W.W. Grainger (GWW)

Matters Affecting Comparability

Grainger’s operating results for the first six months of 2008 include the operating results of the acquisition made by Lab Safety in May 2007. Since the acquisition date, those results have been included in the Lab Safety segment. See the Segment Analysis in the following Management’s Discussion and Analysis.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Matters Affecting Comparability

Grainger’s operating results for the first quarter of 2008 include the operating results of the acquisition made by Lab Safety in May 2007. Since the acquisition date, those results have been included in the Lab Safety segment. See the Segment Analysis in the following Management’s Discussion and Analysis.

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W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Grainger’s operating results for 2007 include the operating results of McFeely’s Square Drive Screws (McFeely’s) from the acquisition date of May 31, 2007. The results of the acquisition are included in the Lab Safety segment.

Effective January 1, 2006, Grainger adopted SFAS No. 123R, “Share-Based Payment,” for the accounting of employee stock-based compensation using the modified prospective method. The effect of the adoption was an approximately $0.14 earnings per share reduction for 2006. See Note 12 to the Consolidated Financial Statements for further discussion of information related to SFAS No. 123R.

During the fourth quarter of 2006, Grainger adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132R.” As a result of the adoption, Grainger recorded an additional liability of $36.8 million to Accrued employment-related benefit costs offset by $14.3 million of deferred income taxes and a reduction of Accumulated other comprehensive earnings of $22.5 million. See Note 14 to the Consolidated Financial Statements for further discussion of information related to SFAS No. 158.

Grainger’s operating results for 2006 include the operating results of Rand Materials Handling Equipment Co. (Rand) from the acquisition date of January 31, 2006. Grainger’s operating results for 2006 also include the operating results of Professional Inspection Equipment, Inc. (Professional Equipment) and Construction Book Express, Inc. (Construction Book) from the acquisition date of November 17, 2006. The results of these acquisitions are included in the Lab Safety segment.

Grainger’s operating results for 2005 include the operating results of AW Direct from the acquisition date of January 14, 2005. AW Direct’s results are included in the Lab Safety segment.

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Grainger’s operating results for 2007 include the operating results of McFeely’s Square Drive Screws (McFeely’s) from the acquisition date of May 31, 2007. The results of the acquisition are included in the Lab Safety segment.

Effective January 1, 2006, Grainger adopted SFAS No. 123R, “Share-Based Payment,” for the accounting of employee stock-based compensation using the modified prospective method. The effect of the adoption was an approximately $0.14 earnings per share reduction for 2006. See Note 12 to the Consolidated Financial Statements for further discussion of information related to SFAS No. 123R.

During the fourth quarter of 2006, Grainger adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132R.” As a result of the adoption, Grainger recorded an additional liability of $36.8 million to Accrued employment-related benefit costs offset by $14.3 million of deferred income taxes and a reduction of Accumulated other comprehensive earnings of $22.5 million. See Note 14 to the Consolidated Financial Statements for further discussion of information related to SFAS No. 158.

Grainger’s operating results for 2006 include the operating results of Rand Materials Handling Equipment Co. (Rand) from the acquisition date of January 31, 2006. Grainger’s operating results for 2006 also include the operating results of Professional Inspection Equipment, Inc. (Professional Equipment) and Construction Book Express, Inc. (Construction Book) from the acquisition date of November 17, 2006. The results of these acquisitions are included in the Lab Safety segment.

Grainger’s operating results for 2005 include the operating results of AW Direct from the acquisition date of January 14, 2005. AW Direct’s results are included in the Lab Safety segment.

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Matters Affecting Comparability

Grainger’s operating results for the first nine months of 2007 include the operating results of the acquisitions made by Lab Safety in 2007 and late 2006. Since the respective acquisition dates, those results have been included in the Lab Safety segment. See Note 3 to the Condensed Consolidated Financial Statements and Segment Analysis in the following Management’s Discussion and Analysis.

There was a lower tax rate in the three and nine months ended September 30, 2006 as a result of a 2004 tax audit settlement. The Company benefited $8.5 million or $0.09 per share from the settlement in the three and nine months ended September 30, 2006.

Matters Affecting Comparability

Grainger’s operating results for the first six months of 2007 include the operating results of the acquisitions made by Lab Safety in 2007 and late 2006. Since the respective acquisition dates, those results have been included in the Lab Safety segment. See Note 3 to the Condensed Consolidated Financial Statements and Segment Analysis in the following Management’s Discussion and Analysis.

Matters Affecting Comparability

Grainger’s operating results for the first quarter of 2007 include the operating results of the businesses acquired from Professional Inspection Equipment, Inc. and Construction Book Express, Inc. Those results have been included in the Lab Safety segment since the acquisition date of November 17, 2006.

Grainger’s operating results for the first quarter of 2006 include the operating results of the business acquired from Rand Materials Handling Equipment Co. (Rand) from the acquisition date of January 31, 2006. Rand’s results are included in the Lab Safety segment.

There were 64 sales days in the first quarter of both 2007 and 2006.

During the fourth quarter of 2006, Grainger adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132R.” As a result of the adoption, Grainger recorded an additional liability of $36.8 million to Accrued employment-related benefit costs offset by $14.3 million of deferred income taxes and a reduction of Accumulated other comprehensive earnings of $22.5 million. See Note 2 to the Consolidated Financial Statements for further discussion of information related to SFAS No. 158.

Grainger’s operating results for 2006 include the operating results of Rand Materials Handling Equipment Co. (Rand) from the acquisition date of January 31, 2006. Grainger’s operating results for 2006 also include the operating results of Professional Inspection Equipment, Inc. (Professional Equipment) and Construction Book Express, Inc. (Construction Book) from the acquisition date of November 17, 2006. The results of these acquisitions are included in the Lab Safety segment.

There were 254 sales days in 2006 compared to 255 sales days in 2005.

Grainger’s operating results for 2005 included the operating results for AW Direct from the acquisition date of January 14, 2005. AW Direct’s results are included in the Lab Safety segment.

Matters Affecting Comparability

Effective January 1, 2006, Grainger adopted SFAS No. 123R, “Share-Based Payment,” for the accounting of employee stock-based compensation. The effect of the adoption was approximately a $0.03 and $0.11 earnings per share reduction for the three months and nine months ended September 30, 2006, respectively.

As a result of recent system enhancements and process improvements in 2006, third quarter earnings benefited $0.03 per share due to changes in the timing of certain inventory-related transactions and estimates that would have been recorded in the fourth quarter of 2006 if the prior system had been used. The nine month benefit was $0.13 per share.

Grainger’s operating results for the nine months of 2006 include the operating results of Rand Materials Handling Equipment Co. (Rand) from the acquisition date of January 31, 2006. Rand’s results are included in the Lab Safety segment.

There was a lower tax rate during the third quarter of 2006 as a result of the 2004 tax audit settlement. The Company benefited $0.09 per share from the settlement in the three and nine months ended September 30, 2006.

There were 63 sales days in the third quarter of 2006 compared to 64 sales days in the third quarter of 2005. There were 191 sales days in the first nine months of 2006 compared to 192 sales days in the first nine months of 2005.

Matters Affecting Comparability

Effective January 1, 2006, Grainger adopted SFAS No. 123R, “Share-Based Payment”, for the accounting of employee stock-based compensation. The effect of the adoption was approximately a $0.05 and $0.08 earnings per share reduction for the three months and six months ended June 30, 2006, respectively.

As a result of recent system enhancements in 2006, second quarter earnings benefited $0.05 per share due to changes in the timing of certain inventory-related transactions and estimates that would have been recorded in the fourth quarter of 2006 if the prior system had been used. The six month benefit was $0.10 per share.

Grainger’s operating results for the six months of 2006 include the operating results of Rand Materials Handling Equipment Co. (Rand) from the acquisition date of January 31, 2006. Rand’s results are included in the Lab Safety segment.

Matters Affecting Comparability

Effective January 1, 2006, Grainger adopted SFAS No. 123R, “Share-Based Payment”, for the accounting of employee stock-based compensation. The effect of the adoption was approximately a $0.03 earnings per share reduction for the quarter.

As a result of recent system enhancements, first quarter earnings benefited $0.05 per share due to changes in the timing of certain inventory-related transactions and estimates that would have been recorded in the fourth quarter of 2006.

Grainger’s operating results for the first quarter of 2006 include the operating results of Rand Materials Handling Equipment Company (Rand) from the acquisition date of January 31, 2006. Rand’s results are included in the Lab Safety segment.

Grainger’s operating results for the first quarter of 2005 include the operating results of AW Direct, Inc. (AW Direct) from the acquisition date of January 14, 2005. AW Direct’s results are included in the Lab Safety segment.

There were 64 sales days in the first quarter of both 2006 and 2005.

Grainger’s operating results for 2004 included a full year of operating results of Gempler’s. Grainger’s operating results for 2003 included the results of Gempler’s only from the acquisition date of April 14, 2003. Gempler’s results are included in the Lab Safety Segment.

Matters Affecting Comparability

Grainger’s operating results for the nine months of 2005 include the operating results of the AW Direct business (AW Direct) from the acquisition date of January 14, 2005. AW Direct’s results are included in the Lab Safety segment.

There were 64 sales days in both the third quarter of 2005 and 2004. There were 192 sales days for the first nine months of 2005 and 2004.

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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