Edgar Filing: GRAINGER W W INC

2000 FORM 10-K FOR W.W. GRAINGER, INC.

66 Pages Complete

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ANNUAL REPORT

(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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

Illinois 36-1150280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

100 Grainger Parkway, Lake Forest, Illinois 60045-5201
(Address of principal executive offices) (Zip Code)

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

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

Title of each class Name of each exchange on
which registered

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

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

Yes ___X___ No ________

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant was $2,780,414,250 as of the close of trading reported on the
Consolidated Transaction Reporting System on March 5, 2001.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

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

Common Stock $0.50 par value 93,922,529 shares outstanding as of March 5, 2001

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement relating to the annual meeting of shareholders
of the registrant to be held on April 25, 2001 are incorporated by reference
into Part III hereof.

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

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

CONTENTS

Page
PART I

Item 1: BUSINESS.................................................................. 3-6
THE COMPANY............................................................. 3
BRANCH-BASED DISTRIBUTION BUSINESSES.................................... 3-5
GRAINGER INDUSTRIAL SUPPLY........................................... 3-4
GRAINGER.COM......................................................... 4
ACKLANDS-GRAINGER INC................................................ 5
GRAINGER GLOBAL SOURCING............................................. 5
GRAINGER PARTS....................................................... 5
GRAINGER, S.A. de C.V. .............................................. 5
DIGITAL BUSINESSES...................................................... 5
FINDMRO.COM.......................................................... 5
MROVERSTOCKS.COM..................................................... 5
TOTALMRO.COM......................................................... 5
LAB SAFETY SUPPLY, INC. ................................................ 6
OTHER BUSINESSES........................................................ 6
GRAINGER INTEGRATED SUPPLY........................................... 6
INDUSTRY SEGMENTS....................................................... 6
COMPETITION............................................................. 6
EMPLOYEES............................................................... 6
Item 2: PROPERTIES................................................................ 6-7
Item 3: LEGAL PROCEEDINGS......................................................... 7
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 7
Executive Officers of the Company........................................................ 7-8
PART II

Item 5: MARKETS FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS......................................... 8
Item 6: SELECTED FINANCIAL DATA................................................... 8
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND THE RESULTS OF OPERATIONS........................................... 9-14
RESULTS OF OPERATIONS................................................... 9-13
FINANCIAL CONDITION..................................................... 13-14
INFLATION AND CHANGING PRICES........................................... 14
FORWARD-LOOKING STATEMENTS.............................................. 14
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 14
Item 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................... 14
PART III

Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................ 14
Item 11: EXECUTIVE COMPENSATION.................................................... 14
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 14
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 15
PART IV

Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K........... 15
Signatures............................................................................... 16
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................... 17
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................. 18-40

PART I
Item 1: Business

The Company

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

In late 1997, the Company began an organizational restructuring with the
formation of several business operations. Several of these operations were
originally part of the Grainger branch-based business. These changes were made
to create greater focus and accountability in serving the diverse needs of the
Company's customers. 1998 was a transition year in establishing the refocused
organization. Further refinements made in 1999 and in 2000 were in response to
significant initiatives designed to take advantage of the opportunities created
by Internet commerce. FindMRO.com and MROverstocks.com were officially launched
in November 1999. TotalMRO.com opened for business on March 31, 2000. Also in
2000, the Company's OrderZone.com business was combined with Works.com, Inc., a
leading Internet business purchasing service, in a transaction in which the
Company received a 40% interest in the combined entity. In addition, efforts
were made to simplify and better target operations to reinforce quality of
service. As part of this effort, the operations of Grainger Custom Solutions
were combined with those of Grainger Industrial Supply.

The Company offers a breadth of MRO solutions by combining products, services,
and information. It tailors its capabilities with a view toward providing the
lowest total cost MRO solution to select customer groups. The Branch-based
Distribution Businesses primarily serve North American businesses with MRO
purchase needs. The Digital Businesses offer a broad array of MRO supplies,
services, and related information to meet the needs of businesses looking to
reduce process costs through Internet-enabled solutions. Lab Safety Supply
serves customers who choose to purchase safety and other industrial products
through a direct marketing company. The Other Businesses of the Company serve
customers who seek to outsource their MRO supply procurement and management
process.

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

A number of Company-wide capabilities assist business units in serving their
respective markets. These capabilities include technology and information
management, supplier partnerships, supply chain integration skills, and an
understanding of the customers' MRO environments.

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

Branch-based Distribution Businesses

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

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

Grainger Industrial Supply operates 382 branches in all 50 states. These
branches are located within minutes of the majority of U.S. businesses and carry
inventory to support their local market needs. Products are available for
immediate pick up, same-day shipment, or delivery.

On average, a branch has 14 employees and handles about 230 transactions per
day. During 2000, an average of approximately 90,000 sales transactions were
completed daily. In 1999, Grainger Industrial Supply began adding new, smaller
"storefront" branches to fulfill will-call needs and customer service as more
shipping was moved from the branches to distribution centers. In addition,
Grainger Industrial Supply has eight "master branches" which range in size from
20,000 square feet to 100,000 square feet and stock the fastest selling 30,000
items. In 2000, Grainger Industrial Supply invested more than $5,000,000 in new
branches, branch relocations, and branch additions. During the year, 13 new
branches were opened, three were relocated, two closed, and a number of
remodeling projects were completed.

Grainger Industrial Supply has six Zone Distribution Centers (ZDCs) in
operation. ZDCs ship orders directly to customers for all branches located in
their zone, including Internet orders. Two Regional Distribution Centers located
in Greenville County, South Carolina, and Kansas City, Missouri, provide the
branches with product. A National Distribution Center is a centralized storage
and shipping facility serving customers and the entire network with slower
moving inventory items.

In 2000, Grainger Industrial Supply began a multi-year redesign and expansion of
its distribution network that will allow the Company to remove the costs of a
warehousing step from the current distribution system. This redesign is not only
intended to reduce costs but also to increase capacity. As part of the redesign,
Grainger Industrial Supply is transitioning its existing zone and regional
warehouses into more highly automated distribution centers. The project includes
the relocation and expansion of some of the existing ZDCs and the building of
two new facilities. When the transition is complete, the distribution centers
will average more than 300,000 square feet in size, employ state-of-the-art
equipment and processes, and stock 50,000 of the fastest selling items.

Grainger Industrial Supply sells principally to service shops, industrial and
commercial maintenance departments, manufacturers, hotels, government,
contractors, and health care and educational facilities. Sales transactions
during 2000 were made to approximately 1,400,000 customers. It is estimated that
approximately 28% of 2000 sales consisted of items bearing the Company's
registered trademarks, including DAYTON(R) (principally electric motors, heating
and ventilation equipment), TEEL(R) (liquid pumps), SPEEDAIRE(R) (air
compressors), AIR HANDLER(R) (air filtration equipment), DEM-KOTE(R) (spray
paints), WESTWARD(R) (hand and power tools), and LUMAPRO(R) (task and outdoor
lighting), as well as other of the Company's trademarks. The Company has taken
steps to protect these trademarks against infringement and believes that they
will remain available for future use in its business. Sales of remaining items
generally consisted of products carrying the names of other well recognized
brands.

The Grainger Industrial Supply catalog offers almost 100,000 MRO products from
more than 1,000 suppliers, most of whom are manufacturers. Approximately 2.0
million copies of the catalog were distributed in 2000. The most current edition
was issued in January 2001. The largest supplier in 2000, a diversified
manufacturer through 18 of its divisions, accounted for about 10% of Grainger
Industrial Supply's purchases. No significant difficulty has been encountered
with respect to sources of supply.

The Grainger Industrial Supply CD-ROM catalog is designed to bring directly to
the customer's place of business a fast, easy way to select products. Through
the CD-ROM catalog, the customer can use a variety of ways to describe a needed
product, and then review Grainger Industrial Supply's offerings, complete with
specifications, prices, and pictures. Another CD-ROM catalog feature includes a
cross-reference function that allows customers to retrieve product information
using their own stock numbers. More than 1.4 million copies of the CD-ROM
catalog were distributed in 2000. The CD-ROM catalog is also used at the
branches as a training tool and resource for identifying appropriate products
for customers' applications.

Grainger.com
------------
The Grainger.com site was one of the first MRO websites. This website is an
"e-storefront" or "point of access" into the Grainger Industrial Supply
business. Grainger.com, however, offers more products than the Grainger
Industrial Supply catalog, as well as automated search and customer
personalization. It also is available 24 hours a day, seven days a week
providing real-time availability, customer-specific pricing, search engines, and
a number of other enhancements. For large customers interested in connecting to
Grainger.com using sophisticated purchasing platforms, Grainger has introduced a
universal connection. This technology translates the different languages used by
electronic marketplaces, exchanges, and enterprise software vendor (ESV) systems
and allows information from these systems to be fed directly into Grainger
Industrial Supply's operating platform.

The Company continued to integrate the Grainger.com site as a prominent service
channel for its branch-based businesses. Customers have access to a much larger
selection of MRO products through Grainger.com, which has more than 220,000
products available. The Company has found that customers that order online
increase their purchases through all Company channels at more than double the
expected rate of growth. Orders processed through Grainger.com resulted in sales
of approximately $267,000,000 in 2000, $101,000,000 in 1999, and $13,500,000 in
1998. Based on year-end volumes, the Company estimated that the annualized run
rate for orders processed through Grainger.com was more than $300,000,000.

Acklands-Grainger Inc. (AGI)
----------------------------
AGI, acquired in December 1996, is Canada's leading branch-based broad-line MRO
distributor. It serves customers through 186 branches and 6 distribution centers
across Canada. AGI distributes tools, lighting, HVAC, safety supplies,
pneumatics, instruments, welding equipment and supplies, motors, and shop
equipment, as well as many other items. A comprehensive catalog, printed in both
English and French, is used to showcase the product line and to help customers
select products. This catalog, with over 70,000 products listed, supports the
efforts of 275 sales representatives throughout Canada. During 2000, an average
of approximately 20,000 sales transactions were completed daily.

Grainger Global Sourcing
------------------------
Grainger Global Sourcing procures competitively priced, high-quality products
produced outside the United States. These items are sold primarily under private
label by Grainger Industrial Supply and the Company's other businesses. Products
obtained through Grainger Global Sourcing in 2000 include WESTWARD(R) tools and
LUMAPRO(R) lighting products, as well as products bearing other trademarks.

Grainger Parts
--------------
Grainger Parts provides access to over 330,000 parts and accessories through its
centralized warehouse located in Northbrook, Illinois. Trained representatives
have access to more than 250,000 pages of detailed parts diagrams online.
Grainger Parts handled about 1,600,000 customer calls in 2000 through its call
centers in Northbrook, Illinois, and Waterloo, Iowa.

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

Grainger, S.A. de C.V.
----------------------
Grainger, S.A. de C.V. serves the MRO product needs of customers in Mexico. The
business employed 87 sales representatives at December 31, 2000. From its 80,000
square foot facility outside Monterrey, the business provides delivery of over
80,000 products throughout Mexico. A new branch was opened in 2000 in
Guadalajara.

Digital Businesses

The Digital Businesses represent a suite of e-commerce offerings designed to
meet the needs of businesses looking to reduce cost and increase the
effectiveness of their MRO/indirect materials process through Internet-enabled
solutions. The Digital Businesses consist of FindMRO.com, TotalMRO.com, and
MROverstocks.com (originally named Grainger Auction). OrderZone.com, the
indirect materials marketplace that was launched in 1999, was combined with
Works.com, a leading Internet business purchasing service, in August 2000. The
Company received a 40% interest in the combined entity.

FindMRO.com
------------
FindMRO.com is an Internet-based sourcing center for indirect material spot
buys. Introduced in November 1999, FindMRO.com accesses a database of more than
14,000 suppliers and 5,000,000 products. Through the convenience of the
Internet, sophisticated search technologies, and sourcing expertise of its
sourcing professionals, FindMRO.com offers to address the time-consuming problem
of finding products when a source is unknown to the buyer. From frequent to
hard-to-find or from daily to one-time purchases, FindMRO.com is designed to
meet a number of customer needs, including product search, product sourcing,
supplier management, order processing, order fulfillment, technical support
facilitation, and logistics management.

MROverstocks.com
-----------------
Introduced in November 1999, MROverstocks.com offers online inventory
liquidation services through real-time bidding. MROverstocks.com provides an
outlet to move discontinued inventory (undamaged products that are not the
latest versions) or excess inventory. Initially, the site exclusively handled
discontinued inventory from Grainger Industrial Supply. Customer response was
such that MROverstocks.com was established as a separate business unit in early
2000 and is now open to Company suppliers, additional Company businesses, and
others.

TotalMRO.com
------------
Introduced in March 2000, TotalMRO.com provides customers with access to a
single, networked catalog containing easily searchable, detailed product
information, prenegotiated prices, and availability information for MRO products
and services from major MRO distributors.

On January 26, 2001, the Company announced the consolidation of the above three
digital businesses, along with three other related service units, into a
separate organization, Material Logic. The new organization is seeking
participation from MRO distributors to create an industry-backed,
industry-funded independent entity that will own and operate those businesses.
The new organization, in which the Company plans to hold a minority position,
plans to work with large national MRO distributors to create a broad digital
solution providing customers access to substantial cost benefits through
e-commerce platforms, e-marketplaces, and hosted ASP solutions.

Lab Safety Supply, Inc.

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

Lab Safety Supply offers extensive product depth, technical support, and high
service levels. It is a primary safety supplier for many small and medium-sized
companies and a critical backup supplier for many larger companies. Customers
have access to over 70,000 products in Lab Safety Supply's General Catalog. In
addition, customers can access products using a new CD-ROM version of the
catalog or online via the web at LabSafety.com.

Other Businesses

Other Businesses of the Company include a number of businesses, the largest
being Grainger Integrated Supply.

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

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

Industry Segments

As a result of meeting certain reporting thresholds in 2000, Lab Safety Supply
is being reported as a separate segment for all years presented. Lab Safety
Supply had previously been grouped with Other Businesses. This new reporting is
not reflective of any management or organizational change. For 2000 the Company
is reporting three industry segments: Branch-based Distribution, Digital, and
Lab Safety Supply. For segment information and the Company's consolidated
revenue and operating earnings see "Item 7: Management's Discussion and Analysis
of Financial Condition and the Results of Operations," and "Item 8: Financial
Statements and Supplementary Data." The total assets of the Company for the last
five years were: 2000, $2,459,601,000; 1999, $2,564,826,000; 1998,
$2,103,966,000; 1997, $2,000,116,000; and 1996, $2,119,021,000.

Competition

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

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

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

Employees

As of December 31, 2000, the Company had 16,192 employees, of whom 13,855 were
full-time and 2,337 were part-time or temporary. The Company has never had a
major work stoppage and considers its employee relations generally to be good.

Item 2: Properties

As of December 31, 2000, the Company's owned and leased facilities totaled
17,629,000 square feet, about the same as in 1999. Grainger Industrial Supply
and Acklands-Grainger Inc. (AGI) accounted for the majority of the total square
footage. Grainger Industrial Supply facilities are located throughout the United
States. AGI facilities are located throughout Canada.

Grainger Industrial Supply branches range in size from 1,200 to 109,000 square
feet and average 20,000 square feet. Most are located in or near major
metropolitan areas, many in industrial parks. Typically, a branch is on one
floor, is of masonry construction, consists primarily of warehouse space,
contains an air-conditioned office and sales area, and has off-the-street
parking for customers and employees. The Company considers that its properties
are generally in good condition and well maintained and are suitable and
adequate to carry on the Company's business.

The significant facilities of the Company are briefly described below:

Size in
Location Facility and Use Square Feet
------------------------------ --------------------------------------------------- ------------------
Chicago Area (1) General Offices & National Distribution Center 2,041,000
Kansas City, MO (1) Regional Distribution Center 1,435,000
Greenville County, SC (1) Regional Distribution Center 1,090,000
United States (1) 6 Zone Distribution Centers 1,385,000
United States (2) 382 Grainger Industrial Supply branch locations 7,728,000
United States and Mexico (3) All other facilities 1,650,000
Canada (4) 186 AGI facilities 2,300,000
-----------------
Total square feet 17,629,000
=================
---------------------------------------------------------------------------------------------------------------------------

(1) These facilities are either owned or leased with most leases expiring
between 2001 and 2007. The owned facilities are not subject to any
mortgages.

(2) Grainger Industrial Supply branches consist of 299 owned and 83 leased
properties. The owned facilities are not subject to any mortgages.

(3) Other facilities represent owned and leased general branch offices,
distribution centers, and branches. Two branches are located in Puerto
Rico and two are located in Mexico. The owned facilities are not subject
to any mortgages.

(4) AGI facilities consist of general offices, distribution centers, and
branches that are either owned or leased. The owned facilities are not
subject to any mortgages.

Item 3: Legal Proceedings

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

Item 4: Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth
quarter of 2000.

Executive Officers of the Company

Following is information about the Executive Officers of the Company as of March
1, 2001. Executive Officers of the Company generally serve until the next annual
election of officers, or until earlier resignation or removal.

Positions and Offices Held and Principal
Name and Age Occupations and Employment During the Past Five Years
------------------------- -----------------------------------------------------------------------------------------
Donald E. Bielinski (51) Group President, a position assumed in 1997 after serving as Senior Vice President,
Marketing and Sales. Previously, Mr. Bielinski served as Senior Vice President,
Organization and Planning.
Wesley M. Clark (48) Group President, a position assumed in 1997 after serving as Senior Vice President,
Operations and Quality. Previously, Mr. Clark served as Vice President, Field Operations
and Quality.
Edward J. Franczek (44) Senior Vice President, Marketing. Before joining the Company in 1999, Mr. Franczek was
Vice President, Corporate Marketing at Kemper Insurance. Prior to assuming the
last-mentioned position in 1998, he served Ameritech Corporation as Vice President,
Corporate Product Management. Mr. Franczek has also served Kraft Foods, Inc., most
recently as Vice President, Marketing and Business Director.
Gary J. Goberville (54) Vice President, Human Resources. Before joining the Company in 1995, Mr. Goberville
served as Vice President, Human Resources of GenCorp, Inc.
Nancy A. Hobor (54) Vice President, Communications and Investor Relations. Before joining the Company in
1999, Ms. Hobor was Vice President, Corporate Communications and Investor Relations of
Morton International, Inc.
John L. Howard (43) Senior Vice President and General Counsel. Before joining the Company in 2000, Mr.
Howard was Vice President and General Counsel of Tenneco Automotive, a position assumed
after serving as Vice President, Law and Assistant General Counsel of Tenneco, Inc.
(continued on next page)

Positions and Offices Held and Principal
Name and Age Occupations and Employment During the Past Five Years
------------------------- -----------------------------------------------------------------------------------------
Dennis G. Jensen (50) Senior Vice President, Sales and Operations, a position assumed in January 2000 after
serving as Vice President and General Manager, Sales and Operations. Prior to assuming
the last-mentioned position in 1997, Mr. Jensen was Vice President, Field Operations.
Previously, he served in various other managerial operating positions.
Richard L. Keyser (58) Chairman of the Board, a position assumed in 1997, and Chief Executive Officer, a
position assumed in 1995. Previously, Mr. Keyser served as President and Chief Operating
Officer.
P. Ogden Loux (58) Senior Vice President, Finance and Chief Financial Officer, positions assumed in 1997
after serving as Vice President, Finance.
Robert D. Pappano (58) Vice President, Financial Reporting, a position assumed in 1999 after serving as Vice
President, Financial Reporting and Investor Relations. Previously, he served as Vice
President and Treasurer.
James T. Ryan (42) Vice President of the Company and President, Grainger.com, a position assumed in January
2000 after serving as Vice President, Information Services. Previously, Mr. Ryan served
the Company as President, Parts Company of America.
John A. Schweig (43) Senior Vice President, Business Development and International, a position assumed in
1996 after serving as Vice President and General Manager, Direct Marketing. Previously,
Mr. Schweig served the Grainger Division as Vice President, Marketing.
John W. Slayton, Jr. (55) Senior Vice President, Supply Chain Management, a position assumed in 1997 after serving
as Senior Vice President, Product Management. Previously, Mr. Slayton served the
Grainger Division as Vice President, Product Management.

PART II

Item 5: Markets for Registrant's Common Equity and Related Shareholder Matters

The Company's common stock is traded on the New York Stock Exchange and the
Chicago Stock Exchange, with the ticker symbol GWW. The high and low sales
prices for the common stock, and the dividends declared and paid for each
calendar quarter during 2000 and 1999 are shown below.

Prices
------------------------------
Quarters High Low Dividends
--------------------------------------------------------------------------------------
2000 First $56.88 $37.25 $0.16
Second 55.69 29.38 0.17
Third 34.75 25.13 0.17
Fourth 40.00 24.31 0.17
--------------------------------------------------------------------------------------
Year $56.88 $24.31 $0.67
--------------------------------------------------------------------------------------
1999 First $48.00 $36.88 $0.15
Second 58.13 42.00 0.16
Third 57.25 42.88 0.16
Fourth 50.63 40.63 0.16
--------------------------------------------------------------------------------------
Year $58.13 $36.88 $0.63
--------------------------------------------------------------------------------------

The approximate number of shareholders of record of the Company's common stock
as of March 5, 2001 was 1,600.

Item 6: Selected Financial Data
Years Ended December 31,
------------------------------------------------------------------------
(In thousands of dollars except for per share amounts)

2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------

Net sales ......................... $ 4,977,044 $ 4,636,275 $ 4,438,975 $ 4,226,941 $ 3,616,640
Net earnings ...................... 192,903 180,731 238,504 231,833 208,526
Net earnings per basic share ...... 2.07 1.95 2.48 2.30 2.04
Net earnings per diluted share .... 2.05 1.92 2.44 2.27 2.02
Total assets ...................... 2,459,601 2,564,826 2,103,966 2,000,116 2,119,021
Long-term debt .................... 125,258 124,928 122,883 131,201 6,152
Cash dividends paid per share ..... $ 0.67 $ 0.63 $ 0.585 $ 0.53 $ 0.49

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

RESULTS OF OPERATIONS

The following table is included as an aid to understanding changes in the
Company's Consolidated Statements of Earnings. All data has been restated to
reflect the adoption of Emerging Issues Task Force Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs."

Years Ended December 31,
---------------------------------------------------------------
Items in Consolidated Statements Percent of Increase
of Earnings as a Percent of (Decrease) from
Net Sales Prior Year
--------------------------------- ---------------------
2000 1999 1998 2000 1999
------ ------ ------ ----- -----
Net sales............................................ 100.0% 100.0% 100.0% 7.4% 4.4%
Cost of merchandise sold............................. 68.2 67.4 66.4 8.5 6.0
Operating expenses................................... 25.1 25.8 24.4 4.8 10.2
Operating earnings................................... 6.7 6.8 9.2 5.6 (22.2)
Other deductions, net................................ 0.0 0.3 0.2 (73.8) 88.9
Income taxes......................................... 2.8 2.6 3.6 12.7 (24.2)
Net earnings......................................... 3.9% 3.9% 5.4% 6.7% (24.2)%

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

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

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

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

Segment Net Sales

The following comments at the segment level include external and intersegment
net sales; those comments at the business unit level include external and inter-
and intrasegment net sales. For segment information see Note 17 to the
Consolidated Financial Statements.

Branch-based Distribution Businesses

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

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

Grainger, S.A. de C.V. experienced double-digit sales growth reflecting the
continued development of this business. This growth in sales was attributable to
an expanded product offering and account penetration. In January 2000, the
Company opened a second branch in Mexico.

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

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

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

Digital Businesses

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

Lab Safety Supply

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

Other Businesses

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

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

Company Net Sales -- 1999 Compared to 1998
------------------------------------------
The Company's net sales of $4,636,275,000 for 1999 increased 4.4% from net sales
of $4,438,975,000 for 1998. This increase resulted from a 3.2% increase in the
Branch-based Distribution Businesses segment, a 499.4% increase in the Digital
Businesses segment, an 8.7% increase at Lab Safety Supply, and a 45.8% increase
in the Other Businesses of the Company. Since 1999 had one fewer sales day than
did 1998 (254 versus 255), the Company's net sales increased 4.9% on a daily
basis.

Despite a soft industrial economy in the United States, sales growth was
positive in 1999 versus 1998. Sales growth for the year 1999 was primarily
volume driven, reflecting the favorable effects from new marketing initiatives
and the continuing acceleration in Internet transactions. Sales growth was
constrained, however, by customer service issues at Grainger Industrial Supply
and Grainger Parts related to the field rollout of the new enterprise resource
planning (ERP) system. A total of $20,000,000 of sales are estimated to have
been lost as a result of these service issues.

Segment Net Sales

Branch-based Distribution Businesses

Net sales at the Branch-based Distribution Businesses amounted to $4,211,316,000
in 1999, a 3.2% increase over 1998 sales of $4,079,415,000. Average daily sales
increased by 3.6%.

Grainger Industrial Supply -- Average daily sales increased 3% in 1999 as
compared with 1998. Contributing to the 1999 sales growth were the addition of
22 new branches opened during the year and increased sales to large customers.
Sales were negatively affected by approximately $18,400,000 as a result of the
customer service issues discussed above. Sales prices decreased 0.7% in 1999
versus 1998.

This business also realized incremental sales of $15,300,000 during the 1999
fourth quarter, including $7,100,000 in December 1999, related to customer
concerns about Y2K. Products affected included generators, flashlights, and
batteries.

Sales were favorably affected by continued momentum in the Company's Internet
strategy. Orders for sales processed through Grainger.com in 1999 were
approximately $101,000,000.

Acklands-Grainger Inc. (Canada) -- Average daily sales increased 6% in 1999 as
compared with 1998. This increase was driven by growth in both Eastern and
Western Canada. The growth in Eastern Canada was primarily attributable to the
addition of 16 net new branches during 1999 and 1998. The growth in Western
Canada was driven by an improvement in the oil and gas, forestry, and industrial
sectors of the economy, along with gains in sales to large customers, including
government agencies. In Canadian dollars, average daily sales increased 7%.

Grainger, S.A. de C.V. (Mexico) -- Average daily sales increased 16% in 1999 as
compared with 1998. This sales growth reflects the continuing planned
development of this new business. A key driver was increased sales to customers
located in Mexico's interior that are served by the Company's facility in
Monterrey.

Grainger Custom Solutions (combined with Grainger Industrial Supply for 2000) --
Average daily sales decreased 2% in 1999 as compared with 1998. The focus of
this business in 1999 was transitioning large, complex customers to the new
business platform, while pursuing rationalization of facilities and other
synergies with Grainger Industrial Supply.

Digital Businesses

Net sales at the Digital Businesses amounted to $2,979,000 in 1999, a 499.4%
increase over 1998 sales of $497,000. These sales included product sales and
service fee revenues for FindMRO.com and service fee revenues for OrderZone.com.
Both businesses were officially launched in 1999. Revenue recorded in 1998
represents intracompany sales for FindMRO.com.

Lab Safety Supply

Net sales at Lab Safety Supply amounted to $313,533,000 in 1999, an 8.7%
increase over 1998 sales of $288,491,000. This sales growth was largely
attributable to Lab Safety Supply's product line expansion program.

Other Businesses

Net sales at the Other Businesses amounted to $125,882,000 in 1999, a 45.8%
increase over 1998 sales of $86,358,000. Sales growth for this segment was
primarily related to a strong sales increase at Grainger Integrated Supply.
Sales for this business unit included product throughput and management fees.
Growth was driven by new engagements, contract renewals, and scope expansions,
reflecting increasing demand for this outsourcing business, which provides
fee-based, on-site indirect materials management services to large businesses.

Company Net Earnings -- 2000 Compared to 1999
---------------------------------------------

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

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

Segment Operating Earnings

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

Branch-based Distribution Businesses

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

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

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

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

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

Digital Businesses

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

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

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

On January 26, 2001, the Company announced the consolidation of FindMRO.com,
MROverstocks.com, and TotalMRO.com into a separate organization, Material Logic.
Participation is being sought from MRO distributors to establish Material Logic
as an industry-backed, industry-funded independent entity that will own and
operate these businesses. Material Logic is also expected to include related
consulting, implementation, and content services. Working with large national
MRO distributors, Material Logic will seek to create a broad digital solution
providing customers access to substantial cost benefits through e-commerce
platforms, e-marketplaces, and hosted ASP solutions.

Lab Safety Supply

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

Other Businesses

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

Other Income Statement Data

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

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

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

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

Company Net Earnings -- 1999 Compared to 1998
---------------------------------------------
The Company's net earnings of $180,731,000 for 1999 decreased 24.2% compared
with 1998 net earnings of $238,504,000. This decline resulted from lower
operating earnings and higher other deductions. Operating earnings declined at
the Branch-based Distribution Businesses and the loss at the Digital Businesses
increased. Operating earnings improved at Lab Safety Supply and the operating
losses at the Other Businesses declined.

The Company's Branch-based Distribution Businesses were affected by
system-related customer service issues. It is estimated that these service
issues cost the Company $32,000,000 in operating earnings in 1999, comprised of
gross profit on lost sales, higher freight-out expenses driven by increased
shipments qualifying for prepaid freight and the use of premium freight to meet
service objectives, and incremental operating expenses. Also affecting
performance were the continuing investments incurred to launch, enhance, and
market the Company's Internet-related businesses.

Segment Operating Earnings

Branch-based Distribution Businesses

Operating earnings of $357,925,000 declined 18% in 1999 as compared with
$435,891,000 for 1998. Operating earnings performance was affected by lower than
expected sales growth, largely due to weakness in the North American industrial
economy and to system-related customer service issues at Grainger Industrial
Supply and Grainger Parts, as previously described. Also contributing to the
decline were lower gross profit margins and higher operating expenses. Of note
are the following factors that affected the gross profit margin:

1. Grainger Industrial Supply's gross profit margin declined. Contributing to
the decline were higher freight-out expenses driven by increased shipments
qualifying for prepaid freight and the use of premium freight to meet
service objectives.
2. Acklands-Grainger Inc. had a lower gross profit margin primarily due to an
unfavorable change in selling price category mix as a result of increased
sales to large customers.
3. The gross profit margin at Grainger Custom Solutions improved.
4. Sales at Grainger Custom Solutions declined, which had a positive effect
on the Company's gross profit margin since Grainger Custom Solutions'
gross profit margin was lower than the Company's average gross profit
margin.

Operating expenses increased about 9% in 1999 versus 1998. This rate of growth
exceeded the rate of growth in net sales due to:

1. Increased expenses related to the development of the business in Mexico;
2. Increased occupancy expenses;
3. Increased data processing expenses related to the installation of Grainger
Industrial Supply's new ERP system;
4. Increased expenses incurred to maintain customer service levels during the
installation of the new ERP system;
5. Continued spending to develop and market Grainger.com (Grainger.com
spending in 1999 was $18,100,000 compared with $6,700,000 in 1998.);
6. Increased expenses related to the opening of eight new branches in Canada
and 22 new branches in the United States; and
7. Increased infrastructure expenses relating to developing the Grainger
Custom Solutions business.

The above factors were partially offset by decreased advertising expenses at
Grainger Industrial Supply resulting from increased cooperative programs.

Digital Businesses

The Digital Businesses incurred operating losses of $20,560,000 in 1999 compared
with operating losses of $8,091,000 in 1998. During 1999 the Company continued
to invest in the development of these businesses. The Digital Businesses
incurred operating expenses of $23,500,000 in 1999 versus $8,600,000 in 1998 for
developing, enhancing, and marketing OrderZone.com and FindMRO.com.

Lab Safety Supply

Operating earnings of $42,878,000 increased 9.0% in 1999 as compared with
$39,330,000 for 1998. The growth in operating earnings was in line with the
growth in net sales.

Other Businesses

The Other Businesses incurred operating losses of $16,306,000 in 1999 compared
with operating losses of $20,822,000 in 1998. This improvement was primarily
attributable to improved operating results at Grainger Integrated Supply. Of
note were the following:

1. The gross profit margin decreased at Grainger Integrated Supply. This
decrease related to product sales throughput, which grew at a faster rate
than the related management fee income.
2. Operating expenses at Grainger Integrated Supply decreased from 1998
levels while average daily sales increased 48%.

Other Income Statement Data

Interest expense increased by $8,944,000 in 1999 as compared with 1998. This
increase resulted from higher average borrowings and higher average interest
rates paid on all outstanding debt, partially offset by higher capitalized
interest.

Unclassified--net had a positive effect on earnings before income taxes of
$2,555,000 in 1999 as compared with 1998. In 1999, the Company recorded a gain
related to the disposal of facilities in the Chicagoland area. The expenses in
1998 were primarily the result of foreign currency translation losses relating
to the Company's operations in Mexico and a write-off of abandoned capital
projects.

The Company's effective income tax rate was 40.5% in both 1999 and 1998.

FINANCIAL CONDITION

Working capital was $735,678,000 at December 31, 2000, compared with
$600,611,000 at December 31, 1999, and $541,872,000 at December 31, 1998. The
ratio of current assets to current liabilities was 2.0, 1.7, and 1.8 at such
dates.

Net cash flows from operations of $277,757,000 in 2000, $37,240,000 in 1999, and
$331,481,000 in 1998, have continued to improve the Company's financial position
and serve as the primary source of funding for capital requirements. For
information as to the Company's cash flows, see "Item 8: Financial Statements
and Supplementary Data."

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

2000 1999 1998
---------- ---------- ----------
(In thousands of dollars)

Land, buildings, structures, and improvements .... $ 32,822 $ 41,104 $ 87,025
Furniture, fixtures, machinery, and equipment .... 32,685 70,796 45,832
---------- ---------- ----------
65,507 111,900 132,857
Capitalized software ............................. 29,406 26,473 36,983
---------- ---------- ----------
Total ............................................ $ 94,913 $ 138,373 $ 169,840
========== ========== ==========

The Company repurchased 37,840 shares of its common stock during 2000, 355,300
shares of its common stock during 1999, and 4,483,100 shares of its common stock
during 1998. As of December 31, 2000, approximately 5,300,000 shares of common
stock remained available under repurchase authorization.

Dividends paid to shareholders were $62,863,000 in 2000, $58,817,000 in 1999,
and $56,683,000 in 1998.

Internally generated funds have been the primary source of working capital and
funds needed for expanding the business, supplemented by debt as circumstances
dictated. In addition to continuing facilities optimization efforts, business
development, and systems and other infrastructure enhancements, funds are being
expended to develop and enhance the Company's Internet initiatives.

The Company maintains a debt ratio and liquidity position that provides
flexibility in funding working capital needs and long-term cash requirements. In
addition to internally generated funds, the Company has various sources of
financing available, including commercial paper sales and bank borrowings under
lines of credit and otherwise. Total debt as a percent of Shareholders' Equity
was 21%, 30%, and 18% at December 31, 2000, 1999, and 1998, respectively.

INFLATION AND CHANGING PRICES

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

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

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

FORWARD-LOOKING STATEMENTS

Throughout this Form 10-K are forward-looking statements, i.e. not historical
facts, about the Company's expected future financial results and business plans,
strategies, and objectives. These forward-looking statements are often
identified by qualifiers such as: "will seek to," "expects," "plans,"
"anticipates," "intends," or similar expressions. There are risks and
uncertainties the outcome of which could cause the Company's results to differ
materially from what is projected.

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

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

Item 8: Financial Statements and Supplementary Data

The financial statements and supplementary data are included on pages 18 to 40.
See the Index to Financial Statements and Supplementary Data on page 17.

Item 9: Disagreements on Accounting and Financial Disclosure
None.

PART III

Item 10: Directors and Executive Officers of the Registrant

Information regarding directors of the Company will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held April 25, 2001, and, to the extent required, is incorporated herein by
reference. Information regarding executive officers of the Company is set forth
under the caption "Executive Officers of the Company."

Item 11: Executive Compensation

Information regarding executive compensation will be set forth in the Company's
proxy statement relating to the annual meeting of shareholders to be held April
25, 2001, and, to the extent required, is incorporated herein by reference.

Item 12: Security Ownership of Certain Beneficial Owners and Management

Information regarding security ownership of certain beneficial owners and
management will be set forth in the Company's proxy statement relating to the
annual meeting of shareholders to be held April 25, 2001, and, to the extent
required, is incorporated herein by reference.

Item 13: Certain Relationships and Related Transactions

Information regarding certain relationships and related transactions will be set
forth in the Company's proxy statement relating to the annual meeting of
shareholders to be held April 25, 2001, and, to the extent required, is
incorporated herein by reference.

PART IV

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

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

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

3. Exhibits:

(3) (a) Restated Articles of Incorporation dated April 27,
1994, incorporated by reference to Exhibit 3(i) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.

(b) Bylaws, as amended.

(10) Material Contracts:

(a) No instruments which define the rights of holders of
the Company's Industrial Development Revenue Bonds
are filed herewith, pursuant to the exemption
contained in Regulation S-K, Item 601(b)(4)(iii).
The Company hereby agrees to furnish to the
Securities and Exchange Commission, upon request, a
copy of any such instrument.

(b) Shareholder rights agreement dated as of April 28,
1999, between the Company and Fleet National Bank
(formerly Bank Boston, NA), incorporated by
reference to Exhibit 4 to the Company's Current
Report on Form 8-K dated April 28, 1999.

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

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

(iii) W.W. Grainger, Inc. 1990 Long-Term Stock Incentive
Plan, as amended, incorporated by reference to
Exhibit 10(c) (iii) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.

(iv) Executive Death Benefit Plan, as amended,
incorporated by reference to Exhibit 10(c) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1999.

(v) Executive Deferred Compensation Plan, incorporated
by reference to Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1989.

(vi) 1985 Executive Deferred Compensation Plan, as
amended, incorporated by reference to Exhibit
10(d)(vii) to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.

(vii) Supplemental Profit Sharing Plan, as amended.

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

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

(21) Subsidiaries of the Company.

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

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of 2000.

SIGNATURES

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

DATE: March 21, 2001

W.W. GRAINGER, INC.

By: /s/ R. L. Keyser By: /s/ R. D. Pappano
------------------------------ -----------------------------------
R. L. Keyser R. D. Pappano
Chairman of the Board Vice President, Financial Reporting
and Chief Executive Officer (Principal Accounting Officer)
(Principal Executive Officer
and a Director)

By: /s/ P. O. Loux
------------------------------
P. O. Loux
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)

/s/ Brian P. Anderson March 21, 2001 /s/ Neil S. Novich March 21, 2001
----------------------------- ------------------------
Brian P. Anderson Neil S. Novich
Director Director

/s/ Jere D. Fluno March 21, 2001 /s/ James D. Slavik March 21, 2001
----------------------------- ------------------------
Jere D. Fluno James D. Slavik
Director Director

/s/ Wilbur H. Gantz March 21, 2001 /s/ Harold B. Smith March 21, 2001
----------------------------- ------------------------
Wilbur H. Gantz Harold B. Smith
Director Director

/s/ David W. Grainger March 21, 2001 /s/ Fred L. Turner March 21, 2001
----------------------------- ------------------------
David W. Grainger Fred L. Turner
Director Director

/s/ John W. McCarter, Jr. March 21, 2001 /s/ Janiece S. Webb March 21, 2001
----------------------------- ------------------------
John W. McCarter, Jr. Janiece S. Webb
Director Director

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 2000, 1999, and 1998

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

FINANCIAL STATEMENTS

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

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

CONSOLIDATED BALANCE SHEETS

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................... 25-37

SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS.......................................... 38

EXHIBIT 11 - COMPUTATIONS OF EARNINGS PER SHARE........................................ 39

EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....................... 40

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of W.W.
Grainger, Inc., and Subsidiaries as of December 31, 2000, 1999, and 1998, and
the related consolidated statements of earnings, comprehensive earnings,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of W.W. Grainger,
Inc., and Subsidiaries as of December 31, 2000, 1999, and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.

We have also audited Schedule II of W.W. Grainger, Inc., and Subsidiaries
for the years ended December 31, 2000, 1999, and 1998. In our opinion, this
Schedule presents fairly, in all material respects, the information required to
be set forth therein.

GRANT THORNTON LLP

Chicago, Illinois
January 29, 2001

W.W. Grainger, Inc., and Subsidiaries

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

Years Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------

Net sales ................................................................. $ 4,977,044 $ 4,636,275 $ 4,438,975
Cost of merchandise sold .................................................. 3,391,707 3,125,647 2,947,962
------------ ------------ ------------
Gross profit ...................................................... 1,585,337 1,510,628 1,491,013
Warehousing, marketing, and
administrative expenses ................................................. 1,250,217 1,193,400 1,083,031
------------ ------------ ------------
Operating earnings ................................................ 335,120 317,228 407,982

Other income or (deductions)
Interest income ......................................................... 1,891 1,606 1,560
Interest expense ........................................................ (24,403) (15,596) (6,652)
Equity in loss of unconsolidated entities ............................... (10,855) -- --
Unclassified--net ....................................................... 29,842 512 (2,043)
------------ ------------ ------------
(3,525) (13,478) (7,135)
------------ ------------ ------------
Earnings before income taxes ...................................... 331,595 303,750 400,847
Income taxes .............................................................. 138,692 123,019 162,343
------------ ------------ ------------
Net earnings ...................................................... $ 192,903 $ 180,731 $ 238,504
============ ============ ============

Earnings per share:
Basic ................................................................... $ 2.07 $ 1.95 $ 2.48
============ ============ ============
Diluted ................................................................. $ 2.05 $ 1.92 $ 2.44
============ ============ ============

Weighted average number of shares outstanding:
Basic ................................................................... 93,003,813 92,836,696 96,231,829
============ ============ ============
Diluted ................................................................. 94,223,815 94,315,479 97,846,658
============ ============ ============

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

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)

Years Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net earnings .............................................................. $ 192,903 $ 180,731 $ 238,504
Other comprehensive earnings (loss), net of tax:
Foreign currency translation adjustments ................................ (9,487) 9,672 (10,354)
Gain (loss) on investment securities:
Unrealized holding (loss) gain ........................................ (60,066) 78,683 --
Reclassification adjustments for realized gains
included in net earnings .............................................. (18,070) -- --
------------ ------------ ------------
(87,623) 88,355 (10,354)
------------ ------------ ------------
Comprehensive earnings .................................................... $ 105,280 $ 269,086 $ 228,150
============ ============ ============

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

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)

December 31,
--------------------------------------------
ASSETS 2000 1999 1998
------------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents ............................................... $ 63,384 $ 62,683 $ 43,171
Accounts receivable, less allowances for
doubtful accounts of $23,436 for 2000,
$18,369 for 1999, and $15,951 for 1998 ................................ 608,297 561,786 463,377
Inventories ............................................................. 704,071 762,495 626,731
Prepaid expenses ........................................................ 25,173 18,387 11,950
Deferred income tax benefits ............................................ 82,077 65,794 61,200
------------ ------------ ------------
Total current assets .............................................. 1,483,002 1,471,145 1,206,429

PROPERTY, BUILDINGS, AND EQUIPMENT
Land .................................................................... 147,437 147,118 135,636
Buildings, structures, and improvements ................................. 711,392 683,426 662,236
Furniture, fixtures, machinery, and equipment ........................... 449,198 471,485 411,295
------------ ------------ ------------
1,308,027 1,302,029 1,209,167
Less accumulated depreciation
and amortization ...................................................... 631,630 604,278 548,639
------------ ------------ ------------
Property, buildings, and
equipment--net ...................................................... 676,397 697,751 660,528

DEFERRED INCOME TAXES ..................................................... 8,820 -- 3,187

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

OTHER ASSETS
Goodwill ................................................................ 180,644 186,504 177,355
Customer lists and other intangibles .................................... 89,611 89,680 89,573
------------ ------------ ------------
270,255 276,184 266,928

Less accumulated amortization ........................................... 111,094 102,913 86,296
------------ ------------ ------------
159,161 173,271 180,632

Investments ............................................................. 27,761 154,203 5,000
Capitalized software--net ............................................... 56,118 49,431 33,280
Sundry .................................................................. 24,504 19,025 14,910
------------ ------------ ------------
Other assets--net ..................................................... 267,544 395,930 233,822
------------ ------------ ------------
TOTAL ASSETS .............................................................. $ 2,459,601 $ 2,564,826 $ 2,103,966
============ ============ ============

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED BALANCE SHEETS-CONTINUED
(In thousands of dollars)

December 31,
--------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 1998
------------ ------------ ------------
CURRENT LIABILITIES
Short-term debt ......................................................... $ 173,538 $ 296,836 $ 88,060
Current maturities of long-term debt .................................... 22,770 27,721 22,831
Trade accounts payable .................................................. 220,924 260,084 212,872
Accrued contributions to employees'
profit sharing plans .................................................. 54,739 66,356 75,113
Accrued expenses ........................................................ 246,001 219,151 232,461
Income taxes ............................................................ 29,352 386 33,220
------------ ------------ ------------
Total current liabilities ........................................... 747,324 870,534 664,557

LONG-TERM DEBT (less current maturities) .................................. 125,258 124,928 122,883

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

ACCRUED EMPLOYMENT-RELATED BENEFITS COSTS ................................. 49,537 40,718 37,785

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

SHAREHOLDERS' EQUITY
Cumulative Preferred Stock--
$5 par value--authorized, 12,000,000 shares,
issued and outstanding, none .......................................... -- -- --
Common Stock--$0.50 par value--authorized,
300,000,000 shares;
issued, 108,037,082 shares, 2000,
107,460,978 shares, 1999, and
107,233,771 shares, 1998 .............................................. 54,017 53,730 53,617
Additional contributed capital .......................................... 276,819 255,569 249,482
Retained earnings ....................................................... 1,837,298 1,707,258 1,585,344
Unearned restricted stock compensation .................................. (22,720) (16,581) (17,238)
Accumulated other comprehensive (loss) earnings ......................... (18,832) 68,791 (19,564)
Treasury stock, at cost--14,104,212 shares, 2000,
14,079,292 shares, 1999 and
13,728,672 shares, 1998 ............................................... (589,196) (588,238) (572,900)
------------ ------------ ------------
Total shareholders' equity .......................................... 1,537,386 1,480,529 1,278,741
------------ ------------ ------------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .................................................... $ 2,459,601 $ 2,564,826 $ 2,103,966
============ ============ ============

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

W.W. Grainger, Inc., and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)

Years Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net earnings ............................................................ $ 192,903 $ 180,731 $ 238,504
Provision for losses on accounts receivable ............................. 18,076 13,585 10,310
Depreciation and amortization:
Property, buildings, and equipment .................................... 81,898 72,446 58,256
Intangibles and goodwill .............................................. 8,746 15,941 15,964
Capitalized software .................................................. 16,249 9,840 4,645
Tax benefit of stock incentive plans .................................... 3,198 3,424 4,107
(Gain) on sales of investment securities ................................ (30,017) -- --
Loss on unconsolidated entities ......................................... 10,855 -- --
Change in operating assets and liabilities:
(Increase) in accounts receivable ..................................... (66,332) (109,269) (21,349)
Decrease (increase) in inventories .................................... 54,468 (130,708) (20,260)
(Increase) in prepaid expenses ........................................ (7,163) (6,333) (3,192)
(Increase) in deferred income taxes ................................... (21,077) (5,909) (7,393)
(Decrease) increase in trade accounts payable ......................... (37,944) 45,621 7,237
Increase (decrease) in other current liabilities ...................... 13,836 (23,530) 42,095
Increase (decrease) in current
income taxes payable ................................................ 28,920 (32,997) (1,407)
Increase in accrued employment
related benefits costs .............................................. 8,819 2,933 2,578
Other--net .............................................................. 2,322 1,465 1,386
------------ ------------ ------------
Net cash provided by operating activities ................................. 277,757 37,240 331,481

Cash flows from investing activities:
Additions to property, buildings, and equipment ......................... (65,507) (111,900) (132,857)
Proceeds from sale of property, buildings,
and equipment--net .................................................... 1,701 4,387 4,315
Expenditures for capitalized software ................................... (29,406) (26,473) (36,983)
Proceeds from sales of investment securities ............................ 31,665 -- --
Purchases of available-for-sale securities .............................. (5,000) (18,500) (5,000)
Investments in unconsolidated entities .................................. (26,862) -- --
Other--net .............................................................. (774) (2,898) (144)
------------ ------------ ------------
Net cash (used in) investing activities ................................... (94,183) (155,384) (170,669)

W.W. Grainger, Inc., and Subsidiaries

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

Years Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from financing activities:
Net (decrease) increase in short-term debt .............................. $ (123,298) $ 208,776 $ 85,100
Long-term debt payments ................................................. (70) (93) (1,079)
Stock options exercised ................................................. 6,011 1,223 443
Purchase of treasury stock--net ......................................... (947) (15,306) (193,959)
Contributions from minority interest .................................... 100 -- --
Cash dividends paid ..................................................... (62,863) (58,817) (56,683)
------------ ------------ ------------
Net cash (used in) provided by financing activities ....................... (181,067) 135,783 (166,178)

Exchange rate effect on cash and cash equivalents ......................... (1,806) 1,873 (687)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .................................................... 701 19,512 (6,053)

Cash and cash equivalents at beginning of year ............................ 62,683 43,171 49,224
------------ ------------ ------------
Cash and cash equivalents at end of year .................................. $ 63,384 $ 62,683 $ 43,171
============ ============ ============

Supplemental Cash Flow Information
Cash payments for interest .............................................. $ 24,578 $ 16,305 $ 5,027
Cash payments for taxes ................................................. 112,934 157,561 165,668
Non-cash Investing Activities:
(Decrease) increase in fair value
of securities available-for-sale, net of tax effect ................... $ (78,136) $ 78,683 $ --
Investment in unconsolidated entity ..................................... 7,831 -- --

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

W.W. Grainger, Inc., and Subsidiaries

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

Unearned Accumulated
Additional Restricted Other
Common Contributed Retained Stock Comprehensive Treasury
Stock Capital Earnings Compensation Earnings (Loss) Stock
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 1998 .......... $ 53,486 $ 242,289 $ 1,403,523 $ (16,528) $ (9,210) $ (378,899)
Exercise of stock options ........... 105 4,316 -- -- -- --
Issuance of 52,500 shares
of restricted common stock ........ 26 2,706 -- (2,732) -- --
Amortization of unearned
restricted stock compensation ..... -- 129 -- 2,022 -- --
Purchase of 4,479,100 shares
of treasury stock, net of
4,000 shares issued ............... -- 42 -- -- -- (194,001)
Cumulative translation adjustments .. -- -- -- -- (10,354) --
Net earnings ........................ -- -- 238,504 -- -- --
Cash dividends paid
($0.585 per share) ................ -- -- (56,683) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 ........ 53,617 249,482 1,585,344 (17,238) (19,564) (572,900)
Exercise of stock options ........... 97 4,411 -- -- -- --
Issuance of 42,000 shares
of restricted common stock ........ 21 1,880 -- (1,901) -- --
Cancellation of 10,000 shares
of restricted common stock ........ (5) (375) -- 380 -- --
Amortization of unearned
restricted stock compensation ..... -- 139 -- 2,178 -- --
Purchase of 350,620 shares
of treasury stock, net of
4,680 shares issued ............... -- 32 -- -- -- (15,338)
Cumulative translation adjustments .. -- -- -- -- 9,672 --
Unrealized holding gain
on investments, net of tax ........ -- -- -- -- 78,683 --
Net earnings ........................ -- -- 180,731 -- -- --
Cash dividends paid
($0.63 per share) ................. -- -- (58,817) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 ........ 53,730 255,569 1,707,258 (16,581) 68,791 (588,238)
Exercise of stock options ........... 140 8,859 -- -- -- --
Issuance of 367,500 shares
of restricted common stock ........ 182 15,145 -- (15,450) -- --
Cancellation of 70,500 shares
of restricted common stock ........ (35) (2,975) -- 3,010 -- --
Amortization of unearned
restricted stock compensation ..... -- 210 -- 6,301 -- --
Purchase of 31,400 shares
of treasury stock, net of
6,440 shares issued ............... -- 11 -- -- -- (958)
Cumulative translation adjustments .. -- -- -- -- (9,487)
Unrealized holding (loss)
on investments, net of tax ........ -- -- -- -- (60,066) --
Reclassification adjustments
for realized gains included
in net earnings ................... -- -- -- -- (18,070) --
Net earnings ........................ -- -- 192,903 -- -- --
Cash dividends paid
($0.67 per share) ................. -- -- (62,863) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 ........ $ 54,017 $ 276,819 $ 1,837,298 $ (22,720) $ (18,832) $ (589,196)
============ ============ ============ ============ ============ ============

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

W.W. Grainger, Inc., and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

INVESTMENT IN UNCONSOLIDATED ENTITIES
Investments in 20% to 50% owned affiliates are accounted for using the equity
method.

RECLASSIFICATIONS
Certain amounts in the 1999 and 1998 financial statements, as previously
reported, have been reclassified to conform to the 2000 presentation.

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

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

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

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

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

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

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

The Company capitalized interest costs of $747,000, $3,238,000, and $2,323,000,
in 2000, 1999, and 1998, respectively.

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

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

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

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

COMPREHENSIVE EARNINGS
The Company's comprehensive earnings include unrealized gains on investments,
net of tax, and foreign currency translation adjustments with no related income
tax effects. The cumulative amount of other comprehensive (loss) earnings was
$(18,832,000), $68,791,000, and $(19,564,000), at December 31, 2000, 1999, and
1998, respectively.

NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, the Emerging Issues Task Force (EITF) reached a consensus
with respect to EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." The purpose of this issue discussion was to clarify the classification
of shipping and handling revenue and costs. The consensus reached was that all
shipping and handling amounts billed to customers should be classified as
revenue.

Additionally, a consensus was reached that the classification of shipping and
handling costs is an accounting policy decision that should be disclosed
pursuant to Accounting Principles Board Opinion No. 22, "Disclosures of
Accounting Policies." The Company may adopt a policy of including shipping and
handling costs in cost of sales or in operating expenses. If shipping costs are
material and are not included in cost of sales, disclosure of both the amount of
such costs and the line item on the income statement is required.

Previously, the Company had netted its revenues from shipping and handling
charges billed to customers against the related costs and included the residual
amount as Warehousing, marketing, and administrative expenses on the
Consolidated Statements of Earnings.

The Company has adopted EITF Issue 00-10 and has reclassified billings to
customers for freight and handling charges from Warehousing, marketing, and
administrative expenses to Net sales in the Consolidated Statements of Earnings
for all periods presented. Additionally, all freight-out and handling expenses
have been reclassified from Warehousing, marketing, and administrative expenses
to Cost of merchandise sold in the Consolidated Statements of Earnings for all
periods presented. The Company defines handling costs as those costs incurred to
fulfill a shipped sales order. The impact of this change was to increase
previously reported Net sales and Cost of merchandise sold while reducing
Warehousing, marketing, and administrative expenses. Reported Operating earnings
and Net earnings did not change.

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was later
amended by Statement No.137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" and by
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities -- an Amendment of FASB Statement No. 133" (collectively,
SFAS No. 133). SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities measured at fair value. The accounting
treatment of gains and losses resulting from changes in the value of derivatives
depends on the use of the derivatives and whether they qualify for hedge
accounting. The Company plans to adopt SFAS No. 133 on January 1, 2001. Adoption
of SFAS No. 133 will be recorded as a cumulative effect of a change in
accounting principle and will not result in restatement of previously issued
financial statements. Additionally, the Company has determined that SFAS No. 133
will not have a material effect on its results of operations or financial
position.

NOTE 2--CASH FLOWS
The Company considers investments in highly liquid debt instruments, purchased
with an original maturity of ninety days or less, to be cash equivalents. For
cash equivalents, the carrying amount approximates fair value due to the short
maturity of these instruments.

NOTE 3--CONCENTRATION OF CREDIT RISK
The Company places temporary cash investments with institutions of high credit
quality and, by policy, limits the amount of credit exposure to any one
institution.

The Company has a broad customer base representing many diverse industries doing
business in all regions of the United States as well as other areas of North
America. Consequently, no significant concentration of credit risk is considered
to exist.

NOTE 4--INVENTORIES
Inventories primarily consist of merchandise purchased for resale.

Inventories would have been $211,801,000, $211,490,000, and $217,455,000, higher
than reported at December 31, 2000, 1999, and 1998, respectively, if the
first-in, first-out (FIFO) method of inventory accounting had been used for all
Company inventories. Net earnings would have increased (decreased) by $188,000,
$(3,603,000), and $1,056,000 for the years ended December 31, 2000, 1999, and
1998, respectively, using the FIFO method of accounting. Inventories under FIFO
approximate replacement cost.

Note 5--INVESTMENTS IN UNCONSOLIDATED ENTITIES
During 2000, the Company made investments in several Internet related start-up
joint ventures.

On August 1, 2000, the Company completed a transaction that combined the assets
of its OrderZone.com business with Works.com. In addition, the Company invested
$21 million in cash in Works.com and agreed to make Works.com's

purchasing management service and marketplace available to the Company's small
and mid-size customers through Grainger.com. For its contributions, the Company
received a 40% equity stake in the combined company, which is subject to certain
voting and transfer restrictions. Subsequent to August 1, 2000, the Company
accounted for its interest in Works.com using the equity method. The results of
OrderZone.com were included in the consolidated results of the Company through
July 31, 2000.

The Company also made equity investments in three other joint ventures. The
Company accounts for all of these joint ventures using the equity method of
accounting.

As start-up businesses, the time frame or the ultimate ability to achieve
profitability is uncertain. Reaching profitability is also dependent upon the
entities securing sufficient capital funding to support developmental
activities.

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

Year Ended December 31, 2000
(In thousands of dollars)
------------------------------------
W.W. Grainger, Inc. Initial Equity
Percentage Investment Losses Investment
Entity Ownership Cost (after-tax) Balance
---------------------------------------- ------------------- ---------- ------------ -----------
Works.com .............................. 40% $ 32,284 $ (10,031) $ 22,253
Other .................................. 24%-49% 2,409 (824) 1,585
---------- ------------ -----------
$ 34,693 $ (10,855) $ 23,838
========== ============ ===========

NOTE 6--INTANGIBLES
Goodwill represents the cost in excess of net assets of acquired companies and
is amortized on a straight-line basis over periods of five to forty years. The
Company's goodwill is predominately denominated in Canadian dollars and,
accordingly, the changes in the asset balance are due to foreign exchange rate
fluctuations.

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

Note 7--INVESTMENTS
Investments in this category are all available-for-sale securities. These
investments consist of marketable securities and non-publicly traded equity
securities for which a market value is not readily determinable. Marketable
securities are reported at fair value, with unrealized gains or losses on such
securities reflected, net of taxes, as a separate component of shareholders'
equity. Non-publicly traded equity securities are reported at cost. There have
been no dividends earned on these investments. During 2000, the Company sold a
portion of its investments. The gains on these sales were calculated using the
specific identification method and are reported in Unclassified--net.

The original cost, realized and unrealized gains (pretax), and fair value of
available-for-sale securities are summarized as follows:

December 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Available-for-Sale Securities (in thousands of dollars)
Marketable securities
Cost ..................................................... $ 16,852 $ 18,500 $ --
Unrealized gains ......................................... 909 130,703 --
------------ ------------ ------------
Fair value ............................................... 17,761 149,203 --
Non-publicly traded equity securities
Cost ..................................................... 10,000 5,000 5,000
------------ ------------ ------------
$ 27,761 $ 154,203 $ 5,000
============ ============ ============
Proceeds from sales ........................................ $ 31,665 $ -- $ --
============ ============ ============
Realized gain on sales ..................................... $ 30,017 $ -- $ --
============ ============ ============

NOTE 8--CAPITALIZED SOFTWARE
Amortization of capitalized software is predominately on a straight-line basis
over five years. During 1998, the Company acquired a new business enterprise
software system. Amortization expense was $16,249,000, $9,840,000, and
$4,645,000 for the years ended December 31, 2000, 1999, and 1998, respectively.

NOTE 9--SHORT-TERM DEBT
The following summarizes information concerning short-term debt:
2000 1999 1998
---------- ---------- ----------
Bank Debt (In thousands of dollars)
---------
Outstanding at December 31 ......................... $ 2,972 $ 4,598 $ 3,704
Maximum month-end balance during the year .......... $ 4,818 $ 4,675 $ 3,704
Average amount outstanding during the year ......... $ 4,191 $ 3,263 $ 2,565
Weighted average interest rate during the year ..... 6.9% 6.1% 6.0%
Weighted average interest rate at December 31 ...... 7.4% 6.6% 5.7%

Commercial Paper
----------------
Outstanding at December 31 ......................... $ 170,566 $ 292,238 $ 84,356
Maximum month-end balance during the year .......... $ 300,607 $ 292,250 $ 84,356
Average amount outstanding during the year ......... $ 247,640 $ 193,674 $ 15,668
Weighted average interest rate during the year ..... 6.5% 5.7% 5.3%
Weighted average interest rate at December 31 ...... 6.6% 6.2% 5.4%

The Company and its subsidiaries had committed lines of credit totaling
$518,344,000, $568,848,000, and $318,069,000 at December 31, 2000, 1999, and
1998, respectively, including $13,344,000, $13,848,000, and $13,069,000
denominated in Canadian dollars. A Company subsidiary also had a $16,680,000,
$17,311,000, and $32,673,000 uncommitted line of credit denominated in Canadian
dollars as of December 31, 2000, 1999, and 1998, respectively. At December 31,
2000, 1999, and 1998, borrowings under the subsidiaries' committed lines of
credit were $2,972,000, $4,598,000, and $3,704,000, respectively. The Company
has guaranteed these borrowings.

NOTE 10--EMPLOYEE BENEFITS

RETIREMENT PLANS. A majority of the Company's employees are covered by a
noncontributory profit sharing plan. This plan provides for annual employer
contributions based upon a formula related primarily to earnings before federal
income taxes, limited to 15% of the total compensation paid to all eligible
employees. The Company also sponsors additional profit sharing and defined
benefit plans, which cover most of the other employees. Provisions under all
plans were $42,353,000, $55,007,000, and $65,576,000 for the years ended
December 31, 2000, 1999, and 1998, respectively.

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

The amounts charged to operating expense for postretirement health care benefits
were $3,767,000, $4,523,000, and $4,256,000 for the years ended December 31,
2000, 1999, and 1998, respectively. Components of the expense were:
2000 1999 1998
---------- ---------- ----------
(In thousands of dollars)
Service cost ....................................................$ 3,083 $ 3,446 $ 3,076
Interest cost ................................................... 3,189 2,854 2,546
Expected return on assets ....................................... (1,563) (1,302) (968)
Amortization of transition asset (22 year amortization) ......... (143) (143) (143)
Amortization of unrecognized gain ............................... (724) (257) (180)
Amortization of prior service cost .............................. (75) (75) (75)
---------- ---------- ----------
$ 3,767 $ 4,523 $ 4,256
========== ========== ==========

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

A Group Benefit Trust has been established as the vehicle to process benefit
payments. The assets of the trust are invested in a Standard & Poors 500 index
fund. The assumed weighted average long-term rate of return is 6.0%, which is
net of a 33.0% tax rate. The funding of the trust is an estimated amount which
is intended to allow the maximum deductible contribution under the Internal
Revenue Code of 1986, as amended, and was $1,385,000, $1,686,000, and
$2,444,000, for the years ended December 31, 2000, 1999, and 1998, respectively.

A reconciliation of the beginning and ending balances of the accumulated
postretirement benefit obligation (APBO), the fair value of assets, and the
funded status of the benefit obligation as of December 31, 2000, 1999, and 1998
is as follows:
2000 1999 1998
---------- ---------- ----------
(In thousands of dollars)

Benefit obligation at the beginning of the year ..... $ 40,394 $ 43,675 $ 35,866
Service cost ...................................... 3,083 3,446 3,076
Interest cost ..................................... 3,189 2,854 2,546
Plan participant contributions .................... 762 535 366
Actuarial loss (gain) ............................. 3,598 (7,913) 3,503
Benefits paid ..................................... (1,982) (2,203) (1,682)
---------- ---------- ----------
Benefit obligation at the end of the year ........... 49,044 40,394 43,675
---------- ---------- ----------
Fair value of plan assets at beginning of year ...... 22,188 18,636 14,079
Actual return on plan assets ...................... (1,848) 3,534 3,429
Employer contributions ............................ 1,385 1,686 2,444
Plan participant contributions .................... 762 535 366
Benefits paid ..................................... (1,982) (2,203) (1,682)
---------- ---------- ----------
Fair value of plan assets at the end of the year .... 20,505 22,188 18,636
---------- ---------- ----------
Funded status ....................................... (28,539) (18,206) (25,039)

Unrecognized transition asset ....................... (1,999) (2,142) (2,285)
Unrecognized net actuarial gain ..................... (3,447) (11,180) (1,296)
Unrecognized prior service cost ..................... (777) (852) (927)
---------- ---------- ----------
Accrued postretirement benefits cost ................ $ (34,762) $ (32,380) $ (29,547)
========== ========== ==========

To determine the APBO as of December 31, 2000, 1999, and 1998, the assumed
weighted average discount rate used was 7.5%, 7.8%, and 6.8%, respectively. The
assumed health care cost trend rate for 2001 is 8.5%. Beginning in 2002, the
assumed health care cost trend rate declines on a straight-line basis until
2010, when the ultimate trend rate of 5.0% is achieved.

If the assumed health care cost trend rate was increased by one percentage point
for each year, the APBO as of December 31, 2000 would increase by $9,784,000.
The aggregate of the service cost and interest cost components of the 2000 net
periodic postretirement benefits expense would increase by $1,462,000.

If the assumed health care cost trend rate was decreased by one percentage point
for each year, the APBO as of December 31, 2000 would decrease by $7,774,000.
The aggregate of the service cost and interest cost components of the 2000 net
periodic postretirement benefits expense would decrease by $1,135,000.

NOTE 11--LONG-TERM DEBT
Long-term debt consisted of the following at December 31:

2000 1999 1998
---------- ---------- ----------
(In thousands of dollars)
Uncommitted revolving credit facility ............... $ 120,363 $ 124,914 $ 117,885
Industrial development revenue bonds ................ 27,650 27,650 27,650
Other ............................................... 15 85 179
---------- --------- ----------
148,028 152,649 145,714
Less current maturities ............................. 22,770 27,721 22,831
---------- --------- ----------
$ 125,258 $ 124,928 $ 122,883
========== ========== ==========

As part of the permanent financing for a Canadian Subsidiary, the Company
maintained a $120,363,000 uncommitted revolving credit facility, denominated in
Canadian dollars. The Company had $120,363,000 outstanding at December 31, 2000
relating to this facility with a weighted average interest rate of 6.05%. The
Company has the intent and the ability to refinance the obligation on a
long-term basis through its credit lines and, therefore, it is included in
long-term debt.

The industrial development revenue bonds include various issues that bear
interest at variable rates up to 15%, or variable rates up to 78.2% of the prime
rate, and come due in various amounts from 2001 through 2021. Interest rates on
some of the issues are subject to change at certain dates in the future. The
bondholders may require the Company to redeem certain bonds concurrent with a
change in interest rates and certain other bonds annually. In addition,
$13,545,000 of these bonds had an unsecured liquidity facility available at
December 31, 2000, for which the Company compensated a bank through a commitment
fee of 0.07%. There were no borrowings related to this facility at December 31,
2000. The Company classified $22,755,000 of bonds currently subject to
redemption options in current maturities of long-term debt at December 31, 2000.
The Company classified $27,650,000 and $22,755,000 of bonds subject to
redemption options in current maturities of long-term debt at December 31, 1999
and 1998, respectively.

The aggregate amounts of long-term debt maturing in each of the five years
subsequent to December 31, 2000 are as follows:

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

2001 ................................................ $ 15 $ 22,755
2002 ................................................ -- --
2003 ................................................ 120,363 --
2004 ................................................ -- --
2005 ................................................ -- 4,895

NOTE 12--LEASES
The Company leases certain land, buildings, and equipment. The Company
capitalizes all significant leases that qualify as capital leases.

At December 31, 2000, the approximate future minimum aggregate payments for all
leases were as follows:

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

2001 ................................................ $ 15,758 $ 216 $ 15,974 $ 15
2002 ................................................ 13,091 197 13,288 --
2003 ................................................ 10,151 -- 10,151 --
2004 ................................................ 7,502 -- 7,502 --
2005 ................................................ 3,490 -- 3,490 --
Thereafter .......................................... 5,071 -- 5,071 --
---------- ---------- ---------- ----------
Total minimum payments required ..................... 55,063 413 55,476 15
Less amounts representing sublease income ........... 1,789 -- 1,789
---------- ---------- ----------
$ 53,274 $ 413 $ 53,687
========== ========== ==========
Less imputed interest ............................... --
----------
Present value of minimum lease payments
(included in long-term debt) ...................... $ 15
==========

Total rent expense, including both items under lease and items rented on a
month-to-month basis, was $20,759,000, $19,383,000, and $16,336,000 for 2000,
1999, and 1998, respectively.

NOTE 13--STOCK INCENTIVE PLANS
The Company's Long-Term Stock Incentive Plan ("The Plan") allows the Company to
grant a variety of incentive awards to key employees of the Company. A maximum
of 8,056,828 shares of common stock are authorized for issuance under the Plan
in connection with awards of non-qualified stock options, stock appreciation
rights, restricted stock, phantom stock rights, and other stock-based awards.

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

The Plan authorizes the granting of options to purchase shares at a price of not
less than 100% of the closing market price on the last trading day preceding the
date of grant. The options expire no later than ten years after the date of
grant.

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

There were 367,500 shares of restricted stock issued in 2000 with a weighted
average fair market value of $41.90 per share. There were 42,000 shares of
restricted stock issued in 1999 with a weighted average fair market value of
$45.26 per share. There were 52,500 shares of restricted stock issued in 1998
with a fair market value of $52.04 per share. The shares vest over periods from
four to ten years from issuance, although accelerated vesting is provided in
certain instances. Restricted stock released totaled 5,000, 0, and 400 shares in
2000, 1999, and 1998, respectively. Compensation expense related to restricted
stock awards is based upon market prices at date of grant and is charged to
earnings on a straight-line basis over the period of restriction. Total
compensation expense related to restricted stock was $6,301,000, $2,178,000, and
$2,022,000 in 2000, 1999, and 1998, respectively.

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

A retainer fee for Board service is paid to non-employee directors in the form
of an annual award under the Director Stock Plan of unrestricted shares of
Grainger common stock. The number of shares is equal to the retainer fee divided
by the fair market value of a share of Grainger common stock at the time of the
award, rounded up to the next 10-share increment. Total shares granted were
6,480, 4,680, and 4,500 in 2000, 1999, and 1998, respectively.

Non-employee directors additionally receive an annual stock option award under
the Director Stock Plan to purchase shares of Grainger common stock. The number
of shares covered by each option is equal to the award divided by the fair
market value of a share of Grainger common stock at the time of award, rounded
to the next 10-share increment. The per-share option exercise price is 100% of
that value. The options are fully exercisable upon award and have a 10-year
term. Total options granted were 16,560, 16,740, and 11,680 in 2000, 1999, and
1998, respectively.

The Company awarded Stock Units under the Director Stock Plan in connection with
the termination of previous director compensation plans. A Stock Unit is
essentially the economic equivalent of a share of Common stock. Additional
deferred fees and dividends are converted to Stock Units based on the market
value of the stock at the relevant time. Payment of the value of Stock Units
generally will be made after the termination of service as a director. As of
December 31, 2000 and 1999, nine directors held Stock Units. As of December 31,
1998, eight directors held Stock Units. The Company recognized expense of
$426,000, $300,000, and $286,000 for 2000, 1999, and 1998, respectively. Total
stock units outstanding were 45,765, 43,219, and 41,644 in 2000, 1999, and 1998,
respectively.

Transactions involving stock options are summarized as follows:
Weighted
Average
Price Per
Option Shares Share Exercisable
------------- --------- -----------
Outstanding at January 1, 1998......................................... 3,293,360 $29.14 1,679,900
Granted.............................................................. 884,620 $51.35 ===========
Exercised............................................................ (335,900) $19.94
Canceled or expired.................................................. (51,640) $38.32
-------------
Outstanding at December 31, 1998....................................... 3,790,440 $35.01 1,732,300
===========

Granted.............................................................. 1,234,100 $48.43
Exercised............................................................ (304,380) $21.49
Canceled or expired.................................................. (110,400) $46.23
-------------
Outstanding at December 31, 1999....................................... 4,609,760 $39.23 2,239,940
===========

Granted.............................................................. 1,974,650 $43.17
Exercised............................................................ (301,860) $23.68
Canceled or expired.................................................. (329,140) $45.85
-------------
Outstanding at December 31, 2000....................................... 5,953,410 $40.96 2,363,810
============= ===========

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

Information about stock options outstanding at December 31, 2000, is as follows:

Options Outstanding
-----------------------------------------------------------------------------------
Weighted Average
--------------------------------------
Range of Exercise Number Remaining Contractual Exercise
Prices Outstanding Life (Years) Price
--------------- ----------- --------------------- --------
$20.53-$33.75 1,674,730 3.6 $29.92
$35.44-$43.50 2,452,950 8.6 $41.92
$44.25-$53.63 1,825,730 7.9 $49.79
-----------------------------------------------------------
5,953,410 7.0 $40.96

Options Exercisable
-------------------------------------------------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
--------------- ------------------- ----------------
$20.53-$33.75 1,627,150 $29.94
$35.44-$43.50 599,580 $10.96
$44.25-$53.63 137,080 $30.62
-----------------------------------
2,363,810 $32.77

Shares available for future awards were 768,168, 2,717,158, and 3,877,538, at
December 31, 2000, 1999, and 1998, respectively.

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

2000 1999 1998
------------ ------------ ------------
(In thousands of dollars
except for per share amounts)

Net earnings ........................... $ 183,131 $ 174,144 $ 234,257
Earnings per share:
Basic ................................ $ 1.97 $ 1.88 $ 2.43
Diluted .............................. $ 1.94 $ 1.85 $ 2.39

The weighted average fair value of the stock options granted during 2000, 1999,
and 1998, was $13.65, $17.26, and $16.12, respectively. The fair value of each
option grant was estimated using the Black-Scholes option-pricing model based on
the date of the grant and the following weighted average assumptions:

2000 1999 1998
--------- ---------- ----------
Risk-free interest rate................. 6.4% 6.8% 5.8%
Expected life........................... 7.0 years 7.0 years 7.0 years
Expected volatility..................... 20.1% 20.1% 20.1%
Expected dividend yield................. 1.8% 1.5% 1.5%

NOTE 14--INCOME TAXES
The asset and liability approach of SFAS No. 109, "Accounting for Income Taxes,"
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial bases and
tax bases of assets and liabilities. Income tax expense consisted of the
following:
2000 1999 1998
--------- ---------- ----------
(In thousands of dollars)
Current provision:
Federal (including foreign) .......... $ 123,356 $ 106,993 $ 141,462
State ................................ 22,948 21,336 28,791
--------- ---------- ----------
Total current ...................... 146,304 128,329 170,253
Deferred tax (benefits) ................ (7,612) (5,310) (7,910)
---------- ---------- ----------
Total provision ........................ $ 138,692 $ 123,019 $ 162,343
========== ========== ==========

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

The income tax effects of temporary differences that gave rise to the net
deferred tax asset as of December 31, 2000, 1999, and 1998 were:

2000 1999 1998
---------- ---------- ----------
(In thousands of dollars)
Current deferred tax assets (liabilities):
Inventory valuations ............................................... $ 33,216 $ 26,043 $ 25,012
Administrative and general expenses
deducted on a paid basis for tax purposes ........................ 45,582 36,208 33,776
Employment-related benefits expense ................................ 3,120 2,755 2,454
Other .............................................................. 159 788 (42)
---------- ---------- ----------
Total net current deferred tax assets ............................ $ 82,077 $ 65,794 $ 61,200
---------- ---------- ----------
Noncurrent deferred tax (liabilities) assets:
Purchased tax benefits ............................................. $ (13,283) $ (17,482) $ (22,185)
Temporary differences related to property,
buildings, and equipment ......................................... (6,749) (2,018) (388)
Intangible amortization ............................................ 8,493 11,583 10,368
Deferred tax liability of foreign investment corporation ........... (7,553) (4,674) (1,233)
Employment-related benefits expense ................................ 24,793 16,206 15,038
Net operating loss carryforwards 8,217 6,492 4,372
Unrealized gain on investments ..................................... (362) (52,020) --
Other .............................................................. 3,481 288 1,587
---------- ---------- ----------
Total gross noncurrent deferred tax asset (liability) ............ 17,037 (41,625) 7,559
Less valuation allowance ........................................... (8,217) (6,492) (4,372)
---------- ---------- ----------
Total net noncurrent deferred tax asset (liability) .............. 8,820 (48,117) 3,187
---------- ---------- ----------
Net deferred tax asset ............................................... $ 90,897 $ 17,677 $ 64,387
========== ========== ==========

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

Under the provisions of SFAS No. 109, Net Operating Losses (NOLs) represent
temporary differences that enter into the calculation of deferred tax balances.
Since 1997, the Company has experienced NOLs for a foreign start-up operation.
The full amount of the deferred tax asset is offset by a valuation allowance due
to the uncertainty of utilizing these NOLs.

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

2000 1999 1998
---------- ---------- ----------
(In thousands of dollars)

Federal income taxes at the statutory rate ........................... $ 119,857 $ 106,313 $ 140,296
Foreign rate differences ............................................. 1,578 1,429 1,703
State income taxes, net of federal income tax benefits ............... 13,197 13,368 17,637
Other--net ........................................................... 4,060 1,909 2,707
---------- ---------- ----------
Income tax expense ................................................. $ 138,692 $ 123,019 $ 162,343
========== ========== ==========

Effective tax rate ................................................. 41.8% 40.5% 40.5%
========== ========== ==========

NOTE 15--EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of shares
outstanding during the year. Diluted earnings per share is based on the
combination of weighted average number of shares outstanding and dilutive
potential shares.

The following table sets forth the computation of basic and
diluted earnings per share for the years ended December 31:
2000 1999 1998
--------- --------- ----------
(In thousands except for per share amounts)

Net earnings ............................................... $ 192,903 $ 180,731 $ 238,504
========== ========== ==========
Denominator for basic earnings per share--
weighted average shares .................................. 93,004 92,837 96,232
Effect of dilutive securities--
stock based compensation ................................. 1,220 1,478 1,615
--------- --------- ----------
Denominator for diluted earnings per share--weighted
average shares adjusted for dilutive securities .......... 94,224 94,315 97,847
========== ========== ==========

Basic earnings per common share ............................ $ 2.07 $ 1.95 $ 2.48
========== ========== ==========

Diluted earnings per common share .......................... $ 2.05 $ 1.92 $ 2.44
========== ========== ==========

NOTE 16--ISSUANCE OF PREFERRED SHARE PURCHASE RIGHTS
The Company adopted a Shareholder Rights Plan, under which there is outstanding
one preferred share purchase right (Right) for each outstanding share of the
Company's common stock. Each Right, under certain circumstances, may be
exercised to purchase one one-hundredth of a share of Series A-1999 Junior
Participating Preferred Stock (intended to be the economic equivalent of one
share of the Company's common stock) at a price of $250.00, subject to
adjustment. The Rights become exercisable only after a person or a group, other
than a person or group exempt under the plan, acquires or announces a tender
offer for 15% or more of the Company's common stock. If a person or group, other
than a person or group exempt under the plan, acquires 15% or more of the
Company's common stock or if the Company is acquired in a merger or other
business combination transaction, each Right generally entitles the holder,
other than such person or group, to purchase, at the then-current exercise
price, stock and/or other securities or assets of the Company or the acquiring
company having a market value of twice the exercise price.

The Rights expire on May 15, 2009, unless earlier redeemed. They generally are
redeemable at $.001 per Right until thirty days following announcement that a
person or group, other than a person or group exempt under the plan, has
acquired 15% or more of the Company's common stock. The Rights do not have
voting or dividend rights and, until they become exercisable, have no dilutive
effect on the earnings of the Company.

NOTE 17--SEGMENT INFORMATION
The Company has three reported segments: Branch-based Distribution, Digital, and
Lab Safety Supply. The Branch-based Distribution segment provides customers with
solutions to their immediate MRO needs. Branch-based Distribution is an
aggregation of the following business segments: Grainger Industrial Supply,
Grainger.com, Acklands-Grainger Inc., Grainger Export, Grainger Global Sourcing,
Grainger Parts, Grainger, S.A. de C.V. and Puerto Rico. The Digital Business
segment provides e-commerce solutions to customers' MRO and other needs. The
Digital segment is an aggregation of the FindMRO.com, MROverstocks.com, and
TotalMRO.com business segments. Lab Safety Supply is a direct marketer of safety
and other industrial products. Other businesses of the Company include a number
of other businesses, the largest being Grainger Integrated Supply.

The Company's segments offer differing ranges of services and/or products and
require different resources and marketing strategies. The Company's segments
were initially formed in late 1999 as the Company refocused its organization to
meet the diverse needs of its customers.

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

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

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

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

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

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

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

1998
--------------------------------------------------------------------------
Branch-based Lab
Distribution Digital Safety Supply Other Totals
------------ ------------ ------------ ------------ ------------
(In thousands of dollars)

Total net sales ........................ $ 4,079,415 $ 497 $ 288,491 $ 86,358 $ 4,454,761
Intersegment net sales ................. 8,610 497 567 6,112 15,786
Net sales to external customers ........ 4,070,805 -- 287,924 80,246 4,438,975
Segment operating
earnings (loss) ...................... 435,891 (8,091) 39,330 (20,822) 446,308

Segment assets ......................... $ 1,830,172 $ 858 $ 115,430 $ 27,654 $ 1,974,114
Depreciation and amortization .......... 56,388 41 16,290 1,419 74,138
Additions to long-lived assets ......... 127,811 1,054 1,334 7,660 137,859

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

2000 1999 1998
------------ ------------ ------------
Operating Earnings:
Total operating earnings for reportable segments ........... $ 390,825 $ 363,937 $ 446,308
Unallocated expenses ....................................... (55,705) (46,709) (38,326)
------------ ------------ ------------
Total consolidated operating earnings .................... $ 335,120 $ 317,228 $ 407,982
============ ============ ============
Assets:
Total assets for reportable segments ....................... $ 2,192,209 $ 2,226,261 $ 1,974,114
Unallocated assets ......................................... 267,392 338,565 129,852
------------ ------------ ------------
Total consolidated assets ................................ $ 2,459,601 $ 2,564,826 $ 2,103,966
============ ============ ============

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

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

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

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

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

Long-lived
Geographic Information: Revenues Assets
------------ ------------
United States .............................................. $ 4,037,821 $ 692,747
Canada ..................................................... 330,054 180,613
Other foreign countries .................................... 71,100 1,080
------------ ------------
$ 4,438,975 $ 874,440
============ ============

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

NOTE 18--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly information for 2000 and 1999 is as follows:

2000 Quarter Ended
------------------------------------------------------------------------
(In thousands of dollars except for per share amounts)

March 31 June 30 September 30 December 31 Total
------------ ------------ ------------ ------------ ------------
Net sales .............................. $ 1,222,449 $ 1,271,651 $ 1,273,038 $ 1,209,906 $ 4,977,044
Cost of merchandise sold ............... $ 840,001 $ 880,463 $ 863,853 $ 807,390 $ 3,391,707
Gross profit ........................... $ 382,448 $ 391,188 $ 409,185 $ 402,516 $ 1,585,337
Warehousing, marketing, and
administrative expenses .............. $ 307,671 $ 318,287 $ 317,607 $ 306,652 $ 1,250,217
Operating earnings ..................... $ 74,777 $ 72,901 $ 91,578 $ 95,864 $ 335,120
Net earnings ........................... $ 41,211 $ 55,662 $ 48,107 $ 47,923 $ 192,903
Earnings per share--basic .............. $ 0.44 $ 0.60 $ 0.52 $ 0.51 $ 2.07
Earnings per share--diluted ............ $ 0.44 $ 0.59 $ 0.51 $ 0.51 $ 2.05

1999 Quarter Ended
------------------------------------------------------------------------
(In thousands of dollars except for per share amounts)

March 31 June 30 September 30 December 31 Total
------------ ------------ ------------ ------------ ------------

Net sales .............................. $ 1,116,454 $ 1,172,522 $ 1,201,595 $ 1,145,704 $ 4,636,275
Cost of merchandise sold ............... $ 742,639 $ 791,649 $ 816,587 $ 774,772 $ 3,125,647
Gross profit ........................... $ 373,815 $ 380,873 $ 385,008 $ 370,932 $ 1,510,628
Warehousing, marketing, and
administrative expenses .............. $ 277,549 $ 293,402 $ 304,626 $ 317,823 $ 1,193,400
Operating earnings ..................... $ 96,266 $ 87,471 $ 80,382 $ 53,109 $ 317,228
Net earnings ........................... $ 56,263 $ 50,553 $ 45,757 $ 28,158 $ 180,731
Earnings per share--basic .............. $ 0.61 $ 0.54 $ 0.49 $ 0.31 $ 1.95
Earnings per share--diluted ............ $ 0.60 $ 0.53 $ 0.49 $ 0.30 $ 1.92

Net sales, cost of merchandise sold, gross profit, and warehousing, marketing,
and administrative expenses have been restated from previously reported amounts.
The Company adopted Emerging Issues Task Force Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs," and has restated all prior periods to
reflect adoption.

NOTE 19--SUBSEQUENT EVENT
On January 26, 2001, the Company announced the consolidation of FindMRO.com,
MROverstocks.com, and TotalMRO.com into a separate organization, Material Logic.
Participation is being sought from additional MRO distributors to establish
Material Logic as an industry-backed, industry-funded independent entity that
will own and operate these businesses. Material Logic is also expected to
include related consulting, implementation, and content services. Working with
large national MRO distributors, Material Logic will seek to create a broad
digital solution that provides customers access to substantial cost benefits
through the use of e-commerce platforms, e-marketplaces, and hosted ASP
solutions.

W.W. Grainger, Inc., and Subsidiaries

SCHEDULE II-ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998

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

Allowance for doubtful accounts

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

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

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

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

W.W. Grainger, Inc., and Subsidiaries EXHIBIT 11

COMPUTATIONS OF EARNINGS PER SHARE

2000 1999 1998
------------ ------------ ------------
BASIC:
Weighted average number of shares
outstanding during the year ........................................ 93,003,813 92,836,696 96,231,829
============ ============ ============

Net earnings ......................................................... $192,903,000 $180,731,000 $238,504,000
============ ============ ============

Earnings per share ................................................... $ 2.07 $ 1.95 $ 2.48
============ ============ ============
DILUTED:

Weighted average number of shares
outstanding during the year (basic) ................................ 93,003,813 92,836,696 96,231,829

Potential shares:

Shares issuable under outstanding options .......................... 1,661,573 2,991,418 3,187,915

Shares which could have been purchased based on
the average market value for the period .......................... 1,267,602 2,089,599 2,114,482
------------ ------------ ------------
393,971 901,819 1,073,433

Dilutive effect of exercised options prior to being exercised ........ 21,406 18,464 21,604
------------ ------------ ------------
Shares for the portion of the period
that the options were outstanding .................................. 415,377 920,283 1,095,037

Contingently issuable shares ......................................... 804,625 558,500 519,792
------------ ------------ ------------

1,220,002 1,478,783 1,614,829
------------ ------------ ------------
Adjusted weighted average number of shares outstanding
during the year .................................................... 94,223,815 94,315,479 97,846,658
============ ============ ============

Net earnings ......................................................... $192,903,000 $180,731,000 $238,504,000
============ ============ ============

Earnings per share ................................................... $ 2.05 $ 1.92 $ 2.44
============ ============ ============

EXHIBIT 23

CONSENT OF INDEPENDENT CERTIFIED

PUBLIC ACCOUNTANTS

We hereby consent to the incorporation of our report on page 18 of this Form
10-K by reference in the prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 2-67983, 2-54995, 33-43902, 333-24215, and
333-56362) and on Form S-4 (No. 33-32091) of W.W. Grainger, Inc.

GRANT THORNTON LLP

Chicago, Illinois
March 21, 2001