Form 10K Annual Report for the Year Ended December 31, 2001 - www.grainger.com

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M7vkZ8lld13lP8esbT1ifVWADk/2nKJVLKNcj9YJ+1d9hnK7+WjfJPoIoz7xhxx2 OGHoEaF8BVGYYKtk/B3d3g== 0000277135-02-000003.txt : 20020415 0000277135-02-000003.hdr.sgml : 20020415 ACCESSION NUMBER: 0000277135-02-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAINGER W W INC CENTRAL INDEX KEY: 0000277135 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DURABLE GOODS [5000] IRS NUMBER: 361150280 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05684 FILM NUMBER: 02580251 BUSINESS ADDRESS: STREET 1: 100 GRAINGER PARKWAY CITY: LAKE FOREST STATE: IL ZIP: 60045-5201 BUSINESS PHONE: 847-535-1000 MAIL ADDRESS: STREET 1: 100 GRAINGER PARKWAY CITY: LAKE FOREST STATE: IL ZIP: 60045 10-K405 1 form10k2001.htm 2001 FORM 10K W.W.GRAINGER, INC. Form 10K Annual Report for the Year Ended December 31, 2001 - www.grainger.com - Prepared by FCDAA

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, 2001
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 (State or other jurisdiction of incorporation or organization)	36-1150280 (I.R.S. Employer Identification No.)
100 Grainger Parkway, Lake Forest, Illinois 60045-5201 (Address of principal executive offices) (Zip Code)

Registrant's telephone number including area code: 847/535-1000

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

Title of each class
Common Stock $0.50 par value, and accompanying
Preferred Share Purchase Rights

Name of each exchange on which registered
New York Stock Exchange
Chicago Stock Exchange

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. (X)

The aggregate market value of the voting stock held by non-affiliates of the registrant was $4,611,782,578 as of the close of trading reported on the Consolidated Transaction Reporting System on March 4, 2002.

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 93,551,269 shares outstanding as of March 4, 2002

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement relating to the annual meeting of shareholders of the registrant to be held on April 24, 2002, 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.)

CONTENTS

                                                                                                   Page

                                                          PART I

Item 1:        BUSINESS......................................................................       3-6
                 THE COMPANY.................................................................         3
                 BRANCH-BASED DISTRIBUTION BUSINESSES........................................       3-5
                    GRAINGER INDUSTRIAL SUPPLY...............................................       3-4
                    ACKLANDS-GRAINGER INC....................................................         4
                    FINDMRO..................................................................         5
                    GRAINGER GLOBAL SOURCING.................................................         5
                    GRAINGER PARTS...........................................................         5
                    GRAINGER, S.A. de C.V....................................................         5
                 DIGITAL BUSINESSES..........................................................         5
                 LAB SAFETY SUPPLY, INC......................................................         5
                 OTHER BUSINESSES............................................................         5
                    GRAINGER INTEGRATED SUPPLY...............................................         5
                 INDUSTRY SEGMENTS...........................................................         6
                 COMPETITION.................................................................         6
                 EMPLOYEES...................................................................         6
Item 2:        PROPERTIES....................................................................         6
Item 3:        LEGAL PROCEEDINGS.............................................................         7
Item 4:        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................         7

Executive Officers of the Company............................................................         7

                                                          PART II

Item 5:        MARKETS FOR REGISTRANT'S COMMON EQUITY
                 AND RELATED SHAREHOLDER MATTERS.............................................         8
Item 6:        SELECTED FINANCIAL DATA.......................................................         8
Item 7:        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND THE RESULTS OF OPERATIONS.....................................      8-14
                 RESULTS OF OPERATIONS.......................................................      8-13
                 FINANCIAL CONDITION.........................................................        13
                 INFLATION AND CHANGING PRICES...............................................        13
                 FORWARD-LOOKING STATEMENTS..................................................        14
Item 7A:       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................        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..................................................     18-42

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 distributor of products used by businesses and institutions to maintain, repair, and operate their facilities. 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.

The Company offers a breadth of maintenance, repair, and operating (MRO) solutions by combining products, services, and information. It tailors its capabilities with a view toward providing the lowest total cost MRO solution to select customer groups. The Branch-based Distribution Businesses primarily serve the needs of North American businesses for MRO supplies. Lab Safety Supply serves customers who choose to purchase safety and other industrial products through a direct marketing company. The Other Businesses of the Company serve customers who seek to outsource their MRO supply procurement and management processes.

The Company also has internal business support functions which provide coordination and guidance in the areas of Accounting, Administrative Services, Business Development, Communications, Compensation and Benefits, Employee Development, Enterprise Systems, Finance, Human Resources, Industrial Relations, Investor Relations, Insurance and Risk Management, Internal Audit, International Operations, Legal, 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 capabilities assist business units in serving their respective markets. These capabilities include technology and information management, supplier partnerships, supply chain management skills, and an understanding of the customers’ MRO environments.

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 efforts are focused on methods of serving customers and the product distribution process.

In January 2001, the Company announced it had consolidated three of its digital businesses into a separate organization. TotalMRO.com, FindMRO, and MROverstocks.com were combined to create Material Logic, which was designed to allow large customers to access a single, networked catalog. Material Logic sought funding participation from other industrial distributors and investors. Economic and market conditions made it difficult to find funding partners and in April 2001, the Company announced it was discontinuing the operations of Material Logic. All of Material Logic’s branded e-commerce sites were shut down with the exception of FindMRO, which remains as an integrated sourcing service for the Company’s customers.

Branch-based Distribution Businesses

The Company's Branch-based Distribution Businesses provide customers with solutions to their immediate and/or planned MRO purchase needs throughout North America. Logistics networks are configured for rapid availability. A broad selection of MRO products is offered at local branches, through catalogs, and via the Internet. The Branch-based Distribution Businesses consist of Grainger Industrial Supply, Grainger.com, Acklands-Grainger Inc. (Canada), FindMRO, Grainger Export, Grainger Global Sourcing, Grainger Parts, Grainger, S.A. de C.V. (Mexico), and Grainger Caribe Inc. (Puerto Rico). Described below are the more significant of these businesses.

Grainger Industrial Supply

The focus of Grainger Industrial Supply is to provide the best combination of product selection, local availability, speed of delivery, and simplicity of ordering at a competitive price to United States businesses and institutions of all sizes. Its primary customers are small and medium-sized companies, but it also addresses large-sized organizations’ MRO needs.

Grainger Industrial Supply operates 388 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 pickup or for shipment.

On average, a branch is 20,000 square feet, has 12 employees, and handles about 239 transactions per day. During 2001, an average of approximately 93,000 sales transactions were completed daily. Grainger Industrial Supply’s branches range in size from small “storefront branches” to large “master branches.” Storefront branches are used to fulfill will-call needs and customer service. Grainger Industrial Supply has five master branches which range in size from 43,000 square feet to 109,000 square feet and stock the fastest selling 30,000 items. In 2001, Grainger Industrial Supply invested more than $4,000,000 in new branches, branch relocations, and branch additions. During the year, 13 new branches were opened, seven were relocated, seven were closed, and a number of remodeling projects were completed.

Grainger Industrial Supply currently operates four Distribution Centers and two new highly automated distribution centers (DCs). DCs ship orders directly to customers for all branches located in their service area, including Internet orders, and replenish branch inventories. Two Regional Distribution Centers located in Greenville County, South Carolina, and Kansas City, Missouri, replenish DC inventories and some branches not served by a DC. A National Distribution Center, located in Niles, Illinois, is a centralized storage and shipping facility serving customers and the entire network with slower moving inventory items.

In 2000, Grainger Industrial Supply began a multi-year redesign and expansion of its distribution network that will allow the Company to remove a warehousing step from the current distribution system. This redesign is not only intended to reduce costs but also to increase capacity. As part of the redesign, Grainger Industrial Supply is transitioning its existing zone and regional warehouses into more highly automated distribution centers. Five new and four redesigned facilities will take over most of the shipping currently handled by the branches. When the transition is complete, each distribution center will average more than 300,000 square feet in size, employ state-of-the-art equipment and processes, and stock 60,000 to 70,000 of the fastest selling items.

Grainger Industrial Supply sells principally to service shops, industrial and commercial maintenance departments, manufacturers, hotels, government, contractors, and health care and educational facilities. Sales transactions during 2001 were made to approximately 1,300,000 customers. It is estimated that approximately 23% of 2001 sales consisted of items bearing the Company’s registered trademarks, including DAYTON® (principally electric motors, heating and ventilation equipment), TEEL® (liquid pumps), SPEEDAIRE® (air compressors), AIR HANDLER® (air filtration equipment), DEM-KOTE® (spray paints), WESTWARD® (hand and power tools), and LUMAPRO® (task and outdoor lighting), as well as other of the Company’s 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 products carrying the names of other well-recognized brands.

The Grainger Industrial Supply catalog offers almost 100,000 MRO products from more than 1,100 suppliers, most of whom are manufacturers. Approximately 1.8 million copies of the catalog were produced in 2001. The most current edition was issued in February 2002. The largest supplier in 2001, a diversified manufacturer through 18 of its divisions, accounted for about 9% of Grainger Industrial Supply’s purchases. No significant difficulty has been encountered with respect to sources of supply.

The Grainger Industrial Supply CD-ROM catalog is designed to bring directly to the customer’s place of business a fast, easy way to select products. Through the CD-ROM 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 CD-ROM catalog feature includes a cross-reference function that allows customers to retrieve product information using their own stock numbers. Approximately 1.4 million copies of the CD-ROM catalog were produced in 2001. The CD-ROM catalog is also used at the branches as a training tool and resource for helping customers identify appropriate products for their applications.

Customers can also utilize Grainger.com, one of the industry’s first MRO websites. This website is an “e-storefront” or “point of access” into the Grainger Industrial Supply business. Grainger.com, however, offers more products than the Grainger Industrial Supply catalog, as well as automated search and customer personalization. It also is available 24 hours a day, seven days a week, providing real-time product availability, customer-specific pricing, multiple product search capabilities, and linkage to customer support and the fulfillment system. For large customers interested in connecting to Grainger.com using sophisticated purchasing platforms, Grainger.com has a universal connection. This technology translates the different data formats used by electronic marketplaces, exchanges, and e-procurement systems and allows information from these systems to be fed directly into Grainger Industrial Supply’s operating platform.

The Grainger.com site serves as a prominent service channel for Grainger Industrial Supply. Customers have access to a much larger selection of MRO products through Grainger.com, which has more than 260,000 products available. Orders processed through Grainger.com resulted in sales of approximately $333,000,000 in 2001, $267,000,000 in 2000, and $101,000,000 in 1999.

Acklands-Grainger Inc. (AGI)

AGI, acquired in December 1996, is Canada’s leading broad-line distributor of industrial, fleet, and safety supplies. It serves customers through 184 branches and six 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, printed in both English and French, 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 approximately 260 field sales representatives throughout Canada. During 2001, an average of approximately 18,000 sales transactions were completed daily. On February 1, 2002, the Company finalized a joint venture agreement combining AGI’s automotive aftermarket parts division and the Western Division of Uni-Select Inc., a Canadian distributor of automotive and industrial supplies. The Company has a 50 percent stake in the new company, which is managed by Uni-Select.

FindMRO

FindMRO is a sourcing center for indirect material spot buys. Through sophisticated search technologies, and the sourcing expertise of its professionals, FindMRO facilitates the location of MRO products when a source is unknown to the buyer. With access to a database of more than 8,000 suppliers and 5,000,000 products, FindMRO sources hard-to-find facilities maintenance supplies for their customers providing them with a one-stop shopping experience.

Grainger Global Sourcing

Grainger Global Sourcing procures competitively priced, high-quality products produced 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 2001 include WESTWARD® tools and LUMAPRO® lighting products, as well as products bearing other trademarks.

Grainger Parts

Grainger Parts provides access to over 440,000 parts and accessories through its centralized warehouse located in Northbrook, Illinois. Trained representatives have access to more than 260,000 pages of detailed parts diagrams online. Customers can purchase over the telephone or online at Grainger.com. Grainger Parts handled about 1,740,000 customer calls in 2001 through its call centers in Northbrook, Illinois, and Waterloo, Iowa.

Grainger Parts has been ISO 9002 certified since 1995. Grainger Parts' 100% compliance with ISO 9002 standards ranked it among the top 10% of all ISO-certified companies.

Grainger, S.A. de C.V.

Grainger, S.A. de C.V. serves the MRO product needs of customers in Mexico. The business employed 51 sales representatives at December 31, 2001. From its five branches, the business provides delivery of over 70,000 products throughout Mexico. Three new branches were opened in 2001 in Tijuana, Mexico City, and Puebla. The largest branch, an 80,000 square foot facility, is located outside of Monterrey.

Digital Businesses

Lab Safety Supply, Inc.

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

Lab Safety Supply offers extensive product depth, technical support, and high service levels. It is a primary safety supplier for many small and medium-sized companies and a critical backup supplier for many larger companies. Customers have access to over 41,000 products in Lab Safety Supply’s General Catalog. In addition, customers can access products using a CD-ROM version of the catalog or online via the web at LabSafety.com. In 2001, Lab Safety Supply acquired The Ben Meadows Co., a $20 million business-to-business direct marketer of equipment for the natural resources and forestry management market.

Other Businesses

In prior years, the Other Businesses category included a number of operating entities. For 2001, Grainger Integrated Supply is the only entity in the Other Businesses category.

Grainger Integrated Supply

Grainger Integrated Supply serves customers who have chosen to outsource components or all of their indirect materials management processes. The service offering is designed to enable customers to focus on their core business objectives.

Grainger Integrated Supply offers a full complement of on-site outsourcing solutions, including business process reengineering, inventory and tool crib management, supply chain management, purchasing management, and information management. Grainger Integrated Supply provides its clients with access to more than 5,000,000 products through its relationships with respected manufacturers, service providers, Grainger Industrial Supply, and other distributors.

Industry Segments

For 2001 the Company is reporting three industry segments: Branch-based Distribution, Digital, and Lab Safety Supply. For segment information and the Company's consolidated net sales 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 year-end assets of the Company for the last five years were: 2001, $2,331,246,000; 2000, $2,459,601,000; 1999, $2,564,826,000; 1998, $2,103,966,000; and 1997, $2,000,116,000.

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, from catalog houses, from certain Internet-based businesses and product fulfillment mechanisms, and from certain retail enterprises.

The principal means by which the Company competes with manufacturers and other distributors are by local stock availability, efficient service, account managers, competitive pricing, its several catalogs, which include product descriptions and in certain cases, extensive technical and application data, 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 share relative to others engaged in whole or in part in similar activities.

Employees

As of December 31, 2001, the Company had 15,385 employees, of whom 13,342 were full-time and 2,043 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, 2001, the Company’s owned and leased facilities totaled 17,886,000 square feet, an increase of 1.5% over 2000. Grainger Industrial Supply and Acklands-Grainger Inc. (AGI) accounted for the majority of the total square footage. Grainger Industrial Supply facilities are located throughout the United States. AGI facilities are located throughout Canada.

Grainger Industrial Supply branches range in size from 1,200 to 109,000 square feet and average 20,000 square feet. Most are located in or near major metropolitan areas. Many are in industrial parks. Typically, a 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:

                                                                                           Size in
          Location                             Facility and Use                          Square Feet
- -------------------------------    -------------------------------------------------    ------------
Chicago Area (1)                   General Offices & National Distribution Center          2,041,000
Kansas City, MO (1)                Regional Distribution Center                            1,435,000
Greenville County, SC (1)          Regional Distribution Center                            1,090,000
United States (1)                  Six Distribution Centers                                1,709,000
United States (2)                  388 Grainger Industrial Supply branch locations         7,631,000
United States and Mexico (3)       All other facilities                                    1,710,000
Canada (4)                         184 AGI facilities                                      2,270,000
                                                                                        ------------
                                   Total square feet                                      17,886,000
                                                                                        ============

(1)	These facilities are either owned or leased with most leases expiring between 2002 and 2011. The owned facilities are not subject to any mortgages.
(2)	Grainger Industrial Supply branches consist of 285 owned and 103 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. Two branches are located in Puerto Rico and five are located in Mexico. The owned facilities are not subject to any mortgages.
(4)	AGI facilities consist of general offices, distribution centers, and branches that are either owned or leased. The owned facilities are not subject to any mortgages.

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 2001.

Executive Officers of the Company

Following is information about the Executive Officers of the Company as of March 1, 2002.

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
- ------------------------------- ----------------------------------------------------------------------------------------
Wesley M. Clark (49) President and Chief Operating Officer, a position assumed in 2001 after serving as Group
President. Before assuming the last-mentioned position in 1997, Mr. Clark served as
Senior Vice President, Operations and Quality.

Timothy M. Ferrarell (45) Senior Vice President, Enterprise Systems, a position assumed in 2001 after serving as
Vice President, Quality and Business Planning. Before assuming the last mentioned
position in 1998, Mr. Ferrarell served as Vice President, Marketing Communications.
Previously, he served as Vice President, Marketing.

Nancy A. Hobor (55) Vice President, Communications and Investor Relations. Before joining the Company in
1999, Ms. Hobor was Vice President, Corporate Communications and Investor Relations of
Morton International, Inc.

John L. Howard (44) Senior Vice President and General Counsel. Before joining the Company in 2000, Mr.
Howard was Vice President and General Counsel of Tenneco Automotive, a position assumed
after serving as Vice President, Law and Assistant General Counsel of Tenneco, Inc.

Richard L. Keyser (59) Chairman of the Board, a position assumed in 1997, and Chief Executive Officer, a
position assumed in 1995. Previously, Mr. Keyser served as the Company's President and
Chief Operating Officer.

Larry J. Loizzo (47) Vice President of the Company and President of Lab Safety Supply, Inc.

P. Ogden Loux (59) Senior Vice President, Finance and Chief Financial Officer, positions assumed in 1997
after serving as Vice President, Finance.

Peter M. Perez (48) Senior Vice President, Human Resources. Before joining the Company in 2002, Mr. Perez
was Chief Human Resource Officer at Alliant Exchange/Clayton Dublier and Rice.
Previously, he was Senior Vice President, Human Resources of Whitman Corporation/Pepsi
Cola.

James T. Ryan (43) Executive Vice President, Marketing, Sales and Service. Until assuming his current role
in 2001, Mr. Ryan served as Vice President of the Company and President of Grainger.com.
Previously, he served as Vice President, Information Services.

John A. Schweig (44) Senior Vice President, Business Development and International.

John W. Slayton, Jr. (56) Senior Vice President, Supply Chain Management, a position assumed in 1997 after serving
as Senior Vice President, Product Management.

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 2001 and 2000 are shown below.

                                                Prices
                                     -------------------------------
         Quarters                    High                       Low                 Dividends
- ---------------------------------------------------------------------------------------------
2001     First                      $39.78                    $29.51                   $0.170
         Second                      48.00                     32.00                    0.175
         Third                       45.25                     36.86                    0.175
         Fourth                      48.99                     37.85                    0.175
- ---------------------------------------------------------------------------------------------
         Year                       $48.99                    $29.51                   $0.695
- ---------------------------------------------------------------------------------------------
2000     First                      $56.88                    $37.25                   $0.160
         Second                      55.69                     29.38                    0.170
         Third                       34.75                     25.13                    0.170
         Fourth                      40.00                     24.31                    0.170
- ---------------------------------------------------------------------------------------------
         Year                       $56.88                    $24.31                   $0.670
- ---------------------------------------------------------------------------------------------

The approximate number of shareholders of record of the Company's common stock as of March 4, 2002 was 1,700.

Item 6: Selected Financial Data

                                                                            Years Ended December 31,
                                                       -------------------------------------------------------------------
                                                             (In thousands of dollars except for per share amounts)
                                                         2001           2000          1999           1998           1997
                                                       ----------     ----------    ----------     ----------    ----------
Net sales........................................      $4,754,317     $4,977,044    $4,636,275     $4,438,975    $4,226,941
Net earnings.....................................         174,530        192,903       180,731        238,504       231,833
Net earnings per basic share.....................            1.87           2.07          1.95           2.48          2.30
Net earnings per diluted share...................            1.84           2.05          1.92           2.44          2.27
Total assets.....................................       2,331,246      2,459,601     2,564,826      2,103,966     2,000,116
Long-term debt...................................         118,219        125,258       124,928        122,883       131,201
Cash dividends paid per share....................      $    0.695     $    0.670    $    0.630     $    0.585     $   0.530

The results for 2001 included a non-recurring after-tax charge of $36,650,000, or $0.39 per share.

The results for 2000 included an after-tax gain of $17,860,000, or $0.19 per share, related to sales of investment securities. For further information see Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 3 and Note 9 to the Consolidated Financial Statements.

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

RESULTS OF OPERATIONS

The following table is included as an aid to understanding changes in the Company's Consolidated Statements of Earnings.

                                                                                 Years Ended December 31,
                                                            ---------------------------------------------------------------
                                                             Items in Consolidated Statements          Percent of Increase
                                                                of Earnings as a Percent of              (Decrease) from
                                                                         Net Sales                         Prior Year
                                                            --------------------------------        -----------------------
                                                              2001         2000         1999          2001            2000
                                                            ------        ------       ------       --------         -------
Net sales............................................        100.0%        100.0%       100.0%         (4.5)%           7.4%
Cost of merchandise sold.............................         66.6          68.2         67.4          (6.7)            8.5
Operating expenses...................................         26.3          25.1         25.8           0.0             4.8
Operating earnings...................................          7.1           6.7          6.8           1.0             5.6
Other deductions, net................................          0.8           0.0          0.3       1,071.4           (73.8)
Income taxes.........................................          2.6           2.8          2.6         (11.5)           12.7
Net earnings.........................................          3.7%          3.9%         3.9%         (9.5)%           6.7%

Company Net Sales-- 2001 Compared to 2000

The Company’s net sales of $4,754,317,000 for 2001 decreased 4.5% from net sales of $4,977,044,000 for 2000. This decrease resulted from a 5.2% decrease in the Branch-based Distribution Businesses segment, a 46.2% decrease in the Digital Businesses segment, and a 1.6% decrease at Lab Safety Supply, partially offset by a 5.5% increase in the Other Businesses of the Company. The year 2001 had the same number of sales days as 2000 (255). Sales performance was affected by the general weakness in the North American economy and worsened by quarter throughout the year.

Segment Net Sales

The following comments at the segment level include external and intersegment net sales; those comments at the business unit level include external and inter- and intrasegment net sales. For segment information see Note 19 to the Consolidated Financial Statements.

Branch-based Distribution Businesses

Net sales at the Branch-based Distribution Businesses amounted to $4,251,596,000 in 2001, a 5.2% decrease as compared with 2000 sales of $4,483,777,000.

Sales in the United States decreased in 2001 as compared with 2000 primarily due to the recession in the United States. Also contributing to the decline was a decrease in the sales of seasonal products due to relatively mild weather in the summer and winter seasons. Sales to government accounts increased while other categories declined.

Sales were favorably affected by continued momentum in the Company’s Internet strategy. For 2001, Grainger.com processed sales of approximately $333,000,000, a 24.7% increase from the $267,000,000 processed in 2000.

In Canada, average daily sales decreased 2.8% in 2001 as compared with 2000. This decrease was driven primarily by an unfavorable Canadian exchange rate. In local currency, average daily sales increased 1.3% in 2001 as compared with 2000. The growth in Canada was driven primarily by an improvement in the oil and gas sector of the economy, partially offset by the impact of the weakness in other sectors of the Canadian economy. The Company’s Canadian operations also experienced a negative sales trend with sales declining in the second half of the year on a comparative basis with 2000.

In Mexico, average daily sales decreased 17.0% in 2001 as compared with 2000. This sales performance reflects the weakness in the automotive and electronics manufacturing industries, deterioration of the Mexican economy, along with the impact of the recession in the United States.

Digital Businesses

Net sales at the Digital Businesses amounted to $29,979,000 in 2001, a 46.2% decrease as compared with 2000 sales of $55,683,000. Net sales for this segment represented product sales and service fee revenues for FindMRO and service fee revenues for the rest of Material Logic.

On April 23, 2001, the Company announced that it would shut down the operations of Material Logic with the exception of FindMRO. In connection with this announcement, the Company took a pretax, non-recurring charge of $39.1 million in 2001. FindMRO was then established as an operating unit separate from Material Logic. Effective June 1, 2001, FindMRO was added to the Branch-based Distribution Businesses. Beginning with the 2001 third quarter, the Digital Businesses segment ceased operations. For additional information, see Note 3 to the Consolidated Financial Statements.

Lab Safety Supply

Net sales at Lab Safety Supply amounted to $324,797,000 in 2001, a 1.6% decrease compared with 2000 sales of $330,108,000. Lab Safety Supply’s sales included the results of The Ben Meadows Co., an acquisition made in the 2001 first quarter. Excluding the sales of The Ben Meadows Co., 2001 sales would have been down 6.2% when compared with 2000, primarily the result of weak sales in the nation’s industrial sector.

Other Businesses

Net sales at the Other Businesses amounted to $190,811,000 in 2001, a 5.5% increase over 2000 sales of $180,852,000. Sales growth for this group of businesses was primarily related to a strong sales increase at Grainger Integrated Supply. Sales for this business unit included product sales and management fees.

Company Net Sales-- 2000 Compared to 1999

The Company’s net sales of $4,977,044,000 for 2000 increased 7.4% from net sales of $4,636,275,000 for 1999. This increase resulted from a 6.5% increase in the Branch-based Distribution Businesses segment, a 1,769.2% increase in the Digital Businesses segment, a 5.3% increase at Lab Safety Supply, and a 43.7% increase in the Other Businesses of the Company. The year 2000 had one more sales day than did 1999 (255 versus 254). On a daily basis the Company’s net sales increased 6.9%.

Sales growth for 2000 was primarily volume driven, reflecting growth in the Branch-based Businesses, especially in Canada and Mexico; strong growth at Grainger Integrated Supply; and continued strong growth in sales processed through the Company’s Internet sites.

Sales processed through the Company's Internet businesses, as represented by the Digital segment plus Grainger.com, amounted to $337,000,000 in 2000, a 230% increase as compared with $102,000,000 for the year 1999.

The Company's sales growth during the fourth quarter of 2000 was negatively affected by a slowing economy.

Segment Net Sales

Branch-based Distribution Businesses

Net sales at the Branch-based Distribution Businesses amounted to $4,483,777,000 in 2000, a 6.5% increase over 1999 sales of $4,211,316,000. Average daily sales increased by 6.1%.

The Company’s Canadian operations experienced double-digit sales growth. The growth was the result of strong sales across most of Canada. The growth was driven by an improvement in the oil and gas, forestry, and mining sectors of the Canadian economy, gains in large customer accounts, and the opening of 10 new branches during 1999.

The Company’s Mexican operations experienced double-digit sales growth reflecting the continued development of this business. This growth in sales was attributable to an expanded product offering and account penetration. In January 2000, the Company opened a second branch in Mexico.

Sales growth in the United States was driven by improved sales at Grainger Industrial Supply. Contributing to the sales growth were 35 new branches opened during 1999 and 2000. Also contributing to the sales growth was increased sales to government accounts.

Sales were also favorably affected by continued momentum in the Company’s Internet initiative. Sales orders processed through Grainger.com amounted to $267,000,000 in 2000, a 164% increase over 1999 sales of $101,000,000.

Partially offsetting this growth was the impact of a 20% decline in third quarter sales of seasonal products resulting from relatively mild weather in the more heavily populated areas of the United States. Also, sales growth during the fourth quarter of 2000 was negatively affected by a slowing economy.

Digital Businesses

Net sales at the Digital Businesses amounted to $55,683,000 in 2000, a significant increase over 1999 sales of $2,979,000. Sales for this group of businesses include product sales and service fee revenues for FindMRO and service fee revenues for MROverstocks.com (formerly Grainger Auction) and TotalMRO.com. FindMRO and MROverstocks.com were officially launched in November 1999. TotalMRO.com opened for business on March 31, 2000.

Lab Safety Supply

Net sales at Lab Safety Supply amounted to $330,108,000, a 5.3% increase over 1999 sales of $313,533,000. This increase reflects the continued growth in sales of industrial products and expanded market share attained through new customers and further penetration of existing accounts. Partially offsetting this increase was a decline in sales of safety products resulting from a slowing of the industrial economy in the United States.

Other Businesses

Net sales at the Other Businesses amounted to $180,852,000 in 2000, a 43.7% increase over 1999 sales of $125,882,000.

Sales growth for this group of businesses was primarily related to a strong sales increase at Grainger Integrated Supply. Sales for this business unit include product sales and management fees. Growth was driven by new engagements, contract renewals, and scope expansions, reflecting increasing demand for this outsourcing business, which provides fee-based, on-site indirect materials management services to large businesses.

Company Net Earnings-- 2001 Compared to 2000

The Company’s net earnings of $174,530,000 for 2001 decreased 9.5% compared with 2000 net earnings of $192,903,000. The Company’s earnings per share for the year declined 10.2% to $1.84 in 2001 from $2.05 in 2000. The results for 2001 included a non-recurring, after-tax charge of $36,650,000, or $0.39 per share. The results for 2000 included an after-tax gain of $17,860,000, or $0.19 per share, related to sales of investment securities. Excluding these non-recurring items from both periods, net earnings increased 20.6% to $211,180,000 in 2001 from $175,043,000 in 2000 and earnings per share increased 19.9% to $2.23 in 2001 from $1.86 in 2000.

Segment Operating Earnings

The following comments at the segment level include external and intersegment operating earnings; those comments at the business unit level include external and inter- and intrasegment operating earnings. For segment information see Note 19 to the Consolidated Financial Statements.

Branch-based Distribution Businesses

Operating earnings of $386,331,000 declined 2.7% in 2001 as compared with $397,252,000 for 2000. Lower sales and an increase in operating expenses contributed to the decline in operating earnings, partially offset by a higher gross profit margin.

Operating expenses increased 1.9% in 2001 versus 2000. Operating expenses increased due to higher occupancy expenses, including the effect of start-up costs relating to the opening of two new distribution centers, increased data processing expenses and increased employee benefits costs. These factors were partially offset by lower travel and entertainment expenses and lower advertising expenses.

The gross profit margin was affected by selected pricing actions in 2001 intended to cover freight and supplier cost increases, and lower sales of seasonal products. Historically, the sales of seasonal products have lower than average gross profit margins.

Digital Businesses

On April 23, 2001, the Company announced that it would shut down the operations of Material Logic with the exception of FindMRO. In connection with this announcement, the Company took a pretax, non-recurring charge of $39,070,000 in 2001. FindMRO was then established as an operating unit separate from Material Logic. Effective June 1, 2001, FindMRO was added to the Branch-based Distribution Businesses. Beginning with the 2001 third quarter, the Digital Businesses segment ceased operations.

The Digital Businesses incurred operating losses of $49,227,000 in 2001 which included the non-recurring charge of $39,070,000 mentioned above. This compares with operating losses of $48,207,000 in 2000. For additional information, see Note 3 to the Consolidated Financial Statements.

Lab Safety Supply

Operating earnings of $51,114,000 decreased 7.1% in 2001 as compared with $55,037,000 for 2000. The decrease in operating earnings was impacted by the decline in net sales and an increase in payroll and employee benefits costs, and increased data processing costs.

Other Businesses

The Other Businesses achieved operating income of $449,000 in 2001 compared with operating losses of $13,257,000 in 2000. This increase was primarily attributable to improved operating results at Grainger Integrated Supply. These results were achieved by eliminating or renegotiating unprofitable contracts and by reducing its cost structure through improved productivity.

Other Income Statement Data

Other income or deductions included the following non-recurring items:

1.	In 2001, a $25,123,000 loss relating to investments in digital enterprises.
2.	In 2000, a gain of $30,017,000 from the sale of investment securities.

Excluding the non-recurring items from both periods, the year 2001 had a net deduction of $16,170,000 versus a net deduction of $33,542,000 in the comparable 2000 period. The difference was primarily attributable to lower interest expense.

The Company's effective tax rate was 41.3% and 41.8% in 2001 and 2000, respectively. The rate decrease in 2001 as compared with 2000 was primarily due to the following two items, which lowered the effective tax rate for 2001 when compared with 2000:

1.	Lower amounts of losses in unconsolidated entities; and
2.	The tax impact of the write-off of investments in unconsolidated entities, which had tax benefits disproportionate to the loss incurred.

These items were partially offset by the tax impact of capital losses which are not deductible in the absence of capital gains.

Excluding the effect of these items, the effective tax rate was 40.5% for both 2001 and 2000.

Company Net Earnings-- 2000 Compared to 1999

The Company's net earnings of $192,903,000 for 2000 increased 6.7% as compared with 1999 net earnings of $180,731,000. This increase resulted from higher operating earnings and lower other deductions, partially offset by a higher effective income tax rate.

Operating earnings improved at the Branch-based Distribution Businesses and at Lab Safety Supply. Also, the operating losses at the Other Businesses decreased. These improvements were partially offset by the increased operating losses at the Digital Businesses.

Segment Operating Earnings

Branch-based Distribution Businesses

Operating earnings at the Branch-based Distribution Businesses amounted to $397,252,000 in 2000, an 11.0% increase over 1999 operating earnings of $357,925,000. This improvement in operating earnings was greater than the sales increase because operating expenses grew at a slower rate than the growth in sales, partially offset by lower gross profit margins.

Operating expenses increased 2%, primarily the result of productivity improvements. Partially offsetting these improvements were higher data processing expenses (including increased depreciation, amortization, and systems maintenance costs) and increased bad debt provisions.

Gross profit margins decreased 0.67 percentage point as compared to 1999. Of note are the following factors affecting the gross profit margin:

Grainger Industrial Supply's gross profit margin declined. This decline was primarily due to an unfavorable change in selling price category mix resulting from increased sales of sourced products and to higher freight costs. The above factors were partially offset by selected price increases during the 2000 third quarter. The price increases were intended to recover freight and supplier cost increases.

Acklands-Grainger Inc. had a lower gross profit margin primarily due to an unfavorable change in selling price category mix as a result of increased sales to large customers.

Digital Businesses

The Digital Businesses incurred operating losses of $48,207,000 in 2000 compared with operating losses of $20,560,000 in 1999. During 2000 the Company continued to invest in developing, enhancing, operating, and marketing these digital businesses.

Total operating expenses associated with the Company's Internet initiatives, as represented by this segment plus Grainger.com (which is included in the Branch-based Distribution Businesses segment), were $108,000,000 in 2000 as compared with $42,000,000 in 1999.

On August 1, 2000, the Company combined OrderZone.com with Works.com, a leading Internet purchasing service. This combination was designed to provide small and mid-size businesses with online purchasing services for indirect business products. The Company received a 40% interest in the combined entity and recognized a proportionate share of earnings or losses as part of Other Deductions.

On January 26, 2001, the Company announced the consolidation of FindMRO, MROverstocks.com, and TotalMRO.com into a separate organization, Material Logic. Participation was sought from MRO distributors to establish Material Logic as an industry-backed, industry-funded independent entity that would own and operate these businesses. Material Logic was also expected to include related consulting, implementation, and content services.

Lab Safety Supply

Operating earnings at Lab Safety Supply amounted to $55,037,000 in 2000, a 28.4% increase over 1999 operating earnings of $42,878,000. This increase resulted from improved operating performance and the elimination of expenses related to certain fully amortized intangibles.

Other Businesses

The Other Businesses of the Company incurred operating losses of $13,257,000 in 2000 compared with operating losses of $16,306,000 in 1999. The lower operating losses for this group of companies was a function of improved performance at all of the businesses grouped under this caption, including Grainger Integrated Supply.

Other Income Statement Data

Interest expense of $24,403,000 for 2000 increased by $8,807,000 as compared with 1999. This increase resulted from higher average borrowings, higher average interest rates paid on all outstanding debt, and lower capitalized interest.

The equity in losses of unconsolidated entities (after tax) primarily related to the Company’s interest in Works.com, which was acquired during the 2000 third quarter.

Unclassified—net income for 2000 was $29,842,000 versus $512,000 for 1999. The year 2000 included a $30,017,000 gain from the sales of investment securities.

The Company’s effective income tax rate was 41.8% for 2000 and 40.5% for 1999. The increase in the effective income tax rate relates to the loss on equity interest in unconsolidated entities, which is a net of tax number. Excluding the effect of these joint venture losses, the effective income tax rate was 40.5% for both years.

FINANCIAL CONDITION

Working capital was $838,800,000 at December 31, 2001, compared with $735,678,000 at December 31, 2000, and $600,611,000 at December 31, 1999. The ratio of current assets to current liabilities was 2.5, 2.0, and 1.7, at such dates.

Net cash flows from operations of $510,794,000 in 2001, $277,757,000 in 2000, and $37,240,000 in 1999, 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, equipment, and capitalized software as summarized in the following table.

                                                                      2001              2000            1999
                                                                    ---------        ---------        ---------
                                                                             (In thousands of dollars)
Land, buildings, structures, and improvements ..............        $  26,534        $  32,822        $  41,104
Furniture, fixtures, machinery, and equipment ..............           73,917           32,685           70,796
                                                                    ---------        ---------        ---------
                                                                      100,451           65,507          111,900
Capitalized software .......................................            6,717           29,406           26,473
                                                                    ---------        ---------        ---------
Total ......................................................        $ 107,168        $  94,913        $ 138,373
                                                                    =========        =========        =========

The Company repurchased 1,820,000 shares of its common stock during 2001, 31,400 shares of its common stock during 2000, and 355,300 shares of its common stock during 1999. As of December 31, 2001, approximately 3,500,000 shares of common stock remained available under the Company’s repurchase authorization.

Dividends paid to shareholders were $65,445,000 in 2001, $62,863,000 in 2000, and $58,817,000 in 1999.

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 to enhance the Company’s Internet initiatives.

The Company maintains a debt ratio and liquidity position that provide 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 8%, 21%, and 30% at December 31, 2001, 2000, and 1999, respectively.

INFLATION AND CHANGING PRICES

Inflation during the last three years has not had a significant effect on 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 appropriate price levels in the marketplace.

FORWARD-LOOKING STATEMENTS

Throughout this Form 10-K are forward-looking statements under the federal securities laws. The forward-looking statements relate to the Company’s expected future financial results and business plans, strategies, and objectives and are not historical facts. They are often identified by qualifiers such as: “will,” “intended,” “is transitioning,” or similar expressions. There are risks and uncertainties the outcome of which could cause the Company’s results to differ materially from what is projected.

Factors that may affect forward-looking statements include the following: higher product costs or other expenses; a major loss of customers; increased competitive pricing pressure on the Company’s businesses; failure to develop or implement new technologies or other business strategies; the outcome of pending and future litigation and governmental proceedings; changes in laws and regulations; facilities disruptions or shutdowns, natural and other catastrophes; unanticipated weather conditions; and other difficulties in achieving or improving margins or financial performance.

Trends and projections could also be affected by general industry and market conditions, gross domestic product growth rates, general economic conditions, including interest rate and currency rate fluctuations, global and other conflicts, and other factors.

Item 7A: Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to foreign currency exchange risk related to its transactions, assets, and liabilities denominated in foreign currencies. The Company partially hedges the net Canadian dollar investment of its Canadian subsidiary with borrowings denominated in Canadian dollars. See Note 13 to the Consolidated Financial Statements for additional information regarding this Canadian dollar denominated financing. For 2001, a uniform 10 percent strengthening of the U.S. dollar relative to foreign currencies in which the Company’s sales are made would not have had a material effect on net income. This sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in potential changes in sales levels or local currency prices.

The Company also is exposed to interest rate risk in its debt portfolio. All of the Company’s long-term debt at December 31, 2001, is variable rate debt. See Note 13 to the Consolidated Financial Statements for the maturity schedule of the debt outstanding as of December 31, 2001. For 2001, a one percentage point increase in interest rates paid by the Company would result in a decrease in net income of approximately $0.9 million. This sensitivity analysis of the effects of changes in interest rates on long-term debt does not factor in potential changes in exchange rates or long-term debt levels.

The Company is not exposed to commodity price risk since it purchases its goods for resale and does not purchase commodities directly.

Item 8: Financial Statements and Supplementary Data

The financial statements and supplementary data are included on pages 18 to 42. 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 24, 2002, 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 of the Company."

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 24, 2002, 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 24, 2002, 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 24, 2002, and, to the extent required, is incorporated herein by reference.

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:

          (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)         Bylaws, as amended, incorporated by reference to Exhibit 3 to the Company's Quarterly Report
                            on Form 10-Q for the quarter ended June 30, 2001.

          (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)         Compensatory Plans or Arrangements

                      (i)   Director Stock Plan, as amended, incorporated by reference to Exhibit 10(d)(i) to the
                            Company's Annual Report on Form 10-K for the year ended December 31, 1998.

                      (ii)  Office of the Chairman Incentive Plan, incorporated by reference to Appendix B of the
                            Company's Proxy Statement dated March 26, 1997.

                      (iii) 1990 Long-Term Stock Incentive Plan, as amended.

                      (iv)  2001 Long-Term Stock Incentive Plan, as amended.

                      (v)   Executive Death Benefit Plan, as amended.

                      (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, incorporated by reference to Exhibit
                            10(d)(vii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998.

                      (viii)Supplemental Profit Sharing Plan, as amended.

                      (ix)  Form of Change in Control Employment Agreement between the Company and certain of its
                            executive officers, incorporated by reference to Exhibit 10(c) to the Company's Annual Report
                            on Form 10-K for the year ended December 31, 1999.

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

          (21)  Subsidiaries of the Company.

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

(b)   Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of 2001.

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 19, 2002

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









     /s/ Brian P. Anderson       March 19, 2002                  /s/ Neil S. Novich      March 19, 2002
    -----------------------                                      ----------------------
         Brian P. Anderson                                           Neil S. Novich
         Director                                                    Director



     /s/ Wesley M. Clark         March 19, 2002                  /s/  James D. Slavik    March 19, 2002
    -----------------------                                      ----------------------
         Wesley M. Clark                                              James D. Slavik
         Director                                                     Director



     /s/ Wilbur H. Gantz         March 19, 2002                  /s/  Harold B. Smith    March 19, 2002
    -----------------------                                      ----------------------
         Wilbur H. Gantz                                              Harold B. Smith
         Director                                                     Director



     /s/ David W. Grainger       March 19, 2002                  /s/  Fred L. Turner     March 19, 2002
    -----------------------                                      ----------------------
         David W. Grainger                                            Fred L. Turner
         Director                                                     Director



     /s/ Frederick A. Krehbiel   March 19, 2002                  /s/  Janiece S. Webb    March 19, 2002
    --------------------------                                   ----------------------
         Frederick A. Krehbiel                                        Janiece S. Webb
         Director                                                     Director



     /s/  John W. McCarter, Jr.  March 19, 2002
    ---------------------------
          John W. McCarter, Jr.
          Director

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

December 31, 2001, 2000, and 1999

                                                                                                                       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..............................................................      25-40

SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS...................................................................         41

EXHIBIT 11 - COMPUTATIONS OF EARNINGS PER SHARE.................................................................         42

EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS................................................         42

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Shareholders and Board of Directors

W.W. Grainger, Inc.

We have audited the accompanying consolidated balance sheets of W.W. Grainger, Inc., and Subsidiaries as of December 31, 2001, 2000, and 1999, 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 auditing standards generally accepted in the United States of America. 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, 2001, 2000, and 1999, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We have also audited Schedule II of W.W. Grainger, Inc., and Subsidiaries for the years ended December 31, 2001, 2000, and 1999. In our opinion, this Schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be set forth therein.

GRANT THORNTON LLP

Chicago, Illinois

January 28, 2002

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands of dollars except for per share amounts)

                                                                                         Years Ended December 31,
                                                                         ------------------------------------------------------
                                                                             2001                 2000                 1999
                                                                         ------------         ------------         ------------
Net sales .......................................................        $  4,754,317         $  4,977,044         $  4,636,275
Cost of merchandise sold ........................................           3,165,030            3,391,707            3,125,647
                                                                         ------------         ------------         ------------
        Gross profit ............................................           1,589,287            1,585,337            1,510,628
Warehousing, marketing, and administrative expenses .............           1,211,644            1,250,217            1,193,400
Restructuring charges ...........................................              39,070                 --                   --
                                                                         ------------         ------------         ------------
        Total operating expenses ................................           1,250,714            1,250,217            1,193,400
                                                                         ------------         ------------         ------------
        Operating earnings ......................................             338,573              335,120              317,228

Other income or (deductions)
  Interest income ...............................................               2,827                1,891                1,606
  Interest expense ..............................................             (10,674)             (24,403)             (15,596)
  Equity in loss of unconsolidated entities .....................              (7,205)             (10,855)                --
  Loss on liquidation of equity in unconsolidated entity ........             (20,123)                --                   --
  Unclassified--net .............................................              (6,118)              29,842                  512
                                                                         ------------         ------------         ------------
                                                                              (41,293)              (3,525)             (13,478)
                                                                         ------------         ------------         ------------
        Earnings before income taxes ............................             297,280              331,595              303,750
Income taxes ....................................................             122,750              138,692              123,019
                                                                         ------------         ------------         ------------
        Net earnings ............................................        $    174,530         $    192,903         $    180,731
                                                                         ============         ============         ============
Earnings per share:
  Basic .........................................................        $       1.87         $       2.07         $       1.95
                                                                         ============         ============         ============
  Diluted .......................................................        $       1.84         $       2.05         $       1.92
                                                                         ============         ============         ============
Weighted average number of shares outstanding:
  Basic .........................................................          93,189,132           93,003,813           92,836,696
                                                                         ============         ============         ============
  Diluted .......................................................          94,727,868           94,223,815           94,315,479
                                                                         ============         ============         ============

The accompanying notes are an integral part of these financial statements.

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands of dollars)

                                                                                         Years Ended December 31,
                                                                         ------------------------------------------------------
                                                                             2001                 2000                  1999
                                                                         ------------         ------------         ------------

Net earnings ....................................................        $    174,530         $    192,903         $    180,731
Other comprehensive earnings (loss) net of tax:
  Foreign currency translation adjustments ......................             (15,457)              (9,487)               9,672
  Gain (loss) on investment securities:
    Unrealized holding gain (loss) ..............................               4,820              (60,066)              78,683
    Reclassification adjustments for realized gains
      included in net earnings ..................................                 (84)             (18,070)                --
                                                                         ------------         ------------         ------------
                                                                              (10,721)             (87,623)              88,355
                                                                         ------------         ------------         ------------
Comprehensive earnings ..........................................        $    163,809         $    105,280         $    269,086
                                                                         ============         ============         ============

The accompanying notes are an integral part of these financial statements.

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

                                                                                             December 31,
                                                                         -----------------------------------------------------
                            ASSETS                                           2001                2000                 1999
                                                                         ------------        ------------        -------------
CURRENT ASSETS
  Cash and cash equivalents .....................................        $    168,846        $     63,384        $     62,683
  Accounts receivable, less allowances for
    doubtful accounts of $30,552 for 2001,
    $23,436 for 2000, and $18,369 for 1999 ......................             454,180             608,297             561,786
  Inventories ...................................................             634,654             704,071             762,495
  Prepaid expenses ..............................................              37,477              25,173              18,387
  Deferred income tax benefits ..................................              97,454              82,077              65,794
                                                                         ------------        ------------        ------------
        Total current assets ....................................           1,392,611           1,483,002           1,471,145

PROPERTY, BUILDINGS, AND EQUIPMENT
  Land ..........................................................             150,335             147,437             147,118
  Buildings, structures, and improvements .......................             722,043             711,392             683,426
  Furniture, fixtures, machinery, and equipment .................             514,046             449,198             471,485
                                                                         ------------        ------------        ------------
                                                                            1,386,424           1,308,027           1,302,029
  Less accumulated depreciation
    and amortization ............................................             696,706             631,630             604,278
                                                                         ------------        ------------        ------------
    Property, buildings, and
      equipment--net ............................................             689,718             676,397             697,751

DEFERRED INCOME TAXES ...........................................                --                 8,820                --

INVESTMENTS IN UNCONSOLIDATED ENTITIES ..........................               4,776              23,838                --

OTHER ASSETS
  Goodwill ......................................................             177,753             180,644             186,504
  Customer lists and other intangibles ..........................              93,622              89,611              89,680
                                                                         ------------        ------------        ------------
                                                                              271,375             270,255             276,184

  Less accumulated amortization .................................             115,892             111,094             102,913
                                                                         ------------        ------------        ------------
                                                                              155,483             159,161             173,271

  Investments ...................................................              27,023              27,761             154,203
  Capitalized software--net .....................................              39,207              56,118              49,431
  Sundry ........................................................              22,428              24,504              19,025
                                                                         ------------        ------------        ------------
    Other assets--net ...........................................             244,141             267,544             395,930
                                                                         ------------        ------------        ------------
TOTAL ASSETS ....................................................        $  2,331,246        $  2,459,601        $  2,564,826
                                                                         ============        ============        ============

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED BALANCE SHEETS - CONTINUED

(In thousands of dollars)

                                                                                             December 31,
                                                                         ------------------------------------------------------
             LIABILITIES AND SHAREHOLDERS' EQUITY                           2001                  2000                  1999
                                                                         ------------         ------------         ------------
CURRENT LIABILITIES
  Short-term debt ...............................................        $      4,526         $    173,538         $    296,836
  Current maturities of long-term debt ..........................              12,520               22,770               27,721
  Trade accounts payable ........................................             275,893              283,112              311,345
  Accrued compensation and benefits .............................              64,549               70,756               52,510
  Accrued contributions to employees'
    profit sharing plans ........................................              60,103               54,739               66,356
  Accrued expenses ..............................................             127,108              113,057              115,380
  Income taxes ..................................................               9,112               29,352                  386
                                                                         ------------         ------------         ------------
      Total current liabilities .................................             553,811              747,324              870,534


LONG-TERM DEBT (less current maturities) ........................             118,219              125,258              124,928

DEFERRED INCOME TAXES ...........................................               1,239                 --                 48,117

ACCRUED EMPLOYMENT-RELATED BENEFITS COSTS .......................              54,649               49,537               40,718

MINORITY INTEREST ...............................................                 139                   96                 --

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, 108,473,703 shares, 2001,
    108,037,082 shares, 2000, and
    107,460,978 shares, 1999 ....................................              54,237               54,017               53,730
  Additional contributed capital ................................             289,201              276,819              255,569
  Retained earnings .............................................           1,937,972            1,837,298            1,707,258
  Unearned restricted stock compensation ........................             (17,722)             (22,720)             (16,581)
  Accumulated other comprehensive (loss) earnings ...............             (29,553)             (18,832)              68,791
  Treasury stock, at cost--15,129,062 shares, 2001,
    14,104,212 shares, 2000, and
    14,079,292 shares, 1999 .....................................            (630,946)            (589,196)            (588,238)
                                                                         ------------         ------------         ------------
  Total shareholders' equity ....................................           1,603,189            1,537,386            1,480,529
                                                                         ------------         ------------         ------------


TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................        $  2,331,246         $  2,459,601         $  2,564,826
                                                                         ============         ============         ============

The accompanying notes are an integral part of these financial statements.

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)


                                                                                       Years Ended December 31,
                                                                         ------------------------------------------------------
                                                                             2001                 2000                 1999
                                                                         ------------         ------------         ------------
Cash flows from operating activities:
  Net earnings ..................................................        $    174,530         $    192,903         $    180,731
  Provision for losses on accounts receivable ...................              21,483               18,076               13,585
  Depreciation and amortization:
    Property, buildings, and equipment ..........................              77,737               81,898               72,446
    Intangibles and goodwill ....................................               5,989                8,746               15,941
    Capitalized software ........................................              19,483               16,249                9,840
  Tax benefit of stock incentive plans ..........................               1,814                3,198                3,424
  (Gain) on sales of investment securities ......................                (138)             (30,017)                --
  Noncash restructuring charge ..................................              11,996                 --                   --
  Asset write-downs .............................................               7,400                 --                   --
  Loss on unconsolidated entities ...............................              25,228               10,855                 --
  Change in operating assets and liabilities--
    net of business acquisition and asset write-downs:
      Decrease (increase) in accounts receivable ................             130,521              (66,332)            (109,269)
      Decrease (increase) in inventories ........................              66,446               54,468             (130,708)
      (Increase) in prepaid expenses ............................             (13,286)              (7,163)              (6,333)
      (Increase) in deferred income taxes .......................              (6,853)             (21,077)              (5,909)
      (Decrease) increase in trade accounts payable .............              (7,168)             (27,017)              22,635
      Increase (decrease) in other current liabilities ..........              12,773                2,909                 (544)
      (Decrease) increase in current
        income taxes payable ....................................             (26,243)              28,920              (32,997)
      Increase in accrued employment-
        related benefits costs ..................................               5,112                8,819                2,933
  Other--net ....................................................               3,970                2,322                1,465
                                                                         ------------         ------------         ------------
Net cash provided by operating activities .......................             510,794              277,757               37,240

Cash flows from investing activities:
  Additions to property, buildings, and equipment ...............            (100,451)             (65,507)            (111,900)
  Proceeds from sale of property, buildings,
    and equipment--net ..........................................              10,467                1,701                4,387
  Expenditures for capitalized software .........................              (6,717)             (29,406)             (26,473)
  Proceeds from sales of investment securities ..................               1,015               31,665                 --
  Purchases of investment securities ............................                --                 (5,000)             (18,500)
  Net cash paid for business acquisition ........................             (14,407)                --                   --
  Investments in unconsolidated entities ........................              (5,764)             (26,862)                --
  Other--net ....................................................                 180                 (774)              (2,898)
                                                                         ------------         ------------         ------------
Net cash (used in) investing activities .........................            (115,677)             (94,183)            (155,384)

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(In thousands of dollars)

                                                                                       Years Ended December 31,
                                                                         ------------------------------------------------------
                                                                             2001                2000                   1999
                                                                         ------------         ------------         ------------
Cash flows from financing activities:
  Net (decrease) increase in short-term debt ....................        $   (169,012)        $   (123,298)        $    208,776
  Long-term debt payments .......................................             (10,250)                 (70)                 (93)
  Stock options exercised .......................................               7,981                6,011                1,223
  Proceeds from sale of treasury stock ..........................              24,366                 --                   --
  Purchase of treasury stock--net ...............................             (74,631)                (947)             (15,306)
  Distributions (to) and contributions
    from minority interest ......................................                 (91)                 100                 --
  Cash dividends paid ...........................................             (65,445)             (62,863)             (58,817)
                                                                         ------------         ------------         ------------

Net cash (used in) provided by financing activities .............            (287,082)            (181,067)             135,783

Exchange rate effect on cash
  and cash equivalents ..........................................              (2,573)              (1,806)               1,873
                                                                         ------------         ------------         ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS .......................             105,462                  701               19,512

Cash and cash equivalents at beginning of year ..................              63,384               62,683               43,171
                                                                         ------------         ------------         ------------

Cash and cash equivalents at end of year ........................        $    168,846         $     63,384         $     62,683
                                                                         ============         ============         ============

Supplemental Cash Flow Information
  Cash payments for interest ....................................        $     10,501         $     24,578         $     16,305
  Cash payments for taxes .......................................             154,228              112,934              157,561
Noncash Investing Activities:
  Fair value of noncash assets
    acquired in business acquisition ............................        $     17,175         $       --           $       --
  Liabilities assumed in business acquisition ...................              (2,768)                --                   --

  Increase (decrease) in fair value
    of investment securities, net of tax effect .................               4,736              (78,136)              78,683
  Investment in unconsolidated entity ...........................                --                  7,831                 --

The accompanying notes are an integral part of these financial statements.

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands of dollars except for per share amounts)

                                                                                  Unearned      Accumulated
                                                    Additional                    Restricted      Other
                                       Common       Contributed     Retained        Stock       Comprehensive     Treasury
                                        Stock        Capital        Earnings      Compensation  Earnings (Loss)    Stock
                                       -------       --------      ----------      ---------      ---------      ----------
Balance at January 1, 1999........     $53,617       $249,482      $1,585,344      $ (17,238)     $ (19,564)     $ (572,900)
Exercise of stock options.........          97          4,411              --             --             --              --
Issuance of 42,000 shares
  of restricted common stock......          21          1,880              --         (1,901)            --              --
Cancellation of 10,000 shares
  of restricted common stock......          (5)          (375)             --            380             --              --
Amortization of unearned
  restricted stock compensation...          --            139              --          2,178             --              --
Purchase of 355,300 shares of treasury
  stock, net of 4,680 shares issued         --             32              --             --             --         (15,338)
Cumulative translation adjustments          --             --              --             --          9,672              --
Unrealized holding gain
  on investments, net of tax......          --             --              --             --         78,683              --
Net earnings......................          --             --         180,731             --             --              --
Cash dividends paid
  ($0.63 per share)...............          --             --         (58,817)            --             --              --
                                       -------       --------      ----------      ---------      ---------      ----------
Balance at December 31, 1999......      53,730        255,569       1,707,258        (16,581)        68,791        (588,238)
Exercise of stock options.........         140          8,859              --             --             --              --
Issuance of 367,500 shares
  of restricted common stock......         182         15,145              --        (15,450)            --              --
Cancellation of 70,500 shares
  of restricted common stock......         (35)        (2,975)             --          3,010             --              --
Amortization of unearned
  restricted stock compensation...          --            210              --          6,301             --              --
Purchase of 31,400 shares of treasury
  stock, net of 6,440 shares issued         --             11              --             --             --            (958)
Cumulative translation adjustments          --             --              --             --         (9,487)             --
Unrealized holding (loss)
  on investments, net of tax......          --             --              --             --        (60,066)             --
Reclassification adjustments for realized
  gains included in net earnings..          --             --              --             --        (18,070)             --
Net earnings......................          --             --         192,903             --             --              --
Cash dividends paid
  ($0.67 per share)...............          --             --         (62,863)            --             --              --
                                       -------       --------      ----------      ---------      ---------      ----------
Balance at December 31, 2000......      54,017        276,819       1,837,298        (22,720)       (18,832)       (589,196)
Exercise of stock options.........         166          9,476              --             --             --              --
Issuance of 247,275 shares
  of restricted common stock,
  net of 24,835 shares retained...         111          5,006              --         (8,760)            --              --
Cancellation of 114,655 shares of
  restricted common stock.........         (57)        (2,785)             --          4,842             --              --
Issuance of 787,020 shares of
  treasury stock .................          --            (72)         (8,411)            --             --          32,849
Remeasurement of restricted stock.          --            526              --             --             --              --
Amortization of unearned
  restricted stock compensation...          --            263              --          8,916             --              --
Purchase of 1,820,000 shares of treasury
  stock, net of 8,130 shares issued         --            (32)             --             --             --         (74,599)
Cumulative translation adjustments          --             --              --             --        (15,457)             --
Unrealized holding gain on
  investments, net of tax.........          --             --              --             --          4,820              --
Reclassification adjustments for realized
  gains included in net earnings..          --             --              --             --            (84)             --
Net earnings......................          --             --         174,530             --             --              --
Cash dividends paid
  ($0.695 per share)..............          --             --         (65,445)            --             --              --
                                       -------       --------      ----------      ---------      ---------      ----------
Balance at December 31, 2001......     $54,237       $289,201      $1,937,972      $ (17,722)     $ (29,553)     $ (630,946)
                                       =======       ========      ==========      =========      =========      ==========

The accompanying notes are an integral part of these financial statements.

W.W. Grainger, Inc., and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001, 2000, and 1999

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.

INVESTMENTS IN UNCONSOLIDATED ENTITIES

For investments in which the Company owns or controls from 20 percent to 50 percent of the voting shares, the equity method of accounting is used. The Company also accounts for investments below 20 percent using the equity method when significant influence over operating and financial policies of the investee company can be exercised for those investments. (See Note 7 to the Consolidated Financial Statements.)

RECLASSIFICATIONS

Certain amounts in the 2000 and 1999 financial statements, as previously reported, have been reclassified to conform to the 2001 presentation.

MANAGEMENT ESTIMATES

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 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 revenues and expenses. Actual results could differ from those estimates.

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.

INVENTORIES

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

COST OF MERCHANDISE SOLD

Cost of merchandise sold includes product costs and product related costs, freight-out costs, and handling costs. The Company defines handling costs as those costs incurred to fulfill a shipped sales order.

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 $1,323,000, $747,000, and $3,238,000, in 2001, 2000, and 1999, respectively.

LONG-LIVED ASSETS

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value of an asset is determined to be less than the carrying amount of the asset, a loss is recognized for the difference.

REVENUE RECOGNITION

Revenues recognized include product sales, billings for freight and handling charges, and fees earned for services provided. The Company recognizes product sales and billings for freight and handling charges on the date products are shipped. Fee revenues are recognized on the date services are completed.

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.

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.

OTHER COMPREHENSIVE EARNINGS

The Company’s other comprehensive earnings include unrealized gains on investments, net of tax, and foreign currency translation adjustments with no related income tax effects. The cumulative amount of other comprehensive (loss) earnings was $(29,553,000), $(18,832,000), and $68,791,000, at December 31, 2001, 2000, and 1999, respectively.

ADOPTION OF ACCOUNTING STANDARD

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Certain Derivative Instruments and Hedging Activities,” effective January 1, 2001. The Company uses non-derivative financial instruments to help hedge its exposure for certain investments in foreign subsidiaries in which the net assets are exposed to currency exchange rate volatility. Adoption of SFAS No. 133 requires the Company to report the net amounts of gains and losses that arise from qualifying non-derivative hedging instruments in the cumulative translation adjustment during the reporting period. The Company’s accounting treatment of SFAS No. 133 is consistent with the method it previously used under SFAS No. 52, “Foreign Currency Translation.”

Currency exposure related to the Company’s investment in the net assets of its Canadian subsidiary, Acklands-Grainger Inc. (AGI), is partially mitigated by a foreign currency denominated debt obligation of the parent. Gains and losses associated with the debt obligation offset gains and losses in the net investment in AGI.

The amount of gain (loss) related to the foreign currency denominated debt obligation for the years ended December 31, 2001, 2000, and 1999 was $7,039,000, $4,550,000, and $(7,028,000), respectively, and were included in accumulated other comprehensive earnings.

NEW ACCOUNTING PRONOUNCEMENTS

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Intangible Assets.” SFAS No. 141 is effective for all business combinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001, and the effective date of SFAS No. 142. Major provisions of these Statements and their effective dates for the Company are as follows:

1.	All business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001.
2.	Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented, or exchanged, either individually or as part of a related contract, asset, or liability.
3.	Goodwill and other intangible assets with indefinite lives, acquired after June 30, 2001, are not amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization.
4.	Effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicated.
5.	All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.

At December 31, 2001, goodwill had a net carrying value of $150 million. In 2001, amortization expense for goodwill was $3,192,000 after-tax, or $0.03 per share. The Company is currently evaluating the classification of other intangibles and the effect of impairment provisions of SFAS No. 142 and is in the process of assessing the impact of adoption on its consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. The Company plans to adopt SFAS No. 144 at January 1, 2002, and has determined that adoption will not have a material effect on its results of operations or financial position.

NOTE 2--BUSINESS ACQUISITION

On February 26, 2001, Lab Safety Supply, Inc., the Company’s wholly owned subsidiary, acquired The Ben Meadows Co., Inc. (Ben Meadows), of Canton, Georgia, for approximately $14.4 million, including costs associated with the acquisition.

Ben Meadows, a privately held corporation with annual sales of $20,000,000, is a business-to-business direct marketer specializing in equipment and supplies for the environmental and forestry management markets. The acquisition was accounted for under the purchase method of accounting. Results for Ben Meadows are included in the Company’s results since the date of its acquisition. Given the size of the acquisition, pro forma disclosures are not considered necessary.

NOTE 3--NON-RECURRING CHARGES

On April 23, 2001, the Company announced its plans to shut down the operations of Material Logic and write down its investment in other digital activities. Material Logic was the business unit the Company formed to seek other equity participants in developing several digital operations. As a result of this action, the Company shut down all of Material Logic’s branded e-commerce sites except FindMRO, which remains an integrated sourcing service for the Company’s customers.

In connection with the closing of Material Logic, the Company took a non-recurring, pretax charge of $39.1 million (after-tax $23.2 million) in 2001. The Company provided a comprehensive separation package, including outplacement services, to the employees whose jobs were eliminated. As part of the shutdown, 166 employees were severed. Severance payments began in July 2001 and will continue until June 2004, when the last severance package expires.

In addition, the Company wrote down its investment in other digital enterprises and took a pretax charge of $25.1 million (after-tax $13.4 million). This included the loss on the divestiture of the Company’s 40% investment in Works.com, Inc. The Company acquired its ownership in Works.com, Inc., an unrelated third party, on August 1, 2000, when the Company’s OrderZone.com business unit was combined with Works.com.

The total effect of these non-recurring charges amounted to an after-tax cost of $36.6 million, or $0.39 per share.

The following table displays the activity and balance of the Material Logic restructuring reserve as of December 31, 2001:

                                                     Original
                                                     Provision       Deductions        Adjustments       Balance
                                                     --------         ---------        ---------        --------
                                                                        (In thousands of dollars)
Restructuring Reserve (Operating expenses):
- -------------------------------------------
Workforce reductions ........................        $ 17,200         $ (9,264)        $ (3,056)        $  4,880
Asset and equipment write-offs and disposals            5,800           (4,277)            (587)             936
Contractual obligations .....................           5,000           (7,482)           2,482             --
Other shutdown costs ........................          12,000           (8,570)             231            3,661
                                                     --------         ---------        ---------        --------
                                                     $ 40,000         $(29,593)        $   (930)        $  9,477
                                                     ========         =========        =========        ========

Deductions reflect cash payments of $17,597,000 and noncash charges of $11,996,000. The amounts in the adjustments column are reclassifications and reductions to reflect management’s current estimate of costs, by expense category.

NOTE 4--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.

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, no significant concentration of credit risk is considered to exist.

NOTE 6--INVENTORIES

Inventories primarily consist of merchandise purchased for resale.

Inventories would have been $202,390,000, $211,801,000, and $211,490,000, higher than reported at December 31, 2001, 2000, and 1999, respectively, if the first-in, first-out (FIFO) method of inventory accounting had been used for all Company inventories. Net earnings would have (decreased) increased by $(5,741,000), $188,000, and $(3,603,000), for the years ended December 31, 2001, 2000, and 1999, respectively, using the FIFO method of accounting. Inventories under FIFO approximate replacement cost.

NOTE 7--INVESTMENTS IN UNCONSOLIDATED ENTITIES

During 2001 and 2000, the Company made investments in several Internet related start-up joint ventures.

On August 1, 2000, the Company completed a transaction that combined the assets of its OrderZone.com business with Works.com. In addition, the Company invested $21 million in cash in Works.com and agreed to make Works.com’s purchasing management service and marketplace available to the Company’s small and mid-size customers through Grainger.com. For its contributions, the Company received a 40% equity stake in the combined company, which was subject to certain voting and transfer restrictions. Subsequent to August 1, 2000, the Company accounted for its interest in Works.com using the equity method. Prior to August 1, 2000, the results of OrderZone.com were included in the consolidated results of the Company. In the second quarter of 2001, the Company divested its 40% ownership share of Works.com (See Note 3 to the Consolidated Financial Statements.)

The Company also made investments in three other joint ventures. The Company accounts for these joint ventures using the equity method of accounting. The Company’s ownership percentages range from 11% to 49%. As start-up businesses, the time frame or the ultimate ability to achieve profitability is uncertain. Reaching profitability is also dependent upon the entities securing sufficient capital funding to support developmental activities.

The table below summarizes the activity of these investments. The losses reflect the start-up nature of these businesses.

                                                               Cumulative
                                              Investment      Equity Losses
                                                 Cost          (after-tax)         Total
                                                --------         --------         --------
                                                        (In thousands of dollars)

Balance at January 1, 2000 .............        $    --          $    --          $    --
  Works.com ............................          32,284          (10,031)          22,253
  Other equity-method investees ........           2,409             (824)           1,585
                                                --------         --------         --------
Balance at December 31, 2000 ...........          34,693          (10,855)          23,838
  Works.com ............................            --             (4,608)          (4,608)
  Other equity-method investees ........           5,764           (2,597)           3,167
  Divestiture of Works.com .............         (17,621)            --            (17,621)
                                                --------         --------         --------
Balance at December 31, 2001 ...........        $ 22,836         $(18,060)        $  4,776
                                                ========         ========         ========

NOTE 8--INTANGIBLES

Goodwill represents the cost in excess of net assets of acquired companies and was 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.

Customer lists and other intangibles are amortized on a straight-line basis over periods of seven to forty years.

Beginning in 2002, goodwill and intangible assets with indefinite lives will no longer be amortized but will be tested for impairment on an annual basis. (See Note 1 to the Consolidated Financial Statements— “New Accounting Pronouncements.”)

NOTE 9--INVESTMENTS

Investments consist of marketable securities and non-publicly traded equity securities for which a market value is not readily determinable. Marketable securities are all classified as available-for-sale and are reported at fair value, with unrealized gains or losses on such securities reflected, net of taxes, as a separate component of shareholders’ equity. Non-publicly traded equity securities are reported at lower of cost or estimated net realizable value. Adjustments to net realizable value are recognized in earnings. There have been no dividends earned on these investments. During 2001 and 2000, the Company sold a portion of its marketable securities investments. The gains on these sales were calculated using the specific identification method and were reported in Unclassified—net.

The original cost, realized and unrealized gains (pretax), and fair value of investments are summarized as follows:

                                                                                     December 31,
                                                                    ----------------------------------------------
                                                                        2001              2000              1999
                                                                    ----------        ----------        ----------
                                                                               (In thousands of dollars)
Marketable securities
  Cost .....................................................        $   16,517        $   16,852        $   18,500
  Unrealized gains .........................................             8,661               909           130,703
                                                                    ----------        ----------        ----------
  Fair value ...............................................            25,178            17,761           149,203
Non-publicly traded equity securities ......................             1,845            10,000             5,000
                                                                    ----------        ----------        ----------
                                                                    $   27,023        $   27,761        $  154,203
                                                                    ==========        ==========        ==========
Proceeds from sales ........................................        $    1,015        $   31,665        $       --
                                                                    ==========        ==========        ==========

Realized gain on sales .....................................        $      138        $   30,017        $       --
                                                                    ==========        ==========        ==========

NOTE 10--CAPITALIZED SOFTWARE

Amortization of capitalized software is predominately on a straight-line basis over five years. Amortization expense was $19,483,000, $16,249,000, and $9,840,000 for the years ended December 31, 2001, 2000, and 1999, respectively.

NOTE 11--SHORT-TERM DEBT

The following summarizes information concerning short-term debt:


                                                                        2001           2000             1999
                                                                    --------         --------         --------
Bank Debt                                                                   (In thousands of dollars)
- ---------
Outstanding at December 31 .................................        $  4,526         $  2,972         $  4,598
Maximum month-end balance during the year ..................        $  4,559         $  4,818         $  4,675
Average amount outstanding during the year .................        $  3,645         $  4,191         $  3,263
Weighted average interest rate during the year .............             5.3%             6.9%             6.1%
Weighted average interest rate at December 31 ..............             3.4%             7.4%             6.6%

Commercial Paper
- ----------------
Outstanding at December 31 .................................        $    --          $170,566         $292,238
Maximum month-end balance during the year ..................        $128,632         $300,607         $292,250
Average amount outstanding during the year .................        $ 64,438         $247,640         $193,674
Weighted average interest rate during the year .............             5.3%             6.5%             5.7%
Weighted average interest rate at December 31 ..............              --%             6.6%             6.2%

The Company and its subsidiaries had committed lines of credit totaling $417,564,000, $518,344,000, and $568,848,000 at December 31, 2001, 2000, and 1999, respectively, including $12,564,000, $13,344,000, and $13,848,000 denominated in Canadian dollars. A Company subsidiary also had a $15,705,000, $16,680,000, and $17,311,000 uncommitted line of credit denominated in Canadian dollars as of December 31, 2001, 2000, and 1999, respectively. At December 31, 2001, 2000, and 1999, borrowings under the subsidiary’s committed lines of credit were $4,526,000, $2,972,000, and $4,598,000, respectively. The Company has guaranteed these borrowings.

NOTE 12--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 related primarily to earnings before federal income taxes, limited to 15% of the total compensation paid to all eligible employees. The Company also sponsors additional defined contribution and defined benefit plans, which cover most of the other employees. Provisions under all plans were $47,621,000, $42,353,000, and $55,007,000 for the years ended December 31, 2001, 2000, and 1999, respectively.

POSTRETIREMENT BENEFITS. The Company has a health care benefits plan that provides coverage to its retired employees and their dependents should they elect to maintain such coverage. A majority of the Company’s employees become eligible for participation when they qualify for retirement while working for the Company.

The amounts charged to operating expense for postretirement health care benefits were $5,348,000, $3,767,000, and $4,523,000 for the years ended December 31, 2001, 2000, and 1999, respectively. Components of the expense were:


                                                                        2001           2000             1999
                                                                    --------         --------         --------
                                                                              (In thousands of dollars)

Service cost ...............................................        $  3,442         $  3,083         $  3,446
Interest cost ..............................................           3,689            3,189            2,854
Expected return on assets ..................................          (1,421)          (1,563)          (1,302)
Amortization of transition asset (22-year amortization) ....            (143)            (143)            (143)
Amortization of unrecognized gain ..........................            (144)            (724)            (257)
Amortization of prior service cost .........................             (75)             (75)             (75)
                                                                    --------         --------         --------
                                                                    $  5,348         $  3,767         $  4,523
                                                                    ========         ========         ========

Participation in the plan is voluntary at retirement and requires participants to make contributions toward the cost of the plan, as determined by the Company. The accounting for the health plan anticipates future cost-sharing changes to retiree contributions that will maintain the current cost-sharing ratio between the Company and the retirees.

A Group Benefit Trust has been established as the vehicle to process benefit payments. The assets of the trust are invested in Standard & Poor’s 500 index funds. The assumed weighted average long-term rate of return is 6%, which is net of a 40.0% 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 $3,470,000, $1,385,000, and $1,686,000 for the years ended December 31, 2001, 2000, and 1999, 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, 2001, 2000, and 1999 is as follows:

                                                                        2001           2000             1999
                                                                    --------         --------         --------
                                                                           (In thousands of dollars)

Benefit obligation at the beginning of the year ............        $ 49,044         $ 40,394         $ 43,675
  Service cost .............................................           3,442            3,083            3,446
  Interest cost ............................................           3,689            3,189            2,854
  Plan participant contributions ...........................             882              762              535
  Actuarial loss (gain) ....................................           7,960            3,598           (7,913)
  Benefits paid ............................................          (2,206)          (1,982)          (2,203)
                                                                    --------         --------         --------
Benefit obligation at the end of the year ..................          62,811           49,044           40,394
                                                                    --------         --------         --------
Fair value of plan assets at beginning of year .............          20,505           22,188           18,636
  Actual return on plan assets .............................          (2,785)          (1,848)           3,534
  Employer contributions ...................................           3,470            1,385            1,686
  Plan participant contributions ...........................             882              762              535
  Benefits paid ............................................          (2,206)          (1,982)          (2,203)
                                                                    --------         --------         --------
Fair value of plan assets at the end of the year ...........          19,866           20,505           22,188
                                                                    --------         --------         --------
Funded status ..............................................         (42,945)         (28,539)         (18,206)
Unrecognized transition asset ..............................          (1,856)          (1,999)          (2,142)
Unrecognized net actuarial loss (gain) .....................           8,863           (3,447)         (11,180)
Unrecognized prior service cost ............................            (702)            (777)            (852)
                                                                    --------         --------         --------
Accrued postretirement benefits cost .......................        $(36,640)        $(34,762)        $(32,380)
                                                                    ========         ========         =========

To determine the APBO as of December 31, 2001, 2000, and 1999, the assumed weighted average discount rate used was 7.0%, 7.5%, and 7.8%, respectively. The assumed health care cost trend rate for 2002 is 8.1%. Beginning in 2003, the assumed health care cost trend rate declines on a straight-line basis until 2011, when the ultimate trend rate of 5.0% is achieved.

If the assumed health care cost trend rate increased by one percentage point for each year, the APBO as of December 31, 2001, would increase by $11,871,000. The aggregate of the service cost and interest cost components of the 2001 net periodic postretirement benefits expense would increase by $1,644,000.

If the assumed health care cost trend rate decreased by one percentage point for each year, the APBO as of December 31, 2001, would decrease by $9,485,000. The aggregate of the service cost and interest cost components of the 2001 net periodic postretirement benefits expense would decrease by $1,277,000.

NOTE 13--LONG-TERM DEBT

Long-term debt consisted of the following at December 31:

                                                                       2001             2000             1999
                                                                    ---------        ---------        ---------
                                                                              (In thousands of dollars)

Uncommitted revolving credit facility ......................        $ 113,324        $ 120,363        $ 124,914
Industrial development revenue bonds .......................           17,415           27,650           27,650
Other ......................................................             --                 15               85
                                                                    ---------        ---------        ---------
                                                                      130,739          148,028          152,649
Less current maturities ....................................           12,520           22,770           27,721
                                                                    ---------        ---------        ---------
                                                                    $ 118,219        $ 125,258        $ 124,928
                                                                    =========        =========        =========

As part of the permanent financing for a Canadian Subsidiary, the Company maintained a $113,324,000 uncommitted revolving credit facility, denominated in Canadian dollars. The Company had $113,324,000 outstanding at December 31, 2001, relating to this facility with an interest rate of 3.52%. 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 variable rates up to 15%, or variable rates up to 78.2% of the prime rate, and come due in various amounts from 2002 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, $10,620,000 of these bonds had an unsecured liquidity facility available at December 31, 2001, for which the Company compensated a bank through a commitment fee of 0.07%. There were no borrowings related to this facility at December 31, 2001. The Company classified $12,520,000 of bonds currently subject to redemption options in current maturities of long-term debt at December 31, 2001. The Company classified $22,755,000 and $27,650,000 of bonds subject to redemption options in current maturities of long-term debt at December 31, 2000 and 1999, respectively.

The aggregate amounts of long-term debt maturing in each of the five years subsequent to December 31, 2001, are as follows:

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

2002.........................................................          $     --         $ 12,520
2003.........................................................           113,324               --
2004.........................................................                --               --
2005.........................................................                --            4,895
2006.........................................................                --               --

NOTE 14--LEASES

The Company leases certain land, buildings, and equipment. The Company capitalizes all significant leases that qualify as capital leases.

At December 31, 2001, the approximate future minimum aggregate payments for all leases were as follows:

                                                                                  Operating Leases
                                                                    -------------------------------------------
                                                                      Real           Personal
                                                                    Property         Property          Total
                                                                    ---------        ---------        ---------
                                                                              (In thousands of dollars)

2002 .......................................................        $  17,525        $      38        $  17,563
2003 .......................................................           14,078             --             14,078
2004 .......................................................           10,583             --             10,583
2005 .......................................................            5,847             --              5,847
2006 .......................................................            2,902             --              2,902
Thereafter .................................................            5,604             --              5,604
                                                                    ---------        ---------        ---------
Total minimum payments required ............................           56,539               38           56,577
Less amounts representing sublease income ..................            1,061             --              1,061
                                                                    ---------        ---------        ---------
                                                                    $  55,478        $      38        $  55,516
                                                                    =========        =========        =========

Total rent expense, including both items under lease and items rented on a month-to-month basis, was $18,837,000, $20,759,000, and $19,383,000 for 2001, 2000, and 1999, respectively.

NOTE 15--STOCK INCENTIVE PLANS

The Company maintains stock incentive plans under which the Company may grant a variety of incentive awards to employees. A maximum of 14,056,828 shares of common stock were authorized for issuance under the plans in connection with awards of non-qualified stock options, stock appreciation rights, restricted stock, phantom stock rights, and other stock-based awards.

The plans authorize 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 no later than ten years after the date of grant.

Shares relating to terminated, surrendered or canceled options and stock appreciation rights, to forfeited restricted stock or other awards, or to transactions that result in fewer shares being issued under the plans, are again available for awards under the plans.

In 2001, a broad-based stock option grant covering 764,400 shares was made to employees who had a minimum of five years of service and who were not participants in other stock option programs.

The plans authorize the granting of restricted stock, which is held by the Company pursuant to the terms and conditions related to the applicable grants. 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.

There were 247,275 shares of restricted stock issued in 2001 with a weighted average fair market value of $33.30 per share. There were 367,500 shares of restricted stock issued in 2000 with a weighted average fair market value of $41.90 per share. There were 42,000 shares of restricted stock issued in 1999 with a weighted average fair market value of $45.26 per share. The shares vest over periods from two to ten years from issuance, although accelerated vesting is provided in certain instances. Restricted stock released totaled 87,000, 5,000, and 0 shares in 2001, 2000, and 1999, respectively. Compensation expense related to restricted stock awards is based upon market prices at the date of grant and is charged to earnings on a straight-line basis over the period of restriction. Total compensation expense related to restricted stock was $8,916,000, $6,301,000, and $2,178,000 in 2001, 2000, and 1999, respectively. In 2001, $2,220,000 of restricted stock compensation expense related to the 2001 digital business restructuring was included in restructuring charges.

On March 26, 2001, a group of 83 executive officers and other key managers bought 787,020 treasury shares from the Company at the then-current market price of the shares. Cash proceeds from the sale, which amounted to $24,366,000, were used by the Company to repurchase shares of the Company’s stock on the open market. Executives who met a threshold purchase requirement of one times their annual base salary received a 25% matching grant of restricted stock that will vest if they remain with the Company and hold their purchased shares for a minimum of two years. The grant totaled 192,275 shares of restricted stock. Most executives financed their purchases through loans arranged with a local bank. Those executives are responsible for repaying their loans. The Company entered into a Note Purchase Agreement with the bank, agreeing to purchase the loan of any defaulting executive.

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 under the plan.

A retainer fee for Board service is paid to non-employee directors in the form of an annual award under the Director Stock Plan of unrestricted shares of common stock. The number of shares is equal to the retainer fee divided by the fair market value of a share of common stock at the time of the award, rounded up to the next 10-share increment. Total shares granted were 8,130, 6,480, and 4,680 in 2001, 2000, and 1999, respectively.

Additionally, non-employee directors receive under the Director Stock Plan an annual grant, denominated in dollars, of options to purchase shares of common stock. The number of shares covered by each option is equal to the award divided by the fair market value of a share of common stock at the time of the award, rounded to the next 10-share increment. The per-share option exercise price is 100% of the fair market value of the shares. The options are fully exercisable upon award and have a ten-year term. Total options granted covered 19,200, 16,560, and 16,740 shares in 2001, 2000, and 1999, respectively.

The Company awards stock units under the Director Stock Plan in connection with deferrals of director fees and dividend equivalents on existing stock units. A stock unit is essentially the economic equivalent of a share of common stock. Deferred fees and dividend equivalents on existing stock units are converted into stock units on the basis of the market value of the stock at the relevant time. Payment of the value of stock units generally is made after the termination of service as a director. As of December 31, 2001, ten directors held stock units. As of December 31, 2000 and 1999, nine directors held stock units. The Company recognized expense for stock units of $419,000, $426,000, and $300,000 for 2001, 2000, and 1999, respectively. Total stock units outstanding were 45,844, 45,765, and 43,219 as of December 31, 2001, 2000, and 1999, respectively.

Transactions involving stock options are summarized as follows:

                                                                                      Weighted
                                                                                       Average
                                                                                      Price Per
                                                                  Option Shares         Share      Exercisable
                                                                  -------------       ----------   -----------
Outstanding at January 1, 1999..............................         3,790,440         $ 35.01      1,732,300
                                                                                                    =========
  Granted   ................................................         1,234,100         $ 48.43
  Exercised ................................................          (304,380)        $ 21.49
  Canceled or expired ......................................          (110,400)        $ 46.23
                                                                     ---------
Outstanding at December 31, 1999 ...........................         4,609,760         $ 39.23      2,239,940
                                                                                                    =========
  Granted ..................................................         1,974,650         $ 43.17
  Exercised ................................................          (301,860)        $ 23.68
  Canceled or expired ......................................          (329,140)        $ 45.85
                                                                     ---------
Outstanding at December 31, 2000 ...........................         5,953,410         $ 40.96      2,363,810
                                                                                                    =========
  Granted ..................................................         3,080,780         $ 39.26
  Exercised ................................................          (385,567)        $ 26.13
  Canceled or expired ......................................          (259,036)        $ 42.78
                                                                     ---------
Outstanding at December 31, 2001 ...........................         8,389,587         $ 40.96      2,826,979
                                                                     =========                      =========

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

Information about stock options outstanding at December 31, 2001, is as follows:

                                              Options Outstanding
                          -----------------------------------------------------------------------------------

                                                                                   Weighted Average
                                                                       -------------------------------------
                          Range of Exercise         Number             Remaining Contractual         Exercise
                               Prices             Outstanding              Life (Years)                Price
                          ---------------         -----------          --------------------          --------
                            $25.75-$37.25          1,862,620                    3.8                    $32.98
                            $37.50-$43.50          4,015,747                    8.8                    $40.21
                            $43.80-$53.63          2,511,220                    7.7                    $48.08
                                                   ----------------------------------------------------------
                                                   8,389,587                    7.4                    $40.96

                                              Options Exercisable
                          -----------------------------------------------------------------
                          Range of Exercise         Number             Weighted Average
                               Prices             Exercisable           Exercise Price
                          ---------------         -----------         ---------------------
                            $25.75-$37.25          1,822,332                $33.03
                            $37.50-$43.50            212,827                $42.01
                            $43.80-$53.63            791,820                $51.31
                                                   ----------------------------------------
                                                   2,826,979                $38.83

Shares available for future awards were 3,805,674, 768,168, and 2,717,158, at December 31, 2001, 2000, and 1999, respectively.

In accordance with Statement of Financial Accounting Standards (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:

                                                                       2001             2000              1999
                                                                    ---------         ---------         ---------
                                                                          (In thousands of dollars
                                                                          except for per share amounts)

Net earnings ...............................................        $ 162,269         $ 183,131         $ 174,144
Earnings per share:
  Basic ....................................................        $    1.74         $    1.97         $    1.88
  Diluted ..................................................        $    1.72         $    1.94         $    1.85

The weighted average fair value of the stock options granted during 2001, 2000, and 1999, was $10.89, $13.65, and $17.26, 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:


                                                                       2001             2000              1999
                                                                    ---------         ---------         ---------

Risk-free interest rate ....................................              5.1%              6.4%              6.8%
Expected life ..............................................        7.0 years         7.0 years         7.0 years
Expected volatility ........................................             20.1%             20.1%             20.1%
Expected dividend yield ....................................              1.8%              1.8%              1.5%

NOTE 16--INCOME TAXES

The asset and liability approach of SFAS No. 109, “Accounting for Income Taxes,” requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial bases and tax bases of assets and liabilities. Income tax expense consisted of the following:



                                                                       2001             2000              1999
                                                                    ---------         ---------         ---------
                                                                                (In thousands of dollars)
Current provision:
  Federal ..................................................        $ 106,322         $ 116,253         $ 100,801
  State ....................................................           18,998            22,948            21,336
  Foreign ..................................................            6,368             7,103             6,192
                                                                    ---------         ---------         ---------
  Total current ............................................          131,688           146,304           128,329
Deferred tax benefits ......................................           (8,938)           (7,612)           (5,310)
                                                                    ---------         ---------         ---------
Total provision ............................................        $ 122,750         $ 138,692         $ 123,019
                                                                    =========         =========         =========

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

The income tax effects of temporary differences that gave rise to the net deferred tax asset as of December 31, 2001, 2000, and 1999 were:

                                                                       2001             2000              1999
                                                                    ---------         ---------         ---------
                                                                              (In thousands of dollars)

Current deferred tax assets:
  Inventory valuations .....................................        $  37,810         $  33,216         $  26,043
  Administrative and general expenses
    deducted on a paid basis for tax purposes ..............           55,850            45,582            36,208
  Employment-related benefits expense ......................            3,683             3,120             2,755
  Other ....................................................              111               159               788
                                                                    ---------         ---------         ---------
    Total current deferred tax assets ......................        $  97,454         $  82,077         $  65,794
                                                                    ---------         ---------         ---------

Noncurrent deferred tax (liabilities) assets:
  Purchased tax benefits ...................................        $ (12,540)        $ (13,283)        $ (17,482)
  Temporary differences related to property,
    buildings, and equipment ...............................           (5,329)           (6,749)           (2,018)
  Intangible amortization ..................................            3,623             8,493            11,583
  Deferred tax liability of foreign investment corporation .          (11,359)           (7,553)           (4,674)
  Employment-related benefits expense ......................           25,638            24,793            16,206
  Foreign net operating loss carryforwards .................           10,618             8,217             6,492
  Unrealized gain on investments ...........................           (3,378)             (362)          (52,020)
  Capital loss carryforwards ...............................            3,316              --                --
  Other ....................................................            2,106             3,481               288
                                                                    ---------         ---------         ---------
    Total noncurrent deferred tax asset (liability) ........           12,695            17,037           (41,625)
  Less valuation allowance .................................          (13,934)           (8,217)           (6,492)
                                                                    ---------         ---------         ---------
    Net noncurrent deferred tax (liability) asset ..........           (1,239)            8,820           (48,117)
                                                                    ---------         ---------         ---------
Net deferred tax asset .....................................        $  96,215         $  90,897         $  17,677
                                                                    =========         =========         =========

The purchased tax benefits represent lease agreements acquired in prior years under the provisions of the Economic Recovery Act of 1981.

At December 31, 2001, the Company has approximately $28,000,000 of foreign operating loss carryforwards related to a foreign operation, which begin to expire in 2004. The valuation allowance represents a provision for uncertainty as to the realization of these carryforwards. In addition, the Company recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to capital loss carryforward limitations. The changes in the valuation allowance were as follows:

                                                                       2001            2000             1999
                                                                    ---------        ---------       ---------
                                                                             (In thousands of dollars)
Beginning balance ..........................................        $   8,217        $   6,492        $   4,372
Foreign net operating loss carryforwards ...................            2,401            1,725            2,120
Capital loss carryforwards .................................            3,316             --               --
                                                                    ---------        ---------        ---------
Ending balance .............................................        $  13,934        $   8,217        $   6,492
                                                                    =========        =========        =========

A reconciliation of income tax expense with federal income taxes at the statutory rate follows:

                                                                       2001             2000               1999
                                                                    ---------         ---------         ---------
                                                                              (In thousands of dollars)

Federal income taxes at the statutory rate .................        $ 104,048         $ 119,857         $ 106,313
Foreign rate differences ...................................            1,725             1,578             1,429
State income taxes, net of federal income tax benefits .....           12,349            13,197            13,368
Other--net .................................................            4,628             4,060             1,909
                                                                    ---------         ---------         ---------
  Income tax expense .......................................        $ 122,750         $ 138,692         $ 123,019
                                                                    =========         =========         =========
  Effective tax rate .......................................             41.3%             41.8%             40.5%
                                                                    =========         =========         =========

NOTE 17--EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of shares outstanding during the year. Diluted earnings per share is based on the combination of weighted average number of shares outstanding and dilutive potential shares.

The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31:

                                                                       2001             2000             1999
                                                                    ---------         ---------       ---------
                                                                               (In thousands except for
                                                                                  per share amounts)

Net earnings ...............................................        $ 174,530        $ 192,903        $ 180,731
                                                                    =========        ==========       =========
Denominator for basic earnings per share--
  weighted average shares ..................................           93,189           93,004           92,837
Effect of dilutive securities--
  stock-based compensation .................................            1,539            1,220            1,478
                                                                    ---------        ---------        ---------
Denominator for diluted earnings per share--weighted
  average shares adjusted for dilutive securities ..........           94,728           94,224           94,315
                                                                    =========        ==========       =========

Basic earnings per common share ............................        $    1.87        $    2.07        $    1.95
                                                                    =========        ==========       =========
Diluted earnings per common share ..........................        $    1.84        $    2.05        $    1.92
                                                                    =========        ==========       =========

NOTE 18--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 one-hundredth of a share of Series A-1999 Junior Participating Preferred Stock (intended to be the economic equivalent of one share of the Company’s common stock) at a price of $250.00, 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 15% or more of the Company’s common stock. If a person or group, other than a person or group exempt under the plan, acquires 15% 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, 2009, unless earlier redeemed. They generally are redeemable at $.001 per Right until thirty days following announcement that a person or group, other than a person or group exempt under the plan, has acquired 15% or more of the Company’s common stock. 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 19--SEGMENT INFORMATION

The Company has three reported segments: Branch-based Distribution, Digital, and Lab Safety Supply. 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. (Canada), FindMRO, Grainger.com, Grainger Export, Grainger Global Sourcing, Grainger Parts, Grainger, S.A. de C.V. (Mexico) and Grainger Caribe Inc. (Puerto Rico). The Digital segment provided e-commerce solutions to customers’ MRO and other needs. The Digital segment was an aggregation of the FindMRO, MROverstocks.com, and TotalMRO.com business segments. During 2001, the Company shut down its digital operations except for FindMRO, which became part of the Branch-based Distribution Segment. (See Note 3 to the Consolidated Financial Statements.) Lab Safety Supply is a direct marketer of safety and other industrial products. In prior years the Other Businesses category included a number of operating entities. For 2001, Grainger Integrated Supply is the only entity in the Other Businesses category.

The Company’s segments offer differing ranges of services and/or products and require different resources and marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment transfer prices are established at external selling prices, less costs not incurred due to the related party sale.


                                                                                  2001
                                         --------------------------------------------------------------------------------------
                                           Branch-based                           Lab
                                           Distribution         Digital       Safety Supply          Other              Total
                                           ------------       ----------      -------------        ----------        ----------
                                                                       (In thousands of dollars)

Total net sales ....................        $4,251,596        $   29,979         $  324,797        $  190,811        $4,797,183
Intersegment net sales .............            13,436            28,138              1,292              --              42,866
Net sales to external customers ....         4,238,160             1,841            323,505           190,811         4,754,317
Segment operating
  earnings (loss) ..................           386,331           (49,227)            51,114               449           388,667

Segment assets .....................        $1,804,216        $       --         $  114,030        $   27,401        $1,945,647
Depreciation and amortization ......            75,686             1,383              8,012               617            85,698
Additions to long-lived assets .....            71,281               639              2,157               185            74,262


                                                                                 2000
                                         --------------------------------------------------------------------------------------
                                           Branch-based                           Lab
                                           Distribution         Digital       Safety Supply          Other              Total
                                           ------------       ----------      -------------        ----------        ----------
                                                                       (In thousands of dollars)

Total net sales ....................        $4,483,777        $   55,683         $  330,108        $  180,852         $5,050,420
Intersegment net sales .............            13,156            54,270                951             4,999             73,376
Net sales to external customers ....         4,470,621             1,413            329,157           175,853          4,977,044
Segment operating
  earnings (loss) ..................           397,252           (48,207)            55,037           (13,257)           390,825

Segment assets .....................        $2,016,220        $    9,933         $  111,961        $   54,095         $2,192,209
Depreciation and amortization ......            74,389             1,170              9,784             2,334             87,677
Additions to long-lived assets .....            72,606             8,153              7,397             2,990             91,146


                                                                                 1999
                                         --------------------------------------------------------------------------------------
                                           Branch-based                           Lab
                                           Distribution         Digital       Safety Supply          Other              Total
                                           ------------       ----------      -------------        ----------        ----------
                                                                       (In thousands of dollars)

Total net sales ....................        $4,211,316        $    2,979         $  313,533        $  125,882         $4,653,710
Intersegment net sales .............             9,826             2,499                715             4,395             17,435
Net sales to external customers ....         4,201,490               480            312,818           121,487          4,636,275
Segment operating
  earnings (loss) ..................           357,925           (20,560)            42,878           (16,306)           363,937

Segment assets .....................        $2,060,781        $    3,615         $  113,393        $   48,472         $2,226,261
Depreciation and amortization ......            66,710               534             16,059             2,255             85,558
Additions to long-lived assets .....           102,835             2,560              8,855             4,701            118,951

Following are reconciliations of the segment information with the consolidated totals per the financial statements (in thousands of dollars):

                                                                                2001               2000             1999
                                                                              ----------        ----------       ----------
Operating Earnings:
Total operating earnings for reportable segments.......................       $  388,667        $  390,825       $  363,937
Unallocated expenses...................................................          (50,094)          (55,705)         (46,709)
                                                                              ----------        ----------       ----------
  Total consolidated operating earnings................................       $  338,573        $  335,120       $  317,228
                                                                              ==========        ==========       ==========
Assets:
Total assets for reportable segments...................................       $1,945,647        $2,192,209       $2,226,261
Unallocated assets.....................................................          385,599           267,392          338,565
                                                                              ----------        ----------       ----------
  Total consolidated assets............................................       $2,331,246        $2,459,601       $2,564,826
                                                                              ==========        ==========       ==========

                                                                                                  2001
                                                                              ----------------------------------------------
                                                                               Segment                          Consolidated
Other Significant Items:                                                       Totals          Adjustments          Total
                                                                              ----------        ----------       ----------
Depreciation and amortization..........................................       $   85,698        $   17,511       $  103,209
Additions to long-lived assets.........................................       $   74,262        $   32,906       $  107,168

                                                                                                                 Long-lived
Geographic Information:                                                                         Revenues           Assets
                                                                                                ----------       ----------
United States...........................................................................        $4,275,852       $  725,096
Canada..................................................................................           392,433          154,163
Other foreign countries.................................................................            86,032            5,149
                                                                                                ----------       ----------
                                                                                                $4,754,317       $  884,408
                                                                                                ==========       ==========

                                                                                                   2000
                                                                              ---------------------------------------------
                                                                               Segment                         Consolidated
Other Significant Items:                                                       Totals          Adjustments          Total
                                                                              ----------        ----------       ----------
Depreciation and amortization..........................................       $   87,677        $   19,216      $   106,893
Additions to long-lived assets.........................................       $   91,146        $    3,767      $    94,913

                                                                                                                 Long-lived
Geographic Information:                                                                         Revenues           Assets
                                                                                                ----------       ----------
United States...........................................................................        $4,475,425       $  718,954
Canada..................................................................................           404,320          170,434
Other foreign countries.................................................................            97,299            2,288
                                                                                                ----------       ----------
                                                                                                $4,977,044       $  891,676
                                                                                                ==========       ==========

                                                                                                  1999
                                                                              ---------------------------------------------
                                                                               Segment                         Consolidated
Other Significant Items:                                                       Totals          Adjustments         Total
                                                                              ----------        ----------       ----------
Depreciation and amortization..........................................       $   85,558        $   12,669       $   98,227
Additions to long-lived assets.........................................       $  118,951        $   19,422       $  138,373

                                                                                                                 Long-lived
Geographic Information:                                                                         Revenues           Assets
                                                                                                ----------       ----------
United States...........................................................................        $4,206,269       $  732,994
Canada..................................................................................           350,599          184,834
Other foreign countries.................................................................            79,407            2,625
                                                                                                ----------       ----------
                                                                                                $4,636,275       $  920,453
                                                                                                ==========       ==========

Long-lived assets consist of property, buildings, equipment, capitalized software, goodwill, and other intangibles. Revenues are attributed to countries based on the location of the customer.

NOTE 20--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of selected quarterly information for 2001 and 2000 is as follows:

                                                                           2001 Quarter Ended
                                        ----------------------------------------------------------------------------------------
                                                       (In thousands of dollars except for per share amounts)
                                          March 31           June 30          September 30       December 31            Total
                                        -----------        -----------        -----------        -----------         -----------

Net sales ..........................    $ 1,219,420        $ 1,225,040        $ 1,199,358        $ 1,110,499         $ 4,754,317
Cost of merchandise sold ...........    $   824,509        $   830,124        $   803,507        $   706,890         $ 3,165,030
Gross profit .......................    $   394,911        $   394,916        $   395,851        $   403,609         $ 1,589,287
Warehousing, marketing, and
  administrative expenses ..........    $   311,222        $   301,228        $   300,474        $   298,720         $ 1,211,644
Restructuring charges ..............    $        --        $    40,000        $        --        $      (930)        $    39,070
Operating earnings .................    $    83,689        $    53,688        $    95,377        $   105,819         $   338,573
Net earnings .......................    $    42,175        $    14,820        $    56,022        $    61,513         $   174,530
Earnings per share--basic ..........    $      0.45        $      0.16        $      0.60        $      0.66         $      1.87
Earnings per share--diluted ........    $      0.45        $      0.15        $      0.59        $      0.65         $      1.84


                                                                           2000 Quarter Ended
                                        ----------------------------------------------------------------------------------------
                                                       (In thousands of dollars except for per share amounts)
                                          March 31           June 30          September 30       December 31            Total
                                        -----------        -----------        -----------        -----------         -----------

Net sales ..........................    $ 1,222,449        $ 1,271,651        $ 1,273,038        $ 1,209,906        $ 4,977,044
Cost of merchandise sold ...........    $   840,001        $   880,463        $   863,853        $   807,390        $ 3,391,707
Gross profit .......................    $   382,448        $   391,188        $   409,185        $   402,516        $ 1,585,337
Warehousing, marketing, and
  administrative expenses ..........    $   307,671        $   318,287        $   317,607        $   306,652        $ 1,250,217
Operating earnings .................    $    74,777        $    72,901        $    91,578        $    95,864        $   335,120
Net earnings .......................    $    41,211        $    55,662        $    48,107        $    47,923        $   192,903
Earnings per share--basic ..........    $      0.44        $      0.60        $      0.52        $      0.51        $      2.07
Earnings per share--diluted ........    $      0.44        $      0.59        $      0.51        $      0.51        $      2.05

In 2001, the Company recorded non-recurring charges relating to the shutdown of its Material Logic business unit and other restructuring charges. (See Note 3 to Consolidated Financial Statements.)

NOTE 21--SUBSEQUENT EVENTS

On February 1, 2002, the Company finalized a joint venture agreement with Uni-Select Inc., a Canadian company, which was previously announced on October 1, 2001. The joint venture combined Uni-Select’s Western Division with the automotive aftermarket division of Acklands-Grainger Inc. (AGI), which operates as Bumper to Bumper. AGI is a Canadian subsidiary of the Company. The Company will have a 50% stake in the new entity, which will be managed by Uni-Select. Annual revenues for the new company are expected to be C$120 million. For the year 2002, this combination is expected to reduce sales for AGI by approximately US$30-35 million, but should have no material effect on net earnings.

No gain or loss will be recognized when this transaction is finalized. As of December 31, 2001, and until February 1, 2002, the results of the Company’s automotive aftermarket division are consolidated with AGI. Beginning February 2, 2002, the Company will account for its interest using the equity method.

On February 28, 2002, the Company purchased substantially all of the assets, consisting of 4,801,600 shares of Company common stock and cash, of Mountain Capital Corporation, a Nevada corporation (“MCC”). In exchange, the Company transferred to MCC 4,695,725 shares of Company common stock. The number of shares transferred reflects a 1.5% discount from the number of shares received, and additionally reflects other adjustments designed to reimburse the Company for its transaction expenses and for the Company’s payment of certain indebtedness of MCC. The shares received by MCC from the Company were subsequently distributed to the MCC shareholders pursuant to a plan of complete liquidation of MCC.

The transaction documentation includes:

(i)	a Purchase Agreement containing the terms and conditions of the transaction,
(ii)	an Escrow Agreement providing for the pledge by MCC of 10% of the shares received in the transaction, and the pledge by the MCC shareholders of the escrowed shares, as security for the indemnification obligations and liabilities of MCC and the MCC shareholders, and
(iii)	a Share Transfer Restriction Agreement providing for certain restrictions on the transfer of Company common stock received by or otherwise held by the MCC shareholders and certain other parties to that agreement.

Prior to the transaction, James D. Slavik, a Company director, was the president and a director of MCC. In addition, Mr. Slavik and certain members of his family owned all of the outstanding stock of MCC either directly or indirectly, including through family trusts of which Mr. Slavik served as trustee. Mr. Slavik was not present and did not participate in any of the deliberations of the Board of Directors or its Board Affairs and Nominating Committee relating to the review, consideration or approval of the transaction.

W.W. Grainger, Inc., and Subsidiaries

SCHEDULE II-ALLOWANCE FOR DOUBTFUL ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

                                                              Balance at       Charged to                           Balance
                                                              beginning        costs and                             at end
Year                                                          of period         expenses      Deductions (a)      of period
- -----                                                         ----------       ----------     --------------      ---------
                                                                                  (In thousands of dollars)

2001 .................................................        $  23,436        $  21,483        $  14,367        $  30,552

2000 .................................................           18,369           18,076           13,009           23,436

1999 .................................................           15,951           13,585           11,167           18,369

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

EXHIBIT 11

W.W. Grainger, Inc., and Subsidiaries

COMPUTATIONS OF EARNINGS PER SHARE


                                                                                2001               2000                1999
                                                                           -------------       -------------       -------------
BASIC:

Weighted average number of shares
  outstanding during the year ......................................          93,189,132          93,003,813          92,836,696
                                                                           =============       =============       =============
Net earnings .......................................................       $ 174,530,000       $ 192,903,000       $ 180,731,000
                                                                           =============       =============       =============
Earnings per share .................................................       $        1.87       $        2.07       $        1.95
                                                                           =============       =============       =============
DILUTED:

Weighted average number of shares
  outstanding during the year (basic) ..............................          93,189,132          93,003,813          92,836,696

Potential shares:

  Shares issuable under outstanding options ........................           4,155,999           1,661,573           2,991,418

  Shares which could have been purchased based on
    the average market value for the period ........................          (3,625,281)         (1,267,602)         (2,089,599)
                                                                           -------------       -------------       -------------
                                                                                 530,718             393,971             901,819

Dilutive effect of exercised options prior to being exercised ......              16,696              21,406              18,464
                                                                           -------------       -------------       -------------
Shares for the portion of the period
  that the options were outstanding ................................             547,414             415,377             920,283

Contingently issuable shares .......................................             991,322             804,625             558,500
                                                                           -------------       -------------       -------------
                                                                               1,538,736           1,220,002           1,478,783
                                                                           -------------       -------------       -------------
Adjusted weighted average number of shares
  outstanding during the year ......................................          94,727,868          94,223,815          94,315,479
                                                                           =============       =============       =============
Net earnings .......................................................       $ 174,530,000       $ 192,903,000       $ 180,731,000
                                                                           =============       =============       =============
Earnings per share .................................................       $        1.84       $        2.05       $        1.92
                                                                           =============       =============       =============

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. 33-43902, 333-24215, 333-56362 and 333-61980) and on Form S-4 (No. 33-32091) of W.W. Grainger, Inc.

GRANT THORNTON LLP

Chicago, Illinois

March 19, 2002

EX-10 4 exhibit10b_iii.htm 1990 L-T STOCK INCENTIVE PLAN Exhibit 10(b)(iii) W.W. Grainger, Inc. - www.grainger.com - Prepared by FCDAA

                                       Exhibit 10(b)(iii) to the Annual Report
                                       on Form 10-K of W.W. Grainger, Inc.
                                       for the year ended December 31, 2001




                              W.W. Grainger, Inc.

                     1990 LONG TERM STOCK INCENTIVE PLAN

                          AS AMENDED FEBRUARY 27, 2002











                               W.W. Grainger, Inc.
                              100 Grainger Parkway
                        Lake Forest, Illinois 60045-5201
                                 (847) 535-1000

                                       43

                               W.W. GRAINGER, INC.
                       1990 LONG TERM STOCK INCENTIVE PLAN
                            AS AMENDED APRIL 25, 2001


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:

                    (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 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


                                       44

                    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

                    (C) a liquidation or dissolution of the Company;

                  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 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

                                       45

                  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:

                           (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 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.

                                       46

         (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:

                  (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");



                                       47

                  (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");

                  (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.

         (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.

                                       48


         (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 cancelled, if Phantom Stock is forfeited or cancelled, if Shares otherwise
deliverable upon (i) exercise of Options, (ii) exercise of SARs, (iii) vesting
of Restricted Stock, or (iv) settlement of Phantom Stock, are not delivered by
reason of payments of the Option exercise price pursuant to Section 6.5(b)
hereunder or withholdings of Shares in satisfaction of tax obligations under
Section 13.3 hereunder, or if any other grant results in any Shares not being
delivered, the Shares covered by such Option, SAR, grant of Re-

- --------

*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.

                                       49


stricted Stock, grant of Phantom Stock or other grant, as the case may be, shall
again be 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, grants of Phantom Stock, and Other Stock-Based Awards and
the number of Shares subject to outstanding Options, SARs, grants of Restricted
Stock, grants of Phantom 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;

         (c)  interpret and construe the Plan and all Agreements;

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

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

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

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

         (h)  maintain records concerning its decisions and proceedings;

                                       50


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

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

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

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

Section 6.  Stock Options.

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

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

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

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

6.5. Payment. Options shall be exercised by the delivery of a written notice 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:

         (a)  cash or its equivalent,

                                       51


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

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

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.

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.

                                       52


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. At the
end of the restriction period applicable to Phantom Stock, payment shall be made
in the manner set forth in the applicable award agreement.

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 shares of Phantom Stock
shall be entitled to receive cash payments equal to any cash dividends and other
distributions paid with respect to a corresponding number of Shares; provided,
however, that if any such dividends or distributions are paid in Shares, the
Fair Market Value of such Shares shall be converted into shares of Phantom Stock
which shall be subject to the same forfeiture restrictions and restrictions on
transferability as apply to the shares of Phantom Stock with respect to which
they are paid.

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


                                       53


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.

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,


                                       54


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.

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, Phantom Stock, or Other
         Stock-Based Awards that were forfeitable shall, unless otherwise
         determined by the Committee, become nonforfeitable and, to the extent
         applicable, shall be converted into Shares; 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.  Effect of Disposition of Facility or Operating Unit.

In the event that the Company or any of its Subsidiaries closes or disposes of
the facility at which a Participant is located or the Company or any of its
Subsidiaries diminish or eliminate ownership interests in any operating unit of
the Company or any of its Subsidiaries so that such operating unit ceases to be
majority owned by the Company or any of its Subsidiaries, then, with respect to
Awards held by Participants who subsequent to such event will not be employees
of the Company or any of its Subsidiaries,

                                       55


the Committee may (i) accelerate the exercisability of Awards to the extent not
yet otherwise exercisable or remove any restrictions applicable to any Awards
and (ii) extend the period during which Awards will be exercisable to a date
subsequent to the date when such Awards would otherwise have expired by reason
of the termination of such Participant's employment with the Company or any of
its Subsidiaries (but in no event to a date later than the expiration date of
the Awards or the fifth anniversary of the transaction in which such facility
closes or operating unit ceases). If the Committee takes no special action with
respect to any disposition of a facility or an operating unit, then any
cessation of employment resulting from such disposition will be treated as an
ordinary cessation of employment as described in Section 11.

Section 14.  Miscellaneous Provisions.

14.1. 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.

14.2. 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.

14.3. 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.

14.4. 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.

14.5. 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


                                       56


are listed on any securities exchange upon which the Common Stock of the Company
is listed.

14.6. 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.

14.7. 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.

14.8. Deferrals. The Committee may permit a Participant to defer such
Participant's receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant by virtue of the exercise of an
Option or SAR, the lapse or waiver of restrictions with respect to Restricted
Stock or Phantom Stock, or the satisfaction of any requirements or goals with
respect to Other Stock-Based Awards. If any such deferral election is permitted,
the Committee shall, in its sole discretion, establish rules and procedures for
such payment deferrals and the manner in which such deferral shall be
accomplished.


                                       57

EX-10 5 exhibit10b_iv.htm 2001 L-T STOCK INCENTIVE PLAN Exhibit 10(b)(vi) W.W. Grainger, Inc. - www.grainger.com - Prepared by FCDAA


                                       Exhibit 10(b)(iv) to the Annual Report
                                       on Form 10-K of W.W. Grainger, Inc.
                                       for the year ended December 31, 2001





                              W.W. Grainger, Inc.


                       2001 LONG TERM STOCK INCENTIVE PLAN

                          AS AMENDED FEBRUARY 27, 2002












                               W.W. Grainger, Inc.
                              100 Grainger Parkway
                        Lake Forest, Illinois 60045-5201
                                 (847) 535-1000


                                       58



                               W.W. GRAINGER, INC.

                       2001 LONG TERM STOCK INCENTIVE PLAN


Section 1.  Objective.

The objective of the 2001 Long Term Stock Incentive Plan (the "Plan") is to
attract and retain highly qualified executives and other employees, to advance
the interests of the Company by giving Employees a stake in the Company's future
growth and success, and to strengthen the alignment of interests between
Employees and the Company's shareholders through the ownership of shares of the
Company's Common Stock.

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) "Award" - The grant of any Option, Stock Appreciation
                  Right, Share of Restricted Stock, Share of Phantom Stock,
                  Share of Stock, Other Stock-Based Award, or any combination
                  thereof.

                  (c)  "Board" - The Board of Directors of the Company.

                  (d) "Change in Control" - 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 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

                                       59


                                    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

                                    (C) a liquidation or dissolution of the
                                    Company;

                           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
                           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


                                       60


                           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 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:

                                    (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 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


                                       61


                  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.

                  (e) "Code" - The Internal Revenue Code of 1986, as amended,
                  including the regulations thereunder, as amended from time to
                  time.

                  (f) "Committee" - The Compensation Committee of the Board or
                  such other Committee of the Board appointed by the Board to
                  administer the Plan. No Employee may serve as a member of the
                  Committee. If the Committee does not exist or cannot function
                  for any reason, the Board may take any action under the Plan
                  that would otherwise be the responsibility of the Committee.

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

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

                  (i) "Disability" or "Disabled" - A Participant's inability to
                  engage in any substantial gainful activity by reason of any
                  medically determinable physical or mental impairment that can
                  be expected to result in death or that has lasted for a
                  continuous period of not less than twelve (12) months.

                  (j) "Effective Date" - The date the Plan is approved by the
                  Company's shareholders.

                  (k) "Employee" - Any person designated as an employee of the
                  Company or a Subsidiary on the payroll records thereof. An
                  Employee shall not include any individual during any period he
                  or she is classified or treated by the Company or a Subsidiary
                  as an independent contractor, a consultant, or any employee of
                  an employment, consulting, or temporary agency or any other
                  entity other than the Company or a Subsidiary, without regard
                  to whether such individual is subsequently determined to have
                  been, or is subsequently retroactively reclassified as, a
                  common-law employee of the Company or a Subsidiary during such
                  period.

                  (l)  "Exempt Person" - 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");

                                       62



                           (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;

                           (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.

                                       63


                  (m) "Fair Market Value" - The closing price of a share of
                  Common Stock as reported in the Composite Tape for New York
                  Stock Exchange listed stocks or any other national stock
                  exchange or national market system on which the Common Stock
                  is then traded, on the last day on which a trade occurred
                  preceding the relevant date, or as otherwise determined by the
                  Committee.

                  (n) "Option" - The right to purchase a specified number of
                  shares of 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 10 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.

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

                  (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" - An Award of Shares granted under Section 9 of
                  the Plan.

                  (w) "Stock Appreciation Right" or "SAR" - The right to receive
                  a payment from the Company in cash, Common Stock, or any
                  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.

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

                                       64


         2.2. Other Definitions. In addition to the above definitions, certain
         words and phrases used in the Plan or any certificate, notice or
         agreement evidencing an Award may be defined elsewhere in the Plan or
         in such certificate, notice or agreement.

Section 3.  Shares Subject to the Plan.

         3.1. Number of Shares Available for Awards. Subject to the provisions
         of Section 3.3, the number of Shares deliverable under the Plan may not
         exceed 6,000,000 Shares, provided, however, that the number of Shares
         of Stock and Shares of Restricted Stock delivered under the Plan other
         than with respect to grants of Options or SARs may not exceed 10% of
         the total. 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 600,000 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 cancelled, if Phantom Stock is
         forfeited or cancelled, if Shares otherwise deliverable upon (i)
         exercise of Options, (ii) exercise of SARs, (iii) vesting of Restricted
         Stock, or (iv) settlement of Phantom Stock, are not delivered by reason
         of payments of the Option exercise price pursuant to Section 6.5(b)
         hereunder or withholdings of Shares in satisfaction of tax obligations
         under Section 15.3 hereunder, or if any other grant results in any
         Shares not being delivered, the Shares covered by such Option, SAR,
         grant of Restricted Stock, grant of Phantom Stock or other grant, as
         the case may be, shall again be available for Awards under the Plan.

         3.3 Adjustments. Subject to Section 5.3, 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, grants of Phantom Stock, and Other Stock-Based
         Awards and the number of Shares subject to outstanding Options, SARs,
         grants of Restricted Stock, grants of Phantom 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.

         The Committee may grant an Award only to an Employee who is actively
         employed by the Company or any Subsidiary on the date the Award is
         made. The granting of Awards


                                       65

         under the terms of this Plan is made at the discretion of the Committee
         and does not entitle a Participant to receive future Awards. The
         adoption of this Plan shall not be deemed to give any Employee any
         right to be granted an Award, except to the extent as may be determined
         by the Committee.

Section 5.        Administration.

         5.1. Committee. The Plan and all Awards granted pursuant hereto shall
         be administered by the Committee, which has sole and absolute
         discretion with respect to all decisions and determinations pertaining
         thereto. 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;

                  (c) interpret and construe the Plan and all Awards and any
                  certificates, notices or agreements relating thereto;

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

                  (e) determine the content and form of all certificates,
                  notices and agreements relating to Awards;

                  (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; and

                  (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. Additional Terms. The Committee may: (i) modify or
                  restrict exercise procedures and any other Plan procedures;
                  (ii) establish local country plans as subplans to this Plan,
                  each of which may be attached as an Appendix hereto and to the
                  extent that the Committee determines that the restrictions
                  imposed by the


                                       66


                  Plan preclude the achievement of the material purposes of the
                  Awards in jurisdictions outside the United States under such a
                  subplan, the Committee will have the authority and discretion
                  to modify those restrictions as the Committee determines to be
                  necessary or appropriate to conform to applicable requirements
                  or practices of jurisdictions outside the United States; (iii)
                  take any action, before or after an Award is made, which it
                  deems advisable to obtain or comply with any necessary local
                  government regulatory exemptions or approvals; provided that
                  the Committee may not take any action hereunder which would
                  violate any securities law or any governing statute; and (iv)
                  in the event of an extraordinary dividend or other
                  distribution, merger, reorganization, consolidation,
                  combination, sale of assets, split up, exchange, or spin off,
                  or other extraordinary corporate transaction, the Committee
                  may, in such manner and to such extent (if any) as it deems
                  appropriate and equitable make provision for a cash payment or
                  for the substitution or exchange of any or all outstanding
                  Awards of the cash, securities or property deliverable to the
                  holder of any or all outstanding Awards based upon the
                  distribution or consideration payable to holders of Common
                  Stock upon or in respect of such event.

         5.4. Delegation. The Committee may delegate to appropriate senior
         officers of the Company, or such other persons or committees as it
         deems appropriate, its duties under the Plan pursuant to such
         conditions and limitations as the Committee may establish.

         5.5. 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. Neither the Committee nor the Board, nor any member
         of the Committee or the Board or anyone acting at the direction of the
         Committee or the Board, shall be liable for any action or determination
         made hereunder in good faith.

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 6 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 a certificate, notice or 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.

                                       67


         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 ten (10) years after the date on which it is
         granted.

         6.5. Payment. The Committee shall determine the procedures governing
         the exercise of Options, and shall require that the per-share option
         price be paid in full at the time of exercise. The per-share option
         price shall be payable in full either: (a) in cash or its equivalent
         (acceptable cash equivalents shall be determined by the Committee); (b)
         unless otherwise determined by the Committee, by tendering previously
         acquired shares of Common Stock having an aggregate Fair Market Value
         at the time of exercise equal to the total option exercise price
         (provided that the shares of Common Stock which are tendered must have
         been held by the Participant for at least six (6) months prior to their
         tender); (c) unless otherwise determined by the Committee, pursuant to
         a "cashless exercise" procedure, as permitted under United States
         Federal Reserve Board's Regulation T, subject to securities law
         restrictions; (d) by a combination of (a), (b) and (c); or (e) by any
         other means which the Committee determines to be consistent with the
         Plan's purpose and applicable law.

         6.6. Rights as a Shareholder. Until the exercise of an Option and the
         delivery 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
         certificate, notice or 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 that 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.

                                       68


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

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

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

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

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

Section 8.  Restricted Stock or Phantom Stock.

         8.1. Grant of Restricted Stock or Phantom Stock. The Committee may
         grant Shares of Restricted Stock or Phantom Stock rights to such
         Participants at such times and in such amounts, and subject to such
         other terms and conditions not inconsistent with the Plan as it shall
         determine. Each grant of Restricted Stock or Phantom Stock rights shall
         be evidenced by a certificate, notice or 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. At the end of
         the restriction period applicable to Phantom Stock, payment shall be
         made in the manner set forth in the applicable award agreement.

         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



                                       69


         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 shares of
         Phantom Stock shall be entitled to receive cash payments equal to any
         cash dividends and other distributions paid with respect to a
         corresponding number of Shares; provided, however, that if any such
         dividends or distributions are paid in Shares, the Fair Market Value of
         such Shares shall be converted into shares of Phantom Stock which shall
         be subject to the same forfeiture restrictions and restrictions on
         transferability as apply to the shares of Phantom Stock with respect to
         which they are paid.

         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.  Awards of Stock.

         Subject to the provisions of the Plan, Shares of Stock may be awarded
         to Participants in such number, upon such terms, and at such time or
         times as the Committee shall determine in its discretion. Each grant of
         Stock may be evidenced by a certificate, notice or agreement setting
         forth the terms of such Award.

Section 10.  Other Stock-Based Awards and Other Benefits.

         10.1. 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 or 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.

         10.2. 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.

         10.3. Substitution or Assumption of Awards. The Committee, from time to
         time, also may substitute or assume outstanding awards granted by
         another company, whether in connection with an acquisition of such
         other company or otherwise, by either (a) granting an Award under the
         Plan in substitution of such other company's award, or (b) assuming
         such award as if it had been granted under the Plan if the terms of
         such assumed award could be applied to an Award


                                       70


         granted under the Plan. Such substitution or assumption shall be
         permissible if the holder of the substituted or assumed award would
         have been eligible to be granted an Award under the Plan if the other
         company had applied the rules of the Plan to such grant. In the event
         the Company assumes an award granted by another company, the terms and
         conditions of such award shall remain unchanged, except that the
         exercise price and the number and nature of Shares issuable upon
         exercise of any such option will be adjusted pursuant to Section 424(a)
         of the Code, notwithstanding other provisions of the Plan. In the event
         the Company elects to grant a new Award rather than assuming an
         existing option, such new Award may be granted with a similarly
         adjusted exercise price.

Section 11.  Amendment, Modification, and Termination of Plan.

         Subject to the terms of the Plan, the Board at any time may terminate
         or suspend the Plan, and from time to time may amend or modify the
         Plan, except that no amendment or modification by the Board without
         shareholder approval shall increase the number of Shares available for
         delivery under the Plan, decrease the minimum per-share Option or SAR
         price or permit Employees to serve on the Committee. 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 12.  Termination of Employment.

         12.1. 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.

         12.2. 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.

                                       71


         12.3. Termination of Employment for Any Other Reason. Unless otherwise
         determined by the Committee, whether at the time of grant or
         thereafter, in the event the employment of the Participant shall
         terminate for any reason other than misconduct or one described in
         Section 12.1 or 12.2, 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
         terminate and 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
         trade 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.

         12.4. Accrual of Right at Date of Termination. The Participant shall
         have the right to exercise an Option or SAR as indicated in Section
         12.3 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 Award and had not previously been exercised.

Section 13.  Change in Control.

Except as otherwise provided at the time of grant in the certificate, notice or
agreement relating to a particular Award, if a Change in Control occurs, then:

         "(i) the Participant's Restricted Stock, Phantom Stock, or Other
         Stock-Based Awards that were forfeitable shall, unless otherwise
         determined by the Committee, become nonforfeitable and, to the extent
         applicable, shall be converted into Shares; and

                                       72

         (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 14.  Effect of Disposition of Facility or Operating Unit.

In the event that the Company or any of its Subsidiaries closes or disposes of
the facility at which a Participant is located or the Company or any of its
Subsidiaries diminish or eliminate ownership interests in any operating unit of
the Company or any of its Subsidiaries so that such operating unit ceases to be
majority owned by the Company or any of its Subsidiaries, then, with respect to
Awards held by Participants who subsequent to such event will not be employees
of the Company or any of its Subsidiaries, the Committee may (i) accelerate the
exercisability of Awards to the extent not yet otherwise exercisable or remove
any restrictions applicable to any Awards and (ii) extend the period during
which Awards will be exercisable to a date subsequent to the date when such
Awards would otherwise have expired by reason of the termination of such
Participant's employment with the Company or any of its Subsidiaries (but in no
event to a date later than the expiration date of the Awards or the fifth
anniversary of the transaction in which such facility closes or operating unit
ceases). If the Committee takes no special action with respect to any
disposition of a facility or an operating unit, then any cessation of employment
resulting from such disposition will be treated as an ordinary cessation of
employment as described in Section 12.

Section 15.  Miscellaneous Provisions.

         15.1. Non-transferability of Awards. Unless otherwise determined by the
         Committee at the time of grant, and except as provided in Section 12,
         no Award granted under the Plan shall be assignable, transferable, or
         payable to or exercisable by anyone other than the Participant to whom
         it was granted.

         15.2. 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.

         15.3. 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. Unless otherwise determined by the Committee, a Participant
         may elect, subject to such conditions as the Committee may require, to
         have Shares otherwise deliverable under the Plan withheld by the
         Company and having a Fair Market Value sufficient to satisfy all or
         part of such


                                       73


         requirements or, if so determined by the Committee, the Participant's
         estimated total federal, state, and local tax obligation associated
         with the transaction.

         15.4. 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.

         15.5. Effectiveness of Plan. The Plan shall become effective upon its
         approval by the shareholders of the Company; provided, however, that no
         Award requiring the delivery 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.

         15.6. 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.

         15.7 Deferrals. The Committee may permit a Participant to defer such
         Participant's receipt of the payment of cash or the delivery of Shares
         that would otherwise be due to such Participant by virtue of the
         exercise of an Option or SAR, the lapse or waiver of restrictions with
         respect to Restricted Stock or Phantom Stock, or the satisfaction of
         any requirements or goals with respect to Other Stock-Based Awards. If
         any such deferral election is permitted, the Committee shall, in its
         sole discretion, establish rules and procedures for such payment
         deferrals and the manner in which such deferral shall be accomplished.


                                       74

EX-10 6 exhibit10b_v.htm EXECUTIVE DEATH BENEFIT PLAN Exhibit 10(b)(v) W.W. Grainger, Inc. - www.grainger.com - Prepared by FCDAA


                                       Exhibit 10(b)(v) to the Annual Report
                                       on Form 10-K of W.W. Grainger, Inc.
                                       for the year ended December 31, 2001





                               W.W. GRAINGER, INC.
                          EXECUTIVE DEATH BENEFIT PLAN

  (Conformed Copy Including Amendments Effective May 8, 1995, December 9, 1998,
             March 3, 1999, December 8, 1999, and February 27, 2002)

                                    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.,
          its divisions or subsidiaries, 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.

                                       75



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

                  2.3      "Committee" shall mean the Compensation Committee of
         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,

                           (c) completes twenty-five (25) Years of Service, or

                           (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

                                       76


         Term Life and Accidental Death and Dismemberment Insurance Plan (or
         equivalent program as recognized by the committee for purposes of this
         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).

                  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 years that a Participant
         hereunder is "eligible" under the W.W. Grainger, Inc. Employees Profit
         Sharing Plan or such equivalent retirement program as the committee may
         recognize for purposes of this 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:

                                       77


                           (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 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 Cashout of Death Benefit Upon Retirement. If a Participant
         incurs a Termination of Service on or after an Early Retirement Date,
         or on or after a Normal Retirement Date, the Participant shall receive,
         if previously elected on a form approved by the Committee, a lump sum
         benefit equal to the present value [determined using an annualized
         interest rate factor of six percent (6%)] of the death benefit that
         would have been payable on behalf of such Participant under Section 4.3
         if such Participant had died


                                       78


         at age eighty (80), increased to reflect estimated federal income tax
         as provided in Section 4.3. A Participant's election under this Section
         4.4 shall be irrevocable and shall not be given effect unless it is
         submitted to the Committee or its designee at least 12 months prior to
         the Participant's Termination of Service. The lump sum benefit payable
         under this Section 4.4, if properly elected, shall be paid within
         ninety (90) days after the end of the calendar quarter in which
         Termination of Service occurs. Following payment of a benefit under
         this Section 4.4, no additional benefits shall be payable to or on
         behalf of a Participant under this Plan.

                  4.5 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.

                  4.6 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 Retirement Date or Normal Retirement Date for
         purposes of this Section 4.6, 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 4.6, 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 during the Participant's life, in accordance with
         applicable Company procedures, 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


                                       79

         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,

                           (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:

                                       80


                           (a) include specific reasons for the decision,

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

                           (c) contain specific references to the relevant Plan
                  provisions upon which the decision is based.

                                   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;

                           (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


                                       81


         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 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


                                       82


         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 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.

                                       83

EX-10 7 exhibit10b_viii.htm SUPPLEMENTAL PROFIT SHARING PLAN Exhibit 10(b)(viii) W.W. Grainger, Inc. - www.grainger.com - Prepared by FCDAA


                                       Exhibit 10(b)(viii) to the Annual Report
                                       on Form 10-K of W.W. Grainger, Inc.
                                       for the year ended December 31, 2001







                              W. W. Grainger, Inc.
                        SUPPLEMENTAL PROFIT SHARING PLAN
               (As Amended and Restated Effective January 1, 1992)
     (Conformed Copy as of December 12, 2001, Including First through Sixth
         Amendments)


                     ARTICLE ONE. PURPOSE AND EFFECTIVE DATE

       1.1 Purpose of Plan. The purpose of this W.W. Grainger, Inc. Supplemental
Profit Sharing Plan is to provide key executives with profit sharing and
retirement benefits commensurate with their current compensation unaffected by
limitations imposed by the Internal Revenue Code on qualified retirement plans.
The Plan is intended to constitute an excess benefit plan, as defined in Section
3(36) of ERISA, and a "top hat" plan, as defined in Section 201(2) of ERISA.

       1.2 Effective Date. This Plan was originally established effective as of
January 1, 1983. It was subsequently amended and restated by action of the Board
of Directors on April 29, 1992. The effective date of the Plan as amended and
restated herein is January 1, 1992.

                            ARTICLE TWO. DEFINITIONS

       2.1 Definitions. Whenever used herein, the following terms shall have the
respective meanings set forth below and, when intended, such terms shall be
capitalized.

              (a) "Retirement" shall have the same meaning as defined in Section
              1.36 of the Profit Sharing Plan.

                                       84



              (b) "Code" shall mean the Internal Revenue Code of 1986, as
              amended from time to time.

              (c) "Committee" shall mean the Profit Sharing Trust Committee.

              (d) "Company" shall mean W.W. Grainger, Inc., a corporation
              organized under the laws of the State of Illinois, and
              subsidiaries thereof.

              (e) "Disability" shall have the same meaning as defined in Section
              1.14 of the Profit Sharing Plan.

              (f) "Employee" shall mean any person who is employed by the
              Company.

              (g) "ERISA" shall mean the Employee Retirement Income Security Act
              of 1974, as amended from time to time.

              (h) "Participant" shall mean any Employee selected by the
              Committee to participate in this Plan pursuant to Article Four.

              (i) "Plan" shall mean this W.W. Granger, Inc. Supplemental Profit
              Sharing Plan.

              (j) "Profit Sharing Plan" shall mean the W.W. Grainger, Inc.
              Employees Profit Sharing Plan as amended form time to time.

       2.2 Gender and Number. Except when otherwise indicated by the context,
any masculine term used in this plan also shall include the feminine; the plural
shall include the singular and the singular shall include the plural.



                                       85


                          ARTICLE THREE. ADMINISTRATION

       3.1 Administration by Committee. The Plan shall be administered by the
Committee, which is appointed by the Board of Directors of the Company to
administer this Plan and the Profit Sharing Plan.

       3.2 Authority of Committee. The Committee shall have the authority to
interpret the Plan, to establish and revise rules and regulations relating to
the Plan, to designate Participants, and to make all determinations that it
deems necessary or advisable for the administration of the Plan.

                            ARTICLE FOUR. ELIGIBILITY

       4.1 Participants. The Committee shall select the Employee or Employees
who shall participate in this Plan, subject to the limitations set forth in
Section 4.2. Once an Employee is designated a Participant, he shall remain a
Participant for the purposes specified in Section 5.1 and/or Section 5.2 until
the earlier of his death, retirement, disability, or termination of employment.

       4.2 Limitations on Eligibility. The Committee may select as Participants
in this Plan only those Employees who are "Eligible Employees" in the Profit
Sharing Plan (as defined therein) and whose share of contribution are
forfeitures under the Profit Sharing Plan are limited by:

              (a) Section 415 of the Code; or

              (b) Any other provision of the Code or ERISA, provided that the
              Employee is among "a select group of management or highly
              compensated Employees" of the Company, within the meaning of
              Sections 201, 301, and 401 of ERISA, such that the Plan with
              respect to benefits attributable to this subsection (b) qualifies
              for a "top hat" exemption from most of the substantive
              requirements of Title I of ERISA.


                                       86


                       ARTICLE FIVE. BENEFITS AND ACCOUNTS

       5.1 Accounts. An account shall be established for each Participant. Each
year there shall be credited to each Participant's account the difference
between (a) the aggregate amount of Company contributions and forfeitures which
would have been allocated to the account of the Participant in the Profit
Sharing Plan without regard to the contribution limitations described in Section
4.2 hereof; and (b) the amount of Company contribution and forfeitures actually
allocated to the account of the Participant in the Profit Sharing Plan.

       5.2 Earnings Factor. In addition to the credit under Section 5.1, if any,
an earnings factor shall be credited to each Participant's account at the end of
each calendar quarter. Such earnings factor shall be equal to the rate of return
that the Participant's account earned under the Profit Sharing Plan for that
calendar quarter; provided that the rate of return for a Participant who no
longer has a Profit Sharing Plan account shall be based upon the Participant's
Profit Sharing Plan investment allocation immediately prior to final
distribution of his Profit Sharing Plan account. Notwithstanding the foregoing,
a Participant may elect to receive after termination of employment an earnings
factor equal to the rate of return in any one of the investment funds (exclusive
of the Grainger Stock Fund) available under the Profit Sharing Plan. Such
election shall be made on a form approved by the Committee, shall not be given
effect unless it is submitted to the Committee or its designee at least 12
months prior to the Participant's termination of employment, and shall remain in
effect until the Participant's vested account balance under this Plan has been
distributed.

       5.3 Distribution Upon Termination of Employment. In the event of a
Participant's termination of employment for any reason other than death, the
Participant's vested account balance under this Plan shall become payable to the
Participant in the form of five annual installments, provided that a vested
account balance less than $100,000 shall be paid in a lump sum within ninety
(90) days after the end of the calendar quarter in which termination occurs.

                                       87



       Notwithstanding, a Participant whose vested account balance is $100,000
or greater may elect, on a form approved by the Committee, to receive
distribution of his or her vested account balance in the form of a lump sum
payment or in the form of annual installments paid over a period not to exceed
the lesser of 15 years or the Participant's remaining life expectancy. Such
election shall not be given effect unless it is submitted to the Committee or
its designee at least 12 months prior to the Participant's termination of
employment. Life expectancy shall be calculated as of the end of the calendar
year during which the Participant's employment is terminated, and shall not
thereafter be recalculated.

       The first annual installment, or a lump sum payment, if properly elected,
shall be paid to the Participant within ninety (90) days after the end of the
calendar quarter in which termination of employment occurs. The remaining
installments shall be paid in the first calendar quarter of each subsequent
year.

       The amount of each annual installment shall be equal to the quotient
obtained by dividing the value of the Participant's vested account balance on
the effective date of the related employment termination (and on the date of
each subsequent installment, as appropriate) by the number of years remaining in
the distribution period including that installment. The Participant's vested
account balance shall continue to accrue earnings, as specified in Section 5.2,
until the entire vested account balance has been paid.

       5.4 Death Benefit. In the event of a Participant's death, the
Participant's entire remaining account balance shall be paid in a lump sum,
within ninety (90) days after the end of the calendar quarter in which such
death occurs, to the Participant's beneficiary, as such beneficiary was
designated by the Participant in accordance with the Company's beneficiary
designation procedures.

       In the event a Participant dies without having designated a beneficiary,
or with no surviving beneficiary, the Participant's account balance shall be
paid in a lump sum to the Participant's estate within ninety (90) days after the
end of the calendar quarter in which death occurs.

                                       88


       5.5 Alternative Payment Form. Notwithstanding the terms and conditions of
Section 5.3, a Participant may at any time on or after his termination of
employment petition the Committee to request that payment of his remaining
vested account balance be made in a lump sum due to circumstances of compelling
personal hardship. The Committee, at its sole discretion, shall make a binding
determination as to whether such alternative form of payment will be allowed.


                              ARTICLE SIX. VESTING

       Vesting. Subject to Section 8.1, each Participant shall become vested in
his account balance under this Plan at the same rate and at the same time as he
becomes vested in his account balance in the Profit Sharing Plan.


                    ARTICLE SEVEN. AMENDMENT AND TERMINATION

       7.1 Amendment. The Company shall have the power at any time and from time
to time to amend this Plan by resolution of its Board of Directors, provided
that no amendment shall be adopted the effect of which would be to deprive any
Participant of his vested interest in his account under this Plan.

       7.2 Termination. The Company reserves the right to terminate this Plan at
any time by resolution of its Board of Directors. Subject to Section 8.1, upon
termination of this Plan, each Participant shall become fully vested in his
account balance and such account balance shall become payable at the same time
and in the same manner as provided in Article Five.

       7.3 Former Employees. Notwithstanding any provision of the Plan to the
contrary, in the event of any amendment of the Plan with respect to the payment
of vested account balances or the termination of the Plan pursuant to this
Article, former employees for whom accounts are then maintained under the Plan
will be treated no

                                       89


less favorably with respect to such amendment or termination than active
employees for whom accounts are then maintained under the Plan.

                          ARTICLE EIGHT. MISCELLANEOUS

       8.1 Funding. This Plan shall be unfunded. No contributions shall be made
to any separate funding vehicle. The Company may set up reserves on its books of
account evidencing the liability under this Plan. To the extent that any person
acquires an account balance hereunder or a right to receive payments from the
Company, such right shall be no greater than the right of a general unsecured
creditor.

       8.2 Limitation of Rights. Nothing in the Plan shall be construed to:

              (a)    Give any Employee any right to participate in the Plan
                     except in accordance with the provisions of the Plan;

              (b)    Limit in any way the right of the Company to terminate an
                     Employee's employment; or

              (c)    Evidence any agreement or understanding, express or
                     implied, that the Company will employ an Employee in any
                     particular position or at any particular rate of
                     remuneration.

       8.3 Nonalienation. No benefits under this Plan shall be pledged,
assigned, transferred, sold or in any manner whatsoever anticipated, charged, or
encumbered by an Employee, former Employee, or their beneficiaries, or in any
manner be liable for the debts, contracts, obligations, or engagements of any
person having a possible interest in the Plan, voluntary or involuntary, or for
any claims, legal or equitable, against any such person, including claims for
alimony or the support of any spouse.

                                       90


       8.4 Controlling Law. This Plan shall be construed in accordance with the
laws of the State of Illinois in every respect, including without limitation,
validity, interpretation, and performance.

       8.5 Text Controls. Article headings are included in the Plan for
convenience of reference only, and the Plan is to be construed without any
reference to such headings. If there is any conflict between such headings and
the text of the Plan, the text shall control.

       IN WITNESS WHEREOF, the Company has caused this Plan, as amended and
restated herein, to be signed and attested by its duly qualified officers and
caused its corporate seal to be hereunto affixed on this 29th day of April,
1992.


                                                          W.W. Grainger, Inc.



                                                          By:  /s/ D.W. Grainger
                                                               ----------------
                                                                   Chairman
Attest:



/s/ J.M. Baisley
- ----------------
Secretary


                                       91

EX-21 8 exhibit21.htm SUBSIDIARIES AS OF FEBRUARY 28, 2002 Exhibit (21) W.W. Grainger, Inc. - www.grainger.com - Prepared by FCDAA


                                          Exhibit (21) to the Annual Report
                                          on Form 10-K of W.W. Grainger, Inc.
                                          for the year ended December 31, 2001




                               W.W. GRAINGER, INC.


                      Subsidiaries as of February 28, 2002


Acklands - Grainger Inc. (Canada)

       - USI - AGI Prairies Inc. (Canada) (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)

       - SC Grainger Co., Ltd. (Japan) (34% owned)

       - MRO Korea Co., Ltd. (Korea) (49% owned)

       - Grainger Global Holdings, Inc.

              - Alpha Purchase Co., Ltd. (Japan) (11% owned)

Grainger Technology Partners, LLC (Delaware) (98% owned)

Lab Safety Supply, Inc. (Wisconsin)

       - The Ben Meadows Co., Inc. (Georgia)


                                       92

-----END PRIVACY-ENHANCED MESSAGE-----