[LOGO]

                                   GRACO INC.
                             88 Eleventh Avenue N.E.
                              Minneapolis, MN 55413


                    NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

Dear Shareholder:

     Please join us on Tuesday,  May 7, 2002,  at 1:00 p.m.  for Graco's  Annual
Meeting of  Shareholders  at the George  Aristides  Riverside  Center,  which is
located at 1150 Sibley Street N.E., Minneapolis, Minnesota.

     At this meeting, shareholders will consider the following matters:

1.   Election of five directors to serve for three-year terms.

2.   Ratification  of the  selection  of  Deloitte & Touche  LLP as  independent
     auditors for the fiscal year 2002.

3.   Transaction of such other business as may properly come before the meeting.

     Shareholders  of record  at the close of  business  on March 8,  2002,  are
entitled to vote at this meeting or any adjournment.

     We encourage  you to join us and  participate  in the  meeting.  If you are
unable to do so, you may either call our  toll-free  telephone  vote number,  or
mark and return the  enclosed  Proxy Card.  Have your Proxy Card in front of you
when you make your call as it contains  important  information which is required
to access the system.

     If you do not call us, return your Proxy Card or vote your shares in person
at the meeting,  you will lose your right to vote on matters that are  important
to you as a shareholder.  Accordingly, if you do not plan to attend the meeting,
please  call  1-800-240-6326  to vote your  shares,  or  execute  and return the
enclosed  Proxy  Card.  This will not  prevent  you from voting in person if you
decide to attend the meeting.


Sincerely,

/s/David A. Roberts                             /s/Robert M. Mattison
David A. Roberts                                Robert M. Mattison
President &                                     Secretary
Chief Executive Officer


March 28, 2002
Minneapolis, Minnesota

                             YOUR VOTE IS IMPORTANT
        We  urge  you  to  call  our  transfer   agent  any  time  toll-free  at
        1-800-240-6326  and vote your  shares.  Have your Proxy Card in front of
        you  when you  make  your  call as it  contains  important  information,
        including a unique shareholder control number that is required to access
        the system. Follow the prompts in the automated menu. If you do not wish
        to take advantage of the telephone  voting,  please mark,  date and sign
        the Proxy Card and  return it in the  accompanying  envelope  as soon as
        possible. If you attend the meeting, you may still revoke your proxy and
        vote in person if you wish.





                                TABLE OF CONTENTS

                                                                            Page
Election of Directors..........................................................2
  Nominees and Other Directors.................................................2
  Meetings and Committees of the Board of Directors............................4
  Nomination of Directors......................................................5
  Audit Committee Report.......................................................5
    Report of the Audit Committee..............................................5
    Principal Accounting Firm Fees.............................................6
    Audit Fees.................................................................6
  Executive Compensation.......................................................6
    Report of the Management Organization
       and Compensation Committee..............................................6
    Comparative Stock Performance Graph........................................9
    Summary Compensation Table................................................10
    Option Grants Table (Last Fiscal Year)....................................11
    Aggregated Option Exercises in Last Fiscal Year And
       Fiscal Year-End Option Values..........................................12
    Change in Control and Termination Arrangements............................12
    Retirement Arrangements...................................................13
    Directors' Fees...........................................................14
    Certain Business Relationships............................................14
  Beneficial Ownership of Shares..............................................15
    Principal Shareholders....................................................16
    Section 16(a) Beneficial Ownership Reporting Compliance...................16
Proposal to Ratify the Appointment of Independent Public Auditors.............17
Other Matters.................................................................17
Shareholder Proposals.........................................................17






      A copy of the 2001 Graco Inc.  Annual  Report on Form 10-K,  including the
      Financial Statements and the Financial Statement Schedule, can be obtained
      free of charge by calling (612)  623-6659,  requesting a copy from our web
      site at www.graco.com, or writing:

                                    Treasurer
                                   Graco Inc.
                                  P.O. Box 1441
                             Minneapolis, Minnesota
                                   55440-1441


                     NOTE: Vote by telephone - call 1-800-240-6326


                                     [LOGO]

                                   GRACO INC.
                             88 Eleventh Avenue N.E.
                              Minneapolis, MN 55413



                                 PROXY STATEMENT
                       FOR ANNUAL MEETING OF SHAREHOLDERS
                             TO BE HELD MAY 7, 2002


     Your proxy, represented by the accompanying Proxy Card, is solicited by the
Board of Directors of Graco Inc.  ("Graco" or the "Company") in connection  with
the Annual Meeting of the Shareholders of the Company to be held on May 7, 2002,
and any adjournments of that meeting.

     The costs of the solicitation,  including the cost of preparing and mailing
the Notice of Meeting  and this Proxy  Statement,  will be paid by the  Company.
Solicitation   will  be  primarily  by  mailing  this  Proxy  Statement  to  all
shareholders  entitled  to vote at the  meeting.  Proxies  may be  solicited  by
officers of the Company personally,  but at no compensation in addition to their
regular compensation as officers.  The Company may reimburse brokers,  banks and
others  holding  shares  in  their  names  for  third  parties,  for the cost of
forwarding  proxy material to, and obtaining  proxies from,  third parties.  The
Proxy Statement and accompanying Proxy Card will be mailed to shareholders on or
about March 28, 2002.

     Proxies may be revoked at any time prior to being  voted by giving  written
notice of  revocation  to the  Secretary of the Company.  All properly  executed
proxies  received  by  management  will be voted in the manner set forth in this
Proxy Statement or as otherwise specified by the shareholder giving the proxy.

     Shares voted as  abstentions  on any matter (or a "withhold vote for" as to
directors)  will be counted as shares that are present and  entitled to vote for
purposes of determining  the presence of a quorum at the meeting and as unvoted,
although  present and entitled to vote, for purposes of determining the approval
of each matter as to which the shareholder has abstained.  If a broker submits a
proxy which indicates that the broker does not have  discretionary  authority as
to certain  shares to vote on one or more matters,  those shares will be counted
as shares that are present and entitled to vote for purposes of determining  the
presence of a quorum at the meeting,  but will not be  considered as present and
entitled to vote with respect to such matters.

     Only  shareholders of record as of the close of business March 8, 2002, may
vote at the meeting or at any  adjournment.  As of that date,  there were issued
and  outstanding  31,533,255  common  shares of the  Company,  the only class of
securities  entitled  to  vote  at  the  meeting.  Each  share  registered  to a
shareholder  of  record  is  entitled  to one  vote.  Cumulative  voting  is not
permitted.

                                   PROPOSAL 1


ELECTION OF DIRECTORS

NOMINEES AND OTHER DIRECTORS

     The number of directors of the Company is currently set at 12 members.  The
directors  are  divided  into  three  classes  as equal in number as  reasonably
possible. Vacancies that occur during a term may be filled by a majority vote of
the directors then in office, though less than a quorum, and directors so chosen
hold  office for a term  expiring at the next  Annual  Meeting of  Shareholders.
Board  policy  states that no director  may continue to serve on the Board after
the last day of the month of his/her seventieth (70th) birthday.

     At the forthcoming  Annual  Meeting,  five persons are to be elected to the
Company's  Board of  Directors.  The Board has nominated  David A. Koch,  Lee R.
Mitau,  James H. Moar,  Martha A.M.  Morfitt and David A. Roberts for three-year
terms expiring in the year 2005. Three nominees, David A. Koch, Lee R. Mitau and
Martha A.M. Morfitt, have previously been elected as directors of the Company by
the shareholders.

     Unless  otherwise  instructed  not to vote for the  election of  directors,
proxies will be voted to elect the nominees.  A director  candidate must receive
the vote of a  majority  of the  voting  power of shares  present in order to be
elected.  Unless the Board reduces the number of directors,  the enclosed  proxy
will be voted to elect the  replacement  nominee  designated by the Board in the
event that a nominee is unable or unwilling to serve.

     The  following  information  is given as of March 8, 2001 with  respect  to
nominees  for  election  and the seven  directors  whose  terms of  office  will
continue after the Annual Meeting.  Except as noted below,  each of the nominees
and directors has held the same position, or another executive position with the
same employer, for the past five years.


Nominees for election at this meeting to terms expiring 2005:

David A. Koch

     Mr.  Koch,  71, is Chairman  Emeritus of the Board of the  Company.  He was
     Chairman and Chief  Executive  Officer from 1985 to 1996 and Chairman until
     May 1, 2001. Mr. Koch has been a director of Graco since 1962. He is also a
     director of SurModics,  Inc. As an exception to Board policy,  the Board of
     Directors has extended the mandatory  retirement  for Mr. Koch until May 6,
     2003.

Lee R. Mitau

     Mr. Mitau,  53, is the Executive Vice President and General Counsel of U.S.
     Bancorp, a regional bank holding company. U.S. Bank National Association, a
     subsidiary of U.S. Bancorp, provides Graco with cash management,  loans and
     foreign  exchange  services,  and  is  a  trustee  of  the  Graco  Employee
     Retirement Plan. Mr. Mitau has been a director of Graco since 1990 and is a
     director of H.B. Fuller Company.  (See section  entitled  Certain  Business
     Relationships on page 14.)

James H. Moar

     Mr. Moar, 53, is Chief Operating Officer of Tennant Company, a manufacturer
     of  nonresidential  floor  cleaning  equipment.  From 1995 to 1998,  he was
     Executive   Vice  President  and  Chief   Operating   Officer  of  DataCard
     Corporation. He was elected a director of the Company in May of 2001.

Martha A.M. Morfitt

     Ms. Morfitt,  44, is President,  Chief Executive  Officer and a director of
     CNS Inc., a manufacturer and marketer of consumer  products,  including the
     Breathe  Right(R) nasal strip.  From 1998 to 2001, she was Chief  Operating
     Officer of CNS Inc. From 1997 to 1998, she was Vice President,  Meals,  and
     from 1994 to 1997,  Vice  President,  Green  Giant  Brands,  The  Pillsbury
     Company. Ms. Morfitt has been a director of Graco since 1995.

David A. Roberts

     David A.  Roberts,  54, is  President  and Chief  Executive  Officer of the
     Company,  a  position  he has held since  June 25,  2001.  Prior to joining
     Graco,  from 1996 to 2001 he was Group Vice  President of the Marmon Group,
     where  Mr.  Roberts  had  responsibility  for a  group  of  companies  with
     approximately  $600 million in revenue and products including grocery store
     refrigeration,  retail store fixtures and fast food  restaurant  equipment.
     Mr. Roberts has been a director of Graco since June 2001.

Directors whose terms continue until 2003:

George Aristides

     Mr.  Aristides,  66, is Chairman of the Board, a position he has held since
     May 1,  2001.  From  January 3, 2000 to June 24,  2001,  he served as Chief
     Executive  Officer of the Company.  From March 1, 1999 to December 29, 1999
     he was Vice Chairman. From 1997 to February 28, 1999 he was Chief Executive
     Officer.  From 1996 to 1997 he was President and Chief  Executive  Officer.
     Mr. Aristides has been a director of Graco since 1993.

Ronald O. Baukol

     Mr.  Baukol,   64,   retired,   formerly  the  Executive  Vice   President,
     International  Operations,   Minnesota  Mining  and  Manufacturing  Company
     ("3M"), a diversified manufacturer of industrial,  commercial, consumer and
     health care  products.  Mr.  Baukol has been a director of Graco since 1989
     and is a director of 3M and The Toro Company.

Robert G. Bohn

     Mr. Bohn, 48, is Chairman,  President and Chief Executive Officer,  Oshkosh
     Truck  Corporation,   Oshkosh,  Wisconsin,  a  designer,  manufacturer  and
     marketer  of a broad  range of  specialty  commercial,  fire and  emergency
     apparatus and military trucks.  Mr. Bohn has been a director of Graco since
     June, 1999.

William J. Carroll

     Mr. Carroll, 57, is  President-Automotive  Systems Group, Dana Corporation,
     Toledo  Ohio,  which  is  engaged  in the  engineering,  manufacturing  and
     distribution  of  components  and  systems  for  worldwide   vehicular  and
     industrial  manufacturers.  Mr.  Carroll has been a director of Graco since
     June, 1999.

Directors whose terms continue until 2004:

William G. Van Dyke

     Mr. Van Dyke,  56, is  Chairman,  Chief  Executive  Officer and  President,
     Donaldson  Company,  Inc.,  a  diversified  manufacturer  of air and liquid
     filtration  products.  Mr. Van Dyke has been a director of Graco since 1995
     and is a director of Donaldson Company, Inc.

Mark H. Rauenhorst

     Mr.  Rauenhorst,  49, is the President and Chief Executive  Officer of Opus
     Corporation,  which is  engaged  in design,  construction  and real  estate
     development activities, positions he assumed in 1999 and 2000 respectively.
     Beginning in 1996 he was President and CEO of Opus Northwest  L.L.C. He was
     elected a director of the Company in  September,  2000 and is a director of
     ConAgra Foods, Inc. (See section entitled Certain Business Relationships on
     page 14.)

J. Kevin Gilligan

     Mr.  Gilligan,  47, is  President,  Home and  Building  Control,  Honeywell
     International,  Inc., a diversified  manufacturer of electronics,  controls
     and  equipment  for  the  aerospace,  industrial  and  building  management
     markets. In 1997 he became President, Solutions and Services Business, Home
     and  Building  Control  of  Honeywell  Inc.  From  1994 to 1997 he was Vice
     President and General  Manager,  North American Region of Honeywell's  Home
     and Building Control. He was elected a director of the Company in February,
     2001.


MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

     During  2001,  the  Board  of  Directors  met 5  times.  Attendance  of the
Company's  directors at all Board and  Committee  meetings  averaged 92 percent.
During 2001, every director except Messrs. Baukol, Gilligan and Moar attended at
least 75  percent  of the  aggregate  number  of  meetings  of the Board and all
committees of the Board on which he or she served.

     The Board of Directors has an Audit Committee, a Governance Committee,  and
a Management Organization and Compensation Committee.  Membership as of March 8,
2002, the record date, was as follows:

                                                         Management
                                                         Organization And
Audit                        Governance                  Compensation
---------------------        ---------------------       ------------------
W. G. Van Dyke, Chair        L. R. Mitau, Chair          M. A.M. Morfitt, Chair
W. J. Carroll                G. Aristides                R. G. Bohn
J. K. Gilligan               R. O. Baukol                W. J. Carroll
M. A.M. Morfitt              D. A. Koch                  L. R. Mitau
M. H. Rauenhorst             J. H. Moar                  J. H. Moar
                             D. A. Roberts               W. G. Van Dyke


Audit Committee (2 meetings in fiscal 2001)

  o  Reviews and discusses with the Company's management and independent auditor
     the Company's financial reporting and internal controls;
  o  Recommends and takes action to oversee the  independence of the independent
     auditor and selects and recommends the independent  auditor to the Board of
     Directors;
  o  Reviews and assesses the Audit Committee Charter annually; and
  o  Reviews  the  internal   audit   results  and  evaluates   internal   audit
     performance.

The responsibilities of the Audit Committee are set forth in the Audit Committee
Charter,  adopted by the  Company's  Board of  Directors on February 25, 2000, a
copy of which was  included  as Appendix A to the Proxy  Statement  for the 2001
Annual Meeting of Shareholders.


Governance Committee (2 meetings in fiscal 2001)

  o  Evaluates  policies  related to Board  membership,  procedure and corporate
     governance;
  o  Recommends  to the Board the  persons to serve as Chairman of the Board and
     as Chief Executive Officer;
  o  Reviews and makes recommendations on directors' compensation; and
  o  Recommends to the Board of Directors nominees for the position of director.


Management Organization and Compensation Committee (2 meetings in fiscal 2001)

  o  Develops the Company's philosophy on executive compensation;
  o  Determines the  compensation of the Company's  Chief Executive  Officer and
     reviews the compensation of the other executive officers;
  o  Reviews the performance of the Chief Executive Officer;
  o  Reviews and makes recommendations on management organization and succession
     plans; and
  o  Administers the Company's executive stock option and incentive plans.


NOMINATION OF DIRECTORS

     Shareholders may nominate candidates for election to the Board of Directors
who will be considered by the Board Governance Committee. Recommendations should
be made in writing and  addressed to the  Committee in care of the  Secretary of
the Company at the Company's  corporate  headquarters.  The By-laws provide that
timely  notice must be received by the  Secretary not less than 90 days prior to
the  anniversary  of the date of the Annual Meeting of  Shareholders,  the first
Tuesday in May of each year. The  nominations  must set forth (i) the name, age,
business and  residential  addresses and  principal  occupation or employment of
each  nominee  proposed  in such  notice;  (ii)  the  name  and  address  of the
shareholder  giving the notice,  as it appears in the Company's  stock register;
(iii)  the  number  of  shares  of  capital  stock  of  the  Company  which  are
beneficially  owned by each such nominee and by such shareholder;  and (iv) such
other  information  concerning  each such nominee as would be required under the
rules of the Securities and Exchange Commission in a proxy statement  soliciting
proxies for the election of such nominee. Such notice must also include a signed
consent of each such nominee to serve as a director of the Company, if elected.


AUDIT COMMITTEE REPORT

Report of the Audit Committee

     The Audit Committee of the Board is responsible for providing  independent,
objective oversight of the Company's accounting functions and internal controls.
In performing its oversight function, the Audit Committee has relied upon advice
and  information  which it has received in its  discussions  with the  Company's
management and independent auditors.

     The Audit Committee is composed of independent directors,  and acts under a
written  charter  adopted  and  approved  by the Board of  Directors.  The Audit
Committee  has  reviewed  and  reassessed  the  adequacy  of its Charter and has
concluded that the Charter  satisfactorily  states the  responsibilities  of the
Committee.  Each member of the Company's Audit Committee meets the  independence
requirements of the New York Stock Exchange.

     The Audit  Committee has reviewed the audited  financial  statements of the
Company for the fiscal year ended  December  28, 2001 with both  management  and
Deloitte & Touche LLP  ("Deloitte"),  the Company's  independent  auditors.  The
Committee  also  discussed  with  Deloitte the matters  required by Statement on
Auditing Standards No. 61,  Communication with Audit Committees.  Management has
represented to the Audit  Committee that the financial  statements were prepared
in accordance with generally accepted accounting principles.

     The Audit Committee has also received the written disclosure and the letter
required by Independence Standards Board Standard No. 1 (Independence Discussion
with Audit Committees) and the Audit Committee has discussed with Deloitte their
independence. The Audit Committee has considered the effect of non-audit fees on
the independence of Deloitte.

     Based on these reviews and discussions,  the Audit Committee recommended to
the Board of  Directors  that the  Company's  audited  financial  statements  be
included in the  Company's  Annual Report on Form 10-K for the fiscal year ended
December 28, 2001 for filing with the Securities and Exchange Commission.



                                            The Members of the Committee
                                               Mr. William G. Van Dyke, Chairman
                                               Mr. William J. Carroll
                                               Mr. J. Kevin Gilligan
                                               Ms. Martha A.M. Morfitt
                                               Mr. Mark H. Rauenhorst




Principal Accounting Firm Fees

     The following  table sets forth the aggregate fees billed to Graco Inc. for
the fiscal year ended December 28, 2001, by the Company's  principal  accounting
firm, Deloitte & Touche LLP.


                           Financial Information
                           Systems Design and
Audit Fees                 Implementation Fees                  All Other Fees
----------                 ---------------------                --------------
                                                             
$292,000                            $0                             $367,000



1    Includes  fees  for  non-audit  services,  principally  statutory  audit of
     non-U.S.  subsidiaries  ($46,000),  tax compliance and consulting  services
     ($114,000),  benefit statement  preparation  ($89,000),  and other services
     ($118,000).

2    The Audit Committee has considered  whether the provision of these services
     is compatible with maintaining the principal accountant's independence.




EXECUTIVE COMPENSATION

Report of the Management Organization and Compensation Committee

Overview
     The  Management  Organization  and  Compensation  Committee of the Board of
Directors  (hereafter  called  "the  Committee"),  composed  of six  independent
nonemployee  directors,  is responsible for developing the Company's  philosophy
and structure for executive compensation. Consistent with this philosophy, on an
annual basis the Committee  determines the  compensation  of the Chief Executive
Officer and reviews the compensation of the other executive officers.

     Compensation  plans which  provide for grants or awards of Company stock to
executive  officers are approved by the Board of Directors and the  shareholders
of the Company.  In 1993, the Internal  Revenue Code ("the Code") was amended to
include a deductibility  limit for  remuneration to certain  executive  officers
[Section 162(m) of the Code].  Qualified  performance-based  compensation is not
subject to this deductibility  limit. The Graco Inc. Stock Incentive Plan, which
permits  grants of stock  options  and stock  appreciation  rights to  executive
officers, meets the requirements of Section 162(m) in all respects.

     In order to qualify annual incentive awards to the Chief Executive  Officer
and other executive  officers as  performance-based  compensation  under Section
162(m) of the Code, the Company has an Executive  Officer Annual Incentive Bonus
Plan. This Plan meets the requirements of Section 162(m) in all respects.

Executive Compensation Philosophy and Structure

     It is the Company's philosophy to set its executive  compensation structure
at ranges that are  competitive  with those of durable  goods  manufacturers  of
comparable  size.  These  ranges  are  determined  by  consulting  a variety  of
independent  third-party executive compensation surveys.  Executive compensation
is then delivered through:

  o  base salaries which  recognize the experience and performance of individual
     executives;
  o  aggressive, performance-driven incentives which:
     -    enhance shareholder value;
     -    balance annual and long-term corporate objectives; and
     -    provide meaningful amounts of Company stock; and
  o  competitive benefits.

     The specific components of the executive compensation program are described
below.

     Base  salary  ranges  are  established  using the salary and trend data for
comparably-sized  durable  goods  manufacturers,  as  published  in a variety of
independent  third-party executive  compensation surveys. The actual base salary
of each officer, within the range, is determined by the executive's performance,
which is  evaluated  annually by the Chief  Executive  Officer and  reviewed and
approved by the Committee.  Both financial and management factors are considered
in the evaluation.

     The Executive  Officer Annual  Incentive Bonus Plan (the  "Executive  Bonus
Plan")  was  available  in 2001 to the  Chief  Executive  Officer  and any other
executive  officer  designated by the Committee.  The Committee is authorized to
establish   financial   growth  targets  for  each   participant   directly  and
specifically tied to one or more financial  measures.  On or before the 90th day
of the  Company's  fiscal  year,  the  Committee  identifies  the  participants,
establishes the "Targeted Bonus Maximum  Percentages" for each participant,  and
establishes  the applicable  "Financial  Measures" and the "Company  Performance
Target(s)"  for each  "Financial  Measure",  as these  terms are  defined in the
Executive  Bonus Plan. At the close of the fiscal year, the Committee  certifies
whether or not the Company Performance Target(s) have been attained.

     The Annual  Bonus Plan covers key  managers  of the  Company and  executive
officers who do not  participate  in the Executive  Bonus Plan. The Annual Bonus
Plan,  available  in 2001  to 13  executive  officers  and 34  other  management
employees,  is structured to encourage  growth in both sales and net earnings by
the Company.  The Plan determines  individual  awards for executive  officers by
measuring  Company  performance  against corporate sales and net earnings growth
targets  established  by the Committee in the first quarter of each year.  Sales
and net earnings targets for 2001 were established to exceed prior year results.
In  addition,  the Chief  Executive  Officer  has been  given the  authority  to
establish  divisional and regional growth targets for the executive  officers in
charge of specific divisions and regions. Overall performance for the divisional
and regional  executives  is measured  against  both  divisional  and  corporate
targets.  Targets are set for minimum,  midpoint and maximum  payouts  under the
plan. In 2001, the committee established a range of payouts as a percent of base
salary for executive positions as follows:



                                       Minimum Payout            Maximum Payout
Position                               as a % of Base Salary     as a % of Base Salary
-------------------------------        ---------------------     ---------------------
                                                                 
Chief Executive Officer                          0%                    90%
Vice President (Board-elected)                   0%                    70%
Vice President (By appointment)                  0%                    50%/60%



The actual  Annual  Bonus  Plan award is  determined  by  evaluating  corporate,
divisional  and  regional   performance   against  the   established   financial
objectives.  For 2001,  sales  results led to an award that was 0 percent of the
maximum  payout.  Corporate  net earnings  results led to an award that was 25.2
percent of the maximum payout.  Awards were made to all executive officers under
the 2001 Annual Bonus Plan with the exception of George  Aristides,  whose award
was made under the Executive Bonus Plan.

     Under the  Chairman's  Award  Program,  a total of  $45,000  in  individual
discretionary  awards were granted to  recognize  significant  contributions  by
selected executive officers and other management employees.  In 2001, Chairman's
Awards were granted to 6 employees.

     The Executive Long Term Stock Incentive  Program is structured to align the
interests of executive officers with those of all Graco  shareholders.  The Long
Term Stock Incentive  program for 2001 consisted of stock options granted to the
executive  officers  under the Graco Inc.  Stock  Incentive  Plan. The number of
stock options granted to each executive officer was determined using competitive
data  for  comparably-sized   durable  goods  manufacturers,   as  reflected  in
independent   third-party  long-term  incentive  surveys.   These  options  were
non-incentive stock options with a 10-year duration and a vesting schedule of 25
percent after years one, two, three and four.

     Executive  officers are  eligible to  participate  in the employee  benefit
programs available to all Graco employees.


Compensation of the Chief Executive Officer

     On an  annual  basis,  the  Committee  is  responsible  for  reviewing  the
individual   performance  of  the  Chief   Executive   Officer  and  determining
appropriate  adjustments in base pay and award opportunities under the Executive
Officer Annual Incentive Bonus Plan and the Stock Incentive Plan.

     Mr. Aristides  served as Chief Executive  Officer of the Company until June
24, 2001. The Committee,  using competitive salary survey data,  established Mr.
Aristides' base salary at $552,000 per year. These data were based on comparably
sized  durable  goods  manufacturing  companies,  as  published  in  independent
compensation  surveys.  Mr.  Aristides  earned a bonus award under the Executive
Bonus Plan of $93,945.  The  maximum  payout as a percent of base salary for Mr.
Aristides  was 90%.  The 2001  bonus  award was based  upon the  achievement  of
specified  levels of net sales and net earnings of the Company.  Sales of $472.8
million in 2001  represent  a decrease in sales of 4.4  percent  from 2000.  Net
earnings of $65.3  million in 2001  represent a decrease in net  earnings of 6.9
percent from net earnings in 2000.

     David A. Roberts was named  President and Chief  Executive  Officer on June
25, 2001. Mr.  Roberts' base salary of $432,000 per year was  established by the
Committee  using  competitive  salary  survey  data.  These  data were  based on
comparably  sized  durable  goods  manufacturing   companies,  as  published  in
independent  compensation surveys. Mr. Roberts earned an annual bonus of $38,175
under the Annual  Bonus Plan,  which  represents  17% percent of his annual base
salary  prorated  for the period that he was  employed  with Graco.  The maximum
payout as a percent of base  salary for Mr.  Roberts  was 90  percent.  The 2001
bonus award was based upon the achievement of specified  levels in net sales and
net  earnings  of the  Company.  Sales of $472.8  million  in 2001  represent  a
decrease in sales of 4.4 percent  from 2000.  Net  earnings of $65.3  million in
2001  represent a decrease in net  earnings of 6.9 percent  from net earnings in
2000.

     Review  of the 2001  performance  of the  Chief  Executive  Officer  by the
Committee included recognition of Mr. Roberts joining Graco on June 25, 2001 and
becoming  directly  involved  in  the  leadership  of  the  Company,   including
responsibility  for strategic  direction as well as the full scope of operations
management.  He has furthered the implementation of previous management plans as
well as developing several new initiatives to generate  opportunities for growth
and  enhanced  profitability.  Under Mr.  Roberts'  leadership  the  Company has
continued  to deliver  financial  results  that  compare  favorably  to industry
competitors. Continued successful emphasis on expense management, high levels of
customer  satisfaction,  new products and increased  manufacturing  productivity
have  made  possible  a high  level of  financial  performance  during a time of
difficult economic  challenges.  Graco stock has continued to perform well since
Mr. Roberts became the Chief Executive Officer,  generating a continued superior
return  to Graco  shareholders,  particularly  in  comparison  to the Dow  Jones
Factory  Equipment  Index and the S & P 500  Index.  Based on this  review,  the
Committee increased Mr. Roberts' base salary from $432,000 to $450,000 effective
January 1, 2002.  For 2002 Mr. Roberts will  participate in the Executive  Bonus
Plan,  with a minimum payout of 0% of base salary and a maximum payout of 90% of
base salary.


                                               The Members of the Committee
                                                  Ms. Martha A.M. Morfitt, Chair
                                                  Mr. Robert G. Bohn
                                                  Mr. William J. Carroll
                                                  Mr. Lee R. Mitau
                                                  Mr. James H. Moar
                                                  Mr. William G. Van Dyke


Comparative Stock Performance Graph

     The graph below compares the  cumulative  total  shareholder  return on the
common stock of the Company for the last five fiscal  years with the  cumulative
total return of the S&P 500 Index and of the Dow Jones Factory  Equipment  Index
over the same period (assuming the value of investment in Graco common stock and
each index was 100 on December 27, 1996, and all dividends were reinvested).


                 Five Year* Cumulative Total Shareholder Return

[GRAPH - Table below lists data points included in graph]

                                                                Dow Jones
Year            Graco Inc.              S&P 500             Factory Equipment
----            ----------              -------             -----------------
1996               100                    100                      100
1997               146                    133                      116
1998               162                    171                       92
1999               226                    208                       83
2000               265                    189                       77
2001               376                    166                       78

                                      *Fiscal Year Ended Last Friday in December




Summary Compensation Table

     The following table shows both annual and long-term compensation awarded to
or earned by the Chief  Executive  Officer and the four most highly  compensated
executive  officers of the Company  whose total annual salary and bonus for 2001
exceeded $100,000.

                                                                                     Long Term Compensation
                                            Annual Compensation                              Awards
                          -----------------------------------------------------     -------------------------
        (a)               (b)       (c)                (d)                 (e)          (f)             (g)             (h)
                                                                          Other     Restricted     Securities       All Other
                                                                         Annual          Stock     Underlying         Compen-
Name and                           Salary             Bonus             Compen-       Award(s)       Options/          sation
Principal Position        Year        ($)       ($)  sation ($)            ($)       SARs (#)         ($)
---------------------     ----   --------          --------          ----------     ----------     ----------       ---------
                                                                                         
George Aristides          2001   $622,474          $ 93,945                   0              0        100,000        $     0
Chief Executive           2000    485,123           395,657                   0              0         60,000              0
Officer                   1999    406,876           182,001                   0              0         60,000          4,800

David A. Roberts          2001    224,514            38,175                   0       $115,800     50,000              0
President and Chief       2000        N/A               N/A                 N/A            N/A            N/A            N/A
Executive Officer         1999        N/A               N/A                 N/A            N/A            N/A            N/A

Dale D. Johnson           2001    252,469            57,975                   0              0         20,000          5,100
Vice President,           2000    280,267           202,989                   0              0         30,000          5,100
Contractor                1999    160,287            76,234                   0              0         15,000          4,800
Equipment Division

David M. Lowe             2001    179,206            58,670                   0              0          7,500         30,996
Vice President,           2000    169,334            45,685                   0              0         11,250         30,996
General Manager,          1999    146,813            28,004                   0              0         11,250         13,432
European Operations

Patrick J. McHale         2001    170,093            56,529                   0              0          7,500          5,100
Vice President,           2000    147,141           119,507                   0              0         11,250          5,100
Manufacturing             1999    105,360            36,172                   0              0            300          3,994

Charles L. Rescorla       2001    185,170            21,671                   0              0         10,000          5,100
Vice President,           2000    168,211           112,450                   0              0         11,250          5,100
Industrial/Automotive     1999    150,262            91,141                   0              0         11,250          4,800
Equipment Division



(1)  Deferred compensation is included in Salary and Bonus in the year earned.

(2)  In  addition  to  base  salary,   the  reported  figure  includes   amounts
attributable  to the imputed value of the group term life insurance  benefit for
each of the named executive officers.  The figure for Mr. Aristides includes pay
in lieu of vacation time due to his retirement as a Company employee on December
31, 2001.

(3) Bonus includes any awards under the Executive Officer Annual Incentive Bonus
Plan,  the Annual Bonus Plan and the Chairman's  Award Program  described in the
Management  Organization and Compensation Committee Report. No Chairman's Awards
were  granted to listed  executives  in 2001.  Mr.  Lowe  received  an award for
$15,000 in 2000. Mr. McHale  received  awards for $25,000 in 2000 and $10,000 in
1999. Mr. Rescorla received an award for $15,000 in 1999.

(4) A  restricted  stock  grant was made to Mr.  Roberts on June 25, 2001 in the
amount shown on the table. The restrictions will lapse on June 25, 2004.

(5) On December 8, 2000, the Board of Directors  approved a three-for-two  stock
split  effective  February 6, 2001, for shares  outstanding on January 15, 2001.
The number of options,  as well as the exercise price, has been restated in this
table and all subsequent tables to reflect the split.

(6) The compensation reported includes the Company contributions under the Graco
Employee  Investment  Plan  (excluding  employee  contributions).  For 2001, the
Company  contribution  accrued under the Graco Employee Investment Plan for each
named  executive  officer  was as  follows:  $0 for  Mr.  Aristides;  $0 for Mr.
Roberts;  $5,100 for Mr. Johnson,  $5,100 for Mr. Rescorla,  $5,100 for Mr. Lowe
and $5,100 for Mr.  McHale.  The Company  contribution  under the Graco Employee
Investment  Plan is a dollar  for  dollar  match up to the first 3% of  employee
contribution.

(7) The reported figure includes a goods and services cost differential provided
to Mr. Lowe as a result of his expatriate assignment.



Option Grants Table (Last Fiscal Year)

    The following  table shows the stock options  granted to the named executive
officers during 2001, their exercise price and their grant date present value.


                                                  Individual Grant                          Grant Date Value
                            --------------------------------------------------------        ----------------
      (a)                           (b)              (c)          (d)            (e)                     (f)
                              Number of       % of Total
                             Securities          Options     Exercise                                  Grant
                             Underlying       Granted to      or Base                                   Date
                                Options     Employees in        Price     Expiration                 Present
Name                        Granted (#)      Fiscal Year       ($/Sh)           Date               Value ($)
-------------------         -----------     ------------     -----------------------        ----------------
                                                                                   
George Aristides            100,000         15.5%           26.35        2/22/11              $1,042,000
David A. Roberts             50,000          7.7%           31.20        6/22/11                 697,500
Dale D. Johnson              20,000          3.1%           26.35        2/22/11                 208,400
Patrick J. McHale             7,500          1.2%           26.35        2/22/11                  78,150
David M. Lowe                 7,500          1.2%           26.35        2/22/11                  78,150
Charles L. Rescorla          10,000          1.5%           26.35        2/22/11                 104,200



(1) Non-incentive stock options were granted on February 22, 2001, in the amount
shown  on  the  table.  40,000  shares  became  exercisable  on  the  day of Mr.
Aristides'retirement,  December 31, 2001; 60,000 shares will become  exercisable
on May 6, 2002.

(2)  Non-incentive  stock  options were granted on June 22, 2001,  in the amount
shown on the table. The options become  exercisable in equal  installments  over
four years, beginning with the first anniversary date of the grant.

(3) Non-incentive stock options were granted on February 22, 2001, in the amount
shown on the table. The options become  exercisable in equal  installments  over
four years, beginning with the first anniversary date of the grant.

(4) The Black-Scholes  option pricing model has been used to determine the grant
date present value.  Annual  volatility was calculated using monthly returns for
36 months prior to the grant date, the interest rate was set using U.S. Treasury
securities of similar  duration to the option  period as of the grant date,  and
dividend  yield was  established  as the yield on the grant  date.  A 10 percent
discount  for   nontransferability   and  3  percent  discount  to  reflect  the
possibility  of  forfeiture  over a two-year  period  were  applied.  For grants
expiring on February 22,  2011,  the  assumptions  used in the model were annual
volatility of 37.08  percent,  interest rate of 5.14 percent,  dividend yield of
1.48 percent,  and time to exercise of 10 years. For grants expiring on June 22,
2011, the assumptions used in the model were annual volatility of 37.01 percent,
interest  rate of 5.17  percent,  dividend  yield of 1.28  percent,  and time to
exercise of 10 years.



Aggregated  Option  Exercises  in Last  Fiscal Year And Fiscal  Year-End  Option
Values

    The following table shows the value of outstanding  in-the-money  options at
the end of the fiscal year 2001 for the named executive officers.


(a)                             (b)            (c)                  (d)                   (e)
                                                              Number of
                                                             Securities              Value of
                                                             Underlying           Unexercised
                                                            Unexercised          In-the-Money
                                                                Options               Options
                                                          at FY-End (#)         at FY-End ($)
                             Shares
                        Acquired on          Value         Exercisable/          Exercisable/
Name                   Exercise (#)       Realized        Unexercisable         Unexercisable
-------------------    ------------    -----------        -------------    ------------------
                                                               
George Aristides            360,262     $5,812,351    56,875/60,000    $1,056,325/  735,000
David A. Roberts                  0              0             0/50,000    $        0/  370,000
Dale D. Johnson                   0              0        24,638/70,437    $  634,781/1,245,999
Patrick J. McHale                 0              0        10,125/18,187    $  260,627/  287,425
David M. Lowe                     0              0        39,683/36,562    $1,075,213/  711,035
Charles L. Rescorla               0              0        37,389/32,311    $1,079,352/  593,088



(1)  "Value  realized"  is the  difference  between  the  closing  price  of the
Company's  common  stock on the date of  exercise  and the  option  price of the
options multiplied by the number of shares received.

(2) "Value at fiscal  year-end" is the difference  between  $38.60,  the closing
price of the Company's  common stock on December 28, 2001,  and the option price
multiplied by the number of shares subject to option.



Change in Control and Termination Arrangements

   Each of the executive officers listed in the Summary  Compensation Table, and
certain  other key  executives  of the  Company,  have  entered into a change of
control  agreement with the Company  (singularly  "Agreement";  collectively the
"Agreements").  The change of control  period is defined to extend for two years
from the date the Agreement is executed.  Each year this period is automatically
extended for one year so as to terminate  two years from the annual  anniversary
date of the  Agreement,  unless the Company gives the executive  notice that the
Company does not wish to extend this period.

   A change of control is generally  defined in the  Agreements to have occurred
if:  (i) a person  other  than a trust  person  (as  defined  in the  Agreement)
acquires beneficial ownership of 25 percent or more of the Company's outstanding
common stock, except acquisitions  directly from the Company, by the Company, by
a Company  employee  benefit  plan, by the executive or a group of which he is a
part, or by a person with  beneficial  ownership of shares under the Trust Under
the Will of Clarissa L. Gray which  equals or exceeds a certain  percentage;  or
(ii) members of the Incumbent Board (as defined in the Agreement) cease to be in
the majority on the Board; or (iii) the shareholders  approve a  reorganization,
merger,  consolidation or statutory exchange of the Company's outstanding common
stock, or approve a sale or other disposition of all or substantially all of the
assets of the Company; or (iv) the shareholders  approve a complete  liquidation
or dissolution of the Company.

   Each  Agreement  provides  that for two years after a change of control there
will be no  adverse  change  in the  executive's  duties  and  responsibilities,
compensation  program,  benefits or other  circumstances,  provided that nothing
will  restrict  the right of the  executive  or the  Company  to  terminate  the
employment of the executive.  If the executive's employment is terminated by the
Company for any reason other than for good cause,  death,  or disability,  or by
the executive for "good reason" (as defined in the Agreement),  within two years
following  a change of  control,  the  executive  will be  entitled  to  certain
benefits. These benefits include a sum equivalent to the executive's base salary
to the date of  termination  (to the extent not yet  paid),  a bonus  calculated
according  to a formula (set forth in the  Agreement)  for the year in which the
termination  occurs, two times the executive's annual base salary, two times the
midpoint  between the maximum and minimum bonus for the fiscal year in which the
termination  occurs,  and benefit  coverage for a minimum of two years following
the date of termination.

   The  payments to which the  employee is entitled  are subject to reduction in
the event the payments would  constitute a parachute  payment within the meaning
of Section 280G of the Internal  Revenue Code of 1989, as amended,  (the "Code")
or any successor provision, provided that the reduction does not exceed $25,000.
If the  reduction  would  exceed  $25,000,  there will be no  reduction  and the
Company will make an additional payment to the executive in the amount that will
put the executive in the same  after-tax  position as if no excise tax under the
Code had been imposed.

   In the event that the employment of Mr.  Roberts is terminated  involuntarily
for other than gross or willful  misconduct,  he will be paid an amount equal to
two years of his then base  salary.  He will also be entitled to a bonus for the
year of his  termination,  based on the bonus program and formula then in effect
for him and salary  actually  earned by him during that year.  The company  will
also reimburse him for any premiums for the company's  health plans he elects to
pay under COBRA.

   It is the  practice  of the  Company to  continue  to provide  base salary to
executive  officers whose employment is involuntarily  terminated by the Company
for a period of twelve months or until the officer secures other employment.


Retirement Arrangements

   The Company has an employee  retirement plan which provides  pension benefits
for eligible regular,  full- and part-time  employees.  Benefits under the Graco
Employee Retirement Plan ("Retirement Plan") consist of a fixed benefit which is
designed  to  provide  retirement  income at age 65 of 43.5  percent  of average
monthly compensation,  less 18 percent of Social  Security-covered  compensation
(calculated in a life annuity  option) for an employee with 30 years of service.
Average  monthly  compensation  is  defined as the  average of five  consecutive
highest years' cash compensation during the last ten years of service, including
base salary,  Executive  Officer Annual Incentive Bonus Plan awards,  and Annual
Bonus Plan awards,  but excluding  Executive Long Term Incentive Program awards,
divided by sixty.  Benefits  under the  Retirement  Plan vest upon five years of
benefit service.

   Federal  tax  laws  limit  the  annual  benefits  that  may  be  paid  from a
tax-qualified  plan such as the  Retirement  Plan.  The  Company  has adopted an
unfunded plan to provide benefits to retired executive  officers impacted by the
benefit limits,  so that they will receive,  in the aggregate,  the benefits the
executive  would have been entitled to receive under the Retirement Plan had the
limits  imposed by the tax laws not been in effect.  The maximum  annual pension
payable to or on behalf of the  executive  under the unfunded plan will be equal
to the difference  between $170,000 and the benefits  actually payable under the
Retirement Plan when the limits imposed by the tax laws are applied.

   The following table shows the estimated  aggregate  annual  benefits  payable
under the Graco Employee  Retirement Plan and the unfunded plan for the earnings
and years of  service  specified.  The years of  benefit  service  for the Chief
Executive Officer and the executive officers listed in the Summary  Compensation
Table are: Mr.  Aristides,  28 years;  Mr. Roberts,  6 months;  Mr. Johnson,  26
years;  Mr. Rescorla,  13 years;  Mr. Lowe 6 years; and Mr. McHale,  12 years. A
maximum  of 30  years  had  previously  been  counted  in  the  pension  benefit
calculation.  For  1998  and  subsequent  years,  the 30 year  maximum  has been
eliminated.


                     Estimated Aggregate Annual Retirement Benefit
                     ---------------------------------------------
Final Average    5 Years    10 Years    15 Years    20 Years   25 Years    30 Years    35 Years    40 Years    45 Years
Compensation     Service     Service     Service     Service    Service     Service     Service     Service     Service
------------     -------    --------    --------    --------   --------    --------    --------    --------    --------
                                                                                    
$200,000         $13,384    $ 26,767    $ 40,151    $ 53,535   $ 66,918    $ 80,302    $ 93,686    $107,069    $120,453
 300,000          20,634      41,267      61,901      82,535    103,168     123,802     144,435     165,069     170,000
 400,000          27,884      55,767      83,651     111,535    139,418     167,302     170,000     170,000     170,000
 500,000          35,134      70,267     105,401     140,535    170,000     170,000     170,000     170,000     170,000
 600,000          42,384      84,767     127,151     169,535    170,000     170,000     170,000     170,000     170,000
 700,000          49,634      99,267     148,901     170,000    170,000     170,000     170,000     170,000     170,000
 800,000          56,884     113,767     170,000     170,000    170,000     170,000     170,000     170,000     170,000


     Prior to December 31, 1996, the Company entered into deferred  compensation
agreements with selected executive officers,  including certain named executives
in the Summary  Compensation Table. These agreements provide for the payment per
year of $10,000 in  deferred  compensation  to the  officer  for ten years after
retirement, or to a beneficiary in the event of death prior to the expiration of
the  ten  year   period.   These   agreements   also  include   provisions   for
non-competition  and the  payment  of $5,000  per year in the event the  officer
becomes disabled prior to age 65. The $5,000 per year disability  payments cease
upon the  attainment  of age 65. A deferred  compensation  agreement  remains in
effect for Mr. Aristides.

Directors' Fees

     During 2001, the Company paid each director, except directors who were also
employees of the Company,  an annual retainer of $20,000,  plus a meeting fee of
$1000 for each Board meeting and $1000 for each committee meeting attended.  Mr.
Koch's annual retainer as Chairman of the Board was $45,000, which was in effect
until May 1,  2001,  when Mr.  Koch  stepped  down as  Chairman  and  thereafter
received the standard annual retainer.  The annual retainer for Mr. Aristides as
Chairman  of the  Board is  $60,000,  effective  as of  January  1,  2002.  (Mr.
Aristides retired as an employee of the Company effective December 31, 2001). On
February 23, 2001, the Board  terminated the retirement  benefit for nonemployee
directors, which provided that upon cessation of service,  nonemployee directors
who have served for five full years will  receive  quarterly  payments  for five
years  at a rate  equal to the  director's  annual  retainer  in  effect  on the
director's last day of service on the Board. Retirement payments will be made in
accordance with the retirement benefit to Mr. Baukol, Mr. Mitau, Ms. Morfitt and
Mr. Van Dyke upon their respective retirements.

     In 1994,  shareholders  approved a Nonemployee  Director Stock Plan.  Under
this  Plan,  a  nonemployee  director  may elect to  receive  all or part of the
director's  annual retainer in the form of shares of the Company's  common stock
instead of cash.  In September  1997,  the Plan was amended to create a deferred
stock  account  alternative  for  the  deferral  of the  annual  retainer.  This
alternative  provides for the  crediting of shares of common stock to a deferred
stock  account  held  by a  trustee  in the  name of the  nonemployee  director.
Dividends  paid on the common  stock,  held in the  deferred  accounts,  will be
credited to the accounts at the time of payment. In 1999 the Plan was amended to
allow nonemployee  directors to defer all or part of the meeting fees as well as
the annual retainer.  Participating  directors may elect to receive payment from
their deferred stock account in a lump sum or installments. Payments, whether in
a lump sum or by  installments,  shall be made in shares of common  stock,  plus
cash in lieu of any fractional share.  Eight directors have elected to defer all
or part of their annual  retainer  and/or  meeting fees into the deferred  stock
accounts established under this Plan.

     In 1996,  shareholders  approved a Nonemployee  Director Stock Option Plan.
Under this Plan,  nonemployee directors receive an initial option grant of 3,000
shares upon first  appointment  or election and an annual  option grant of 2,500
shares on the date of the Company's Annual Shareholders Meeting. Options granted
under  the  Plan  are  non-statutory,   have  a  ten-year  duration  and  become
exercisable  in equal  installments  over four years,  beginning  with the first
anniversary  date of the grant.  The option  exercise  price is the fair  market
value on the date of grant.

Certain Business Relationships

     Mr. Mitau,  who has been a director of Graco since 1990, is Executive  Vice
President and General Counsel of U.S. Bancorp, a bank holding company. U.S. Bank
National  Association  is the lead bank in a syndicate  of nine banks with which
the Company  entered into a five-year  $190,000,000  reducing  revolving  credit
facility in 1998.  Available  credit under this facility has been reduced to $50
million.  There  is  no  outstanding  debt  under  this  facility.  For  further
information see footnote F to the Company's  financial  statements in its Annual
Report to Shareholders for fiscal year 2001. U.S. Bank also provides the Company
with  banking  services  such  as cash  management,  payroll  accounts,  foreign
currency  exchange,  wire  transfers and letters of credit.  U.S. Bank is also a
trustee of the Graco Employee Retirement Plan.

     Mr.  Rauenhorst,  who has been a director of Graco since 2000, is President
and Chief  Executive  Officer  of Opus  Corporation  which is engaged in design,
construction and real estate development activities.  The Company entered into a
$2.8 million contract for the construction of its Sioux Falls facility expansion
with Opus Northwest L.L.C., an affiliate of Opus Corporation,  on June 29, 2001.
The construction was completed in September 2001.

BENEFICIAL OWNERSHIP OF SHARES

     The  following  information,  furnished  as of  March  8,  2002,  indicates
beneficial ownership of the common shares of the Company by each director,  each
nominee for election as director,  the executive  officers listed in the Summary
Compensation  Table and by all  directors  and  executive  officers  as a group.
Except  as  otherwise  indicated,  the  persons  listed  have  sole  voting  and
investment power.


                                                                                Percent of
                                            Amount and Nature of              Common Stock
Name of Beneficial Owner                    Beneficial Ownership      Outstanding*
------------------------                    --------------------              ------------
                                                                                
G. Aristides                                     192,031
R. O Baukol                                               27,019
R. G. Bohn                                             4,563
W. J. Carroll                                              6,881
J. K. Gilligan                                         1,976
D. D. Johnson                                             43,633
D. A. Koch                                 1,697,022                      5.38%
D. M. Lowe                                                65,720
P. J. McHale                                              13,987
L. R. Mitau                                               25,298
J. H. Moar                                                 1,129
M. A.M. Morfitt                                           20,558
M. H. Rauenhorst                                       4,388
C. L. Rescorla                                        62,798
D. A. Roberts                                          3,000
W. G. Van Dyke                                            23,692

All directors and
executive officers as a
group (22 persons)                     2,366,126                       7.5%

* Less than one (1) percent if no percentage is given.


(1) All share data reflects the three-for-two  stock split effective February 6,
2001.

(2) Includes  440,677  shares with respect to which  executive  officers  have a
right, as of May 7, 2002, to acquire  beneficial  ownership upon the exercise of
vested stock options.

(3)  Includes  the  following  shares  owned by spouses of  directors  and named
executive  officers as to which the director or executive  officer may be deemed
to share voting and investment power: Mr. Koch, 61,236 shares and Mr. Aristides,
69,597 shares.

(4)  Excludes  the  following  shares  as  to  which  beneficial   ownership  is
disclaimed:  (i) 498,333 shares owned by the Graco Employee  Retirement Plan, as
to which Messrs. Aristides,  Koch, Bohn, Gilligan,  Rauenhorst and Roberts share
voting and investment  power as members of the Company's  Investment  Committee;
(ii) 13,212 shares held by The Graco  Foundation as to which Messrs.  Koch,  and
Rescorla  share voting and  investment  powers as  directors;  and (iii) 103,800
shares held by  Greycoach  Foundation  as to which Mr.  Koch  shares  voting and
investment power as a director.

(5) Includes  1,102,962  shares held by the Clarissa L. Gray Trust, of which Mr.
Koch's wife,  Barbara Gray Koch, and their children are the beneficiaries and as
to which Mr. Koch shares voting and investment power as trustee.  See "Principal
Shareholders".

(6) If the  shares  referred  to in  footnote  4 above,  as to which one or more
directors and designated  executive  officers share voting power, were included,
the number of shares beneficially owned by all directors,  nominees for election
as director and executive officers would be 2,981,471 shares, or 9.46 percent of
the outstanding shares.



Principal Shareholders

   The following  table  identifies each person or group known to the Company to
beneficially  own as of March 8, 2002,  more than 5 percent  of the  outstanding
common shares of the Company, the only class of security entitled to vote at the
Annual Meeting.


                                                Beneficial               Percent
                                                 Ownership              of Class
------------------------------                  ----------              --------
                                                                    
David A. Koch                            1,697,022                 5.38%

Ariel Capital Management, Inc.               4,658,088                14.98%


(1) Includes  1,102,962  shares owned by the Trust under the Will of Clarissa L.
Gray. Mr. Koch is one of the trustees of the Trust and the  beneficiaries of the
Trust  are  Mrs.  Koch  and  their  children.  The  other  trustees  are Paul M.
Torgerson,  Senior Vice President and Chief  Administrative  Officer at Fairview
Health Services, Minneapolis,  Minnesota, and US Bank Trust National Association
S.D.,  Sioux Falls,  South  Dakota.  The Trustees  share voting and  dispositive
power.  Includes  549,322 shares owned by David A. Koch or Mrs.  Koch.  Includes
44,738 shares with respect to which Mr. Koch has a right,  as of May 7, 2002, to
acquire beneficial ownership upon the exercise of vested stock options.

(2)  Excludes  the  following  shares  as  to  which  beneficial   ownership  is
disclaimed:  (i) 498,333 shares owned by the Graco Employee  Retirement Plan, as
to which Messrs. Aristides,  Koch, Bohn, Gilligan,  Rauenhorst and Roberts share
voting and investment  power as members of the Company's  Investment  Committee;
(ii) 13,212 shares held by The Graco  Foundation  as to which  Messrs.  Koch and
Rescorla  share voting and  investment  powers as  directors;  and (iii) 103,800
shares held by  Greycoach  Foundation  as to which Mr.  Koch  shares  voting and
investment power as a director.

(3) Based on  information  of  beneficial  ownership  as of  December  31,  2001
included in a Schedule 13G filed on January 16, 2002.



Section 16(a) Beneficial Ownership Reporting Compliance

     The Company's executive officers,  directors,  and 10 percent  shareholders
are  required  under  the  Securities  Exchange  Act  of  1934  and  regulations
promulgated  thereunder  to file initial  reports of ownership of the  Company's
securities  and reports of changes in that  ownership  with the  Securities  and
Exchange  Commission.  Copies  of these  reports  must also be  provided  to the
Company.

     Based  upon its  review of the  reports  and any  amendments  made  thereto
furnished  to the  Company,  or written  representations  that no  reports  were
required,  the Company believes that all reports were filed on a timely basis by
reporting  persons during and with respect to 2001,  except for one  inadvertent
late filings by Mr. Fred Sutter, who sold 954 shares in January 2001.


                                   PROPOSAL 2


PROPOSAL TO RATIFY THE APPOINTMENT OF INDEPENDENT PUBLIC AUDITORS

     Deloitte & Touche LLP has acted as  independent  auditors  for the  Company
since 1962. The Board of Directors  recommends  ratification of the selection of
Deloitte & Touche LLP as  independent  auditors for the fiscal year 2002. If the
shareholders do not ratify the selection of Deloitte & Touche LLP, the selection
of the independent  auditors will be  reconsidered by the Board of Directors.  A
representative  of Deloitte & Touche LLP will be present at the meeting and will
have the  opportunity  to make a  statement  if so desired and be  available  to
respond to any shareholder questions.


OTHER MATTERS

     The Board of Directors is not aware of any matter,  other than those stated
above, which will or may properly be presented for action at the meeting. If any
other  matters  properly  come before the  meeting,  it is the  intention of the
persons  named in the enclosed form of proxy to vote the shares  represented  by
such proxies in accordance with their best judgment.


SHAREHOLDER PROPOSALS

     The Company did not receive a request from any shareholder that a matter be
submitted to a vote at the 2002 Annual Meeting. Any shareholders wishing to have
a matter  considered for inclusion in the proxy statement for the Annual Meeting
in the year 2003 must submit such  proposal in writing to the  Secretary  of the
Company at the address shown on page 1 of this  statement no later than November
30, 2002.

     The  persons  named as  proxies  intend  to  exercise  their  discretionary
authority  to vote as they  deem in the best  interests  of the  Company  on any
shareholder  proposal  submitted  at the Annual  Meeting  in year  2003,  if the
Company has not received advance written notice of the matter from the proponent
by February 1, 2003.

     YOU ARE  RESPECTFULLY  REQUESTED TO EXERCISE YOUR RIGHT TO VOTE. YOU MAY DO
SO BY CALLING OUR TOLL-FREE TELEPHONE VOTE NUMBER (1-800-240-6326) AND FOLLOWING
THE VOICE  INSTRUCTIONS OR BY FILLING IN AND SIGNING THE ENCLOSED PROXY CARD AND
RETURNING IT IN THE ENVELOPE  ENCLOSED FOR YOUR  CONVENIENCE.  In the event that
you attend the meeting,  you may revoke your proxy (either given by telephone or
by mail) and vote your shares if you wish.

For the Board of Directors

/s/RobertM. Mattison
---------------------------
Robert M. Mattison
Secretary


Dated:  March 28, 2002



                  NOTE: Vote by telephone - call 1-800-240-6326

                                     [MAP]



                                   GRACO INC.

                         ANNUAL MEETING OF SHAREHOLDERS

                              Tuesday, May 7, 2002
                                    1:00 p.m.

                        George Aristides Riverside Center
                             1150 Sibley Street N.E.
                          Minneapolis, Minnesota 55413





                                     [LOGO]

GRACO INC.
88 Eleventh Avenue N.E.
Minneapolis, Minnesota  55413

This  Proxy is  Solicited  by the Board of  Directors  for use at the Graco Inc.
Annual Meeting on Tuesday, May 7, 2002.

The shares of common  stock of Graco  Inc.  which you were  entitled  to vote on
March 8, 2002, will be voted as you specify on this card.

By signing this proxy, you revoke all prior proxies and appoint David A. Roberts
and Mark W. Sheahan as Proxies,  each with full power of  substitution,  to vote
your shares as  specified  on the reverse  side and at their  discretion  on any
other  matter  which  may  properly  come  before  the  Annual  Meeting  or  any
adjournment thereof.


TO VOTE BY TELEPHONE - TOLL FREE - 1-800-240-6326 - QUICK *** EASY *** IMMEDIATE

Your telephone vote authorizes the Named Proxies to vote your shares in the same
manner as if you marked, signed and returned your proxy card.

o    Have your proxy card in hand.
o    Use any  touch-tone  telephone  to vote your proxy 24 hours a day, 7 days a
     week, until 12:00 Noon EST on May 6, 2002.
o    You will be prompted to enter your 3-digit  Company Number and your 7-digit
     Control  Number.  Both  numbers  appear in the box in the upper  right hand
     corner.

Option 1: To vote as the Graco Board recommends on ALL proposals, press 1.


          When asked, please confirm by pressing 1.


Option  2: To vote on each  Proposal  separately,  press 0.  (You will then hear
these instructions:)

Proposal 1: to vote FOR ALL nominees, press 1
            to WITHHOLD FOR ALL nominees, press 9
            to WITHHOLD FOR AN INDIVIDUAL NOMINEE, press 0 and listen to the
               instructions.

Proposal 2: to vote FOR, press 1; AGAINST, press 9; ABSTAIN, press 0


          When asked, please confirm your vote by pressing 1.




TO VOTE BY MAIL

If you do not vote by telephone,  mark, sign and date your proxy card and return
the card in the  postage-paid  envelope  provided  (Graco Inc.,  c/o  Shareowner
ServicesSM, P.O. Box 64873, St. Paul, MN 55164-0873).


     If you vote by telephone, there is no need to mail back your Proxy Card


            The Board of Directors Recommends a Vote FOR Items 1 and 2.

Item 1.     Election of Directors            FOR ALL          WITHHOLD FOR ALL
                                          --               --
            NOMINEES:      David A. Koch          James H. Moar

                           Lee R. Mitau           Martha A.M. Morfitt

                                                  David A. Roberts


            (INSTRUCTION:  To  withhold  authority  to  vote for  any individual
            nominee, strike a line through the nominee's name in the list above)

Item 2.     Ratification of Appointment of Deloitte & Touche LLP as Independent
            Auditors

               FOR                 AGAINST                    ABSTAIN
            ---                 ---                        ---


In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the meeting. A properly executed proxy will be voted
in the manner  directed by the person(s)  signing below.  If you make no choice,
your proxy will be voted "FOR" Item 1 and 2.

Please  sign  exactly  as your  name(s)  appears  at left.  In the case of joint
owners,  each should sign. If signing as executor,  trustee,  guardian or in any
other representative capacity or as an officer of a corporation, please indicate
your full title.


                                       Dated:                          , 2002
                                             --------------------------

                                       --------------------------------------
                                       Signature


                                       --------------------------------------
                                       Signature