W.W. Grainger (GWW)

Net sales of $427.5 million increased by 15.1% in the first nine months of 2006 compared to 2005 net sales of $371.4 million, including the effect of a favorable exchange rate. Daily sales were up 15.7%. In local currency, daily sales increased 7.1% due to a stronger economy, improved branch presence, and higher sales to the oil and gas sectors.

The gross profit margin increased 0.3 percentage point in the first nine months of 2006 over the first nine months of 2005. Contributing to the improvement was positive inflation recovery, partially offset by higher freight costs.

Operating expenses for Canada were up 17.0% in the first nine months of 2006, primarily driven by payroll and benefits due to increased headcount, higher severance costs as a result of a leadership change and higher information technology, advertising and occupancy costs.

Operating earnings of $12.1 million in the first nine months of 2006 increased 8.1% from the $11.2 million in 2005 as a result of strong sales growth and an improved gross profit margin, partially offset by operating expenses which grew at a faster rate than sales.

Net sales of $285.9 million increased by 15.9% in the first six months of 2006 compared to 2005 net sales of $246.8 million, including the effect of a favorable exchange rate. In local currency, sales increased 6.7% due to a stronger economy, improved branch presence, and higher sales to the oil and gas sectors.

The gross profit margin increased 0.6 percentage point in the first half of 2006 over the first half of 2005. Contributing to the improvement was positive inflation recovery, partially offset by higher freight costs.

Operating expenses for Canada were up 20.9% in the first six months of 2006, primarily driven by payroll and benefits due to increased headcount, higher severance costs as a result of a leadership change and higher information technology costs.

Operating earnings of $6.9 million in the first six months of 2006 were down 10.5% from the $7.8 million in 2005 due to higher operating expenses, partially offset by increased sales and a higher gross profit margin.

Net sales in Canada in the first quarter of 2006 were 18.7% higher than the comparable quarter of 2005 including the effect of a favorable exchange rate. In local currency, sales increased 11.8%, due to a stronger economy, improved branch presence, and higher sales to the energy, mining and government customers. Sales growth also benefited from the timing of the Easter holiday.

The gross profit margin increased 0.4 percentage point in the 2006 quarter over the first quarter of 2005. Contributing to the improvement was positive inflation recovery, partially offset by higher freight costs.

Operating expenses for Canada were up 20.4% in the quarter primarily driven by payroll and benefits due to increased headcount and incremental expenses related to the SAP initiative, which, when completed, will allow Canada to operate on the U.S. SAP system.

Operating earnings of $3.9 million in the first quarter of 2006 were up 18.4%, resulting from increased sales and a higher gross profit margin, partially offset by increased operating expenses.

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W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS