Outstanding Equity Awards at 2006 Fiscal Year Ended December 29, 2006

The following table summarizes the outstanding equity awards held by each Named Executive Officer at fiscal year ended December 29, 2006.

Options Exercised and Stock Vested in 2006

None of the Company’s NEOs exercised any stock options or vested in restricted stock awards during the fiscal year ended December 29, 2006.

Equity Compensation Plan Information at Fiscal Year Ended December 29, 2006

The following table provides information about shares that may be issued under our Company’s various stock option and purchase plans at December 29, 2006:

Change in Control and Post-Termination Payments

Change in Control

Each of the named executive officers and the other executive officers and certain other key employees, have entered into change of control agreements with us (singularly “Agreement”; collectively the “Agreements”). The change in 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 of date of the Agreement, unless we give the executive notice that we do 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% or more of our outstanding common stock, except acquisitions directly from us, by us, by our employee benefit plan, or by the executive or a group of which he is a part; (ii) members of the Incumbent Board (as defined in the Agreement) cease to be in the majority on the Board; (iii) the shareholders approve a reorganization, merger, consolidation or statutory exchange of our outstanding common stock, or approve a sale or other disposition of all or substantially all of our assets; or (iv) the shareholders approve a complete liquidation or dissolution of the Company.

Each Agreement provides that for two years after a change in 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 us to terminate the employment of the executive. If the executive’s employment is terminated by us 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 the change in control, the executive will be entitled to certain benefits. These benefits include the executive’s annual base salary yet to be paid through the date of termination, the higher of (1) the midpoint between the minimum and maximum bonus for the fiscal year in which the termination occurs, and (2) the amount payable to the executive under the Annual Bonus Plan had the termination not occurred pro-rated for the number of days in the current fiscal year through the date of termination, two times the executive’s annual base salary, and two times the midpoint between the minimum and maximum bonus for the fiscal year in which the termination occurs. Any unvested options held by the executive will become immediately and fully exercisable on the day following the change of control. The executive officers’ employee benefit coverage will be continued for a minimum of two years following the date of termination. This will include, without limitation, medical, dental, disability, salary continuance, group life insurance, and accidental death and travel accident insurance. For purposes of the Graco Employee Retirement Plan and the nonqualified Graco Inc. Restoration Plan, the executive officers will be considered to have remained employed until two years after the date of termination and to have retired two years after the date of termination.

Excise Tax/Gross-Up Payments

If, upon a change in control, the executive is subject to certain excise taxes or any interest or penalties pursuant to Section 280G of the Internal Revenue Code, as amended, (the “Code”) or any successor provision, the executive will be entitled to receive an additional gross-up payment equal to, including without limitation, any income taxes and excise tax imposed upon the gross-up payment, and any interest or penalties imposed with respect to such taxes.

The payments to which the executive is entitled are subject to reduction in the event the payments would constitute a parachute payment within the meaning of Section 280G of the Code, provided that the reduction does not exceed $25,000. If the reduction would exceed $25,000, there will be no reduction and we will make an additional gross-up 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 as discussed above.

Termination Arrangements

In the event Mr. Roberts’ employment 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. We will also reimburse him for any premiums for our health plans he elects under COBRA. As of December 31, 2006, he was considered fully vested in our pension and restoration plan.

If Mr. Roberts’ employment is terminated due to death or disability, 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. Mr. Roberts will be entitled to receive death and disability benefits. In accordance with the Graco Stock Incentive Plan, all unvested options held by Mr. Roberts will vest upon the date of termination.

The separation terms for executive officers, excluding the CEO, whose employment is involuntarily terminated by the Company without cause are reviewed and approved by the Management Organization and Compensation Committee on a case by case basis, although it has been the general practice of the Company to continue to provide twelve months base salary to the terminated executive officer subject to execution of a written release. The Management Organization and Compensation Committee has the discretion to consider other elements of separation pay and benefits, including but not limited to payment by our Company of the employee’s COBRA premiums and outplacement benefits.

Non-Incremental Compensation Payable Upon All Terminations

Each named executive officer is eligible for the following benefits as part of our standard practice or policy, however the benefits are not triggered by the any specific termination reason. Incremental amounts for each of these benefits are disclosed in the Summary Compensation Table, Potential Payments Upon Termination or Following a Change in Control Table, or Retirement Benefits Table.

Per the Executive Officer Annual Incentive Bonus Plan and the Executive Officer Bonus Plan, each participant is eligible to receive a prorated bonus based on the amount of base salary earned during the fiscal year and the bonus percentage paid for that year for a termination due to death, disability or retirement. All unvested stock option awards provided to any employee will automatically be accelerated and fully vested in the event the employee is terminated due to death, disability or retirement. Participants in the Graco Employee Retirement Plan, the Graco Inc. Restoration Plan and the Supplemental Executive Retirement Plan would receive the accumulated pension benefits over their lifetime, a specific defined time or at the time of their retirement. These amounts are reflected in column (d) of the Retirement Benefits Table. All of our employees are eligible to receive payment for any credited but unused vacation time. Each named executive officer would receive reimbursement for any miscellaneous travel and spousal travel perquisites and associated tax gross-up payments when incurred during the fiscal year.

The following Table describes the potential payments and benefits, other than those available generally on a nondiscriminatory basis to all salaried employees, provided upon termination of employment or following a change in control for each of the named executive officers calculated as if the termination occurred on December 29, 2006.

Potential Payments Upon Termination Following a Change in Control for Fiscal Year Ended December 29, 2006

Pension Benefits

Graco Employee Retirement Plan (1991 Restatement)

The Graco Employee Retirement Plan (The “Retirement Plan”) is a funded defined benefit plan designed to coordinate with Social Security benefits to provide a basic level of retirement benefits for all eligible employees. Eligible executive officers participate in our tax-qualified defined benefit pension plan on the same terms as the rest of our eligible employees. Each of the named executive officers is eligible for benefits under the Retirement Plan.

Benefits for those eligible under the Retirement Plan consist of a fixed benefit, which is designed to provide retirement income at age 65 of 43.5% of average monthly compensation, less 18% 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 the five consecutive highest years’ cash compensation during the last ten years of service, divided by sixty. The Retirement Plan defines eligible cash compensation as base salary, holiday pay, income earned outside of the United States but paid in the United States, annual bonus, CEO award, sales incentive, area differential, short-term disability payments, vacation pay and paid out accrued vacation, deferrals made under a cash or deferred agreement under Code section 401(k), contributions to a plan established under Code section 125, and transit and parking reimbursements made under Code section 132. Benefits under the Retirement Plan vest upon five years of benefit service.

Normal retirement age is defined as sixty-five (65). Early retirement is available to participants age fifty-five (55) with five (5) years of vesting service. The monthly amount of a participant’s benefit when retiring prior to age sixty-five (65) will be reduced by one-half of one percent (0.5%) for each month by which the date of the participant’s pension benefit is to begin prior to the participant turning age sixty-five (65).

The default form of pension benefit is a single life annuity that provides a monthly benefit for the life of the participant. A participant may elect an optional form of payment. The optional forms available are survivor annuity form or a term certain form. A survivor annuity form is an annuity that is payable monthly to and for the lifetime of the participant with a survivor annuity that is payable monthly after the participant dies to and for the lifetime of a participant’s designated joint annuitant in an amount equal to fifty percent (50%) or sixty-six and two-thirds percent (66 2/3%) or one hundred percent (100%) (as elected by the participant) of the amount payable during the joint lives of the participant and the designated joint annuitant. The value of the amounts payable in the survivor annuity form shall be actuarially equivalent to the value of the amounts payable in the single life annuity form. Term certain form is a form of annuity, that is payable monthly to and for the lifetime of the participant or, if longer, for one hundred twenty (120) or one hundred eighty (180) months, as elected by the participant before his pension is to begin.

Graco Inc. Restoration Plan (2005 Statement)

Because the Internal Revenue Code limits the pension benefits that can be accrued under a tax-qualified defined benefit pension plan, we have established the Graco Inc. Restoration Plan (the “Restoration Plan”). This plan is a nonqualified unfunded excess benefit plan designed to provide retirement benefits to eligible executives as a replacement for the retirements benefits limited under the Retirement Plan by operation of Section 415 and Section 401(a)(17) of the Code. The Restoration Plan provides comparable level retirement benefits as a percentage of compensation as those provided to other employees.

An employee that is a participant in the Retirement Plan, and has experienced a legislative reduction in benefits under the Graco Employee Retirement Plan due to limitations imposed by Section 415 of the Code, Section 401(a)(17) of the Code, or who have experienced a reduction in benefits due to participant contributions to the Graco Deferred Compensation Plan (2005 Restatement), and is selected for participation shall be eligible to participate in the Plan.

Benefits under the Restoration Plan are based on the formula contained in the Retirement Plan. The Plan shall pay as a benefit to a participant the excess, if any, of the amount that would have been payable to the participant under the Retirement Plan if such benefit had been determined without regard to the benefit limitations under Section 415 of the Code, or to the compensation limitation of section 401(a)(17) of the Code. Although the benefit amount is based on the formula in the Retirement Plan, no elections or optional forms of settlement under the Graco Employee Retirement Plan shall apply to the benefits under the Graco Inc. Restoration Plan. A participant’s benefit shall commence as of the first day of the month after the later of (i) the date the participant attains age sixty-two (62), or (ii) the participant separates from service. In the case of a distribution to a key employee (as defined in IRS Code section 409A) where the timing is based on the key employee’s separation from service, the date of the distribution to the key employee shall be the first day of the month following the date that is six (6) months after the date of the key employee’s separation from service.

If the participant is married at the time distribution of a participant’s benefit is to commence, a participant’s benefit is to be paid in the form of a qualified joint and survivor annuity. A qualified joint and survivor annuity will be paid over the life of the participant with the annuity reduced and fifty percent of the annuity paid to the spouse after the participant’s death if the spouse survives the participant. The annuity shall not be subject to the rules governing qualified joint and survivor annuities under the Code. If a participant is single at the time distribution of a participant’s benefit is to commence, the participant’s benefit is to be paid in a single life annuity. If the value of a participant’s benefit under the plan is ten thousand dollars ($10,000) or less as of the date the participant’s benefit is to commence, the benefit shall be paid in a single lump sum payment.

In 2006, the Committee approved an increase to the maximum benefit cap on the Restoration Plan. The cap previously in effect limited the aggregate annual retirement benefits of the Graco Employee Retirement Plan (1991 Restatement) and the Graco Inc. Restoration Plan (2005 Restatement) benefits combined to a maximum of $170,000. The maximum was removed to provide a comparable level of retirement benefits as a percentage of compensation as those provided to other employees. This decision was based on competitive benchmarking data provided by an outside consultant. The increase of the cap had no negative impact on the financial statements.

On February 16, 2007, the Committee approved an arrangement by which Mr. Roberts, effective January 1, 2007, will be credited with one-and-one-half years of service under the Restoration Plan for each year worked until retirement.

The actuarial present values of accumulated benefits as of December 31, 2006 for both the 1991 and 2005 Restatements are reflected in the Present Value of Accumulated Benefit Column of the Pension Benefits for 2006 table below. The actuarial present values are based on the valuation method and the assumptions applied in the calculations.

Supplemental Executive Retirement Plan

The Company desires to retain the services of Mr. Graner and realizes that if he were to enter into competition with the Company, it may suffer a financial loss. Therefore, the Company entered into an agreement with Mr. Graner to provide him one additional unfunded supplemental retirement benefit of $10,000 per year guaranteed payable for ten years via 120 monthly installments.

The agreement acknowledges that Mr. Graner may retire on the first of any month coincident with or following the completion of five years of service and attainment of age fifty-five. If Mr. Graner elects to retire prior to the age of sixty-five, the benefit amount will be reduced by one half of one percent for each month by which his retirement precedes age sixty-five.

Mr. Graner agrees that, as long as he continues to receive monthly payments, he will not directly or indirectly enter into or in any manner take part in any business, profession or other endeavor either as an employee, agent, independent contractor, owner or otherwise which in the opinion of our board of directors shall be in competition with the business of our company.

Benefits reflected in the following Table are based on either age 65 or the earliest date the NEO would receive unreduced benefits. Messrs. Graner and Johnson are eligible for unreduced benefits upon reaching age 62 and Mr. Sutter upon reaching age 64.

Retirement Benefits at Fiscal Year Ended December 29, 2006

Nonqualified Deferred Compensation

The Graco Deferred Compensation Plan (2005 Statement) (the “Deferred Compensation Plan”) is a nonqualified, unfunded, deferred compensation plan under section 409A of the Internal Revenue Code. This plan was adopted following the freezing of the Graco Inc. Deferred Compensation Plan (1992 Restatement) effective December 31, 2004. Only a select group of management or highly compensated employees are eligible for the current Plan.

A participant in this Plan may elect to defer one percent to fifty percent of his or her base salary or advance sales incentive and/or one percent to one hundred percent of his or her annual bonus and year-end sales incentive award. The Plan uses measurement funds to value the performance of the participants’ accounts. Participants can select one or more measurement funds and allocate their accounts in whole percentages. Participants have the ability to change their measurement funds on a daily basis. Participants are fully vested in the funds credited to their account at all times.

Upon enrollment in the Plan, the participant elects the year distributions are to begin and the form of distribution. The participant may elect a one-time change to the year in which the distribution is to begin. The election shall delay the first distribution date for at least five years after the date the distributions would have begun under the original election. Participants have the ability to select between the following distribution forms: lump sum or annual installments for five, ten or fifteen years. In the event of a separation from service, the account will be distributed as soon as administratively possible on the January next following the date of separation from service. Key employee (as defined by IRS Code section 409A) distributions where the timing of the distribution is based on separation from service, the date of distribution shall be the first of the month following the date that is six months after the date the key employee separated from service.

Effective December 31, 2004, Graco froze the Graco Inc. Deferred Compensation Plan (1992 Restatement). A participant in the Graco Inc. Deferred Compensation Plan (1992 Restatement) could have deferred one percent to twenty-five percent of his or her base salary or advance sales incentive and/or one percent to fifty percent of his or her annual bonus and year-end sales incentive award. The Graco Inc. Deferred Compensation Plan (1992 Restatement) provided a guaranteed interest rate equal to the ten year United States Treasury Note rate in effect on the last business day of November preceding the new calendar year. Participants are fully vested in the funds credited to their account at all times.

A participant in the Graco Inc. Deferred Compensation Plan (1992 Restatement) is eligible for distribution upon his retirement on or after the date he attains age fifty-five and completes at least five years of service. The monthly amount of a participant’s benefit will be determined by dividing their account balance by the number of months of the payout period that was irrevocably selected by the participant upon enrollment or the number of months necessary to provide a minimum monthly payment of $1,000.

As of December 31, 2006, Mr. Roberts was the only eligible named executive officer to elect to contribute to the Plan in fiscal 2006.

DIRECTOR COMPENSATION

During 2006, the annual retainer for each non-employee director of our Company, except the non-employee Chairman, was $32,000. The non-employee Chairman was paid at the rate of $60,000 per annum through April 21, 2006. At the Board meeting held on April 21, 2006, David A. Roberts, our President and CEO, was elected Chairman, a position for which he receives no compensation. There are also annual retainers for $5,000 for the chairs of the Governance Committee and Management Organization and Compensation Committee, and $7,500 for the chair of the Audit Committee. From January through April 2006, the non-employee directors received a meeting fee of $1,000 for each Board meeting attended. From May through December 2006, the meeting fee was $1,500 for each Board meeting attended. The meeting fee for the Governance Committee and the Management Organization and Compensation Committee is $1,000 per meeting. The meeting fee for the Audit Committee is $1,200 per meeting. Attendance by telephone at any Board or Committee meeting is paid one-half of the fee for in-person attendance. All retainer and meeting fees are paid in arrears.

On February 16, 2007, the Board of Directors, upon recommendation by the Governance Committee, approved an increase from $1,000 to $1,200 for the Management Organization and Compensation Committee and Governance Committee meeting fees, and an increase from $5,000 to $7,500 for the Management Organization and Compensation Committee chair’s annual retainer. These changes become effective May 1, 2007, and were based upon a review of the median data from two survey sources and data reported by a group of twenty peer companies.

A non-employee director may elect to receive shares of our common stock instead of cash for all or part of the director’s annual retainer (including committee chair retainer) and meeting fees. A director may choose to receive the shares currently or defer receipt until the director leaves the Board, at which time the director may receive the shares 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. When our Board declares a dividend, the director’s deferred stock account is credited with additional shares of stock in an account held by a trustee in the name of the non-employee director equivalent to the number of shares that could be purchased with the dividends at the current fair market value of the shares.

Under the Amended and Restated Graco Inc. Stock Incentive Plan (2006), non-employee directors receive an annual option grant of 3,600 shares on the date of the Company’s annual meeting of shareholders. In 2006, non-employee directors were eligible to receive an initial option grant of 3,600 shares upon first joining the Board. 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 of the stock on the date of grant, as defined in the Plan. The Plan defines “fair market value” as the last sale price of the stock as reported by the New York Stock Exchange on the date immediately prior to the date of grant.

In February 2001, the Board terminated the retirement benefit for non-employee directors, which provided that, upon cessation of service, non-employee 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. Mitau, Ms. Morfitt and Mr. Van Dyke upon their respective retirements.

Director Compensation Table for Fiscal Year Ended December 29, 2006

The following table summarizes the total compensation paid to or earned by the members of our Board of Directors during the fiscal year ended December 29, 2006.

Supplemental Table to the Director Option Awards Column, for Fiscal Year Ended December 29, 2006

Name		Grant Date		Shares Granted (#)		Expense Recorded ($)
Robert G. Bohn		5/6/2002		5,625		2,831
		5/5/2003		3,750		4,812
		4/22/2004		3,000		5,411
		4/22/2005		3,600		7,435
		4/21/2006		3,600		57,830
Total						78,319
William J. Carroll		5/6/2002		5,625		2,831
		5/5/2003		3,750		4,812
		4/22/2004		3,000		5,411
		4/22/2005		3,600		7,435
		4/21/2006		3,600		57,830
Total						78,319
Jack W. Eugster		2/19/2004		4,500		7,635
		4/22/2004		3,000		5,411
		4/22/2005		3,600		7,435
		4/21/2006		3,600		14,067
Total						34,548
J. Kevin Gilligan		5/6/2002		5,625		2,831
		5/5/2003		3,750		4,812
		4/22/2004		3,000		5,411
		4/22/2005		3,600		7,435
		4/21/2006		3,600		57,830
Total						78,319
Lee R. Mitau		5/6/2002		5,625		2,831
		5/5/2003		3,750		4,812
		4/22/2004		3,000		5,411
		4/22/2005		3,600		7,435
		4/21/2006		3,600		57,830
Total						78,319
James H. Moar		5/6/2002		5,625		2,831
		5/5/2003		3,750		6,490
		4/22/2004		3,000		12,547
		4/22/2005		3,600		24,696
		4/21/2006		3,600		57,830
Total						104,394
Martha A. Morfitt		5/6/2002		5,625		2,831
		5/5/2003		3,750		4,812
		4/22/2004		3,000		5,411
		4/22/2005		3,600		7,435
		4/21/2006		3,600		57,830
Total						78,319
Mark H. Rauenhorst		5/6/2002		5,625		2,831
		5/5/2003		3,750		4,812
		4/22/2004		3,000		5,411
		4/22/2005		3,600		7,435
		4/21/2006		3,600		57,830
Total						78,319
William G. Van Dyke		5/6/2002		5,625		2,831
		5/5/2003		3,750		4,812
		4/22/2004		3,000		5,411
		4/22/2005		3,600		7,435
		4/21/2006		3,600		57,830
Total						78,319
Robert W. Van Sant		2/19/2004		4,500		7,635
		4/22/2004		3,000		5,411
		4/22/2005		3,600		7,435
		4/21/2006		3,600		14,067
Total						34,548

CERTAIN BUSINESS RELATIONSHIPS

Mr. Roberts, our Chairman, President and Chief Executive Officer, is the brother-in-law of Gary Tepas, the President of EmKay, Inc. On June 17, 2002, we entered into an agreement with EmKay, Inc. for the lease and maintenance of approximately 164 vehicles and trailers. This agreement and the ongoing business relationship between the Company and EmKay Leasing was discussed and approved at a meeting of the Board of Directors on September 27, 2002. On April 21, 2006, the Audit Committee of the Board of Directors reviewed the terms and conditions proposed by several fleet managers, which proposals were presented to us pursuant to a bidding process. One of the fleet managers was EmKay, Inc. The Audit Committee determined that the EmKay, Inc. terms were fair and in the best interests of our Company, and authorized the management of our Company to enter into certain lease and maintenance arrangements with EmKay Leasing and/or its affiliated entities (“EmKay”). The amount paid to EmKay for the fiscal year ended December 29, 2006, was approximately $2,080,000.

RELATED PERSON TRANSACTION APPROVAL POLICY

In February 2007, our Board of Directors adopted a written related person transaction approval policy, which sets forth our Company’s policies and procedures for the review, approval or ratification of any transaction required to be reported in our filings with the Securities and Exchange Commission. Our policy applies to any transaction, arrangement or relationship or any series of similar transactions, arrangements or relationships in which our Company is a participant and in which a related person has a direct or indirect interest, other than the following:

•

payment of compensation by our Company to a related person for the related person’s service to our Company in the capacity or capacities that give rise to the person’s status as a “related person;” and

•

transactions generally available to all employees or all shareholders of our Company on the same terms.

The Audit Committee of our Board of Directors must approve any related person transaction subject to this policy before commencement of the related person transaction or, if it is not practicable to approve the transaction before commencement, the transaction will be submitted to the Audit Committee or chair of the Audit Committee for ratification as soon as possible. The Audit Committee or its Chair will analyze the following factors, in addition to any other factors the Audit Committee deems appropriate, in determining whether to approve a related person transaction:

•

the benefits to our Company;

•

the impact on a director's independence;

•

the availability of other sources for comparable products or services;

•

the terms of the transaction and whether they are fair to our Company;

•

the terms available to unrelated third parties or to employees generally; and

•

whether the transaction is material to the Company.

The Audit Committee or its Chair may, in its or his sole discretion, approve or deny any related person transaction. Approval of a related person transaction may be conditioned upon our Company and the related person following certain procedures designated by the Audit Committee or its Chair.

BENEFICIAL OWNERSHIP OF SHARES

Director and Executive Officer Beneficial Ownership

The following information, furnished as of February 19, 2007, indicates beneficial ownership of the common shares of our Company by each director, each nominee for election as director, the named executive officers and by all directors and executive officers as a group. Except as otherwise indicated, the persons listed have sole voting and investment power.

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership(1,2,3)	Percent of Common Stock Outstanding(4)	Phantom Stock Units
Robert G. Bohn	36,593		—
William J. Carroll	34,181		11,997
Jack W. Eugster	14,775		2,912
J. Kevin Gilligan	23,213		8,725
James A. Graner(2,5)	138.942		—
Dale D. Johnson	224,607		—
Lee R. Mitau	70,121		24,313
James H. Moar(6)	26,325		8,040
Marti Morfitt	59,257		14,569
Mark H. Rauenhorst	28,860		8,026
Charles L. Rescorla(2)	188,697		—
David A. Roberts(2)	496,632		—
Fred A. Sutter(2)	115,298		—
William G. Van Dyke	60,973		19,663
R. William Van Sant	8,775		3,528
All directors and
executive officers as a
group (21 persons)(7)	1,980,312	3.0%

(1)	Includes 1,358,230 shares with respect to which executive officers, and 268,130 shares with respect to which non-employee directors, have a right, as of February 19, 2007, to acquire beneficial ownership upon the exercise of vested stock options.

(2)

Excludes the following shares as to which beneficial ownership is disclaimed: (i) 348,748 shares owned by the Graco Employee Retirement Plan, as to which Messrs. Graner, Rescorla and Roberts share voting and investment power as members of the Company’s Benefits Finance Committee; and (ii) 16,008 shares held by The Graco Foundation, as to which Messrs. Roberts and Sutter share voting and investment power as directors.

(3)

Beneficial ownership excludes units shown as phantom stock units, held by each individual non-employee director listed as of February 19, 2007, the record date. Each non-employee director listed has elected to acquire phantom stock in lieu of meeting and annual retainer fees. Upon termination of the director’s service on the Board, the non-employee director will be paid the balance in his or her deferred stock account through issuance of Graco shares, either in a lump sum or installments, by January 10 of the year following the separation of non-employee director from service. The information in this column is not required by the rules of the Securities Exchange Commission because the phantom stock units carry no voting rights and the non-employee director has no right or ability to convert the phantom stock to common stock within 60 days of February 19, 2007. Nevertheless, we believe that this information provides a more complete picture of the financial stake that our directors have in the Company.

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

(5)	Mr. Graner pledged 23,984 shares of Graco common stock for lines of credit totaling $1,200,000. The outstanding balance of the lines of credit as of December 29, 2006, remains at $0.

(6)	Mr. Moar resigned from the Board effective September 22, 2006.

(7)

If the shares referred to in footnote 2 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 2,345,068 shares, or 3.5% of the outstanding shares.

Principal Shareholder Beneficial Ownership

The following table identifies each person or group known to our Company to beneficially own as of February 19, 2007, more than five percent (5%) of the outstanding common shares of the Company, the only class of security entitled to vote at the Annual Meeting.

Name of Shareholder	Beneficial Ownership	Percent of Class
Barclays Global Investors, N.A.(1)	4,308,240	6.40%

(1)

Based on information of beneficial ownership as of December 31, 2006 included in a Schedule 13G filed on January 23, 2007. Barclay’s Global Investors, N.A. reports sole voting power with respect to 2,665,619 shares and sole dispositive power with respect to 3,329,891 shares, Barclays Global Fund Advisors reports sole voting power with respect to 695,381 shares and sole dispositive power with respect to 698,789 shares; Barclays Global Investors, Ltd. reports sole voting power with respect to 81,242 shares and sole dispositive power with respect to 81,242 shares; Barclays Global Investors Japan Limited reports sole voting power with respect to 198,318 shares and sole dispositive power with respect to 198,318 shares.

Section 16(a) Beneficial Ownership Reporting Compliance

Our Company’s executive officers, directors, and ten percent (10%) 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 our Company, or written representations that no reports were required, management believes that, except as set forth in this section, all reports were filed on a timely basis by reporting persons during and with respect to 2006. On December 23, 2005, Mr. Rauenhorst gifted 3,375 shares of Graco stock owned by him to the Mark and Karen Rauenhorst Family Foundation, a 501(c)(3) charitable foundation. The transaction was not reported on a Form 4 or Form 5 by February 2006.

PROPOSAL 2

PROPOSAL TO RATIFY THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP (“Deloitte”) has acted as independent registered public accounting firm for the Company since 1962. The Audit Committee of the Board, which has selected Deloitte as the independent registered public accounting firm for fiscal year 2007, recommends ratification of the selection by the shareholders. If the shareholders do not ratify the selection of Deloitte, the selection of the independent auditors will be reconsidered by the Audit Committee. A representative of Deloitte 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.

The Audit Committee of the Board of Directors recommends a vote FOR ratification of the appointment of Deloitte as the independent registered public accounting firm for fiscal year 2007.

PROPOSAL 3

PROPOSAL TO APPROVE THE EXECUTIVE OFFICER ANNUAL INCENTIVE BONUS PLAN

The Company is seeking shareholder approval of the Graco Inc. Executive Officer Annual Incentive Bonus Plan (the “Plan”). This Plan is substantially similar to the Executive Officer Annual Incentive Bonus Plan adopted by our shareholders at the Annual Meeting of Shareholders on May 6, 2003, which will expire on December 31, 2007. This proposed Plan will, if approved, be effective January 1, 2008 and expire on December 31, 2012. The Plan will be administered by the Management Organization and Compensation Committee of the Board. The Plan is intended to qualify compensation paid thereunder as “qualified performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Section 162(m) of the Code generally limits to $1 million our federal income tax deductions for compensation paid to named executive officers that is not performance-based compensation within the meaning of that section. Shareholder approval of the Plan is necessary every five years in order for the Plan to qualify under Section 162(m) so that the compensation paid under the Plan will not count toward the $1 million limitation on deductible compensation.

The Management Organization and Compensation Committee is composed solely of non-employee directors who are outside directors within the meaning of Section 162(m) of the Code. Participants in the Plan are the Chief Executive Officer and any of our other executive officers designated by the Committee within the first ninety (90) days of the fiscal year.

Participants shall be eligible for the payment of a bonus if certain performance targets are achieved. The performance targets are financial growth targets established by the Management Organization and Compensation Committee at the beginning of each fiscal year and must be directly tied to one or more financial measures, including, among other things, net earnings and net revenues. No payment may be made if the performance targets are not achieved. No adjustment of the award to any participant is permitted, but certain changes in status, such as death, retirement or disability, will cause the bonus payment to be pro-rated and resignation or termination prior to the end of the fiscal year will eliminate the bonus entirely. There is a $2,000,000 individual award limit in any fiscal year.

The Management Organization and Compensation Committee may amend the Plan prospectively and may terminate or curtail the benefits of the Plan.

The above description summarizes the principal features of the Plan, but is qualified in its entirety by reference to the text of the Plan which is set forth as Appendix A to this Proxy Statement.

Awards under the Plan will be based upon performance targets established with respect to each fiscal year. Accordingly, the amount of awards to be paid in the future to any participant cannot be determined at this time since the performance period has not yet been completed. Actual awards will depend upon actual performance measured against the attainment of the pre-established performance targets.

Assuming the shareholders approve the Plan, the Company will generally be entitled to a federal income tax deduction equal to the amount of ordinary income realized by the participant upon payment of a bonus. The amount of bonus received by a participant under the Plan will be included in the income of the participant at the time of payment and will be subject to tax at ordinary income rates.

The Board of Directors recommends that shareholders vote FOR approval of the Graco Inc. Executive Officer Annual Incentive Bonus Plan.

OTHER MATTERS

The Board 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

We did not receive a request from any shareholder that a matter be submitted to a vote at the 2007 Annual Meeting. Any shareholders wishing to have a matter considered for inclusion in the proxy statement for the Annual Meeting in the year 2008 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 10, 2007.

Any shareholder proposal for the Annual Meeting in year 2008 not included in the Proxy Statement must be submitted by written notice to the Secretary of the Company by January 21, 2008 to be considered.

You are respectfully requested to exercise your right to vote. You may do so by calling (1-800-560-1965), by accessing our website at www.eproxy.com/ggg, or by completing and signing the enclosed proxy card and returning it. In the event that you attend the meeting, you may revoke your proxy (either given by telephone, via the internet or by mail) and vote your shares in person if you wish.

For the Board of Directors

Karen Park Gallivan
Secretary

Dated March 6, 2007

NOTE:

Vote by telephone - call 1-800-590-1965 Vote via the internet at www.eproxy.com/ggg

Appendix A

EXECUTIVE OFFICER ANNUAL INCENTIVE BONUS PLAN

1.         Definitions. When the following terms are used herein with initial capital letters, they shall have the following meanings:

1.1         Base Salary — the base salary for each Participant as set forth in Schedule A

1.2         Compensation Committee — the Management Organization and Compensation Committee of the Board of Directors of Graco Inc.; it is intended that the Compensation Committee will satisfy the requirements of Section 162(m) of the Code by being comprised of two or more “outside directors.”

1.3         Code — the Internal Revenue Code of 1986, as it may be amended from time to time, and any proposed, temporary or final Treasury Regulations promulgated thereunder.

1.4         Company — Graco Inc., a Minnesota corporation, and any of its affiliates that adopt the Plan.

1.5         Eligible Employee — the chief executive officer and any executive officer of the Company designated by the Compensation Committee.

1.6         Participant — an Eligible Employee designated by the Compensation Committee, at any time ending on or before the 90th day of each Performance Period, as subject to the Plan.

1.7         Performance Period — the Company's fiscal year.

1.8         Plan — this Executive Officer Annual Incentive Bonus Plan.

1.9         Minimum Bonus Percentage — the minimum potential bonus payout expressed as a percentage of the Participant’s Base Salary as identified in Schedule B.

1.10        Target Bonus Percentage — the target potential bonus payout expressed as a percentage of the Participant’s Base Salary as identified in Schedule B.

1.11        Maximum Bonus Percentage — the maximum potential bonus payout expressed as a percentage of the Participant’s Base Salary as identified in Schedule B.

1.12        Company Performance Target(s) — the financial growth target(s) established by the Compensation Committee for a Performance Period and reflected in the percentages identified in Schedule C for each of minimum, target and maximum performance targets. The Company Performance Target(s) shall be directly tied to one or more of the following financial measures: consolidated pre-tax earnings, net revenues, net earnings, operating income, earnings before interest and taxes, cash flow, return on equity, return on assets, or earnings per share (hereinafter “Financial Measure(s)”) for the applicable Performance Period, all as computed in accordance with generally accepted accounting principles as in effect from time to time and as applied by the Company in the preparation of its financial statements, and subject to other special rules and conditions as the Compensation Committee may establish at any time ending on or before the 90th day of the applicable Performance Period. Any Financial Measure may be stated in absolute terms or as compared to another company or companies. Such Financial Measures shall constitute the sole bases upon which the Company Performance Targets shall be based.

1.13        Retirement — when a Participant’s employment is terminated and the Participant has, as of the date of termination, reached the age of 55 or more and has at least ten years of service with the Company, or has reached at least age 65.

2.         Administration.

2.1         Determinations must be made prior to each Performance Period — At any time ending on or before the 90th day of each Performance Period, the Compensation Committee shall:

(a)         designate the Participants in the Plan for that Performance Period;

(b)         indicate the Base Salary of each Participant for the Performance Period by amending Schedule A in writing;

(c)         establish Targeted Bonus Percentages for the Performance Period by amending Schedule B in writing; and

(d)         establish Company Performance Target(s) for the Performance Period by amending Schedule C in writing.

2.2         Certification — Following the close of each Performance Period and prior to payment of any bonus under the Plan, the Compensation Committee must certify in writing that the Company Performance Target(s) and any other material terms were in fact satisfied.

2.3          Shareholder Approval — The material terms of the Plan shall be disclosed to and approved by shareholders of the Company in accordance with Section 162(m) of the Code. No bonus shall be paid under the Plan unless such shareholder approval has been obtained.

3.         Bonus Payment

3.1        Maximum — Each Participant shall receive a bonus payment for each Performance Period calculated in accordance with the formula set forth in subparagraph 3.2 and in an amount not greater than the Participant’s Maximum Bonus Percentage multiplied by the Participant’s Base Salary.

3.2         Formula — Subject to other provisions of this Plan, each Participant shall receive a bonus payment for each Performance Period calculated as follows:

(a)          Each of the Company Performance Targets shall be assigned a weight expressed as a percent of the Participant’s Maximum Bonus Percentage.

(b)          At the conclusion of each Performance Period, the percent of the Participant’s Maximum Bonus Percentage achieved for each applicable Financial Measure shall be calculated.

(c)          The percentages achieved by performing the calculation described in subparagraph 3.2(b) shall be added together and this sum shall be multiplied by the Participant’s Maximum Bonus Percentage.

(d)          The amount obtained by performing the calculation described in subparagraph 3.2(c) shall be multiplied by the Participant’s Base Salary.

3.3        Limitations

(a)          No payment if Company Performance Targets not achieved — In no event shall any Participant receive a bonus payment hereunder if the Company Performance Targets and all other factors on which the bonus payment is based are not achieved during the Performance Period.

(b)          No payment in excess of preestablished amount — No Participant shall receive a payment under the Plan for any Performance Period in excess of Two Million Dollars ($2,000,000).

(c)          Pro-ration or elimination of Bonus payment — Participation in the Plan ceases with resignation, termination, Retirement, death or long-term disability. A Participant who resigns or is terminated effective during the Performance Period is ineligible for a bonus payment. A Participant who Retires, dies or becomes eligible for long-term disability benefits under the Company’s long-term disability benefit plan during the Performance Period will be paid a bonus based on a calculation performed in accordance with the provisions of subparagraph 3.2.

4.         Time and Form of Payments; Taxability — Subject to any deferred compensation election pursuant to any such plans of the Company, a bonus payment shall be made to the Participant in one or more cash payments as soon as determined by the Compensation Committee after it has certified that the Company Performance Target(s) and all other factors upon which the bonus payment for the Participant is based have been achieved.

4.1          Nontransferability — Participants and beneficiaries shall not have the right to assign, encumber or otherwise anticipate the payments to be made under the Plan, and the benefits provided hereunder shall not be subject to seizure for payment of any debts or judgments against any Participant or any beneficiary.

4.2          Tax Withholding — In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant.

5.         Amendment and Termination — The Compensation Committee may amend the Plan prospectively at any time and for any reason deemed sufficient by it without notice to any person affected by the Plan and may likewise terminate or curtail the benefits of the Plan, both with regard to persons expecting to receive benefits hereunder in the future and persons with outstanding awards to receive bonus payments at the time of such action, provided that no amendment to the Plan shall be effective which would increase the maximum amount payable to a Participant under paragraph 3.3(b), which would change the Financial Measures upon which Company Performance Targets must be based as set forth in subparagraph 1.10 of this Plan or which would modify the requirements for eligibility under subparagraph 1.5, unless the shareholders of the Company shall have approved such change in accordance with the requirements of Section 162(m).

6.         Miscellaneous

6.1          Effective Date — January 1, 2008

6.2          Term of the Plan — Unless the Plan shall have been discontinued or terminated, the Plan shall terminate on December 31, 2012. No bonus shall be granted after the termination of the Plan; provided, however, that a payment with respect to a Performance Period which begins before such termination may be made thereafter. In addition, the authority of the Compensation Committee to amend the Plan shall extend beyond the termination of the Plan.

6.3          Headings — Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

6.4          Applicability to Successors — The Plan shall be binding upon and inure to the benefit of the Company and each Participant, the successors and assigns of the Company, and the beneficiaries, personal representatives and heirs of each Participant. If the Company becomes a party to any merger, consolidation or reorganization, this Plan shall remain in full force and effect as an obligation of the Company or its successors in interest.

6.5         Employment Rights and Other Benefit Programs — The provisions of the Plan shall not give any Participant any right to be retained in the employment of the Company. In the absence of any specific agreement to the contrary, the Plan shall not affect any right of the Company, or of any affiliate of the Company, to terminate, with or without cause, the Participant’s employment at any time. The Plan shall not replace any contract of employment, whether oral or written, between the Company and any Participant, but shall be considered a supplement thereto. The Plan is in addition to, and not in lieu of, any other employee benefit plan or program in which any Participant may be or become eligible to participate by reason of employment with the Company. Receipt of benefits hereunder shall have such effect on contributions to and benefits under such other plans or programs as the provisions of each such other plan or program may specify.

6.6          No Trust or Fund Created — The Plan shall not create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any affiliate and a Participant or any other person. To the extent that any person acquires a right to receive payments from the Company or any affiliate pursuant to the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company or of any affiliate.

6.7         Governing Law — The validity, construction and effect of the Plan or any bonus payable under the Plan shall be determined in accordance with the laws of the State of Minnesota.

6.8         Severability — If any provision of the Plan is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Compensation Committee, materially altering the purpose or intent of the Plan, such provision shall be stricken as to such jurisdiction, and the remainder of the Plan shall remain in full force and effect.

6.9         Qualified Performance-Based Compensation — All of the terms and conditions of the Plan shall be interpreted in such a fashion as to qualify all compensation paid hereunder as qualified performance-based compensation within the meaning of Section 162(m) of the Code.

SCHEDULE A

BASE SALARY FOR PERFORMANCE PERIOD
BEGINNING                    AND ENDING                   

Name	Base Salary
	Actual paid salary for the calendar year that most closely coincides with the Performance Period

SCHEDULE B

BONUS PERCENTAGE FOR PERFORMANCE PERIOD
BEGINNING                    AND ENDING                   

Name	Minimum Bonus Percentage as a Percentage of Base Salary	Target Bonus Percentage as a Percentage of Base Salary	Maximum Bonus Percentage as a Percentage of Base Salary

SCHEDULE C

COMPANY PERFORMANCE TARGETS
FOR PERFORMANCE PERIOD
BEGINNING                    AND ENDING                   

Financial Measures	Company Performance Target(s) Weight	Minimum Company Performance Target(s)	Target Company Performance Target(s)	Maximum Company Performance Target(s)
	%	$	$	$
	%	$	$	$

GRACO INC.

ANNUAL MEETING OF SHAREHOLDERS

Friday, April 20, 2007
1:00 p.m. Central Time

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

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GRACO INC. 88 Eleventh Avenue NE Minneapolis, Minnesota 55413

proxy

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This Proxy is Solicited by the Board of Directors for use at the Graco Inc. Annual Meeting on Friday, April 20, 2007.

The shares of common stock of Graco Inc. which you were entitled to vote on February 19, 2007, will be voted as you specify on this card.

By signing this proxy, you revoke all prior proxies and appoint David A. Roberts and James A. Graner as Proxies, each of them acting in the absence of the other, 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.

SEE REVERSE FOR VOTING INSTRUCTIONS

COMPANY #                                                          

There are three ways to vote your Proxy

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

VOTE BY PHONE – TOLL FREE – 1-800-560-1965 – QUICK *** EASY *** IMMEDIATE

•	Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week, until 12:00 noon (CT) on April 19, 2007.

•	Please have your proxy card and the last four digits of your Social Security Number or Tax Identification Number available. Follow the simple instructions on the taped voice message to vote your shares.

VOTE BY INTERNET – http:www.eproxy.com/ggg/ – QUICK *** EASY *** IMMEDIATE

•	Use the Internet to vote your proxy 24 hours a day, 7 days a week, until 12:00 noon (CT) on April 19, 2007.

•	Please have your proxy card and the last four digits of your Social Security Number or Tax Identification Number available. Follow the simple instructions to obtain your records, create an electronic ballot and vote your shares.

VOTE BY MAIL

Mark, sign and date your proxy card and return the card in the postage-paid envelope we've provided or return it to Graco Inc., c/o Shareholder Services^SM, P.O. Box 64873, St. Paul, MN 55164-0873.

If you vote by Phone or Internet, please do not mail back your Proxy Card

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The Board of Directors Recommends a Vote FOR Items 1, 2, and 3.

1.  Election of Directors: NOMINEES:	01  J. Kevin Gilligan	03  William G. Van Dyke	  FOR ALL	  WITHHOLD
	02  Mark H. Rauenhorst		(except as marked)	FOR ALL

(INSTRUCTION: To withhold authority to vote for any individual nominee, Write the number(s) of the nominee(s) in the box provided to the right.)

2.  Ratification of Appointment of Deloitte & Touche LLP as the Independent Registered Public Accounting Firm

  For

  Against

  Abstain

3.  Approval of the Executive Officer Annual Incentive Bonus Plan

  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” Items 1, 2, and 3.

Address Change? Mark Box    Indicate changes below:	Dated:                              , 2007
	Signature(s) in Box
	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.