Net sales at Lab Safety were $222.7 million for the first six months of 2008, an increase of $3.2 million, or 1.5%, when compared with $219.5 million for the same period in 2007. Sales from an acquisition made during May 2007 contributed approximately 2% to the growth. Excluding this acquisition, the rest of the business was down approximately 1%.

The gross profit margin increased 0.2 percentage point in the first half of 2008 from the first half of 2007. Gross profit margin was up as a result of positive inflation recovery, partially offset by unfavorable selling price category mix.

Operating expenses were up 3.6% in the first six months of 2008. Expenses grew at a faster rate than sales primarily due to higher payroll as a result of increased headcount, higher benefit expenses related to increased medical claims and increased charge card fees as a result of increased credit card sales volume.

Operating earnings of $28.4 million for the first six months of 2008 decreased 2.0% versus the same period in 2007. This earnings decrease was a result of operating expenses which grew at a faster rate than sales.

Net sales at Lab Safety were $112.8 million for the first quarter of 2008, an increase of $3.7 million, or 3.4%, when compared with $109.1 million for the same period in 2007. Sales from an acquisition made during May 2007 contributed approximately 3 percentage points to the growth. Excluding this acquisition the rest of the business was essentially flat.

The gross profit margin decreased 0.2 percentage point in the first quarter of 2008 from the first quarter of 2007. Gross profit margin was down as a result of unfavorable selling price category mix and product mix, partially offset by positive inflation recovery.

Operating expenses were up 3.6% in the first quarter of 2008. Expenses grew at a faster rate than sales primarily due to higher benefit expenses related to increased medical claims.

Operating earnings of $14.8 million for the first quarter of 2008 increased 1.3% over the same period in 2007. This earnings improvement was less than the sales growth rate due to a lower gross profit margin and operating expenses which grew at a slightly faster rate than sales.

Net sales at Lab Safety were $411.5 million for 2006, an increase of $31.4 million, or 8.3%, when compared with $380.1 million for 2005. Daily sales were up 8.7%. The sales growth included the benefit of incremental sales from Rand, acquired on January 31, 2006, and Professional Equipment and Construction Book, acquired on November 17, 2006, as well as sales growth in the manufacturing sector. Rand contributed 4.0 percentage points to the daily sales increase. Professional Equipment and Construction Book contributed 0.6 percentage point to the daily sales increase. Excluding Rand, Professional Equipment and Construction Book, daily sales increased 4.1%.

The gross profit margin decreased 0.3 percentage point in 2006 from 2005 primarily as a result of increased freight costs and lower margin Rand product sales, partially offset by positive inflation recovery.

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Operating expenses of $121.8 million were $12.8 million, or 11.7%, higher in 2006, primarily due to incremental costs associated with the acquisitions, higher advertising costs and increased expenses from the upgrade of the business’ enterprise resource planning system.

Operating earnings of $52.3 million for 2006 were down 0.8% compared to 2005, resulting from a lower gross profit margin and higher operating expenses, partially offset by increased sales.

Net sales at Lab Safety were $411.5 million for 2006, an increase of $31.4 million, or 8.3%, when compared with $380.1 million for 2005. Daily sales were up 8.7%. The sales growth included the benefit of incremental sales from Rand, acquired on January 31, 2006, and Professional Equipment and Construction Book, acquired on November 17, 2006, as well as sales growth in the manufacturing sector. Rand contributed 4.0 percentage points to the daily sales increase. Professional Equipment and Construction Book contributed 0.6 percentage point to the daily sales increase. Excluding Rand, Professional Equipment and Construction Book, daily sales increased 4.1%.

The gross profit margin decreased 0.3 percentage point in 2006 from 2005 primarily as a result of increased freight costs and lower margin Rand product sales, partially offset by positive inflation recovery.

15

Operating expenses of $121.8 million were $12.8 million, or 11.7%, higher in 2006, primarily due to incremental costs associated with the acquisitions, higher advertising costs and increased expenses from the upgrade of the business’ enterprise resource planning system.

Operating earnings of $52.3 million for 2006 were down 0.8% compared to 2005, resulting from a lower gross profit margin and higher operating expenses, partially offset by increased sales.

Net sales at Lab Safety were $330.7 million for the first nine months of 2007, an increase of $18.9 million, or 6.0%, when compared with $311.8 million for the same period in 2006. Sales from the acquisitions made during 2007 and late 2006 contributed approximately 7 percentage points to the growth.

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W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The gross profit margin decreased 0.5 percentage point in the first nine months of 2007 over the first nine months of 2006. Gross profit margin was down as a result of increased freight costs and unfavorable selling and product mix, partially offset by positive inflation recovery.

Operating expenses were 6.0% higher in the first nine months of 2007 primarily driven by higher acquisitions costs.

Operating earnings of $43.2 million for the first nine months of 2007 were up 2.0% over 2006. This earnings improvement was less than the sales growth rate primarily due to a lower gross profit margin.

Net sales at Lab Safety were $219.5 million for the first six months of 2007, an increase of $12.3 million, or 5.9%, when compared with $207.2 million for the same period in 2006. Sales from the acquisitions made during 2007 and late 2006 contributed approximately 6 percentage points to the growth.

The gross profit margin decreased 0.7 percentage point in the first half of 2007 over the first half of 2006. The gross profit margin was down as a result of unfavorable selling and product mix.

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W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Operating expenses were 5.7% higher in the first six months of 2007. This increase was driven primarily by non-payroll related operating expenses, partially offset by payroll and benefits which increased at a slower rate than sales.

Operating earnings of $29.0 million for the first six months of 2007 were up 1.0% over 2006. This earnings improvement was less than the sales growth rate due to a lower gross profit margin, partially offset by operating expenses which grew at a slightly slower rate than sales.

Net sales for Lab Safety were $109.1 million for the first quarter of 2007, an increase of $5.2 million, or 5.0%, when compared with $103.9 million for the same period in 2006. Sales from the acquisitions made during 2006 contributed approximately 6 percentage points to the growth.

The gross profit margin of 42.7% for the first quarter of 2007 decreased 0.9 percentage point from the first quarter of 2006. The gross profit margin was down as a result of customer and product mix and higher freight costs.

Operating expenses of $32.0 million were $2.0 million, or 6.5% higher in the quarter due primarily to higher media and information technology costs.

Operating earnings of $14.6 million in the first quarter of 2007 were down 4.1% over 2006, resulting from lower gross profit margin and operating expenses which grew at a faster rate than sales.

Net sales at Lab Safety were $380.1 million in 2005, an increase of $43.4 million, or 12.9%, when compared with $336.7 million of sales in 2004. Higher sales were principally driven by incremental sales from AW Direct, which was acquired on January 14, 2005. Excluding AW Direct, sales increased 4.0 percentage points over 2004.

The gross profit margin of 42.5% increased 0.7 percentage point when compared to the gross profit margin of 41.8% for 2004. Contributing to the improvement was a favorable selling price category mix, partially offset by the negative effect of AW Direct sales, which carry lower gross profit margins.

Operating expenses were $109.0 million in 2005, up $13.7 million, or 14.3%, over 2004. The increase over the prior year was principally driven by higher variable compensation expense related to the strong performance for the year and higher catalog media costs, partially offset by lower data processing expense related to fully amortized enterprise software. Also contributing to the increase were costs associated with the AW Direct acquisition.

Operating earnings of $52.7 million were up 15.9% in 2005 over 2004, resulting primarily from the increase in sales and the improved gross profit margin, partially offset by increased operating expenses.

Net sales at Lab Safety were $311.8 million for the first nine months of 2006, an increase of $22.9 million, or 7.9%, when compared with $288.9 million for the same period in 2005. Daily sales were up 8.5%. The sales growth included the benefit of incremental sales from Rand, acquired on January 31, 2006, as well as strong sales to the manufacturing sector. Excluding Rand, daily sales increased 4.8%.

The gross profit margin decreased 0.2 percentage point for the first nine months of 2006 from the first nine months of 2005 primarily as a result of increased freight costs and lower margin Rand product sales.

Operating expenses of $90.4 million were $7.5 million, or 9.1%, higher in the first nine months of 2006 primarily due to incremental costs associated with the acquisition of Rand, higher advertising and increased expenses associated with the upgrade of the business’s ERP system.

Operating earnings of $42.3 million for the first nine months of 2006 were up 3.8% over 2005, resulting from increased sales, partially offset by a lower gross profit margin and higher operating expenses.

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W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Net sales at Lab Safety were $207.2 million for the first six months of 2006, an increase of $16.0 million, or 8.4%, when compared with $191.2 million for the same period in 2005. The sales growth included the benefit of incremental sales from Rand, acquired on January 31, 2006, as well as strong sales to the manufacturing sector. Excluding Rand, sales increased 4.8%.

The gross profit margin was flat for the first half of 2006 compared to the 2005 period.

Operating expenses of $60.1 million were $5.4 million, or 9.8%, higher in the first six months of 2006 due to higher healthcare costs and incremental costs associated with the acquisition of Rand.

Operating earnings of $28.7 million for the first six months of 2006 were up 5.6% over 2005, resulting from increased sales, partially offset by higher operating expenses.

29

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Net sales at Lab Safety were $103.9 million for the first quarter of 2006, an increase of $10.4 million, or 11.1%, when compared with $93.5 million for the same period in 2005. The sales growth included the benefit of incremental sales from Rand, acquired on January 31, 2006, as well as strong sales to the manufacturing sector. Excluding Rand, sales increased 8.1%.

The gross profit margin of 43.5% for the first quarter of 2006 increased 0.2 percentage point over the first quarter of 2005. The 2006 gross profit margin benefited from favorable inflation recovery, partially offset by sales of Rand products, which generally have lower gross profit margins than the remainder of Lab Safety’s products.

Operating expenses of $30.0 million were $3.1 million, or 11.6%, higher in the quarter due to higher healthcare costs and incremental costs associated with the acquisition of Rand.

Operating earnings of $15.2 million in the first quarter of 2006 were up 11.7% over 2005, resulting from increased sales and a higher gross profit margin, partially offset by increased operating expenses.

Net sales at Lab Safety were $336.7 million in 2004, an increase of $31.2 million, or 10.2%, when compared with $305.5 million of sales in 2003. Higher sales were principally driven by growth in nonsafety products. Sales through Lab Safety’s Web sites were up 26.1% in 2004 over 2003. Also contributing to the year-over-year increase were incremental sales from Gempler’s, which was acquired on April 14, 2003. Excluding Gempler’s, sales increased 6.1% over 2003.

The gross profit margin of 41.8% decreased 0.4 percentage point when compared to the gross profit margin of 42.2% for 2003. Contributing to the decline was the negative effect of selling price category mix combined with the effect of a full year of Gempler’s sales, which carry lower than average gross profit margins.

Operating expenses were $95.3 million in 2004, up $8.4 million, or 9.6%, over 2003. The increase over the prior year was principally driven by higher variable compensation expense related to the strong performance for the year, higher catalog media costs and higher benefits expenses from increases in healthcare costs. Also contributing to the increase were costs associated with Gempler’s for a full year in 2004 versus a partial year in 2003.

Operating earnings of $45.5 million were up 8.6% in 2004 over 2003, resulting primarily from the increase in sales, partially offset by the lower gross profit margin and increased operating expenses.

13

Lab Safety

Net sales for Lab Safety were $288.9 million for the first nine months of 2005, an increase of $30.6 million, or 11.8%, when compared with $258.3 million for the same period in 2004. The sales growth was primarily attributable to incremental sales from AW Direct, acquired on January 14, 2005. Excluding AW Direct, sales were up 3.6%.

The gross profit margin of 42.8% for the first nine months of 2005 increased 1.1 percentage points when compared with the first nine months of 2004. The margin improvement was primarily attributable to the elimination of a 2004 fulfillment program that had lower than average gross profit margins. The 2005 gross profit margin also benefited from inflation recovery. These margin increases were partially offset by incremental sales of AW Direct products, which generally have lower gross profit margins than other Lab Safety products.

Operating expenses at Lab Safety of $82.9 million were $11.6 million, or 16.3%, higher in the first nine months of 2005 due to incremental costs associated with the acquisition of AW Direct, as well as increased investment in media. Excluding AW Direct, operating expenses were up $4.7 million or 6.6%.

Operating earnings of $40.8 million, up 12.1% in the first nine months of 2005 over 2004, resulted primarily from increased sales and improved gross profit margin, partially offset by higher operating expenses.

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Table of Contents

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

LAB SAFETY

Net Sales – Sales increased 13% for the quarter for Lab Safety, the Company’s direct marketing business, primarily due to the acquisition of AW Direct in January 2005. Also contributing to the improvement was an increase in core product lines.

Operating Earnings – Operating earnings for the 2005 third quarter were up 9%. The improvement in operating earnings was due to higher sales and improved gross profit margins, partially offset by increased operating expenses. Contributing to this improvement was the benefit from the results of AW Direct. The operating expense increase was primarily due to higher media, healthcare and information technology costs.

The GAAP financial statements are the source for all amounts used in the Return on Invested Capital (ROIC) calculation. ROIC is calculated using annualized operating earnings based on year-to-date operating earnings divided by a ten point average for net working assets. Net working assets are working assets minus working liabilities defined as follows: working assets equal total assets less cash equivalents (non-operating cash), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve. Working liabilities are the sum of trade payables, accrued compensation and benefits, accrued contributions to employees’ profit sharing plans, and accrued expenses.

LAB SAFETY

Net Sales – Sales increased 9% for the quarter for Lab Safety, the Company’s direct marketing business, primarily due to the acquisition of AW Direct, Inc. in January 2005 and increased volume in the core product lines. In 2004, Lab Safety participated in Harvest Partners, a customer loyalty program that was later discontinued.

Operating Earnings – Operating earnings for the 2005 first quarter were up 15%. The improvement in operating earnings was due to improved gross profit margins, partially offset by increased operating expenses. Also contributing to the improvement was the benefit from the AW Direct, Inc. acquisition.

*See footnote, page 8.

W.W. Grainger, Inc. Supplemental Financial Information for the First Quarter Ended March 31, 2005

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LAB SAFETY

Net Sales – Daily sales increased 6% for the quarter for Lab Safety, the Company’s direct marketing business. The increase in sales was primarily driven by sales growth of labware, material handling products and signs and labels. Sales through Lab Safety’s Web sites were up 24% for the quarter.

Operating Earnings – Operating earnings for the 2004 fourth quarter were down 2%. Operating expenses grew faster than sales due in part to the upgrade of Lab Safety’s data processing system, higher catalog media costs and higher bonus expense related to the strong performance for the year.

 *See footnote, page 8.

W.W. Grainger, Inc. Supplemental Financial Information for the Fourth Quarter Ended December 31, 2004

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