in
effect on July 1.

E. Ungraded Positions -- Participants who are in an ungraded
position will be considered, for purposes of this program, to
be in the grade indicated on the most recently approved PAF. If
none has been indicated, Human Resources, in conjunction with
the functional Vice President, will determine the grade to be
used.

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F. Transfer to Other Business Units -- An employee who transfers
to another Company business unit and no longer participates in
the MIP and will not participate in the new unit's management
incentive program, will receive a pro-rata award for the number
of months the person was in a participating position on the
next regular incentive payment date.

G. Job Elimination or Downgrade -- If a participant's job is
eliminated for business reasons or is downgraded and the
employee's new job is at a non-participating level, a pro-rata
award for the current year will be made on the next regular
incentive payment date. In the event the participant does not
continue employment, an award for the current year will be made
on the next regular incentive payment date. The salary used in
the calculations will be the actual amount paid in the year
rather than an annualized amount.

H. Voluntary Resignation - If a participant leaves before October
1, no award will be paid for the current year. If a participant
leaves after October 1, but before the end of a calendar year,
the employee will be deemed to have earned that year's payment
and will receive that year's payout on the next regular
incentive payment date. The salary to be used in the
calculations will be the actual amount paid in the year rather
than an annualized amount.

I. Involuntary Termination - For Misconduct or Performance Related
Reasons - In these instances, no award will be granted for the
current year or the prior year if not yet paid at the time of
termination.

"For Misconduct" means:

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 trade secrets or
confidential information of the Company; has 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.

J. Death, Retirement or Long-term Disability -- A pro-rata award
will be made for the current year to the employee or his/her
estate on the next regular incentive payment date. Retirement
is defined the same as under the W.W. Grainger, Inc. or Lab
Safety Supply, Inc. Profit Sharing Plan. The salary to be used
in the calculations will be the final monthly salary.

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K. Inactive Status - Participants are not eligible to receive a
payment for any time that they are on inactive status or if
they are on inactive status on December 31, unless they are on
short-term disability.

L. Employees rated 1 or 2 are not eligible for participation. For
those business units / functions that have transitioned to
Performance Excellence, the employee must be in good standing.
Good standing is defined as not currently being on a
performance improvement program.

Exceptions to the above provisions can only be approved by the CCOM.

V. ADMINISTRATION OF THE PROGRAM

The governance of the MIP is the responsibility of the Compensation
Committee of Management (CCOM), subject to the review and approval of
the Compensation Committee of the Board (CCOB). The CCOM shall have
the sole and complete authority to interpret this program, determine
all questions relating to it, and to modify its provisions. All
determinations, interpretations or other actions made or taken by the
CCOM in connection with it shall be final and conclusive for all
purposes and upon all persons.

The administration of this program, including the calculation of
payments, is the responsibility of the Vice President & Treasurer;
the Director, Compensation, and the Employee Systems Manager.

VI. MEASURES AND TARGET AWARDS

The MIP consists of two components - a quantitative one and a
qualitative one. The quantitative component consists of one
performance measure: improvement in Company Economic Earnings. Target
awards are established for each of incentive-eligible grades 10 and
above and are stated as a percentage of the participant's annualized
base salary as of December 31. The target award for all participants
is based solely on Company EE. The target award is adjusted upward or
downward based on the relationship between Actual Company EE and
Target Company EE for each year.

Target Company EE is based on a weighted average of the three prior
years' Actual Company EE before MIP accrual plus a 10% improvement
factor. The Target Company EE formula is:

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Target Company EE =
[(50% x EE-1) + (30% x EE-2) + (20% x EE-3)] x 110%
Where: EE-1 equals EE in prior year (year one)
EE-2 equals EE in year prior to year one (year two)
EE-3 equals EE in year prior to year two (year three)

Note: The improvement factor applicable to any prior year having
negative EE is 90%.

The next step involves comparison of Actual EE to Target EE in order to
calculate the Bonus Earned. Two factors are employed: the Bonus
Interval and the Bonus Multiple. The Bonus Interval is the variance
from Target EE required to double the bonus earned or to result in no
bonus earned. The Bonus Interval has been set at $75 million. The Bonus
Multiple can be expressed as:

EE Bonus Multiple = (Actual EE - Target EE) / Bonus Interval + 1.00

The Bonus Earned is computed as:

Target Bonus $ = (12/31 Monthly Salary X 12) X Target Award Percentage

Bonus Earned = (Target EE Bonus $ x EE Bonus Multiple)

The Bonus Earned constitutes the quantitative component of the MIP.
The total bonus earned is equal to this quantitative component plus or
minus any discretionary adjustment as recommended by the CCOM and
approved by the CCOB.

The qualitative component consists of a discretionary adjustment. The
discretionary adjustment, if any, begins as a pool and can be plus or
minus up to 10% of the base salaries of the bonus group. Once the
amount of the pool is determined, it is allocated pro-rata across the
group according to the quantitative component earned by each
participant.

VII. PAYMENT

Payments under this program will be made annually or before March 15
for the prior years' results. Payment will be made in cash, less
amounts required to be withheld.

Payments under this program are included in "admissible pay" under the
Profit Sharing Plan.

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Notwithstanding anything herein to the contrary, payment of all or
part of awards under the MIP that are subject to or otherwise result
in disallowance as deductions for employee remuneration under Section
162(m) of the Internal Revenue Code of 1986, as amended, shall be
deferred as and to the extent provided by the Board of Directors or
the CCOB.

VIII. RIGHT OF CONTINUED EMPLOYMENT

Participation in this program is not a guarantee of employment nor of
continued participation in any subsequent year.

IX. TERMINATION OF THE PROGRAM

The Company reserves the right to modify, amend or terminate the
program at any time with or without prior notice.

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Exhibit 10(d)(x) to the Annual Report
on Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1998

CHANGE IN CONTROL EMPLOYMENT AGREEMENT
(Senior Executive)

AGREEMENT by and between W.W. Grainger, Inc., an Illinois corporation
(the "Company"), and [[Officer]] ("Executive"), dated as of March ___ , 1999
(the "Agreement Date").

Recitals

A. The Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its shareholders to assure
that the Company will have the continued dedication of Executive,
notwithstanding the possibility, threat, or occurrence of a Change in Control
(as defined below) of the Company.

B. The Board believes it is imperative to diminish the inevitable
distraction of Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change in Control, to encourage Executive's
full attention and dedication to the Company, and to provide Executive with
compensation and benefits arrangements upon a Change in Control which (i) will
satisfy Executive's compensation and benefits expectations and (ii) are
competitive with those of other major corporations.

Agreement

In consideration of the mutual agreements contained herein, the Company
and Executive hereby agree as follows:

1. Certain Definitions. The terms set forth below in alphabetical order
have the following meanings (such meanings to be applicable to both the singular
and plural forms):

"Accrued Annual Bonus" means the amount of any Annual Bonus accrued but
not yet paid with respect to each fiscal year of the Company ended prior to the
Date of Termination.

"Accrued Base Salary" means the amount of Executive's Annual Base
Salary which is accrued but not yet paid as of the Date of Termination.

"Accrued Obligations" -- see Section 4(a)(i)(A).

"Agreement Term" means the period commencing on the Agreement Date and
ending on the third anniversary of such date or, if later, such later date to
which the Agreement Term is extended pursuant to the following sentence. On each
day after the second anniversary of the Agreement Date, the Agreement Term shall
be automatically

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extended by one day to create a new one-year term until, at any time on or after
the second anniversary of the Agreement Date, the Company delivers a written
notice (an "Expiration Notice") to Executive stating that this Agreement shall
expire on a date specified in the Expiration Notice (the "Expiration Date") that
is at least 12 months after the date the Expiration Notice is delivered to
Executive; provided, however, that if a Change in Control occurs before the
Expiration Date specified in an Expiration Notice, then (a) such Expiration
Notice shall automatically be cancelled and of no further effect and (b) the
Company shall not give Executive any additional Expiration Notice prior to the
date which is 24 months after the Effective Date.

"Annual Base Salary" -- see Section 2(b)(i).

"Annual Bonus" -- see Section 2(b)(ii).

"Cause" -- see Section 3(b).

"Change in Control" means any one or more of the following events:

(A) approval by the shareholders of the Company of:

(i) any merger, reorganization or
consolidation of the Company or any Subsidiary with or into
any corporation or other Person if Persons who were the
beneficial owners (as such term is used in Rule 13d-3 under
the Act) of the Company's Common Stock and securities of the
Company entitled to vote generally in the election of
directors ("Voting Securities") immediately before such
merger, reorganization or consolidation are not, immediately
thereafter, the beneficially owners, directly or indirectly,
of at least 60% of the then-outstanding common shares and the
combined voting power of the then-outstanding Voting
Securities ("Voting Power") of the corporation or other Person
surviving or resulting from such merger, reorganization or
consolidation (or the parent corporation thereof) in
substantially the same respective proportions as their
beneficial ownership, immediately before the consummation of
such merger, reorganization or consolidation, of the
then-outstanding Common Stock and Voting Power of the Company;
or

(ii) the sale or other disposition of all or
substantially all of the consolidated assets of the Company,
other than a sale or other disposition by the Company of all
or substantially all of its consolidated assets to an entity
of which at least 60% of the common shares and the Voting
Power outstanding immediately after such sale or other
disposition are then beneficially owned (as such term is used
in Rule 13d-3 under the Act) by shareholders of the Company in
substantially the same respective proportions as their
beneficial ownership of Common Stock and Voting

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Power of the Company immediately before the consummation of
such sale or other disposition; or

(iii) a liquidation or dissolution of the
Company; or

(B) the following individuals cease for any reason to
constitute a majority of the directors of the Company then serving:
individuals who, on the Agreement Date, constitute the Board and any
subsequently-appointed or elected director of the Company (other than a
director whose initial assumption of office is in connection with an
actual or threatened election contest, including a consent
solicitation, relating to the election or removal of one or more
directors of the Company) whose appointment or election by the Board or
nomination for election by the Company's shareholders was approved or
recommended by a vote of at least two-thirds of the Company's directors
then in office whose appointment, election or nomination for election
was previously so approved or recommended or who were directors on the
Agreement Date; or

(C) the acquisition or holding by any person, entity or
"group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Act), other than by any Exempt Person, the Company, any Subsidiary, any
employee benefit plan of the Company or a Subsidiary, of beneficial
ownership (as such term is used in Rule 13d-3 under the Act) of 20% or
more of either the Company's then-outstanding Common Stock or Voting
Power; provided that:

(i) no such person, entity or group shall be
deemed to own beneficially any securities held by the Company
or a Subsidiary or any employee benefit plan (or any related
trust) of the Company or a Subsidiary;

(ii) no Change in Control shall be deemed to
have occurred solely by reason of any such acquisition if both
(x) after giving effect to acquisition, such person, entity or
group has beneficial ownership of less than 30% of the
then-outstanding Common Stock and Voting Power of the Company
and (y) prior to such acquisition, at least two-thirds of the
directors described in (and not excluded from) paragraph (B)
of this definition vote to adopt a resolution of the Board to
the specific effect that such acquisition shall not be deemed
a Change in Control; and

(iii) no Change in Control shall be deemed
to have occurred solely by reason any such acquisition or
holding in connection with any merger, reorganization or
consolidation of the Company or any Subsidiary which is not a
Change in Control within the meaning of paragraph (A)(i) of
this definition.

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Notwithstanding the occurrence of any of the foregoing events, no Change in
Control shall occur with respect to Executive if (i) the event which otherwise
would have be a Change in Control (or the transaction which resulted in such
event) was initiated by Executive or was discussed by him with any third party,
in either case without the approval of the Board with respect to Executive's
initiation or discussion, as applicable, or (ii) Executive is, by written
agreement, a participant on his own behalf in a transaction in which the persons
(or their affiliates) with whom Executive has the written agreement cause the
Change in Control to occur and, pursuant to the written agreement, Executive has
an equity interest (or a right to acquire such equity interest) in the resulting
entity.

"Code" means the Internal Revenue Code of 1986, as amended.

"Date of Termination" means the effective date of any termination of
Executive's employment for any or no reason, whether by the Company or by
Executive, as specified in the Notice of Termination; provided, however, that if
Executive's employment is terminated by reason of his death or Disability, the
Date of Termination shall be the date of death of or the Disability Effective
Date, as the case may be.

"Effective Date" means the first date during the Agreement Term on
which a Change in Control occurs. Anything in this Agreement to the contrary
notwithstanding, if Executive's employment with the Company is terminated prior
to the date on which a Change in Control occurs, and Executive reasonably
demonstrates that such termination of employment (i) was requested by a third
party who has taken steps reasonably calculated to effect the Change in Control
or (ii) otherwise arose in connection with or anticipation of the Change in
Control, then for all purposes of this Agreement the Effective Date shall be the
date immediately prior to the Date of Termination.

"Employment Period" means the period commencing on the Effective Date
and ending on the third anniversary of such date.

"Exempt Person" means any one or more of the following:

(a) any descendant of W.W. Grainger (deceased) or any spouse,
widow or widower of any such descendant (any such descendants, spouses, widows
and widowers collectively defined as the "Grainger Family Members");

(b) any descendant of E.O. Slavik (deceased) or any spouse,
widow or widower of any such descendant (any such descendants, spouses, widows
and widowers collectively defined as the "Slavik Family Members" and with the
Grainger Family Members collectively defined as the "Family Members");

(c) any trust which is in existence on the Agreement Date and
which has been established by one or more Grainger Family Members, any estate of
a Grainger Family Member who died on or before the Agreement Date, and The
Grainger Founda-

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tion (such trusts, estates and named entity collectively defined as the
"Grainger Family Entities");

(d) any trust which is in existence on the Agreement Date and
which has been established by one or more Slavik Family Members, any estate of a
Slavik Family Member who died on or before the Agreement Date, Mark IV Capital,
Inc., and Mountain Capital Corporation (such trusts, estates and named entities
collectively defined as the "Slavik Family Entities" and with the Grainger
Family Entities collectively defined as the "Existing Family Entities");

(e) any estate of a Family Member who dies after the Agreement
Date or any trust established after the Agreement Date by one or more Family
Members or Existing Family Entities; provided that one or more Family Members,
Existing Family Entities or charitable organizations which qualify as exempt
organizations under Section 501(c) of the Code ("Charitable Organizations"),
collectively are the beneficiaries of at least 50% of the actuarially-determined
beneficial interests in such estate or trust;

(f) any Charitable Organization which is established by one or
more Family Members or Existing Family Entities (a "Family Charitable
Organization");

(g) any corporation of which a majority of the voting power
and a majority of the equity interest is held, directly or indirectly, by or for
the benefit of one or more Family Members, Existing Family Entities, estates or
trusts described in clause (e) above, or Family Charitable Organizations; or

(h) any partnership or other entity or arrangement of which a
majority of the voting interest and a majority of the economic interest is held,
directly or indirectly, by or for the benefit of one or more Family Members,
Existing Family Entities, estates or trusts described in clause (e) above, or
Family Charitable Organizations.

"Formula Bonus" means the greater of:

(a) the average dollar amount of annual bonus paid or payable
to Executive during the three fiscal years preceding the Date of
Termination (any such annual bonus amount to be annualized for any
fiscal year consisting of less than 12 full months or with respect to
which Executive has been employed by the Company for less than 12 full
months), or

(b) the amount of the Annual Bonus which Executive was, as of
the Date of Termination, eligible to receive in respect of the fiscal
year of the Date of Termination, assuming for purposes of this
paragraph (i) that target-level performance had been achieved for such
fiscal year, (ii) that Executive's employment would have continued
until the first date on which such Annual Bonus would have been
payable, and (iii) if the amount of such Annual Bonus that Executive

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was eligible to receive was reduced after the Effective Date (whether
or not such reduction qualified as Good Reason), that such reduction
had not occurred.

"Good Reason" -- see Section 3(c).

"Gross-Up Multiple" -- see Section 9(e).

"Highest Profit Sharing Plan Contribution" -- see Section 2(b)(iii).

"Including" means including without limitation.

"Non-Employee Director" means a director of the Company who is not an
employee of (i) the Company, (ii) any Subsidiary or (iii) any Person who
beneficially owns more than 30% of the Common Stock then outstanding.

"Person" means .any individual, corporation, partnership, limited
liability company, sole proprietorship, trust or other entity.

"Policies" means policies, practices and programs.

"Prorated Annual Bonus" means (i) the product of the amount of the
Annual Bonus to which Executive would have been entitled (based on target-level
performance) if he had been employed by the Company on the last day of the
Company's fiscal year that includes the Date of Termination and if performances
were achieved at the target level for such fiscal year, multiplied by (ii) a
fraction of which the numerator is the numbers of days that have elapsed in such
fiscal year through the Date of Termination and the denominator is 365.

"Subsidiary" means corporation, limited liability company, partnership
or other business entity in which the Company, directly or indirectly, holds a
majority of the voting power of the outstanding securities.

"Taxes" means the incremental United States federal, state and local
income, excise and other taxes payable by Executive with respect to any
applicable item of income.

2. Terms of Employment. The Company shall to continue Executive in its
employ during the Employment Period on the following terms and conditions:

(a) Position and Duties.

(i) During the Employment Period, (A) Executive's
position (including status, offices, titles and reporting
requirements), authority, duties and responsibilities shall be at least
commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 90-

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day period immediately preceding the Effective Date and (B) Executive's
services shall be performed at the location where Executive was
employed immediately preceding the Effective Date or any office or
location less than 50 miles from such location.

(ii) During the Employment Period, and excluding any
periods of vacation, sick leave and disability to which Executive is
entitled, Executive shall devote reasonable attention and time during
normal business hours to the business and affairs of the Company and,
to the extent necessary to discharge the responsibilities assigned to
Executive thereunder, to use Executive's reasonable best efforts to
perform faithfully and efficiently such responsibilities. During the
Employment Period, Executive may (A) serve on corporate, civic or
charitable boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (C) manage
personal investments, so long as such activities are consistent with
the policies of the Company at the Effective Date and do not
significantly interfere with the performance of Executive's
responsibilities (as set forth in this Agreement) as an employee of the
Company. To the extent that any such activities have been conducted by
Executive prior to the Effective Date and were consistent with the
policies of the Company at the Effective Date, the continued conduct of
such activities (or the conduct of activities similar in nature and
scope thereto) subsequent to the Effective Date shall not thereafter be
deemed to interfere with the performance of Executive's
responsibilities to the Company.

(b) Compensation.

(i) Base Salary. During the Employment Period,
Executive shall receive an annual base salary in cash ("Annual Base
Salary"), which shall be paid in a manner consistent with the Company's
payroll practices immediately preceding the Effective Date at a rate at
least equal to 12 times the highest monthly base salary (unreduced by
any salary reductions or deferrals pursuant to a plan maintained under
Section 401(k) of the Code or any similar plan) paid or payable to
Executive by the Company in respect of the 12-month period immediately
preceding the month in which the Effective Date occurs. During the
Employment Period, the Company shall review the Annual Base Salary at
least annually and shall increase Annual Base Salary at any time and
from time to time as shall be substantially consistent with increases
in base salary awarded in the ordinary course of business to peer
executives of the Company. Any increase in Annual Base Salary shall not
serve to limit or reduce any other obligation to Executive under this
Agreement. Annual Base Salary shall not be reduced after any such
increase and the term "Annual Base Salary" shall refer to Annual Base
Salary as so increased.

(ii) Annual Bonus. In addition to Annual Base Salary,
Executive shall be awarded, for each fiscal year during the Employment
Period, an annual

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bonus (the "Annual Bonus") in cash which is at least equal to the
average dollar amount of annual bonus paid or payable to Executive
during the three fiscal years preceding the Effective Date (any such
annual bonus amount to be annualized for any fiscal year consisting of
less than 12 full months or with respect to which Executive has been
employed by the Company for less than 12 full months). The Company
shall pay each such Annual Bonus no later than 90 days after the end of
the fiscal year for which the Annual Bonus is awarded, unless Executive
shall elect to defer the receipt of such Annual Bonus.

(iii) Incentive, Savings and Retirement Plans. In
addition to Annual Base Salary and Annual Bonus payable as hereinabove
provided, Executive shall be entitled to participate during the
Employment Period in all incentive, savings and retirement plans and
Policies applicable to peer executives of the Company, but in no event
shall such plans and Policies provide Executive with incentive, savings
and retirement benefits opportunities, in each case, less favorable, in
the aggregate, than the most favorable of those provided by the Company
for Executive under such plans and Policies as in effect at any time
during the 90-day period immediately preceding the Effective Date.
Benefits to which this paragraph shall apply include, but are not
limited to, a contribution ("Highest Profit Sharing Plan Contribution")
for each calendar year of Executive's employment during the Employment
Period, on Executive's behalf to the W.W. Grainger, Inc. Profit Sharing
Plan (the "PST") and, if applicable, a credit under the W.W. Grainger,
Inc. Supplemental Profit Sharing Plan (the "Supplemental Plan" and with
the PST, collectively referred to as the "Profit Sharing Plans") equal
to not less than the product of (A) the greater of (I) 15%; or (II) the
highest percentage of the sum of Executive's base salary and annual
bonus paid or payable as a contribution to or credit under the Profit
Sharing Plans, as applicable, for any of the three fiscal years
preceding the Effective Date, and (B) the sum of Executive's Annual
Base Salary and Annual Bonus, each as of the first day of such calendar
year. In the event that a contribution or credit, as applicable, of
less than the Highest Profit Sharing Plan Contribution is made to the
Profit Sharing Plans on Executive's behalf for any calendar year of
Executive's employment during the Employment Period, Executive shall be
entitled to a cash payment equal to the difference between the Highest
Profit Sharing Plan Contribution and the amount of the Company's
contribution or credit, as applicable, to the Profit Sharing Plans on
Executive's behalf for such year, payable at the time that the
Company's contribution is made to the PST, but in no event later than
the date prescribed by law, including extensions of time, for the
filing of the Company's federal income tax return for such year.

(iv) Welfare Benefit Plans. During the Employment
Period, Executive and/or Executive's family, as the case may be, shall
be eligible to participate in and shall receive all benefits under
welfare benefit plans and Policies provided by the Company (including
medical, prescription, dental, disability, salary continuance, employee
life, group life, accidental death and travel accident

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insurance plans and programs) and applicable to peer executives of the
Company, but in no event shall such plans and Policies provide benefits
which are less favorable, in the aggregate, than the most favorable of
such plans and Policies in effect at any time during the 90-day period
immediately preceding the Effective Date.

(v) Expenses. During the Employment Period, Executive
shall be entitled to prompt reimbursement for all reasonable expenses
incurred by Executive in accordance with the most favorable Policies of
the Company in effect at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to Executive, as in
effect at any time thereafter with respect to peer executives of the
Company.

(vi) Fringe Benefits. During the Employment Period,
Executive shall be entitled to fringe benefits in accordance with the
most favorable plans and Policies of the Company in effect at any time
during the 90-day period immediately preceding the Effective Date or,
if more favorable to Executive, as in effect at any time thereafter
with respect to peer executives of the Company.

(vii) Office; Support Staff. During the Employment
Period, Executive shall be entitled to an office or offices of a size
and with furnishings and other appointments, and to personal
secretarial and other assistance, at least equal to the most favorable
of the foregoing provided to Executive by the Company at any time
during the 90-day period immediately preceding the Effective Date or,
if more favorable to Executive, as provided at any time thereafter with
respect to peer executives of the Company.

(viii) Vacation. During the Employment Period,
Executive shall be entitled to paid vacation in accordance with the
most favorable plans and Policies of the Company as in effect at any
time during the 90-day period immediately preceding the Effective Date
or, if more favorable to Executive, as in effect at any time thereafter
with respect to peer executives of the Company.

(ix) Subsidiaries. To the extent that, immediately
prior to the Effective Date, Executive has been on the payroll of, and
participated in the bonus, incentive or employee benefit plans of, a
Subsidiary, the references to the Company contained in Sections 2(b)(i)
through 2(b)(viii) and elsewhere in this Agreement referring to
benefits to which Executive may be entitled shall also refer to such
Subsidiary.

3. Termination of Employment.

(a) Death or Disability. Executive's employment shall
terminate automatically upon Executive's death during the Employment Period. If
the Company determines in good faith that the Disability of Executive has
occurred during the Employment

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Period, it may give to Executive written notice of its intention to terminate
Executive's employment. In such event, Executive's employment with the Company
shall terminate as of the 30th day after Executive's receipt of such notice (the
"Disability Effective Date"); provided that, within the 30 days after such
receipt, Executive shall not have returned to full-time performance of his
duties. "Disability" means the absence of Executive from Executive's duties with
the Company on a full-time basis for a period of time equal to the Waiting
Period as a result of incapacity due to mental or physical illness that is
determined to be total and permanent by a physician selected by the Company or
its insurers and acceptable to Executive or Executive's legal representative
(such agreement as to acceptability not to be unreasonably withheld or delayed).
"Waiting Period" means the waiting period under a long-term disability plan of
the Company that is applicable to Executive and satisfies the requirements of
Section 2(b)(iv).

(b) Cause. The Company may terminate Executive's employment
during the Employment Period for Cause. "Cause" means the occurrence of any one
or more of the following actions or failures to act as determined by the Board
in its reasonable judgment and in good faith:

(i) embezzlement, fraud or theft with respect to the
property of the Company or a conviction for any felony involving moral
turpitude or causing material harm, financial or otherwise, to the
Company;

(ii) habitual neglect in the performance of
Executive's significant duties (other than on account of incapacity due
to physical or mental illness or Disability); or

(iii) a demonstrably deliberate act or failure to
act, including a violation of the rules or policies of the Company,
which causes a material financial or other loss, damage or injury to
the property, reputation or employees of the Company; provided,
however, that, unless such an act or a failure to act was done by
Executive in bad faith or without a reasonable belief that Executive's
act or failure to act, as the case may be, was in the best interest of
the Company or was required by applicable law, such act or failure to
act shall not constitute Cause if, within 20 days after the Board or
the Chief Executive Officer of the Company gives Executive written
notice of such act or failure to act that specifically refers to this
Section, Executive cures such act or failure to act to the fullest
extent that it is curable.

"Cause" shall not mean (x) bad judgment or negligence other than habitual
neglect of significant duties or (y) any act or omission in respect of which the
Board could have properly determined that Executive met the applicable standard
of conduct for the indemnification or reimbursement under the by-laws of the
Company or applicable law, in each case as in effect at the time of such act or
omission. In addition, a termination

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of Executive's employment shall not be deemed to be for Cause unless each of the
following conditions is satisfied:

(v) The Company provides Executive a written notice
(a "Notice of Intent to Terminate") not less than 30 days prior to the
Date of Termination setting forth the Company's intention to consider
terminating Executive's employment. Such Notice shall include a
statement of the intended Date of Termination and a detailed
description of the specific facts that the Company believes to
constitute Cause.

(w) No act or omission of Executive shall constitute
Cause if such act or omission occurred more than 12 months before the
earliest date on which any member of the Board who is not a party to
the act or omission knew or in the reasonable exercise of his or her
duties as a director should have know of such act or omission.

(x) Executive is offered an opportunity to respond to
such Notice of Intent to Terminate by appearing in person, together
with Executive's legal counsel, before the Board on a date specified in
the Notice of Intent to Terminate, which date shall be at least 25 days
after Executive's receipt of the Notice of Intent to Terminate and, in
any event, at least five days prior to the Date of Termination proposed
in such Notice.

(y) By a vote of the Board that includes the
affirmative vote of at least 75% of the Non-Employee Directors, the
Board determines that the actions of Executive specified in the Notice
of Intent to Terminate constitute Cause and that Executive's employment
should accordingly be terminated for Cause.

(z) The Company provides Executive a copy of the
Board's written determination setting forth in detail (I) the specific
basis for such termination for Cause and (II) if the Date of
Termination is other than the date of Executive's receipt of such
determination, the Date of Termination (which date shall be not more
than 15 days after the giving of such notice).

By determination of the Board, the Company may suspend Executive from his duties
for a period of up to 30 days with full pay and benefits thereunder during the
period of time in which the Board is determining whether to terminate Executive
for Cause. Any purported termination for Cause by the Company that does not
satisfy each substantive and procedural requirement of this Section 3(b) shall
be treated for all purposes under this Agreement as a termination by the Company
without Cause.

(c) Good Reason. Executive may terminate his employment at any time
during the Employment Period for Good Reason. "Good Reason" means any one or
more of the following:

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(i) the assignment to Executive of any duties
inconsistent in any respect with Executive's position (including
status, offices, titles and reporting requirements), authority, duties
or responsibilities as contemplated by Section 2(a), or any other
action by the Company which results in a material adverse change in
such position, authority, duties or responsibilities, excluding an
isolated, insubstantial and inadvertent action not taken in bad faith
and which is remedied by the Company promptly after receipt of notice
thereof given by Executive;

(ii) any failure by the Company to comply with any of
the provisions of Section 2(b), other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given
by Executive;

(iii) any requirement that Executive be based at any
office or location other than the location specified in Section
2(a)(i)(B);

(iv) any purported termination by the Company of
Executive's employment otherwise than as expressly permitted by this
Agreement (it being understood that any such purported termination
shall not be effective for any other purpose of this Agreement);

(v) any failure by the Company to comply with Section
10(c); or

(vi) anything in this Agreement to the contrary
notwithstanding, any termination by Executive for any reason during the
30-day period immediately following the first anniversary of the
Effective Date.

Any good faith determination of Good Reason made by Executive shall be
conclusive.

(d) Notice of Termination. Any termination of Executive's
employment by the Company or by Executive shall be communicated by Notice of
Termination to the other party hereto. "Notice of Termination" means a written
notice which (i) indicates the specific termination provision in this Agreement
relied upon, (ii) sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated and (iii) if the Date of Termination is other than the
date of receipt of such notice, specifies the Date of Termination (which date
shall be not more than 15 days after the giving of such notice). The failure by
Executive to set forth in the Notice of Termination any fact or circumstance
which contributes to a showing of Good Reason shall not waive any right of
Executive thereunder or preclude Executive from asserting such fact or
circumstance in enforcing Executive's rights thereunder.

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4. Obligations of the Company upon Termination.

(a) Good Reason; Other Than for Cause or Disability. If,
during the Employment Period, Executive's employment shall be terminated by the
Company other than for Cause, death or Disability, or by Executive for Good
Reason, then the Company shall have all of the following obligations:

(i) The Company shall pay to Executive the following
amounts in a lump sum in cash within 10 days after Executive's Date of
Termination:

(A) an amount equal to the sum of
Executive's Accrued Base Salary, Accrued Annual Bonus and
accrued but unpaid vacation pay (collectively, the "Accrued
Obligations"),

(B) the Prorated Annual Bonus,

(C) the product of three (3.0) (such
number, the "Severance Multiple") times the sum of Executive's
(1) Annual Base Salary, (2) Formula Bonus and (3) Highest
Profit Sharing Plan Contribution; and

(D) an amount equal to the value of
the unvested portion of Executive's accounts under the Profit
Sharing Plans as of the Date of Termination.

(ii) (A) During the period commencing on the
Date of Termination and continuing thereafter for a number of
years equal to the Severance Multiple, or such longer period
as any plan or Policy in which Executive is a participant as
of the Date of Termination (such eligibility to be determined
based on the terms of such plan or Policy as in effect on the
Effective Date or, if more favorable to Executive, the terms
of such plan or Policy as in effect on the Date of
Termination), the Company shall continue to provide, at no
cost to Executive, medical (including post-retirement medical
benefits to the extent that Executive is or becomes eligible
for such benefits as of the Date of Termination after giving
effect to paragraph (C) of this Section 4(a)(ii)),
prescription, dental and similar health care benefits (or, if
such benefits are not available, the after-tax economic value
thereof determined pursuant to paragraph (D) of this Section
4(a)(ii)) to Executive and his family.

(B) The terms of such benefits shall
be at least as favorable to Executive as the terms of the most
favo-

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rable plans or Policies of the Company applicable to peer
executives at Executive's Date of Termination, but in no event
less favorable to Executive than the most favorable plans or
Policies of the Company applicable to peer executives during
the 90-day period immediately preceding the Effective Date.

(C) For purposes of determining
whether, and on what terms and conditions, Executive is
eligible to receive the post-retirement medical benefits
specified in paragraph (A) above, Executive shall on the Date
of Termination be credited with three (3.0) additional years
for purposes of attained age and years of service.

(D) The after-tax economic value of
any benefit to be provided pursuant to paragraph (A) above
shall be deemed to be the present value of the premiums
expected to be paid for all such benefits that are to be
provided on an insured basis. The after-tax economic value of
all other benefits shall be deemed to be the present value of
the expected net cost to the Company of providing such
benefits.

(iii) The Company shall cause Executive to receive,
at the Company's expense, standard outplacement services from a
nationally-recognized firm selected by Executive; provided that the
cost of such services to the Company shall not exceed 15% of
Executive's Annual Base Salary in effect on the Date of Termination.

(b) Cause; Other than for Good Reason. If, during the
Employment Period, Executive's employment is terminated by the Company for Cause
or by Executive other than for Good Reason, the Company shall pay to Executive
in a lump sum in cash within no more than 10 days after the Date of Termination,
any Accrued Obligations.

(c) Death or Disability. If, during the Employment Period,
Executive's employment is terminated by reason of Executive's death or
Disability, the Company shall pay to Executive in cash a lump sum amount equal
to all Accrued Obligations within no more than 10 days after the Date of
Termination.

5. Non-exclusivity of Rights. If Executive receives payments pursuant
to Section 4(a), Executive hereby waives the right to receive severance payments
under any other plan, policy or agreement of the Company. Except as provided in
the previous sentence, nothing in this Agreement shall prevent or limit
Executive's continuing or future participation in any benefit, bonus, incentive
or other plans or Policies provided by the Company or any of its Subsidiaries
and for which Executive may qualify, nor shall anything herein limit or
otherwise affect such rights as Executive may have under any other agreements
with the Company or any of its Subsidiaries.

6. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be

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affected by any circumstances, including set-off, counterclaim, recoupment,
defense or other claim, right or action that the Company may have against
Executive or others.

7. No Duty to Mitigate. Executive shall not be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to Executive under any of the provisions of this Agreement, nor shall the amount
of any payment hereunder be reduced by any compensation earned by Executive as
result of employment by another employer or by any retirement benefits which may
be paid or payable to Executive; provided, however, that any continued welfare
benefits provided for pursuant to Section 4(a)(ii) shall not duplicate any
benefits that are provided to Executive and his family by such other employer
and shall be secondary to any coverage provided by such other employer.

8. Enforcement.

(a) If Executive incurs legal, accounting, expert witness or
other fees and expenses in an effort to establish entitlement to compensation
and benefits under this Agreement, the Company shall, regardless of the outcome
of such effort, pay or reimburse Executive for such fees and expenses, together
with an additional amount such that, after providing for the Taxes payable by
Executive in respect of such additional amount, there remains a balance
sufficient to pay the Taxes payable by Executive in respect of such payment or
reimbursement of fees and expenses by the Company. The Company shall reimburse
Executive for such fees and expenses on a monthly basis within 10 days after its
receipt of his request for reimbursement accompanied by reasonable evidence that
the fees and expenses were incurred.

(b) If Executive does not prevail (after exhaustion of all
available judicial remedies), and the Company establishes before a court of
competent jurisdiction that Executive had no reasonable basis for bringing an
action hereunder and acted in bad faith in doing so, no further reimbursement
for legal fees and expenses shall be due to Executive and Executive shall refund
any amounts previously reimbursed hereunder with respect to such action.

(c) If the Company fails to pay any amount provided under this
Agreement when due, the Company shall pay interest on such amount at a rate
equal to 200 basis points over the prime commercial lending rate published from
time to time in The Wall Street Journal; provided, however, that if the interest
rate determined in accordance with this Section shall in no event exceed the
highest legally-permissible interest rate.

9. Certain Additional Payments by the Company.

(a) Gross-Up. If it is determined (by the reasonable
computation of the Company's independent auditors, which determination shall be
certified to by such auditors and set forth in a written certificate
("Certificate") delivered to Executive) that

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any monetary or other benefit received or deemed received by Executive from the
Company or any Subsidiary or affiliate pursuant to this Agreement or otherwise,
whether or not in connection with a Change in Control (such monetary or other
benefits collectively, the "Potential Parachute Payments"), is or will become
subject to any excise tax under Section 4999 of the Code or any similar tax
under any United States federal, state, local or other law (such excise tax and
all such similar taxes collectively, "Excise Taxes"), then the Company shall,
subject to Section 9(h), within five business days after such determination, pay
Executive an amount (the "Gross-Up Payment") equal to the product of:

(i) the amount of such Excise Taxes

multiplied by

(ii) the Gross-Up Multiple.

The Gross-Up Payment is intended to compensate Executive for the Excise Taxes
and any other Taxes payable by Executive with respect to the Gross-Up Payment.

(b) Timing. Executive or the Company may at any time request
the preparation and delivery to Executive of a Certificate. The Company shall,
in addition to complying with Section 9(c), cause all determinations and
certifications under this Article to be made as soon as reasonably possible and
in adequate time to permit Executive to prepare and file his individual tax
returns on a timely basis.

(i) If (A) the Company shall fail to deliver a
Certificate to Executive within 30 days after receipt from Executive of
a written request for a Certificate, (B) the Company shall deliver a
Certificate to Executive but shall fail to pay to Executive the full
amount of the Gross-Up Payment set forth therein, or (C) at any time
following his receipt of a Certificate, Executive disputes either (x)
the amount of the Gross-Up Payment set forth therein or (y) the
determination set forth therein to the effect that no Gross-Up Payment
is due by reason of Section 9(h)), then Executive may elect to require
the Company to pay a Gross-Up Payment in the amount determined by
Executive, in accordance with an Executive Counsel Opinion (as defined
in Section 9(f)). Executive shall make any such demand by delivery to
the Company of a written notice that specifies the Gross-Up Payment
determined by Executive and an Executive Counsel Opinion regarding such
Gross-Up Payment (such written notice and opinion collectively, the
"Executive's Determination"). Within 15 days after delivery of
Executive's Determination to the Company, the Company shall either (1)
pay Executive the Gross-Up Payment set forth in the Executive's
Determination (less the portion of such amount, if any, previously paid
to Executive by the Company) or (2) deliver to Executive a Certificate
specifying the Gross-Up Payment determined by the

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Company's independent auditors, together with a Company Counsel Opinion
(as defined in Section 9(f)), and pay Executive the Gross-Up Payment
specified in such Certificate. If for any reason the Company fails to
comply with the preceding sentence, the Gross-Up Payment specified in
the Executive's Determination shall be controlling for all purposes.

(i) If Executive does not request a Certificate, and
the Company does not deliver a Certificate to Executive, the Company
shall, for purposes of Section 9(h), be deemed to have determined that
no Gross-Up Payment is due.

(d) Additional Gross-Up Amounts. If for any reason (whether
pursuant to subsequently-enacted provisions of the Code, final regulations or
published rulings of the Internal Revenue Service ("IRS"), a final judgment of a
court of competent jurisdiction or a determination of the Company's independent
auditors) it is later determined that the amount of Excise Taxes payable by
Executive is greater than the amount determined by the Company or Executive
pursuant to Section 9(a) or 9(b), as applicable, then the Company shall pay
Executive an amount (which shall also be deemed a Gross-Up Payment) equal to the
product of:

(i) the sum of (A) such additional Excise Taxes and
(B) any interest, fines, penalties, expenses or other costs incurred by
Executive as a result of having taken a position in accordance with a
determination made pursuant to Section 9(a) or 9(b), as applicable,

multiplied by:

(ii) the Gross-Up Multiple.

(e) Gross-Up Multiple. The Gross-Up Multiple shall equal a
fraction, the numerator of which is one (1.0), and the denominator of which is
one (1.0) minus the sum, expressed as a decimal fraction, of the effective
after-tax marginal rates of all Taxes and any Excise Taxes applicable to the
Gross-Up Payment; provided that such sum of rates shall not exceed 0.8 and if it
does exceed 0.8, it shall be deemed to be 0.8. If different rates of tax are
applicable to various portions of a Gross-Up Payment, the weighted average (not
to exceed 0.80) of such rates shall be used.

(f) Opinion of Counsel. "Executive Counsel Opinion" means a
legal opinion of nationally-recognized executive compensation counsel to the
effect that the amount of the Gross-Up Payment determined by Executive is the
amount that courts of competent jurisdiction, based on a final judgment not
subject to further appeal, are most likely to decide to have been calculated in
accordance with this Article and applicable law. "Company Counsel Opinion" means
a legal opinion of nationally-recognized executive compensation counsel to the
effect that (i) the amount of the Gross-Up Payment set forth in the Certificate
of the Company's independent auditors is the

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amount that courts of competent jurisdiction, based on a final judgment not
subject to further appeal, are most likely to decide to have been calculated in
accordance with this Article and applicable law, and (ii) there is no reasonable
basis for the calculation of the Gross-Up Payment determined by Executive.

(g) Amount Increased or Contested. Executive shall notify the
Company in writing of (i) any claim by the IRS or other taxing authority that,
if successful, would require the payment by Executive of Excise Taxes in respect
of Potential Parachute Payments or (ii) of any intention by Executive to pay any
Excise Taxes in respect of Potential Parachute Payments notwithstanding the
absence of such a claim. Such notice shall include the nature of such claim and
the date on which such claim is due to be paid. Executive shall give such notice
as soon as practicable, but no later than 10 business days, after Executive
first obtains actual knowledge of such claim; provided, however, that any
failure to give or delay in giving such notice shall affect the Company's
obligations under this Article only if and to the extent that such failure
results in actual prejudice to the Company. Executive shall not pay such claim
less than 30 days after Executive gives such notice to the Company (or, if
sooner, the date on which payment of such claim is due). If the Company notifies
Executive in writing before the expiration of such 30-day period that the
Company desires to contest such claim, Executive shall:

(i) give the Company any information that it
reasonably requests relating to such claim,

(ii) take such action in connection with contesting
such claim as the Company reasonably requests in writing from time to
time, including accepting legal representation with respect to such
claim by an attorney reasonably selected by the Company,

(iii) cooperate with the Company in good faith to
contest such claim, and

(iv) permit the Company to participate in any
proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
Executive harmless, on an after-tax basis, for any Excise Tax or income
tax, including related interest and penalties, imposed as a result of
such representation and payment of costs and expenses. Without limiting
the foregoing, the Company shall control all proceedings in connection
with such contest and, at its sole option, may pursue or forego any and
all administrative appeals, proceedings, hearings and conferences with
the taxing authority in respect of such claim and may, at its sole
option, either direct Executive to pay the

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tax claimed and sue for a refund or contest the claim in any
permissible manner. Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs Executive to
pay such claim and sue for a refund, the Company shall advance the
amount of such payment to Executive, on an interest-free basis and
shall indemnify Executive, on an after-tax basis, for any Excise Tax or
income tax, including related interest or penalties, imposed with
respect to such advance; and further provided that any extension of the
statute of limitations relating to payment of taxes for the taxable
year of Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount. The
Company's control of the contest shall be limited to issues with
respect to which a Gross-Up Payment would be payable. Executive shall
be entitled to settle or contest, as the case may be, any other issue
raised by the IRS or other taxing authority.

(h) Limitation on Gross-Up Payments. Notwithstanding any other
provision of this Section 9, if it shall be determined (by the reasonable
computation of the Company's independent auditors, which determination shall be
certified to by such auditors and set forth in the Certificate delivered to
Executive) that the aggregate amount of the Potential Parachute Payments that,
but for this Section 9(h), would be payable to Executive, does not exceed 110%
of the greatest amount of Potential Parachute Payments that could be paid to
Executive without giving rise to any liability for Excise Taxes in connection
therewith (such greatest amount, the "Floor Amount"), then:

(i) no Gross-Up Payment shall be made to Executive;
and

(ii) the aggregate amount of Potential Parachute
Payments payable to Executive shall be reduced (but not below the Floor
Amount) to the largest amount which would both (A) not cause any Excise
Taxes to be payable by Executive and (B) not cause any Potential
Parachute Payments to become nondeductible by the Company by reason of
Section 280G of the Code (or any successor provision); provided,
however, that in no event shall any such reduction (x) in any way
affect any Potential Parachute Payments that are provided to Executive
in any form other than cash or (y) reduce the aggregate amount of
Potential Parachute Payment that are payable in cash to an amount below
the aggregate amount of Taxes payable by Executive in respect of all
Potential parachute Payments received by him (whether in cash or
otherwise).

For purposes of the preceding sentence, Executive shall be deemed to be subject
to the highest effective after-tax marginal rate of federal and Illinois Taxes.

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(i) Refunds. If, after the receipt by Executive of any payment
or advance of Excise Taxes by the Company pursuant to this Article, Executive
becomes entitled to receive any refund with respect to such Excise Taxes,
Executive shall (subject to the Company's complying with any applicable
requirements of Section 9(g)) promptly pay the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 9(g), a determination is made that Executive shall
not be entitled to any refund with respect to such claim and the Company does
not notify Executive in writing of its intent to contest such determination
before the expiration of 30 days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid. Any contest of a denial of refund shall be controlled by
Section 9(g).

10. Successors.

(a) This Agreement is personal to Executive and without the
prior written consent of the Company shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by Executive's legal
representatives.

(b) The Company may not assign its rights and obligations
under this Agreement without the prior written consent of Executive except to a
successor which has satisfied the provisions of Section 10(c). This Agreement
shall inure to the benefit of the Company and such permitted assigns.

(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. All references to the Company shall also refer to any such
successor, and the Company and such successor shall be jointly and severally
liable for all obligations of the Company under this Agreement.

11. Miscellaneous.

(a) Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois, without
reference to such State's principles of conflict of laws.

(b) Notices. All notices hereunder shall be in writing and
shall be given by hand delivery, nationally-recognized courier service that
provides overnight delivery, or by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:

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If to Executive, at his most recent home address on file with the
Company.

If to the Company, to: W.W. Grainger, Inc.
455 Knightsbridge Parkway
Lincolnshire, Illinois 60069-3620
Attention: General Counsel

or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice shall be effective when actually received
by the addressee.

(c) Severability. If any part of this Agreement is declared by
any court or governmental authority to be unlawful or invalid, such unlawfulness
or invalidity shall not serve to invalidate any part of this Agreement not
declared to be unlawful or invalid. Any paragraph or part of a paragraph so
declared to be unlawful or invalid shall, if possible, be construed in a manner
which will give effect to the terms of such paragraph or part of a paragraph to
the fullest extent possible while remaining lawful and valid.

(d) Tax Withholding. The Company may withhold from any amounts
payable under this Agreement such federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or regulation.

(e) Amendments; Waiver. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the Company and
Executive. A waiver of any term, covenant or condition contained in this
Agreement shall not result in a waiver of any other term, covenant or condition,
and any waiver of any default shall not result in a waiver of any later default.

(f) Entire Agreement. This Agreement contains the entire
understanding of the Company and Executive with respect to the subject matter
hereof, and shall supersede all prior agreements, promises and representations
of the parties regarding employment or severance, whether in writing or
otherwise.

(g) No Right to Employment. Except as may be provided under
any other agreement between Executive and the Company, the employment of
Executive by the Company is at will, and, prior to the Effective Date, may be
terminated by either Executive or the Company at any time. Upon a termination of
Executive's employment prior to the Effective Date, there shall be no further
rights under this Agreement.

(h) Sections. Except where otherwise indicated by the context,
any reference to a "Section" shall be to a section of this Agreement.

(i) Survival of Executive's Rights. All of Executive's rights
hereunder shall survive the termination of Executive's employment.

114
<PAGE>

(j) Number and Gender. Wherever appropriate, the singular
shall include the plural, the plural shall include the singular, and the
masculine shall include the feminine.

(k) Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.

IN WITNESS WHEREOF, Executive and the Company have executed this
Agreement as of the date first above written.

W.W. GRAINGER, INC.

By:
---------------------------
Richard L. Keyser
Chairman and Chief Executive Officer

EXECUTIVE:

--------------------------------
[[Officer]]

115
<PAGE>

Exhibit 21 to the Annual Report
on Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1998

W.W. GRAINGER, INC.

Subsidiaries as of December 31, 1998

Acklands - Grainger Inc. (Canada)

- - 370071 Alberta Ltd. (Alberta) (50% owned)

- - 655206 Alberta Ltd. (Alberta) (50% owned)

- - Wilter Auto & Industrial Supply (Lloyd) Ltd. (Alberta) (50% owned)

AGI Investment Corporation (Alberta)

Dayton Electric Manufacturing Co. (Illinois)

Grainger Caribe, Inc. (Illinois)

Grainger FSC, Inc. (U.S. Virgin Islands)

Grainger International, Inc. (Illinois)

- - WWG de Mexico, S.A. de C.V. (Mexico)

- - Grainger, S.A. de C.V. (Mexico)

- - WWG Servicios, S.A. de C.V. (Mexico)

- - Grainger Canada Inc. (Canada)

Lab Safety Supply, Inc. (Wisconsin)

116
<PAGE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 43,107
<SECURITIES> 0
<RECEIVABLES> 479,328
<ALLOWANCES> 15,951
<INVENTORY> 626,731
<CURRENT-ASSETS> 1,206,365
<PP&E> 1,209,167
<DEPRECIATION> 548,639
<TOTAL-ASSETS> 2,103,902
<CURRENT-LIABILITIES> 664,493
<BONDS> 122,883
0
0
<COMMON> 53,617
<OTHER-SE> 1,225,124
<TOTAL-LIABILITY-AND-EQUITY> 2,103,902
<SALES> 4,341,269
<TOTAL-REVENUES> 4,341,269
<CGS> 2,743,598
<TOTAL-COSTS> 2,743,598
<OTHER-EXPENSES> 1,189,689
<LOSS-PROVISION> 10,310
<INTEREST-EXPENSE> 6,652
<INCOME-PRETAX> 400,847
<INCOME-TAX> 162,343
<INCOME-CONTINUING> 238,504
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238,504
<EPS-PRIMARY> 2.48
<EPS-DILUTED> 2.44

<FN>
Earnings per share data reflect the 2-for-1 stock split effective at the close
of business on May 11, 1998. Prior Financial Data Schedules have not been
restated for this stock split.
</FN>

</TABLE>