10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission file number 1-5684

W.W. Grainger, Inc.

(Exact name of registrant as specified in its charter)

Illinois	36-1150280
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
100 Grainger Parkway, Lake Forest, Illinois	60045-5201
(Address of principal executive offices)	(Zip Code)
(847) 535-1000
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year; if changed since last report)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer T	Accelerated filer £
Non-accelerated filer £	Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

There were 73,623,181 shares of the Company’s Common Stock outstanding as of June 30, 2009.

1

TABLE OF CONTENTS
		Page No.
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings  for the Three and Six Months Ended June 30, 2009 and  June 30, 2008	3
	Condensed Consolidated Statements of Comprehensive Earnings for the Three and Six Months Ended  June 30, 2009 and June 30, 2008	4
	Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008	5 - 6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and  June 30, 2008	7 - 8
	Notes to Condensed Consolidated Financial Statements	9 – 18
Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations	19 – 27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
Signatures		31
EXHIBITS
Exhibits 31 & 32	Certifications

2

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands of dollars, except for share and per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Net sales	$	1,533,263		$	1,756,856		$	2,998,511		$	3,417,902
Cost of merchandise sold		908,295			1,050,979			1,744,128			2,032,091
Gross profit		624,968			705,877			1,254,383			1,385,811
Warehousing, marketing and administrative expenses		471,039			521,042			941,240			1,015,153
Operating earnings		153,929			184,835			313,143			370,658
Other income and (expense):
Interest income		273			1,236			674			2,040
Interest expense		(2,318	)		(3,765	)		(4,536	)		(5,198	)
Equity in net income (loss) of unconsolidated entities		707			1,343			783			2,080
Other non-operating income		234			796			237			1,431
Other non-operating expense		(1,199	)		(65	)		(207	)		(131	)
Total other income and (expense)		(2,303	)		(455	)		(3,049	)		222
Earnings before income taxes		151,626			184,380			310,094			370,880
Income taxes		59,160			71,201			121,250			143,463
Net earnings (loss)	$	92,466		$	113,179		$	188,844		$	227,417
Earnings per share:
Basic	$	1.23		$	1.44		$	2.50		$	2.88
Diluted	$	1.21		$	1.42		$	2.46		$	2.83
Weighted average number of shares outstanding:
Basic		73,443,360			76,542,071			73,852,588			77,241,860
Diluted		74,558,636			78,028,077			74,853,304			78,641,274
Cash dividends paid per share	$	0.46		$	0.40		$	0.86		$	0.75

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

3

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands of dollars)

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Net earnings (loss)	$	92,466	$	113,179	$	188,844	$	227,417
Other comprehensive earnings (losses):
Foreign currency translation adjustments, net of tax (expense) benefit of $(4,135), $(409), $(2,351), and $1,599, respectively		34,022		2,459		17,957		(7,439	)
Comprehensive earnings	$	126,488	$	115,638	$	206,801	$	219,978

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

4

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except for share and per share amounts)

(Unaudited)

ASSETS	June 30, 2009		Dec. 31, 2008
CURRENT ASSETS
Cash and cash equivalents	$	416,291	$	396,290
Accounts receivable (less allowances for doubtful
accounts of $27,955 and $26,481, respectively)		582,431		589,416
Inventories		899,843		1,009,932
Prepaid expenses and other assets		72,479		95,915
Deferred income taxes		53,981		52,556
Total current assets		2,025,025		2,144,109
PROPERTY, BUILDINGS AND EQUIPMENT		2,181,430		2,131,863
Less accumulated depreciation and amortization		1,252,634		1,201,552
Property, buildings and equipment – net		928,796		930,311
DEFERRED INCOME TAXES		110,723		97,442
INVESTMENT IN UNCONSOLIDATED ENTITIES		19,645		20,830
GOODWILL		218,841		213,159
OTHER ASSETS AND INTANGIBLES – NET		102,735		109,566
TOTAL ASSETS	$	3,405,765	$	3,515,417

5

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

(In thousands of dollars, except for share and per share amounts)

(Unaudited)

LIABILITIES AND SHAREHOLDERS' EQUITY	June 30, 2009			Dec. 31, 2008
CURRENT LIABILITIES
Short-term debt	$	25,499		$	19,960
Current maturities of long-term debt		42,090			21,257
Trade accounts payable		255,373			290,802
Accrued compensation and benefits		119,887			162,380
Accrued contributions to employees’ profit sharing plans		55,421			146,922
Accrued expenses		80,778			118,633
Income taxes payable		2,564			1,780
Total current liabilities		581,612			761,734
LONG-TERM DEBT (less current maturities)		467,395			488,228
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES		35,872			33,219
ACCRUED EMPLOYMENT-RELATED BENEFITS		210,208			198,431
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock – $5 par value – 12,000,000 shares authorized; none issued nor outstanding		–			–
Common Stock – $0.50 par value – 300,000,000 shares authorized; issued 109,659,219 shares		54,830			54,830
Additional contributed capital		576,433			564,728
Retained earnings		3,794,397			3,670,726
Accumulated other comprehensive earnings (losses)		(20,568	)		(38,525	)
Treasury stock, at cost – 36,036,038 and 34,878,190 shares, respectively		(2,294,414	)		(2,217,954	)
Total shareholders' equity		2,110,678			2,033,805
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	3,405,765		$	3,515,417

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

6

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

(Unaudited)

	Six Months Ended June 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)	$	188,844		$	227,417
Provision for losses on accounts receivable		8,237			9,053
Deferred income taxes and tax uncertainties		(14,404	)		(10,693	)
Depreciation and amortization:
Property, buildings and equipment		54,364			52,366
Capitalized software and other intangibles		14,141			12,529
Stock-based compensation		24,841			27,478
Tax benefit of stock incentive plans		685			1,097
Net gains on sales of property, buildings and equipment		53			(3,366	)
(Income) from unconsolidated entities – net		(783	)		(2,080	)
Change in operating assets and liabilities – net of business acquisitions
(Increase) decrease in accounts receivable		6,618			(82,929	)
(Increase) decrease in inventories		120,528			(22,107	)
(Increase) decrease in prepaid expenses and other assets		24,004			(12,591	)
Increase (decrease) in trade accounts payable		(41,776	)		27,761
Increase (decrease) in other current liabilities		(163,188	)		(101,329	)
Increase (decrease) in current income taxes payable		878			(8,800	)
Increase (decrease) in accrued employment-related benefits cost		11,730			6,781
Other – net		(2,162	)		(1,865	)
Net cash provided by operating activities		232,610			118,722
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings and equipment – net of dispositions		(46,796	)		(97,613	)
Additions to capitalized software		(5,108	)		(4,166	)
Net cash acquired (paid) for business acquisitions		1,345			(6,868	)
Other – net		948			19,429
Net cash used in investing activities	$	(49,611	)	$	(89,218	)

7

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands of dollars)

(Unaudited)

	Six Months Ended June 30,
	2009			2008
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term debt	$	–		$	(95,947	)
Borrowings under line of credit		2,996			7,442
Payments against line of credit		(816	)		(111	)
Proceeds from issuance of long-term debt		–			500,000
Stock options exercised		21,476			31,891
Excess tax benefits from stock-based compensation		5,412			9,369
Purchase of treasury stock		(127,696	)		(270,950	)
Cash dividends paid		(65,174	)		(59,351	)
Net cash (used in) provided by financing activities		(163,802	)		122,343
Exchange rate effect on cash and cash equivalents		804			(7,050	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		20,001			144,797
Cash and cash equivalents at beginning of year		396,290			113,437
Cash and cash equivalents at end of period	$	416,291		$	258,234

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

8

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.BACKGROUND AND BASIS OF PRESENTATION

W.W. Grainger, Inc. distributes facilities maintenance products and provides services used by businesses and institutions primarily in the United States, Canada and Mexico to keep their facilities and equipment running.  In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries.

The Condensed Consolidated Financial Statements of the Company and the related notes are unaudited and should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2008, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).

The Condensed Consolidated Balance Sheet as of December 31, 2008, has been derived from the audited consolidated financial statements at that date, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.

The unaudited financial information reflects all adjustments (primarily consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the statements contained herein.

The Company has evaluated subsequent events through July 31, 2009, the date the financial statements were issued.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NEW ACCOUNTING STANDARDS

In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (FSP 141(R)-1).  FSP 141(R)-1 requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated.  If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with FASB Statement No. 5, “Accounting for Contingencies,” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss.” This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company does not expect the adoption of FSP 141(R)-1 to have a material effect on its results of operations or financial position.

9

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In April 2009, the FASB issued three Staff Positions intended to provide application guidance and revise the disclosures regarding fair value measurements and impairment of securities.  A summary of each Staff Position is as follows:

·   FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” addresses the determination of fair values when there is no active market or where the price inputs represent distressed sales.  FSP 157-4 reaffirms the view in SFAS No. 157 that the objective of fair value measurement is to reflect an asset’s sale price in an orderly transaction at the date of the financial statements.

·   FSP 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” enhances consistency in financial reporting by increasing the frequency of fair value disclosures to a quarterly basis for any financial instruments that are not currently reflected on the balance sheet at fair value.

·   FSP 115-2, FAS 124-2, and EITF 99-20-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” provides additional guidance designed to create greater consistency to the timing of impairment recognition and provide greater clarity about the credit and noncredit components of impaired debt securities that are not expected to be sold.

The three Staff Positions are effective for interim and annual periods ending after June 15, 2009.  The adoption of these FSPs did not have a material effect on the Company’s results of operations or financial position.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (SFAS No. 165) to provide authoritative accounting literature for subsequent events which was previously addressed only in auditing literature.  SFAS No. 165 addresses events that occur after the balance sheet date but before the issuance of the financial statements.  It distinguishes between subsequent events that should be recognized in the financial statements and those that should not.  Also, it requires disclosure of the date through which subsequent events were evaluated and disclosures for certain non-recognized events.  SFAS No. 165 is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009.  The Company applied the provision of SFAS No. 165 for the period ending June 30, 2009 and disclosed the date through which it has evaluated subsequent events and the basis for choosing that date.  The adoption of SFAS No. 165 did not have a material effect on the Company’s results of operations or financial position.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167 (SFAS No. 167) which is a revision to FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities.”  This statement changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  SFAS No. 167 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement.  SFAS No. 167 will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity.  The Company does not expect the adoption of SFAS 167 to have a material effect on its results of operations or financial position.

10

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In June 2009, the FASB issued statement No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (FASB Statement No. 168) which establishes the FASB Accounting Standards Codification to become the source of authoritative U.S. generally accepted accounting principles to be applied by non-governmental entities.  The Accounting Standards Codification will supersede all existing non-SEC accounting and reporting standards.  FASB Statement No. 168 is effective for interim or annual financial periods ending after September 15, 2009.  The Company will apply this statement for the period ending September 30, 2009, however it does not expect adoption to have a material effect on its results of operations or financial position.

3. ACQUISITIONS

In June 2009, the Company acquired the remaining 50.1% of its joint venture in India, Asia Pacific Brands India Private Limited (Asia Pacific Brands), for $1.2 million.  Asia Pacific Brands had revenue of approximately US$32 million for its fiscal year ended March 31, 2009.  The Company originally paid $5.4 million for its ownership interest which was effective July 21, 2008.  At the time of the original investment, the Company and its joint venture partner each made a $1.1 million capital infusion which was intended to help grow the business.  In the fourth quarter of 2008, the Company wrote-off its investment in this joint venture due to the economic slowdown in India and the loss of a major supplier which accounted for approximately 25% of the joint venture’s annual revenue.  These conditions severely affected Asia Pacific Brands’ ability to secure additional financing to meet its current obligations and continue as a going concern.  Up through the time that the investment was written-off, the Company used the equity method to account for this investment.  Over the past six months Asia Pacific Brands’ business has improved.  It has been able to streamline its operations, strengthen its management and enhance its supplier base.  The results of Asia Pacific Brands are now included in the Company’s consolidated results from the date of acquisition.  Due to the immaterial nature of this transaction, disclosure of pro forma results were not considered necessary.

4. INVESTMENTS IN UNCONSOLIDATED ENTITIES

On June 19, 2009, the Company announced that it plans to become a majority owner of MonotaRO, a direct marketer of maintenance, repair and operating supplies in Japan, in which the Company currently has a 38.3% ownership interest.  MonotaRO held a shareholder meeting which authorized the repurchase of 1.83 million shares.  In August, the Company plans to initiate a tender offer bid for 380,000 MonotaRO shares, allowing the Company to achieve a majority interest in MonotaRO.  The Company expects to invest approximately $4.0 million through the tender offer bid process.  The tender is anticipated to be completed in the third quarter.  At the time majority ownership is obtained, the Company will recognize 100% of the fair value of acquired assets and assumed liabilities.  It is anticipated that this transaction will result in consolidation of MonotaRO’s results and trigger realization of a one time gain which could be significant.

11

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. DIVIDEND 

On July 29, 2009, the Company’s Board of Directors declared a quarterly dividend of 46 cents per share, payable September 1, 2009, to shareholders of record on August 10, 2009.

6. WARRANTY RESERVES

The Company generally warrants the products it sells against defects for one year.  For a significant portion of warranty claims, the manufacturer of the product is responsible for the expenses associated with this warranty program.  For warranty expenses not covered by the manufacturer, the Company provides a reserve for future costs based on historical experience.  The warranty reserve activity was as follows (in thousands of dollars):

	Six Months Ended June 30,
	2009			2008
Beginning balance	$	3,218		$	3,442
Returns		(5,626	)		(5,997	)
Provision		5,550			6,064
Ending balance	$	3,142		$	3,509

7. 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 with a minimum contribution of 8% and a maximum contribution of 18% of total eligible compensation paid to all eligible employees.

Postretirement Benefits

The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its employees and their dependents should they elect to maintain such coverage upon retirement. Covered employees become eligible for participation when they qualify for retirement while working for the Company.  Participation in the plan is voluntary and requires participants to make contributions toward the cost of the plan, as determined by the Company.

The net periodic benefit costs charged to operating expenses, which are valued at the measurement date of January 1 and recognized evenly throughout the year, consisted of the following components (in thousands of dollars):

12

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Service cost	$	3,076		$	2,425		$	6,152		$	4,850
Interest cost		2,682			2,372			5,365			4,745
Expected return on assets		(851	)		(1,116	)		(1,701	)		(2,232	)
Amortization of transition asset		(35	)		(36	)		(71	)		(72	)
Amortization of unrecognized losses		1,033			328			2,067			656
Amortization of prior service credits		(318	)		(304	)		(607	)		(608	)
Net periodic benefit costs	$	5,587		$	3,669		$	11,205		$	7,339

The Company has established a Group Benefit Trust to fund the plan and process benefit payments.  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 (IRC), as amended.  There are no minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC.  During the three and six months ended June 30, 2009, the Company contributed $1.0 million and $1.8 million, respectively, to the trust.

8. SEGMENT INFORMATION

Effective January 1, 2009 the Company revised its segment disclosure.  The Company has two reportable segments:  the United States and Canada.  In the first quarter of 2009, the Company integrated the Lab Safety Supply business into the Grainger Industrial Supply business and results are now reported under the United States segment.  The Canada segment reflects the results for Acklands – Grainger, Inc., the Company’s Canadian branch-based distribution business.  Other Businesses include the following:  Grainger, S.A. de C.V. (Mexico), Asia Pacific Brands India Private Limited (India), Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China) and Grainger Panama S.A. (Panama).  These businesses generate revenue through the distribution of facilities maintenance products.  Prior year segment amounts have been restated in a consistent manner.  Following is a summary of segment results (in thousands of dollars):

	Three Months Ended June 30, 2009
	United States			Canada			Other Businesses			Total
Total net sales	$	1,353,795		$	160,724		$	27,901		$	1,542,420
Intersegment net sales		(8,957	)		(81	)		(119	)		(9,157	)
Net sales to external customers	$	1,344,838		$	160,643		$	27,782		$	1,533,263
Segment operating earnings (losses)	$	176,533		$	9,740		$	(3,284	)	$	182,989

13

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

`

	Three Months Ended June 30, 2008
	United States			Canada		Other Businesses			Total
Total net sales	$	1,542,921		$	197,867	$	30,527		$	1,771,315
Intersegment net sales		(14,285	)		–		(174	)		(14,459	)
Net sales to external customers	$	1,528,636		$	197,867	$	30,353		$	1,756,856
Segment operating earnings (losses)	$	209,721		$	16,013	$	(1,927	)	$	223,807

	Six Months Ended June 30, 2009
	United States			Canada			Other Businesses			Total
Total net sales	$	2,662,532		$	304,519		$	50,433		$	3,017,484
Intersegment net sales		(18,650	)		(93	)		(230	)		(18,973	)
Net sales to external customers	$	2,643,882		$	304,426		$	50,203		$	2,998,511
Segment operating earnings (losses)	$	349,718		$	15,694		$	(6,218	)	$	359,194

	Six Months Ended June 30, 2008
	United States			Canada		Other Businesses			Total
Total net sales	$	3,012,276		$	375,170	$	55,072		$	3,442,518
Intersegment net sales		(24,388	)		–		(228	)		(24,616	)
Net sales to external customers	$	2,987,888		$	375,170	$	54,844		$	3,417,902
Segment operating earnings (losses)	$	404,854		$	27,688	$	(6,151	)	$	426,391

	United States		Canada		Other Businesses		Total
Segment assets:
June 30, 2009	$	2,173,493	$	464,849	$	147,237	$	2,785,579
December 31, 2008	$	2,310,484	$	448,660	$	133,111	$	2,892,255

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W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Operating earnings:
Total operating earnings for reportable segments	$	182,989		$	223,807		$	359,194		$	426,391
Unallocated expenses and eliminations		(29,060	)		(38,972	)		(46,051	)		(55,733	)
Total consolidated operating earnings	$	153,929		$	184,835		$	313,143		$	370,658

	June 30, 2009			Dec. 31, 2008
Assets:
Total assets for reportable segments	$	2,785,579		$	2,892,255
Elimination of intersegment assets		(2,470	)		(2,095	)
Unallocated assets		622,656			625,257
Total consolidated assets	$	3,405,765		$	3,515,417

Unallocated expenses and unallocated assets primarily relate to the Company headquarters’ support services, which are not part of any business segment.  Unallocated expenses include payroll and benefits, depreciation and other costs associated with headquarters-related support services.  Unallocated assets primarily include non-operating cash and cash equivalents, certain prepaid expenses, deferred income taxes and non-operating property, buildings and equipment – net.

Unallocated expenses decreased $9.9 million and $9.7 million for the three and six months ended June 30, 2009, respectively.  The decrease in unallocated expenses is primarily due to lower payroll and benefits and a $6.0 million provision for a legal reserve in 2008 that did not repeat in 2009.

The unallocated assets as of June 30, 2009 were essentially flat when compared to the unallocated assets at December 31, 2008.

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W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. EARNINGS PER SHARE

In June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP 03-6-1). FSP 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.  Upon adoption, a company is required to retrospectively adjust its earnings per share data presentation to conform with the FSP 03-6-1 provisions.  FSP 03-6-1 is effective for fiscal years beginning after December 15, 2008.

On January 1, 2009, the Company adopted FSP 03-6-1.  The Company’s unvested share-based payment awards, such as certain Performance Shares, Restricted Stock and Restricted Stock Units that contain nonforfeitable rights to dividends meet the criteria of a participating security as defined by FSP 03-6-1.  The adoption of FSP 03-6-1 has changed the methodology of computing the Company’s earnings per share to the two-class method from the treasury stock method.  As a result, the Company has restated previously reported earnings per share.  This change has not affected previously reported consolidated net earnings or net cash flows from operations.  Under the two-class method, earnings are allocated between common stock and participating securities.  FSP 03-6-1 provides guidance that the presentation of basic and diluted earnings per share is required only for each class of common stock and not for participating securities.  As such, the Company will present basic and diluted earnings per share for its one class of common stock.

The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period.  The Company’s reported net earnings is reduced by the amount allocated to participating securities to arrive at the earnings allocated to common stock shareholders for purposes of calculating earnings per share.

The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class method.  The Company has determined the two-class method to be the more dilutive.  As such, the earnings allocated to common stock shareholders in the basic earnings per share calculation is adjusted for the reallocation of undistributed earnings to participating securities as prescribed by FSP 03-6-1 to arrive at the earnings allocated to common stock shareholders for calculating the diluted earnings per share.

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W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table sets forth the computation of basic and diluted earnings per share under the two-class method as prescribed by FSP 03-6-1 (in thousands of dollars, except for share and per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Net earnings as reported	$	92,466		$	113,179		$	188,844		$	227,417
Less: Distributed earnings available to participating securities		(750	)		(673	)		(1,440	)		(1,189	)
Less: Undistributed earnings available to participating securities		(1,413	)		(1,998	)		(2,968	)		(3,796	)
Numerator for basic earnings per share – Undistributed and distributed earnings available to common shareholders	$	90,303		$	110,508		$	184,436		$	222,432
Add: Undistributed earnings allocated to participating securities		1,413			1,998			2,968			3,796
Less: Undistributed earnings reallocated to participating securities		(1,392	)		(1,961	)		(2,929	)		(3,730	)
Numerator for diluted earnings per share – Undistributed and distributed earnings available to common shareholders	$	90,324		$	110,545		$	184,475		$	222,498
Denominator for basic earnings per share – weighted average shares		73,443,360			76,542,071			73,852,588			77,241,860
Effect of dilutive securities		1,115,276			1,486,006			1,000,716			1,399,414
Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities		74,558,636			78,028,077			74,853,304			78,641,274
Earnings per share Two-class method
Basic	$	1.23		$	1.44		$	2.50		$	2.88
Diluted	$	1.21		$	1.42		$	2.46		$	2.83

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. CONTINGENCIES AND LEGAL MATTERS

As previously reported, in December 2007, the Company received a letter from the Commercial Litigation Branch of the Civil Division of the Department of Justice (the “DOJ”) regarding the Company’s contract with the United States General Services Administration (the “GSA”).  The letter suggested that the Company had not complied with its disclosure obligations and the contract’s pricing provisions, and had potentially overcharged government customers under the contract.

Discussions relating to the Company’s compliance with its disclosure obligations and the contract’s pricing provisions are ongoing.  The timing and outcome of these discussions are uncertain and could include settlement or civil litigation by the DOJ to recover, among other amounts, treble damages and penalties under the False Claims Act.  While this matter is not expected to have a material adverse effect on the Company’s financial position, an unfavorable resolution could result in significant payments by the Company.  The Company continues to believe that it has complied with the GSA contract in all material respects.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Item 2.

Overview

General

Grainger is the leading broad-line supplier of facilities maintenance and other related products in North America.  Grainger distributes a wide range of products used by businesses and institutions to keep their facilities and equipment up and running.  Grainger uses a multichannel business model to provide customers with a range of options for finding and purchasing products through a network of branches, sales representatives, direct marketing including catalogs, and a variety of electronic and Internet channels.  Grainger serves customers through a network of more than 600 branches, 18 distribution centers and multiple Web sites.

Effective January 1, 2009 Grainger revised its segment disclosure.  Grainger has two reportable segments:  the United States and Canada.  In the first quarter of 2009, Grainger integrated the Lab Safety Supply business into the Grainger Industrial Supply business and results are now reported under the United States segment.  The Canada segment reflects the results for Acklands – Grainger, Inc., Grainger’s Canadian branch-based distribution business.  Other Businesses include the following:  Grainger, S.A. de C.V. (Mexico), Asia Pacific Brands India Private Limited (India), Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China) and Grainger Panama S.A. (Panama).

Business Environment

Several economic factors and industry trends tend to shape Grainger’s business environment.  The overall economy and leading economic indicators provide insight into anticipated economic factors for the near term and help in forming the development of projections for the remainder of 2009.  In July 2009, Consensus Forecast-USA projected a 2009 Industrial Production and GDP decline for the United States of 11.0% and 2.6%, respectively.  In July 2009, Consensus Forecast-USA projected a GDP decline of 2.3% for Canada.

Historically, Grainger’s sales trends have tended to correlate with industrial production.  According to the Federal Reserve, overall industrial production decreased 13.6% from June 2008 to June 2009.  The continued decline in the economy has affected Grainger’s sales growth for the second quarter of 2009, which declined 13 percent.

The light and heavy manufacturing customer sectors have historically correlated with manufacturing employment levels and manufacturing output.  Manufacturing output decreased 15.5% from June 2008 to June 2009 while manufacturing employment levels decreased 12.2%.  These declines contributed to an almost 30 percent decline in the heavy manufacturing customer sector for the three and six months ended June 30, 2009, and a low double-digit percent decline in the light manufacturing customer sector for the three and six months ended June 30, 2009.

Grainger expects some continued decline in sales and increased pricing pressure throughout the remainder of the year.  Grainger plans to use its financial strength in an effort to increase its market share during the downturn.  Some reductions to operating margins are expected as a result of expanding the sales force and implementing additional customer incentives.  Grainger expects these actions to cost approximately $25-50 million this year, although it is more likely these costs will trend towards the lower end of the range.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Given the continued decline in economic trends, in February 2009 Grainger announced the elimination of 300-400 jobs across the Company’s workforce.  Grainger incurred approximately $8 million in severance expenses for the elimination of 298 of these positions during the first six months of 2009.

Matters Affecting Comparability

There were 127 sales days for the first six months of 2009, compared to 128 sales days for the first six months of 2008.

Since June 2009, Grainger’s operating results have included the operating results of Asia Pacific Brands India Private Limited (India)in the Other Businesses segment.  See Note 3 to the Consolidated Financial Statements for additional information regarding this business acquisition.

Effective January 1, 2009 Grainger revised its segment disclosure.  Prior year amounts have been restated in a consistent manner.

Results of Operations – Three Months Ended June 30, 2009

The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings:

	Three Months Ended June 30,
							Percent
	As a Percent of Net Sales						Increase
	2009			2008			(Decrease)
Net sales		100.0	%		100.0	%		(12.7	)%
Cost of merchandise sold		59.2			59.8			(13.6	)
Gross profit		40.8			40.2			(11.5	)
Operating expenses		30.7			29.7			(9.6	)
Operating earnings		10.1			10.5			(16.7	)
Other income (expense)		(0.2	)		0.0			406.2
Income taxes		3.9			4.1			(16.9	)
Net earnings		6.0	%		6.4	%		(18.3	)%

Grainger’s net sales of $1,533.3 million for the second quarter of 2009 decreased 12.7% compared with sales of $1,756.9 million for the comparable 2008 quarter.  For the quarter, sales were positively affected by pricing of approximately 6 percentage points which was offset by a decline in volume of 18 percentage points.  In addition, sales were negatively affected by approximately 2 percentage points due to foreign exchange, while sales from acquisitions contributed approximately 1 percentage point. Sales in all customer segments declined except sales to the government, which increased in the low single digits.  The overall decrease in net sales was led by an almost 30 percent decline in the heavy manufacturing customer sector, a low 20 percent decline in the reseller customer sector, and a mid-teen percent decline in the contractor customer sector.  The light manufacturing customer sector declined in the low double-digits.  Refer to the Segment Analysis below for further details.

Gross profit of $625.0 million for the second quarter of 2009 decreased 11.5%.  The gross profit margin during the second quarter of 2009 increased 0.6 percentage point when compared to the same period in 2008, primarily due to positive inflation recovery, partially offset by unfavorable selling price category mix.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Operating expenses of $471.0 million for the second quarter of 2009 decreased 9.6%.  Operating expenses decreased primarily due to lower commissions, bonuses and profit sharing accruals, partially offset by an increase in severance costs.  In addition, the second quarter of 2008 included a $6.0 million provision for a legal reserve that did not repeat in 2009.

Operating earnings for the second quarter of 2009 totaled $153.9 million, a decrease of 16.7% compared to the second quarter of 2008.  The decrease in operating earnings was primarily due to the decline in sales combined with operating expenses, which declined at a lower rate than sales.  These declines were partially offset by an increase in gross profit margin.

Net earnings for the second quarter of 2009 decreased by 18.3% to $92.5 million from $113.2 million in 2008.  The decrease in net earnings for the quarter primarily resulted from the decline in operating earnings.  Lower interest income, lower equity in net income of unconsolidated entities and foreign currency transaction losses also contributed to the decline in net earnings.  Diluted earnings per share of $1.21 in the second quarter of 2009 were 14.8% lower than the $1.42 for the second quarter of 2008 primarily due to the decrease in net earnings, partially offset by lower shares outstanding.  In the first quarter of 2009 Grainger adopted FSP 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” resulting in a one cent reduction to the previously reported 2008 second quarter earnings per share.

Segment Analysis

The following comments at the segment level refer to external and intersegment net sales.  Comments at the business unit level include external and inter- and intrasegment net sales.  See Note 8 to the Condensed Consolidated Financial Statements.

United States

Net sales were $1,353.8 million for the second quarter of 2009, a decrease of $189.1 million, or 12.3%, when compared with net sales of $1,542.9 million for the same period in 2008.  Sales in all customer segments declined except sales to the government, which increased in the low single digits. The decrease in net sales was led by an almost 30 percent decline in the heavy manufacturing customer sector, a high-teen percent decline in the reseller customer sector, and a mid-teen percent decline in the contractor customer sector.  The light manufacturing customer sector declined in the low double-digits.

The segment added approximately 50,000 net new products to the catalog issued in February 2009.  The 2009 catalog includes a total of 233,000 products.  Grainger will continue to expand the product line throughout the year and anticipates having almost 300,000 products in the 2010 catalog. There are 38,000 Lab Safety products also currently available on grainger.com.

The segment gross profit margin increased 1.1 percentage points in the 2009 second quarter over the comparable quarter of 2008.  The improvement in gross profit margin was primarily driven by positive inflation recovery, partially offset by unfavorable selling price category mix.

Operating expenses in this segment were down 7.0% in the second quarter of 2009 versus the second quarter of 2008.  Operating expenses decreased primarily due to lower commissions, bonuses and profit sharing accruals, partially offset by an increase in severance costs.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

For the segment, operating earnings of $176.5 million for the second quarter of 2009 decreased 15.8% from $209.7 million for the second quarter of 2008.  The decrease in operating earnings for the quarter is primarily due to the decline in net sales and operating expenses which declined at a lower rate than sales, partially offset by an increase in gross profit margin.

Canada

Net sales were $160.7 million for the second quarter of 2009, a decrease of $37.2 million, or 18.8%, when compared with $197.9 million for the same period in 2008.  In local currency daily sales decreased 6.3% for the quarter.  The decrease in net sales was led by declines in the forestry, manufacturing, transportation and mining industries, partially offset by growth in the utilities and infrastructure related sectors, as well as strong sales to the government.

The gross profit margin decreased 2.1 percentage points in the 2009 second quarter versus the second quarter of 2008, primarily due to negative inflation recovery due to unfavorable foreign exchange rates on inventory purchases.  In addition, price competition, an increase in lower margin sales to large customer and government accounts and an increase in inventory reserves negatively affected gross profit margins.

Operating expenses were down 18.8% in the second quarter of 2009 versus the second quarter of 2008.  In local currency, operating expenses decreased 6.3% primarily due to lower commissions and bonus accruals, and other non-payroll related expenses including lower travel and advertising costs, partially offset by an increase in severance costs.

Operating earnings of $9.7 million for the second quarter of 2009 were down $6.3 million, or 39.2% from $16.0 million for the second quarter of 2008.  In local currency operating earnings declined 30.1% in the second quarter of 2009 over the same period in 2008.  The decrease in earnings was primarily due to the decline in sales and gross profit margin.

Other Businesses

Net sales for other businesses, which include Mexico, India, Puerto Rico, China and Panama, were down 8.6% for the second quarter of 2009 when compared to the same period in 2008.  Sales in Mexico decreased 26.8% in the second quarter of 2009 versus the second quarter of 2008, and in local currency daily sales decreased 6.6%.  In China, sales increased 44.3% in the second quarter of 2009 versus the second quarter of 2008.  Operating losses for other businesses were $3.3 million or a 70.4% increase over operating losses of $1.9 million in the second quarter of 2008.  The operating losses are primarily due to the volume declines in Mexico and the incorporation of India’s results for the month of June.

Other Income and Expense

Other income and expense was an expense of $2.3 million and $0.5 million in the second quarter of 2009 and 2008, respectively.  This increase in expense was primarily due to foreign currency transaction losses and to lower interest income due to lower interest rates.

Income Taxes

Grainger’s effective income tax rates were 39.0% and 38.6% for the second quarter of 2009 and 2008, respectively.  The increase in the effective rate is due to lower earnings reported in non-U.S. jurisdictions with lower tax rates, as well as an increase in current estimates of the overall U.S. state income tax rates.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Results of Operations – Six Months Ended June 30, 2009

The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings:

	Six Months Ended June 30,
							Percent
	As a Percent of Net Sales						Increase
	2009			2008			(Decrease)
Net sales		100.0	%		100.0	%		(12.3	)%
Cost of merchandise sold		58.2			59.5			(14.2	)
Gross profit		41.8			40.5			(9.5	)
Operating expenses		31.4			29.7			(7.3	)
Operating earnings		10.4			10.8			(15.5	)
Other income (expense)		(0.1	)		0.0			(1,473.4	)
Income taxes		4.0			4.2			(15.5	)
Net earnings		6.3	%		6.6	%		(17.0	)%

Grainger’s net sales of $2,998.5 million for the first six months of 2009 decreased 12.3% compared with sales of $3,417.9 million for the comparable 2008 period.  Daily sales were down 11.6%.  For the first six months of 2009, sales were positively affected by pricing of approximately 6 percentage points which was offset by a decline in volume of 17 percentage points.  In addition, sales were negatively affected by 2 percentage points due to foreign exchange, while sales from acquisitions contributed approximately 1 percentage point.  Sales in all customer segments declined except sales to the government, which increased in the low single digits.  The overall decrease in net sales was led by an almost 30 percent decline in the heavy manufacturing customer sector, a high-teen percent decline in the reseller customer sector and a mid-teen percent decline in the contractor customer sector.  The light manufacturing customer sector declined in the low double-digits.  Refer to the Segment Analysis below for further details.

Gross profit of $1,254.4 million for the first six months of 2009 decreased 9.5%.  The gross profit margin during the first six months of 2009 increased 1.3 percentage points when compared to the same period in 2008, primarily due to positive inflation recovery, partially offset by unfavorable selling price category mix.

Operating expenses of $941.2 million for the first six months of 2009 decreased 7.3%.  Operating expenses decreased primarily due to lower commissions, bonuses and profit sharing accruals, other non-payroll related expenses including lower travel and training costs, partially offset by an increase in severance costs.  In addition, the first six months of 2008 included a $6.0 million provision for a legal reserve that did not repeat in 2009.

Operating earnings for the first six months of 2009 totaled $313.1 million, a decrease of 15.5% from the first six months of 2008.  The decrease in operating earnings was primarily due to the decline in sales combined with operating expenses, which declined at a lower rate than sales.  These declines were partially offset by an increase in gross profit margin.

23

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Net earnings for the first six months of 2009 decreased by 17.0% to $188.8 million from $227.4 million in 2008.  The decrease in net earnings for the six months primarily resulted from the decline in operating earnings.  Lower interest income, lower equity in net income of unconsolidated entities and foreign currency transaction losses also contributed to the decline in net earnings.  Diluted earnings per share of $2.46 in the first six months of 2009 were 13.1% lower than the $2.83 for the first six months of 2008 primarily due to the decrease in net earnings, partially offset by lower shares outstanding.  During the first quarter of 2009 Grainger adopted FSP 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” resulting in a three cent reduction to the previously reported earnings per share for the first six months of 2008.

Segment Analysis

The following comments at the segment level refer to external and intersegment net sales.  Comments at the business unit level include external and inter- and intrasegment net sales.  See Note 8 to the Condensed Consolidated Financial Statements.

United States

Net sales were $2,662.5 million for the first six months of 2009, a decrease of $349.8 million, or 11.6%, when compared with net sales of $3,012.3 million for the same period in 2008.  Daily sales were down 10.9%.  Sales in all customer segments declined except sales to the government, which increased in the low single digits.  The decrease in net sales was led by an almost 30 percent decline in the heavy manufacturing customer sector and a mid-teen percent decline in the contractor and reseller customer sectors.  The light manufacturing customer sector declined in the low double-digits.

The segment added approximately 50,000 net new products to the catalog issued in February 2009.  The 2009 catalog includes a total of 233,000 products.  Grainger will continue to expand the product line throughout the year and anticipates having almost 300,000 products in the 2010 catalog. There are 38,000 Lab Safety products also currently available on grainger.com.

The segment gross profit margin increased 1.7 percentage points in the 2009 first six months over the comparable 2008 period.  The improvement in gross profit margin was primarily driven by positive inflation recovery, partially offset by unfavorable selling price category mix.

Operating expenses in this segment were down 5.2% in the first six months of 2009 versus the first six months of 2008.  Operating expenses decreased primarily due to lower commissions, bonuses and profit sharing accruals, partially offset by an increase in severance costs.

For the segment, operating earnings of $349.7 million for the first six months of 2009 decreased 13.6% over $404.9 million for the first six months of 2008.  The decrease in operating earnings for the six months is primarily due to the decline in net sales and operating expenses which declined at a lower rate than sales, partially offset by an increase in gross profit margin.

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W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Canada

Net sales were $304.5 million for the first six months of 2009, a decrease of $70.7 million, or 18.8%, when compared with $375.2 million for the same period in 2008.  On a daily basis sales decreased 18.2%.  In local currency daily sales decreased 2.4% for the first six months of 2009.  The decrease in net sales was led by declines in the forestry, manufacturing, transportation and mining industries, partially offset by growth in the utilities and infrastructure related sectors, as well as strong sales to the government.

The gross profit margin decreased 1.7 percentage points in the first six months of 2009 versus the comparable period in 2008, primarily due to negative inflation recovery due to unfavorable foreign exchange rates, price competition and an increase in lower margin sales to large customer and government accounts.

Operating expenses were down 17.5% in the first six months of 2009 versus the first six months of 2008.  In local currency operating expenses decreased 1.3% primarily due to lower commissions and bonus accruals, and other non-payroll related expenses including lower travel and advertising costs, partially offset by an increase in severance costs.

Operating earnings of $15.7 million for the first six months of 2009 were down $12.0 million, or 43.3% from $27.7 for the first six months of 2008.  In local currency operating earnings declined 32.9% in the first six months of 2009 from the same period in 2008.  The decrease in earnings was primarily due to the decline in gross profit margin and operating expenses which declined at a slower rate than sales.

Other Businesses

Net sales for other businesses, which include Mexico, India, Puerto Rico, China and Panama, were down 8.4% for the first six months of 2009 when compared to the same period in 2008.  Daily sales decreased 7.7%.  Daily sales in Mexico decreased 25.0% in the first six months of 2009 versus the first six months of 2008, and in local currency daily sales decreased 2.3%.  In China daily sales increased 61.9% in the first six months of 2009 versus the first six months of 2008.  Operating losses for other businesses were $6.2 million or flat versus the first six months of 2008.  The operating losses are primarily due to the volume declines in Mexico and the incorporation of India’s results for the month of June.

Other Income and Expense

Other income and expense was an expense of $3.0 million in the first six months of 2009 compared with $0.2 million of income in the first six months of 2008.  This decrease in income was primarily due to foreign currency transaction losses and to lower interest income due to lower interest rates.

Income Taxes

Grainger’s effective income tax rates were 39.1% and 38.7% for the first six months of 2009 and 2008, respectively.  The increase in the effective rate is due to lower earnings reported in non-U.S. jurisdictions with lower tax rates, as well as an increase in current estimates of the overall U.S. state income tax rates.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Financial Condition

For the six months ended June 30, 2009, working capital of $1,443.4 million increased by $61.0 million when compared to $1,382.4 million at December 31, 2008.  The increase in working capital primarily relates to a decrease in accrued liabilities due to lower compensation and profit sharing accruals.  The ratio of current assets to current liabilities increased to 3.5 at June 30, 2009, versus 2.8 at December 31, 2008, primarily due to the decline in other current liabilities as a result of annual cash payments for profit sharing and bonuses.

Net cash provided by operating activities was $232.6 million and $118.7 million for the six months ended June 30, 2009 and 2008, respectively.  Net cash flows from operating activities serve as Grainger’s primary source to fund its growth initiatives.  Contributing to cash flows from operations were net earnings in the six months ended June 30, 2009 of $188.8 million and the effect of non-cash expenses such as stock-based compensation, and depreciation and amortization.  Partially offsetting these amounts were changes in operating assets and liabilities, which resulted in a net use of cash of $41.2 million for the first six months of 2009.  Other current liabilities declined primarily due to annual cash payments for profit sharing and bonuses.  The principal operating sources of cash were decreases in accounts receivable and inventory due to lower sales volume.

Net cash used in investing activities was $49.6 million and $89.2 million for the six months ended June 30, 2009 and 2008, respectively.  Cash expended for additions to property, buildings, equipment and capitalized software was $53.5 million in the first six months of 2009 versus $108.3 million in the first six months of 2008.  Capital expenditures in 2009 included funding of infrastructure improvement projects in the distribution centers in the United States, Canada and Mexico.  In 2008, cash used was partially offset by proceeds on sales of marketable securities.

Net cash used in financing activities was $163.8 million for the six months ended June 30, 2009, versus net cash provided by financing activities of $122.3 million for the six months ended June 30, 2008.  The $286.1 million difference in cash used versus provided in financing activities for the six months ended June 30, 2009 was due primarily to a four-year bank term loan of $500 million obtained in May 2008.  Amounts used in financing activities included treasury stock purchases of $127.7 million for the first six months of 2009 versus $271.0 million for the first six months of 2008.  Grainger repurchased 1.9 million shares and 3.5 million shares in the first six months of 2009 and 2008, respectively.  As of June 30, 2009, approximately 5.7 million shares of common stock remained available under Grainger’s repurchase authorization.  Grainger also used cash in financing activities to pay dividends to shareholders of $65.2 million and $59.4 million for the first six months of 2009 and 2008, respectively.  Offsetting these financing cash outlays were net proceeds from short-term borrowings of $2.2 million in the first six months of 2009 versus payments of $88.6 million in the first six months of 2008.  Also offsetting cash outlays were proceeds and excess tax benefits realized from stock options exercised of $26.9 million and $41.3 million in the first six months of 2009 and 2008, respectively.

Grainger 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, Grainger has various sources of financing available, including commercial paper sales and bank borrowings under lines of credit.  Total debt as a percent of total capitalization was 20.2% at June 30, 2009, and 20.7% at December 31, 2008.

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W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements.  Management bases its estimates on historical experience and other assumptions, which it believes are reasonable.  If actual amounts are ultimately different from these estimates, the revisions are included in Grainger’s results of operations for the period in which the actual amounts become known.

Accounting policies are considered critical when they require management to make assumptions about matters that are uncertain at the time the estimate is made and when different estimates than those management reasonably could have made have a material impact on the presentation of Grainger’s financial condition, changes in financial condition or results of operations.  For a description of Grainger’s critical accounting policies see the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Forward-Looking Statements

This Form 10-Q contains statements that are not historical in nature but concern future results and business plans, strategies and objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws.  Grainger has generally identified such forward-looking statements by using words such as “anticipates, anticipated, believes, continue to expand, continued, continues to believe it complies, could, effort to increase, expect, expected, expects, intended, intends, likely, may, plans, projected, projections, should, tended, timing and outcome are uncertain, and will" or similar expressions.

Grainger cannot guarantee that any forward-looking statement will be realized although Grainger does believe that its assumptions underlying its forward-looking statements are reasonable. Achievement of future results is subject to risks and uncertainties which could cause Grainger’s results to differ materially from those which are presented.

Factors that could cause actual results to differ materially from those presented or implied in a forward-looking statement include, without limitation:  higher product costs or other expenses; a major loss of customers; loss or disruption of source of supply; increased competitive pricing pressures; failure to develop or implement new technologies or business strategies; the outcome of pending and future litigation or governmental or regulatory proceedings; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes and unanticipated weather conditions.

Caution should be taken not to place undue reliance on Grainger’s forward-looking statements and Grainger undertakes no obligation to publicly update the forward-looking statements, whether as a result of new information, future events or otherwise.

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W.W. Grainger, Inc. and Subsidiaries

PART I – FINANCIAL INFORMATION

Item 3.        Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see “Item 7A: Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Item 4.        Controls and Procedures

Disclosure Controls and Procedures

Grainger carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of Grainger’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There were no changes in Grainger’s internal control over financial reporting that occurred during the first six months, that have materially affected, or are reasonably likely to materially affect, Grainger’s internal control over financial reporting.

PART II – OTHER INFORMATION

Items 1A, 3 and 4 not applicable.

Item 1. Legal Proceedings

As previously reported, in December 2007, the Company received a letter from the Commercial Litigation Branch of the Civil Division of the Department of Justice (the “DOJ”) regarding the Company’s contract with the United States General Services Administration (the “GSA”).  The letter suggested that the Company had not complied with its disclosure obligations and the contract’s pricing provisions, and had potentially overcharged government customers under the contract.

Discussions relating to the Company’s compliance with its disclosure obligations and the contract’s pricing provisions are ongoing.  The timing and outcome of these discussions are uncertain and could include settlement or civil litigation by the DOJ to recover, among other amounts, treble damages and penalties under the False Claims Act.  While this matter is not expected to have a material adverse effect on the Company’s financial position, an unfavorable resolution could result in significant payments by the Company.  The Company continues to believe that it has complied with the GSA contract in all material respects.

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W.W. Grainger, Inc. and Subsidiaries

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities – Second Quarter

Period	Total Number of Shares Purchased (A)	Average Price Paid per Share (B)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C)	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
April 1 – April 30	–	–	–	5,683,580	shares
May 1 – May 31	–	–	–	5,683,580	shares
June 1 – June 30	–	–	–	5,683,580	shares
Total	–	–	–

(A)   There were no shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock awards.

(B)   Average price paid per share includes any commissions paid and includes only those amounts related to purchases as part of publicly announced plans or programs.

(C)   Purchases were made pursuant to a share repurchase program approved by Grainger’s Board of Directors on April 30, 2008.  The Board of Directors granted authority to repurchase up to 10 million shares.  The program has no specified expiration date.  No share repurchase plan or program expired or was terminated during the period covered by this report.  Activity is reported on a trade date basis.

Item 5.       Other Information 

Effective as of July 29, 2009, the Company’s Board of Directors amended the Company by-laws.

Article II, to clarify the provisions requiring advance notice of all shareholder proposals and nominations whether the materials would be included in the Company’s or the proposing party’s proxy materials and to ensure that any shareholder making a nomination or proposal fully discloses his ownership interest in Company stock, including voting and economic positions, as well as any voting agreements.

Article XII, to clarify the provisions requiring preservation of director and officer existing indemnification rights and not allow any future action to decrease or diminish the right to indemnification including advancement of expenses, and that indemnification and advancement of expenses is a continuing right and that this right remains available after a change in control.

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W.W. Grainger, Inc. and Subsidiaries

Item 6.		Exhibits
	(a)	Exhibits (numbered in accordance with Item 601 of Regulation S-K)
		(3)	Bylaws, as amended.
		(31)	Rule 13a – 14(a)/15d – 14(a) Certifications
			(a)  Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
			(b)  Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		(32)	Section 1350 Certifications
			(a)  Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
			(b)  Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

		W.W. Grainger, Inc.
		(Registrant)
Date: July 31, 2009	By:	/s/ R. L. Jadin
		R. L. Jadin, Senior Vice President and Chief Financial Officer
Date: July 31, 2009	By:	/s/ G. S. Irving
		G. S. Irving, Vice President and Controller

EX-31.A

CERTIFICATION

Exhibit 31(a)

I, J. T. Ryan, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of W.W. Grainger, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 31, 2009

By:	/s/ J. T. Ryan
Name:	J. T. Ryan
Title:	Chairman, President and Chief Executive Officer

EX-31.B

CERTIFICATION

Exhibit 31(b)

I, R. L. Jadin, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of W.W. Grainger, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 31, 2009

By:	/s/ R. L. Jadin
Name:	R. L. Jadin
Title:	Senior Vice President and Chief Financial Officer

EX-32.A

Exhibit 32(a)

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, J. T. Ryan, Chairman, President and Chief Executive Officer of W.W. Grainger, Inc. (“Grainger”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.   The Quarterly Report on Form 10-Q of Grainger for the quarter ended June 30, 2009, (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Grainger.

/s/ J. T. Ryan

J. T. Ryan

Chairman, President and Chief Executive Officer

July 31, 2009

EX-32.B

Exhibit 32(b)

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, R. L. Jadin, Senior Vice President and Chief Financial Officer of W.W. Grainger, Inc. (“Grainger”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.   The Quarterly Report on Form 10-Q of Grainger for the quarter ended June 30, 2009, (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Grainger.

/s/ R. L. Jadin

R. L. Jadin

Senior Vice President

and Chief Financial Officer

July 31, 2009

EX-3

As Amended 07/29/2009

BY-LAWS

OF

W.W. GRAINGER, INC.

ARTICLE I

OFFICES

The principal office of the corporation shall be located in the State of Illinois.  The corporation may have such other offices, either within or without the State of Illinois, as the business of the corporation may require from time to time.

The registered office of the corporation required by the Illinois Business Corporation Act to be maintained in the State of Illinois may be, but need not be, identical with the principal office in the State of Illinois, and the address of the registered office may be changed from time to time by the board of directors.

ARTICLE II

SHAREHOLDERS

SECTION 1.  ANNUAL MEETING.  (a)  The annual meeting of the shareholders shall be held on the last Wednesday of April, in each year, or at such time as may be determined by the board of directors, for the purpose of electing directors and for the transaction of such other business as may properly come before the meeting.  If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day.  If the election of the directors shall not be held on the day designated herein for any annual meeting or adjournment thereof, the board of directors shall cause the election to be held at a meeting of the shareholders as soon thereafter as conveniently may be.

(b)  At any annual meeting or adjournment thereof only such nominations or other business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the board of directors or (ii) by any shareholder (x) who is entitled to vote at the time of giving notice provided for in this Section 1(b) and remains such until the meeting and (y) who complies with the procedures and other requirements set forth in this Section 1(b).  For nominations or other business to be properly brought before an annual meeting or adjournment thereof by a shareholder, the shareholder must have given timely notice thereof in proper written form to the secretary.  To be timely, a shareholder’s notice must be delivered to or mailed and received at the principal office of the corporation not later than the close of business on the 90th day and not earlier than the close of business on the 120th day prior to the first anniversary of the prior year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or after such anniversary date, notice by the shareholder to be timely shall be delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of (i) the 90th day prior to such annual meeting and (ii) the 10th day following the date of the first public announcement of the date of the meeting; further provided that in the case of such a shareholder’s nomination of one or more persons for

1

election or reelection to the board of directors at the next annual meeting of shareholders and notwithstanding anything to the contrary in this Section 1(b), the aforementioned shareholder’s notice shall be delivered to or mailed and received at the principal office of the corporation not later than the date with respect to submission of shareholders’ proposals for such next annual meeting as set forth in the corporation’s proxy statement for the preceding annual meeting of shareholders.  In no event shall the public announcement of an adjournment of an annual meeting, or such adjournment, commence a new time period (or extend any time period) for the giving of a shareholder notice as described above.  To be in proper written form, a shareholder’s notice to the secretary shall set forth in writing (x) as to each person whom the shareholder proposes to nominate for election or reelection as a director (i) all information concerning the shareholder’s relationship to and transactions with such person and information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected), and (ii) with respect to each nominee for election or reelection to the board of directors, include a completed and signed questionnaire, representation and agreement required by paragraph (c) of this Section 1 (collectively, the information described in subclauses (i) and (ii) of clause (x) is the “Nominee Information”); (y) as to any other business the shareholder proposes to bring before the meeting a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and, if such business includes a proposal to amend the by-laws of the corporation, the text of the proposed amendment), the reasons for conducting such business at the meeting, and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the nomination or proposal is made (collectively, the information described in clause (y) is the “Other Business Information”); and (z) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the corporation’s books, and of such beneficial owner; (ii) the class and number of shares of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner and, in the case of such shareholder, his commitment to remain a shareholder through the date of the shareholders’ meeting with respect to which his shareholder’s notice was given; (iii) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the corporation or with a value derived in whole or in part from the value of any class or series of shares of the corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of capital stock of the corporation or otherwise directly or indirectly owned beneficially by such shareholder or beneficial owner and any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of shares of the corporation, including, without limitation, any derivative instrument, swap, short interest, hedge or profit sharing arrangement (a “Derivative Instrument”); (iv) any proxy, contract, arrangement, understanding, or relationship pursuant to which such shareholder or beneficial owner has a right to vote any shares of any security of the corporation; (v) any short interest of such shareholder or beneficial owner in any security of the corporation (for purposes of this by-law, a person shall be deemed to have a short interest in a security if such person directly or indirectly, through any agreement, arrangement, understanding, relationship or otherwise, has the opportunity to profit or share in any profit derived from any

2

decrease in the value of the subject security), and whether any other agreement, arrangement or understanding (including any borrowing or lending of shares) has been made, the effect or intent of which is to mitigate loss to or manage risk or benefit of share price changes for, or to increase or decrease the voting power of, such shareholder or any such beneficial owner with respect to any share of stock of the corporation; (vi) any rights to dividends on the shares of the corporation owned beneficially by such shareholder or beneficial owner that are separated or separable from the underlying shares of the corporation; (vii) any proportionate interest in shares of the corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which such shareholder or beneficial owner is a general partner or, directly or indirectly, beneficially owns an interest in a general partner; (viii) any performance-related fees (other than an asset-based fee) that such shareholder or beneficial owner is entitled to based on any increase or decrease in the value of shares of the corporation or Derivative Instruments, if any, as of the date of such notice, including without limitation any such interests held by members of such shareholder’s or beneficial owner’s immediate family sharing the same household; (ix) a description of all agreements, arrangements and understandings between such shareholder or beneficial owner, if any, and any other person or persons (including their names) in connection with or relating to the proposed action or nomination by such shareholder; (x) a representation as to whether the shareholder or the beneficial owner, if any, intends, or is or intends to be part of a group that intends, (A) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock required to approve or adopt the proposal and/or (B) otherwise to solicit proxies from shareholders in support of such proposal; and (xi) a representation that such shareholder is a holder of record of stock of the corporation, entitled to vote at such meeting, and intends to appear in person or by proxy at the shareholders’ meeting to make such nominations or bring such business before the meeting (collectively, the information described in subclauses (i) through (xi) of clause (z) is the “Shareholder/Beneficial Owner Information”).

A shareholder providing notice of a proposed nomination for election to the board of directors of the corporation or other business proposed to be brought before a meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice under this paragraph (b) shall be true and correct as of the record date for the meeting and as of the date that is ten business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to the secretary at the principal executive office of the corporation not later than five business days after the record date for the meeting (in the case of the update and supplement required to be made as of the record date), and not later than eight business days prior to the date for the meeting or any adjournment or postponement thereof (in the case of the update and supplement required to be made as of ten business days prior to the meeting or any adjournment or postponement thereof).  The corporation may also require any proposed nominee for election to the board of directors of the corporation to consent to a background check (which consent shall not be unreasonably withheld) and to furnish such other information as may be reasonably required for the corporation to determine the eligibility of such proposed nominee to serve as an independent director of the corporation or that could be material to a reasonable shareholder’s understanding of the qualifications and/or independence, or lack thereof, of such nominee.

(c)  To be eligible to be a nominee for election or reelection as a director of the corporation, the prospective nominee, or someone acting on such prospective nominee’s

3

behalf, must deliver (in accordance with any applicable time periods prescribed for delivery of notice under this by-law) to the secretary at the principal executive office of the corporation a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the secretary upon written request). The prospective nominee must also provide a written representation and agreement, in the form provided by the secretary upon written request, that such prospective nominee: (A) is not and will not become a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such prospective nominee, if elected as a director of the corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the corporation or (2) any Voting Commitment that could limit or interfere with such prospective nominee’s ability to comply, if elected as a director of the corporation, with such prospective nominee’s fiduciary duties under applicable law; (B) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein; and (C) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance if elected as a director of the corporation, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, corporate opportunity, confidentiality and stock ownership and trading policies and guidelines of the corporation.

SECTION 2.  SPECIAL MEETINGS.  Special meetings of the shareholders may be called by (i) the chairman of the board, (ii) the board of directors, or (iii) by timely notice thereof in proper written form to the secretary, by the holders (a “One Fifth Holder”) of not less than one-fifth of all the outstanding shares of the corporation entitled at the time of such call and continuously thereafter until the date of the meeting so called to vote on the matter for which the meeting is called.  The purpose or purposes for which a special meeting is called shall be specified in the notice of meeting given with respect thereto pursuant to Section 5 of this Article II, and no other business may be transacted at any such meeting.

To be timely, a call by a One Fifth Holder must be delivered or mailed and received at the principal office of the corporation not later than the close of business on the 90th day, and not earlier than the close of business on the 120th day, before the date of the special meeting being called.

To be in proper written form, a One Fifth Holder’s notice to the secretary shall set forth in writing (x) Nominee Information as to each person whom the One Fifth Holder proposes to nominate for election or reelection as a director, provided that the corporation may require any proposed nominee to furnish such other information as may be reasonably required by the corporation, to determine the qualifications of such nominee to serve as a director of the corporation; (y) Other Business Information as to any other business the One Fifth Holder proposes to bring before the meeting; and (z) Shareholder/Beneficial Owner Information as to the One Fifth Holder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made.

           A shareholder providing notice of a proposed nomination for election to the board of directors of the corporation or other business proposed to be brought before a meeting shall further update and supplement such notice, if necessary, so that the information provided or

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required to be provided in such notice under this section shall be true and correct as of the record date for the meeting and as of the date that is ten business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to the secretary at the principal executive office of the corporation not later than five business days after the record date for the meeting (in the case of the update and supplement required to be made as of the record date), and not later than eight business days prior to the date for the meeting or any adjournment or postponement thereof (in the case of the update and supplement required to be made as of ten business days prior to the meeting or any adjournment or postponement thereof).  The corporation may also require any proposed nominee for election to the board of directors of the corporation to consent to a background check (which consent shall not be unreasonably withheld) and to furnish such other information as may be reasonably required for the corporation to determine the eligibility of such proposed nominee to serve as an independent director of the corporation or that could be material to a reasonable shareholder’s understanding of the qualifications and/or independence, or lack thereof, of such nominee.

SECTION 3.  MEETINGS - GENERAL.  (a) Only such persons who are nominated in accordance with the procedures set forth in this Article II (or in Article III, Section 8) shall be eligible to be elected as directors at a meeting of shareholders and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the applicable procedures set forth in this Article II.  The presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in this Article II and, if such presiding officer determines that any proposed nomination or business is not in compliance with this Article II, to declare that such defective nomination or proposal shall be disregarded and any such nomination or business not properly brought before the meeting shall not be transacted.

(b)  For purposes of this Article II, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press, Reuters or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act, and “group” shall have the meaning ascribed to such term under Section 13(d)(3) of the Exchange Act and the rules and regulations thereunder.

(c)  Notwithstanding the foregoing provisions of this Article II, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Article II.  The requirements of this Article II shall apply to all shareholder nominations and all shareholder proposals to be considered at a meeting of shareholders, whether or not such nominations or proposals are sought to be included in the corporation’s proxy statement; provided, however, that nothing in this Article II shall be deemed to affect any rights of (x) shareholders to request inclusion of proposals in the corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act, or (y) the holders of any series of Preferred Stock to elect directors under specified circumstances.  The foregoing notice requirements of this Article II shall be deemed satisfied with respect to a shareholder proposal if the shareholder has notified the corporation of the shareholder’s intention to present such proposal at an annual meeting in compliance with Rule 14a-8 promulgated under the Exchange Act and such shareholder’s proposal has been included in a proxy statement that has been prepared by the corporation to solicit proxies for

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such annual meeting.  The provisions of this Article II shall also govern what constitutes timely notice for purposes of Rule 14a-4(c) of the Exchange Act.

SECTION 4.  PLACE OF MEETING.  The board of directors may designate any place, either within or without the State of Illinois, as the place of meeting for any annual meeting or for any special meeting called by the board of directors.  If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal office of the corporation in the State of Illinois.

SECTION 5.  NOTICE OF MEETINGS.  Written notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty days nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board or the secretary, or in the event that a special meeting has been properly called by a One Fifth Holder in accordance with Section 2 of this Article II, and notice of such meeting has not been given by the secretary within 65 days after the call of such meeting, notice thereof shall be given between the 66th and the 75th day after such call by the persons calling the meeting, to each shareholder of record entitled to vote at such meeting.  If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the records of the corporation, with postage thereon prepaid.

SECTION 6.  FIXING OF RECORD DATE.  For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors of the corporation may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty days and, in case of a meeting of shareholders, not less than ten days, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty days, prior to the date on which the particular action, requiring such determination of shareholders, is to be taken.  If no record date is fixed for the determination of shareholders entitled to notice of or entitled to vote at a meeting of shareholders, or entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the board of directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders.  When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided above, such determination shall apply to any adjournment thereof.

SECTION 7.  VOTING LISTS.  The officer or agent having charge of the transfer books for shares of the corporation shall make within twenty days after the record date for a meeting of shareholders, or ten days before such meeting of shareholders, whichever is earlier, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten days prior to such meeting, shall be kept on file at the principal office of the corporation in the State of Illinois and shall be subject to inspection by any shareholder at any time during usual business hours and to copying at the shareholder's expense. Such list shall

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also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting.  The original share ledger or transfer book, or a duplicate thereof kept in the State, shall be prima facie evidence as to who are the shareholders entitled to examine such list or share ledger, or transfer book or to vote at any meeting of shareholders.

SECTION 8.  QUORUM.  A majority of the outstanding shares of the corporation, entitled to vote on a matter, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders.

When any meeting is convened, the presiding officer, if directed by the Board, may adjourn the meeting without a vote of shareholders if (a) no quorum is present for the transaction of business, or (b) the Board determines that adjournment is necessary or appropriate to enable the shareholders (1) to consider fully information which the Board determines has not been made sufficiently or timely available to shareholders, or (2) otherwise to exercise effectively their voting rights.  At any such adjourned meeting at which there is a quorum, any business may be transacted that might have been transacted at the meeting originally called.

SECTION 9.  PROXIES.  A shareholder may appoint a proxy to vote or otherwise act for the shareholder by delivering a valid appointment to the person so appointed or such person's agent; provided that no shareholder may name more than three persons as proxies to attend and to vote the shareholder's shares at any meeting of shareholders.  Such appointment may be by any means, including means of electronic transmission, permitted by law.  No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy.

SECTION 10.  VOTING OF SHARES.  Subject to the provisions of Section 12 of this Article, each outstanding share, regardless of class, shall be entitled to one vote upon each matter submitted to vote at a meeting of shareholders.

SECTION 11.  VOTING OF SHARES BY CERTAIN HOLDERS.  Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent, or proxy as the by-laws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine.

Shares standing in the name of a deceased person may be voted by his administrator or executor, either in person or by proxy.  Shares standing in the name of a guardian, conservator, or trustee may be voted by such fiduciary, either in person or by proxy, but no guardian, conservator, or trustee shall be entitled, as such fiduciary, to vote shares held by him without a transfer of such shares into his name.

Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so be contained in an appropriate order of the court by which such receiver was appointed.

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A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred.

Shares of its own stock belonging to this corporation shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding shares at any given time, but shares of its own stock held by it in a fiduciary capacity may be voted and shall be counted in determining the total number of outstanding shares at any given time.

SECTION 12.  CUMULATIVE VOTING.  In all elections for directors, every shareholder shall have the right to vote, in person or by proxy, the number of shares owned by him, for as many persons as there are directors to be elected, or to cumulate said shares, and give one candidate as many votes as the number of directors multiplied by the number of his shares shall equal, or to distribute them on the same principle among as many candidates as he shall see fit.

SECTION 13.  VOTING BY BALLOT.  Voting on any question or in any election may be by voice, unless the officer or other person presiding over the meeting shall order or any shareholder shall demand that voting be by ballot.

SECTION 14.  PRESIDING OFFICERS AND ORDER OF BUSINESS.  All meetings of shareholders shall be called to order and presided over by the chairman of the board, or in his absence, by another director designated by the board, or in the absence of such designated director or if no such designation has been made, by the senior chairman of the board, if any.  The secretary of the corporation shall act as secretary of the meeting, but in the absence of the secretary of the corporation, the presiding officer may appoint a secretary of the meeting.

SECTION 15.  PROCEDURAL MATTERS.  At each meeting of shareholders, the presiding officer shall fix and announce the date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at the meeting and shall determine the order of business and all other matters of procedure.  Except to the extent inconsistent with any such rules and regulations as adopted by the Board, the presiding officer may establish rules, which need not be in writing, to maintain order for the conduct of the meeting, including, without limitation, restricting attendance to bona fide shareholders of record and their proxies and other persons in attendance at the invitation of the presiding officer and making rules governing speeches and debates.  The presiding officer acts in his or her absolute discretion and his or her rulings are not subject to appeal.

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ARTICLE III

DIRECTORS

SECTION 1.  GENERAL POWERS.  The business and affairs of the corporation shall be managed under the direction of its board of directors.

SECTION 2.  NUMBER, TENURE AND QUALIFICATIONS.  The number of directors of the corporation shall be not less than nine nor more than fourteen.  The number of directors may be fixed or changed from time to time, within the minimum and maximum, by the directors or the shareholders without amending these by-laws.  Each director shall hold office until the next annual meeting of shareholders or until his successor shall have been elected and qualified.  Directors need not be residents of Illinois or shareholders of the corporation.

SECTION 3.  REGULAR MEETINGS.  A regular meeting of the board of directors shall be held without other notice than this by-law, immediately after the annual meeting of shareholders.  The board of directors may provide by resolution, the time and place, either within or without the State of Illinois, for the holding of additional regular meetings without other notice than such resolution.

SECTION 4.  SPECIAL MEETINGS.  Special meetings of the board of directors may be called by or at the request of the chairman of the board or any two directors.  The person or persons authorized to call special meetings of the board of directors may fix any place, either within or without the State of Illinois, as the place for holding any special meeting of the board of directors called by them.

SECTION 5.  NOTICE.  Notice of any special meeting shall be given at least two days previously thereto by written notice delivered personally, sent by United States mail, sent by a third party entity that provides delivery services in the ordinary course of business and guarantees delivery in the particular case no later than the following day, or sent by electronic transmission.  If mailed, such notice shall be deemed to be delivered 24 hours after deposited in the United States mail, next-day delivery guaranteed, addressed to the director at the director’s business address, with postage thereon prepaid.  If sent by delivery service, notice shall be deemed to be delivered 24 hours after delivery to the third party delivery service.  If notice is sent by electronic transmission, such notice shall be deemed to be delivered upon transmission.  For this purpose, “electronic transmission” may include, but shall not be limited to, a telex, wire or wireless equipment that transmits a facsimile of the notice and provides the transmitter with an electronically generated receipt, or other electronic means.  Any director may waive notice of any meeting.  The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened.  Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting.

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SECTION 6.  QUORUM.  A majority of the board of directors shall constitute a quorum for transaction of business at any meeting of the board of directors, provided, that if less than a majority of the directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice.

SECTION 7.  MANNER OF ACTING.  The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors.

SECTION 8.  VACANCIES.  Any vacancy occurring in the board of directors and any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose; provided, however, vacancies arising between meetings of shareholders by reason of an increase in the number of directors or otherwise may be filled by a majority of the board of directors then remaining.  A director elected by the shareholders to fill a vacancy shall hold office for the balance of the term for which elected.  A director appointed by the directors to fill a vacancy shall serve until the next meeting of shareholders at which directors are to be elected.

SECTION 9.  COMPENSATION.  By resolution of the board of directors, the directors may be paid their expenses, if any, for attendance at each meeting of the board or of a committee thereof, and may be paid a fixed sum for attendance at meetings and/or a stated retainer as directors.  No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor.

SECTION 10.  PRESUMPTION OF ASSENT.  A director of the corporation who is present at a meeting of the board of directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

SECTION 11.  COMMITTEES.  Committees of the board of directors shall consist of an audit committee, a compensation committee, a board affairs and nominating committee, and such other committees as the board of directors by resolution may create.  Each committee shall have such number of members and shall exercise such authority and carry out such duties as are set forth in resolutions of the board of directors.  Committee members shall be elected annually but shall serve at the discretion of the board of directors and may be removed by the board of directors.  The board of directors may increase or decrease the number of members of any committee at any time and may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member or members at any meeting of the committee.  A majority of members of a committee shall constitute a quorum and, unless otherwise set forth in resolutions of the board of directors, a majority of those members present at a meeting and not disqualified from voting shall constitute the acts of the committee.

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SECTION 12.  INFORMAL ACTION BY DIRECTORS.  (a) Any action required to be taken at a meeting of the board of directors of the corporation, or any other action which may be taken at a meeting of the board of directors or a committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof, or by all of the members of such committee, as the case may be.

(b)  The consent shall be evidenced by one or more written approvals, each of which sets forth the action taken and bears the signature of one or more directors.  All the approvals evidencing the consent shall be delivered to the secretary to be filed in the corporate records.  The action taken shall be effective when all the directors have approved the consent unless the consent specifies a different effective date.

(c)  Any such consent signed by all the directors or all the members of a committee shall have the same effect as a unanimous vote, and may be stated as such in any document filed with the Secretary of State.

SECTION 13.  TELEPHONE ATTENDANCE.  (a) Members of the board of directors or of any committee of the board of directors may participate in and act at any meeting of such board or committee through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other.  Participation in such meeting shall constitute attendance and presence in person at the meeting of the person or persons so participating.

(b)  The board of directors or any committee may, at its option, provide for a tape recording of any such conference telephone portion of a meeting but the lack thereof shall not affect the validity of any actions taken at such meeting.

SECTION 14.  REMOVAL OF DIRECTORS.  One or more of the directors may be removed, with or without cause, at a meeting of shareholders by the affirmative vote of the holders of a majority of the outstanding shares then entitled to vote at an election of directors, except that:

(1)  No director shall be removed at a meeting of shareholders unless the notice of such meeting shall state that a purpose of the meeting is to vote upon the removal of one or more directors named in the notice.  Only the named director or directors may be removed at such meeting;

(2)  If less than the entire board is to be removed, no director may be removed, with or without cause, if the votes cast against his removal would be sufficient to elect him, if then cumulatively voted at an election of the entire board of directors; and

(3)  If a director is elected by a class or series of shares, he may be removed only by the shareholders of that class or series.

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SECTION 15.  DIRECTOR CONFLICT OF INTEREST.  If a transaction is fair to the corporation at the time it is authorized, approved or ratified, the fact that a director of the corporation is directly or indirectly a party to the transaction shall not be grounds for invalidating the transaction.

SECTION 16.  NOMINATIONS OF DIRECTORS.  Except for directors elected to fill vacancies pursuant to these by-laws, nominations for election for the board of directors may be made by the board of directors, by the nominating committee of the board of directors and approved by the board of directors, or by shareholders in accordance with the procedures set forth in Article II.  Such nominations shall be submitted to a vote of the shareholders at the next annual meeting of shareholders or at a special meeting of shareholders called for such purpose.

ARTICLE IV

OFFICERS

SECTION 1.  NUMBER.  The officers of the corporation shall be a chairman of the board, chief executive officer, one or more presidents, a chief financial officer, one or more vice presidents, a treasurer, a secretary, and such other officers and such assistant or administrative officers as may be elected or appointed as hereinafter provided.  Any two or more offices may be held by the same person.

SECTION 2.  ELECTION, APPOINTMENT AND TERM OF OFFICE.  Officers of the corporation shall be elected or appointed annually by the board of directors, although vacancies may be filled or new offices created and filled at any meeting of the board of directors.  Each officer elected or appointed by the board of directors shall hold office until the next annual election or appointment of officers by the board of directors, or until his earlier death, resignation or removal.  Officers and assistant or administrative officers of the corporation may also be appointed from time to time by the chairman of the board, to serve as such at his pleasure.

SECTION 3.  REMOVAL.  Any officer or assistant or administrative officer of the corporation elected or appointed by the board of directors may be removed by the board of directors whenever in its judgment the best interests of the corporation would be served thereby.  Any officer or assistant or administrative officer of the corporation appointed by the chairman of the board may be removed by the chairman of the board whenever in his judgment the best interests of the corporation would be served thereby.  Any removal provided for in this Section 3 shall be without prejudice to the contract rights, if any, of the person so removed.  Election or appointment of an officer or assistant or administrative officer of the corporation shall not itself create contract rights.

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SECTION 4.  CHAIRMAN OF THE BOARD.  The chairman of the board shall preside at all meetings of the shareholders and the board of directors.  He shall be primarily responsible for carrying out the policies established by and the directions of the board of directors and shall perform such other duties as may be prescribed from time to time by the board of directors.  He may from time to time, to the extent not delegated by the board of directors, delegate and re-delegate any part of any of the responsibilities and authority set forth herein to the senior chairman of the board, if any, to any other member of the board of directors, and/or to the chief executive officer.  The chairman of the board must be a director of the corporation.

The chairman of the board may sign deeds, mortgages, bonds, contracts or other instruments which the board of directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors or by these by-laws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed.  The chairman of the board may delegate signing authority to other persons within the corporation as shall be deemed necessary.

SECTION 5.  CHIEF EXECUTIVE OFFICER.  The chief executive officer of the corporation shall oversee and direct the operations and activities of the corporation and shall perform such other duties as from time to time may be prescribed by the board of directors or delegated to him by the chairman of the board.

The chief executive officer may sign deeds, mortgages, bonds, contracts or other instruments which the board of directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors or by these by-laws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed.  The chief executive officer may delegate signing authority to other persons within the corporation as shall be deemed necessary.  The chief executive officer must be a director of the corporation.

SECTION 6.  PRESIDENT.  The president, or if there be more than one the presidents, shall oversee and direct such operations and activities and shall perform such other duties as from time to time may be assigned by the board of directors, the chairman of the board or the chief executive officer.  If there be more than one president, the board of directors may designate one or more of them as group presidents or use a similar descriptive designation.

SECTION 7.  CHIEF FINANCIAL OFFICER.  The chief financial officer shall be the principal financial officer.  He shall have responsibility for administering the financial affairs of the corporation and, in general perform all duties incident to the office of the chief financial officer and such other duties as from time to time may be assigned to him by the board of directors, the chairman of the board or the chief executive officer.

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SECTION 8.  VICE PRESIDENTS.  Each of the vice presidents shall be responsible for those activities and shall perform those duties as from time to time may be assigned by the board of directors, the chairman of the board, the chief executive officer or a president.  The board of directors may designate one or more of the vice presidents as executive, group or senior vice presidents or use a similar descriptive designation.

SECTION 9.  SENIOR CHAIRMAN.  The senior chairman of the corporation, if any, shall consult with the chairman of the board on matters of long- and short-term strategic planning and policy and other significant matters affecting the corporation, and shall perform such other duties as may from time to time be prescribed by the board of directors, or delegated to him by the chairman of the board.  The senior chairman need not be a director of the corporation.

SECTION 10.  TREASURER.  If required by the board of directors, the treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the board of directors shall determine.  He shall (a) have charge and custody of and be responsible for all funds and securities of the corporation, (b) receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Article V of these by-laws and (c) in general perform all the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him by the board of directors, the chairman of the board, chief executive officer, or the chief financial officer.

SECTION 11.  SECRETARY.  The secretary shall (a) keep the minutes of the shareholders’ and of the board of directors’ meetings in one or more books provided for that purpose, (b) see that all notices are duly given in accordance with the provisions of these by-laws or as required by law, (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all certificates for shares prior to the issue thereof and to all documents, the execution of which on behalf of the corporation under its seal is duly authorized in accordance with the provisions of these by-laws, (d) keep, or cause the transfer agent to keep, a register of the post office address of each shareholder which shall be furnished to the secretary by such shareholder, (e) sign with the chairman of the board certificates for shares of the corporation, the issue of which shall have been authorized by resolution of the board of directors, (f) have general charge of the stock transfer books of the corporation and (g) in general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the board of directors,  the chairman of the board or the chief executive officer.

SECTION 12.  SALARIES.  The salaries of the officers elected or appointed by the board of directors shall be fixed from time to time by the board of directors and no such officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation.

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ARTICLE V

CONTRACTS, LOANS, CHECKS AND DEPOSITS

SECTION 1.  CONTRACTS.  The board of directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.

SECTION 2.  LOANS.  No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors.  Such authority may be general or confined to specific instances.

SECTION 3.  CHECKS, DRAFTS, ETC.  All checks, drafts or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the board of directors.

SECTION 4.  DEPOSITS.  All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositaries as the board of directors may select.

ARTICLE VI

CERTIFICATES FOR SHARES

AND THEIR TRANSFER

SECTION 1.  CERTIFICATES FOR SHARES.  The issued shares of the corporation shall be represented by certificates, except as and to the extent determined by, or pursuant to, resolution adopted by the board of directors.  Certificates representing shares of the corporation shall be in such form as may be determined by the board of directors.  Such certificates shall be signed by the chairman of the board and by the secretary or an assistant secretary, and shall be sealed with the seal of corporation.  All certificates for shares shall be consecutively numbered or otherwise identified.  The name of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered in the books of the corporation, as shall similar information with respect to shares that are uncertificated.  All certificates surrendered to the corporation for transfer shall be canceled.  No new certificate shall be issued until the former certificate for a like number of shares, unless the shares are uncertificated, shall have been surrendered and canceled except that in the case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the board of directors may prescribe.

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SECTION 2.  TRANSFERS OF SHARES.  Transfers of shares of the corporation shall be made either on the books of the corporation or on the books of the duly authorized and appointed agent or agents of the corporation by the holder of record thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation or proper officer of the transfer agent and, unless such shares are uncertificated, on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the corporation or its duly authorized and appointed transfer agent or agents shall be deemed the owner thereof for all purposes as regards the corporation.

ARTICLE VII

FISCAL YEAR

The fiscal year of the corporation shall begin on the first day of January in each year and end on the last day of December in each year.

ARTICLE VIII

DIVIDENDS

The board of directors may from time to time, declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its articles of incorporation.

ARTICLE IX

SEAL

The board of directors shall provide a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the corporation and the words, "Corporate Seal, Illinois".

ARTICLE X

WAIVER OF NOTICE

Whenever any notice whatever is required to be given under the provisions of these by-laws or under the provisions of the articles of incorporation or under the provisions of the Illinois Business Corporation Act, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein shall be deemed equivalent to the giving of such notice.

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ARTICLE XI

AMENDMENTS

These by-laws may be altered, amended or repealed and new by-laws may be adopted at any meeting of the board of directors of the corporation by a majority vote of the directors present at the meeting.

ARTICLE XII

INDEMNIFICATION OF DIRECTORS AND OFFICERS

SECTION 1.  The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

SECTION 2.  The corporation shall indemnify any person who was or is a party, or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to the best interests of the corporation, and except that no indemnification shall be made with respect to any claim, issue or matter as to which such person has been finally adjudged to have been liable to the corporation, unless, and only to the extent that the court in which such action, suit or proceeding was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper.

SECTION 3.  (a)  Any indemnification under Sections 1 or 2 (unless ordered by a court) shall be made only as authorized in the specific case, upon a determination that indemnification of the director or officer is proper in the circumstances because he has met

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the applicable standard of conduct set forth in Sections 1 or 2.  Such determination shall be made: (i) if a change in control shall have occurred, by independent legal counsel in a written opinion to the board of directors, a copy of which shall be delivered to the claimant; or (ii) if a change in control shall not have occurred: (A) by a majority vote of directors who were not parties to such action, suit or proceeding, even though less than a quorum, (B) by a committee of directors who were not parties to such action, suit or proceeding, even though less than a quorum, designated by a majority vote of the directors, (C) if there are no such directors who were not parties to such action, suit or proceeding, or if such directors so direct, by independent legal counsel in a written opinion, or (D) by the shareholders.

(b)  In any event, to the extent that a present or former director or officer of the corporation has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding referred to in Sections 1 or 2 or in defense of any claim, issue or matter therein, he shall be indemnified against reasonable expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation.

(c)  In the event the determination of entitlement to indemnification is to be made by independent legal counsel pursuant to subsection 3(a) hereof, the independent legal counsel shall be selected as provided in this subsection 3(c).  If a change in control shall not have occurred, the independent legal counsel shall be selected by the board of directors, and the corporation shall give written notice to the claimant advising him of the identity of the independent legal counsel so selected.  If a change in control shall have occurred, the independent legal counsel shall be selected by the claimant (unless the claimant shall request that such selection be made by the board of directors, in which event the preceding sentence shall apply) and the claimant shall give written notice to the corporation advising it of the identity of the independent legal counsel so selected.

SECTION 4.  (a)  Reasonable expenses (including attorney’s fees) incurred by an director or officer in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding, upon receipt of (i) a statement signed by such director or officer to the effect that such director or officer acted in good faith and in a manner which he believed to be in, or not opposed to the best interests of the corporation and (ii) an undertaking by or on behalf of the director or officer to repay such amount, if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article XII.

(b)  The board of directors may, by separate resolution adopted under and referring to this Article XII of the by-laws, provide for securing the payment of authorized advances by the creation of escrow accounts, the establishment of letters of credit or such other means as the board deems appropriate and with such restrictions, limitations and qualifications with respect thereto as the board deems appropriate in the circumstances.

SECTION 5.  (a)  The corporation is specifically authorized to enter into agreements with any of its directors or officers extending rights to indemnification and advancement of expenses to such person to the fullest extent permitted by law.  The indemnification and advancement of expenses provided by or granted under this Article XII shall be separate and distinct from and shall not be deemed exclusive of any other rights to which those seeking

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indemnification or advancement of expenses may be entitled under any statute, by-law, agreement, including, without limitation, indemnification agreements entered into between the corporation and any director or officer thereof, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office.  To the extent that there is a conflict or inconsistency between this Article XII, the corporation’s articles of incorporation and any indemnification agreement between the corporation and any of its directors or officers, it is the intent that the director and/or officer shall enjoy the greater benefits regardless of whether contained herein, in the articles of incorporation or in such indemnification agreement.

(b)  The provisions of this Article XII shall be deemed to be a contract between the corporation and each director and officer who serves in such capacity at anytime while this Article XII is in effect and all rights under this Article XII including with respect to indemnification and advancement of expenses shall immediately and fully vest at the time a person first becomes a director or officer, shall remain vested as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person, and such rights cannot be terminated or diminished in scope by the corporation, the board of directors or the shareholders of the corporation with respect to a person’s service prior to the date of such termination.  Any repeal or modification of this Article XII or any repeal or modification of the Illinois Business Corporation Act or any other applicable law shall not limit any rights under this Article XII then existing or arising out of events, acts, omissions or circumstances occurring or existing prior to such repeal or modification, including, without limitation, the right to indemnification and advancement of expenses for proceedings commenced after such repeal or modification to enforce this Article XII with regard to acts, omissions, events or circumstances occurring or existing prior to such repeal or modification.  If the scope of indemnity provided by this Article XII or any replacement article, or pursuant to the Illinois Business Corporation Act or any modification or replacement thereof is increased, then such person shall be entitled to such increased indemnification as is in existence at the time indemnity is provided to such person, it being the intent, subject to Section 10 of this Article XII, to indemnify persons specified in this Article XII to the fullest extent permitted by law.

SECTION 6.  The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article.

SECTION 7.  Subject to Section 10 of this Article XII, if a claim under this Article XII is not promptly paid in full by the corporation after a written claim has been received by the corporation or if expenses pursuant to Section 4 of this Article XII have not been promptly advanced after a written request for such advancement accompanied by the statement and undertaking required by Section 4 of this Article XII has been received by the corporation, the director or officer may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim or the advancement of expenses.  If successful, in whole or in part, in such suit, such director or officer shall also be entitled to be paid the reasonable expense thereof, including attorneys' fees.  It shall be a defense to any such action (other

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than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the director or officer has not met the standards of conduct which make it permissible under the Illinois Business Corporation Act for the corporation to indemnify the director or officer for the amount claimed, but the burden of proving such defense shall be on the corporation.  Neither the failure of the corporation (including its board of directors, independent legal counsel, or its shareholders) to have made a determination, if required, prior to the commencement of such action that indemnification of the director or officer is proper in the circumstances because he or she has met the applicable standard of conduct required under the Illinois Business Corporation Act, nor an actual determination by the corporation (including its board of directors, independent legal counsel, or its shareholders) that the director or officer had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the director or officer had not met the applicable standard of conduct.

SECTION 8.  For purposes of this Article XII, references to "the corporation" shall include, in addition to the surviving corporation, any merging corporation (including any corporation having merged with a merging corporation) absorbed in a merger which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers and employees or agents, so that any person who was a director or officer of such merging corporation, or was serving at the request of such merging corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article XII with respect to the surviving corporation as such person would have with respect to such merging corporation if its separate existence had continued.

SECTION 9.  For purposes of this Article XII, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; references to "serving at the request of the corporation" shall include any service as a director, officer or employee or agent of the corporation which imposes duties on, or involves services by such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and references to "officers" shall include elected officers and appointed officers.  A person who acted in good faith and in a manner he reasonably believed to be in the best interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the corporation" as referred to in this Article XII.

SECTION 10.  Anything herein to the contrary notwithstanding, if the corporation purchases insurance in accordance with Section 6 of this Article XII, the corporation shall not be required to, but may (if the board of directors so determines in accordance with this Article XII) reimburse any party instituting any action, suit or proceeding if a result of the institution thereof is the denial of or limitation of payment of losses under such insurance when such losses would have been paid thereunder if a non-insured third party had instituted such action, suit or proceedings.

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ARTICLE XIII

INDEMNIFICATION OF EMPLOYEES AND AGENTS

The corporation may indemnify any agent or employee of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (including, but not limited to any such proceeding by or in the right of the corporation) whether civil, criminal, administrative or investigative, by reason of the fact that he is or was serving the corporation at its request and in the course and scope of his duties and acting in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, against expenses (including reasonable attorney's fees) actually and reasonably incurred by him in connection with the defense or settlement of such action, suit or proceeding.  The standards of conduct, the provisions for payment and advances, and the terms and conditions contained in Article XII, Sections 1, 2, 3, 4, 5(a), 6, 8, 9 and 10 shall apply to any indemnification hereunder.

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